China markets may be poised for losses after holiday
February 8 2008
NEW YORK, Feb 8 (Reuters) - The Year of the Rat is ready to spring a nasty little trap on investors in Chinese equities when trading in Hong Kong and Shanghai resumes after this week’s long holiday celebration.
A sharp decline in the two major Chinese stock indexes appears inevitable after U.S.-traded shares of overseas companies tumbled this week as signs of a recession grew.
Chinese ADRs, or American Depositary Receipts, were among the worst performers, in part because Chinese exporters rely so heavily on the U.S. market.
Shares that trade in local markets are now poised to play catch-up -- or more to the point, play catch-down -- with their ADR counterparts.
The Bank of New York’s index of leading American Depositary Receipts (ADRs) fell about 6 percent for the week, while the 30-share Dow Jones industrial average declined 4.4 percent.
On Friday, the index was down 0.37 percent, while the Dow was off 0.53 percent.
“I suspect that unless there’s some kind of recovery in equities around the world, (Chinese stocks) are going to open lower. That shouldn’t be much of a surprise,” said Donald H. Straszheim, vice chairman, Roth Capital Partners, LLC, in Los Angeles. “Evidence continues to accumulate that global growth is slowing and the U.S. is clearly slowing.”
Some of the hardest-hit Chinese ADRs included oil refiner PetroChina Co Ltd, based in Beijing, which was down 4.9 percent for the week; Yanzhou Coal Mining Co Ltd, down 7.1 percent for the week; and the Aluminum Corp of China Ltd, down 6.1 percent.
Other ADRs not dual listed in Shanghai and Hong Kong, but widely tracked in the Chinese market suffered even heavier losses.
China Internet search company Baidu.com Inc, down 13.2 percent this week, and China solar panel maker Suntech Power Holdings Co Ltd, down 18.9 percent.
The Shanghai Composite Index, which last traded on Feb. 5 and was already closed when Wall Street registered its worst daily loss in a year later in the global trading day, is due to reopen on Wednesday.
Meanwhile, Hong Kong’s Hang Seng Index, which last traded in a half-day session on Feb. 6 after getting buffetted by at least some of Wall Street’s downdraft, will reopen on Monday.
Global equity markets have been on the defensive all week on worries about a possible U.S. recession, but Chinese markets have yet to take the full brunt of the economic news that came this week.
Tuesday’s sell-off in U.S. stocks was the biggest since a global equity rout that started in China on just the second day back after last year’s new year holiday.
China could be especially hurt by a U.S. recession since it is a heavy exporter to the United States, manufacturing many products sold here by big U.S. companies including Wal-Mart Stores Inc.
Expectations of “weaker growth in China is already being reflected in some of those Chinese ADRs, and I think there will be more,” Straszheim said.
Friday marked the first anniversary of the emergence of the U.S. subprime turmoil, when news of profit warnings stemming from bad home loans hit U.S. markets.
On Feb. 27 last year, a drop in China’s market led a global equities sell-off. The Dow plunged more than 400 points that day, and a period of heavy market volatility ensued, but U.S. stocks soon recovered most of those losses.
“I think people will be anxiously watching what happens when China, Hong Kong, Korea reopen,” said John Praveen, chief investment strategist at Prudential International Investments Advisers LLC in Newark, New Jersey.
Among other U.S.-listed Chinese shares, Beijing-based Huaneng Power International Inc was down 4.4 percent and China Life Insurance Co Ltd lost 4.3 percent.
China is ready to be a key player on the world investment stage, and Australian companies are firmly in its sights, writes Elisabeth Sexton.
This week's flying visit by the urbane, unflappable Xiao Yaqing delivered an unmistakable message: Chinese money is changing Australian business.
A $15 billion surprise raid on the share register of the miner Rio Tinto by the company Xiao runs, the state-owned aluminium producer Chinalco, was a dramatic means of confirming that the second wave of China's economic influence is under way.
It remains to be seen how Chinalco's abrupt interruption of BHP Billiton's drawn-out stalking of Rio plays out. Whichever way it ends, it is now suddenly clear to all local investors and companies that the Chinese have the funds and the guts to be big players in the stockmarket. And while the resources sector is attracting most attention, Chinese companies are also bobbing up on the registers of Australian industrial companies.
The purchase of 12 per cent of Rio's UK arm (via a joint venture vehicle to which US aluminium company Alcoa contributed $US1.2 billion) was the largest single foreign investment by a Chinese company.
It outranked Industrial & Commercial Bank of China's $US5.5 billion ($6.2 billion) purchase of 20 per cent of Standard Bank Group of South Africa in October and China Investment Corp's injection of $US5 billion into the Wall Street investment firm Morgan Stanley in December. Both involved the issue of new capital.
Unlike those moves, the investment in Rio shares, which equates to 9 cent of the dual-listed company, was not welcomed.
Standard Bank's chief executive, Jacko Maree, described his new 20 per cent shareholder as bringing "numerous complementary benefits to the relationship".
Morgan Stanley's chairman, John Mack, announcing the Chinese investment along with $US9 billion in write-downs related to the US mortgage market, said it would "enhance growth opportunities globally, while also building on Morgan Stanley's deep historic ties and market leadership in China".
In contrast, Rio's chairman, Paul Skinner, issued a brief statement. "This unsolicited development, of which we had no prior notice, reinforces our view of the long-term value of Rio Tinto," he said.
China's rapid industrial growth has already been credited with shielding Australia from much of the financial gloom enveloping the United States and Europe. Chinese demand for Australian commodities was a major factor in the Reserve Bank of Australia's decision on Tuesday to raise interest rates, while its US and European counterparts are cutting them.
In phase two, China will be more active.
With foreign reserves of $US1.5 trillion in December - almost double the $US819 billion recorded just two years earlier - and a generation of business leaders already familiar with transactions and joint ventures with Western companies, Chinese firms are ready to call the shots.
They are well placed to take advantage of what the Reserve Bank governor, Glenn Stevens, on Tuesday called "fragile" sentiment in international capital and equity markets.
The chairman of the Australia China Business Council, Kevin Hobgood-Brown, a Sydney lawyer, says China's new role in world markets is a natural progression as its economy develops.
"People have been predicting it for a number of years now, and it's only going to be particularly noticeable in the first years as that [investment] flow commences," Hobgood-Brown says.
"I think it's a healthy development because it means that China, like all developed economies, has a more multi-faceted stake in the success and strength of the global economy."
There is a difference between Chinese firms and their first-world counterparts that invest in global markets. The Chinese companies with the most clout are all owned by the Government. While this gives them privileged access to funds, often via government financiers such as the China Development Bank, it also brings a political dimension to their investments that is not always welcome in target countries.
Around the globe the rise in Chinese direct foreign investment is raising concerns that it is not being driven by commercial rationale but aimed at boosting Chinese development and employment, or other policy or strategic goals, at the expense of other countries.
Attracting particular attention is last year's establishment of the China Investment Corporation, a so-called sovereign wealth fund.
In a paper published in December, two Australian Treasury officials, Will Devlin and Bill Brummitt, defined these bodies as "any government-controlled fund that manages and invests government savings, regardless of the revenue source". The Future Fund set up by the Howard government with the proceeds of the last part of the Telstra privatisation is another example.
The China Investment Corporation was formally set up in September, although by then it had already made a big splash by injecting $US3 billion into the US investment firm Blackstone. The Chinese Government gave the corporation a starting kitty of $US200 billion and, according to its announcement of the Blackstone purchase, a mandate to be "an investment vehicle with respect to the foreign exchange reserve of the People's Republic of China".
Its 10 per cent stake in Blackstone is in non-voting shares. Similarly, Morgan Stanley said in December that the corporation would "have no special rights of ownership and no role in the management of Morgan Stanley, including no right to designate a member of the firm's board of directors".
On Thursday a US congressional committee called financial and market regulators to a hearing to debate whether the benefits of Chinese capital during the subprime crisis were outweighed by concerns about currency manipulation and the difficulty of supervising market activities by government bodies.
In Australia, "direct investments by foreign governments and their agencies" trigger the interest of the Foreign Investment Review Board irrespective of the size of the investment. (For non-government investors, the usual threshold is a 15 per cent stake.)
Any proposals for such investments "should be notified to the Government for approval", according to a summary of Australia's policy published by the Federal Treasury.
During a convoluted exchange with reporters after a meeting with China's Foreign Minister, Yang Jiechi, the Prime Minister, Kevin Rudd, said the policy of reviewing direct investments by foreign government agencies was "as relevant to the national interest considerations as anything else".
Rudd would not be drawn on whether Chinalco fell under the description of "foreign government agency".
"I presume this will be the subject of deliberations between the staff of the Foreign Investment Review Board and those seeking clarification of the facts from the Chinese investor," he said.
According to Chinalco's website, it is "one of the key state enterprises managed by the central government directly".
Ian McCubbin, a Melbourne lawyer, says all Chinese state-owned enterprises apply to the Foreign Investment Review Board as a matter of course. "The Australian Government's position is that all those well-known Chinese enterprises that are now investing in these major projects in Australia are all regarded by FIRB and other agencies as government enterprises for the purposes of that policy," says McCubbin, who heads the China practice at the law firm Deacons.
For 20 years the state-owned enterprises have been notifying the board about their proposals, and throughout that time "FIRB hasn't raised any national interest issues and the applications have simply been approved without much fanfare," McCubbin says. The regulator has been more concerned about the development of Australian assets than the ownership of the foreign investor, he says.
"The sort of issues that have been put to us might be whether a major resource in Australia might not be developed in an optimum way, or whether a timetable reflects Australia's best interests [where] an applicant company might have other projects of a similar nature around the world that might take priority."
Longstanding investments by Chinese state-owned enterprises include the stake in Victoria's Portland aluminium smelter, now 22 per cent, held by the investment conglomerate CITIC since 1985, and Rio's 1987 Channar iron ore joint venture with what is now Sinosteel, China's largest raw materials supplier and sales agent for steel mills.
But McCubbin says the applications to the Foreign Investment Review Board are coming much faster now, and are more commonly involving proposals to buy shares rather than joint venture stakes.
He cites three recent policy changes by a newly outward-focused Chinese Government driving the change, starting with the China Investment Corporation. His second factor is Beijing's recent change to the rules governing investments by its banks, particularly the China Development Bank. They are now encouraged to finance projects outside China.
The third factor is the Government's recent blessing for state-owned enterprises to invest directly in foreign stockmarkets.
"Over the last 12 months approvals from the National Development and Reform Commission and the other authorities in Beijing seem to have been freed up to all the state enterprises to participate in equity markets more easily," he says. "Now we are starting to look at the prospects of takeovers by Chinese companies."
In the past few months several companies listed on the Australian Securities Exchange have reported investment by Chinese companies.
A focus has been the mid-west region of Western Australia, where iron ore projects have caught the attention of steel companies, although others include the chemical manufacturer Nufarm and the China-focused dairy company Montec. In some cases the target companies are in the market for development finance and are happy to strike a deal with their future customers.
State premiers have been vocal supporters of development funding. The West Australian Premier, Alan Carpenter, whose state has benefited most from Chinese money, spoke up after Chinalco's move attracted criticism.
"I welcome Chinese investment in Western Australia," Carpenter said. "China has become our most important, our biggest, trade partner and much of the economic vitality and strength we are enjoying here is due to our relationship with China."
In the mid-west region near Geraldton a consortium of five Chinese companies, including Sinosteel and Ansteel, is backing a $3 billion port and rail project via an investment in the unlisted Yilgarn Infrastructure.
The Foreign Investment Review Board approved the Chinese involvement last month, and it is understood the application was considered within the standard 40-day process with no serious hiccups.
The Queensland Premier, Anna Bligh, in her previous role as infrastructure minister, met Chinalco's Xiao in September, when she granted a mining development licence for a $3 billion bauxite project in Cape York to Chinalco's subsidiary Chalco. At the time Bligh hailed the prospect of the largest single foreign investment in Queensland history, saying it would create thousands of jobs.
Many Foreign Investment Review Board applications contain supportive submissions from Australian partners or target companies. That is not always the case, if the investment involves a transfer of an existing shareholding rather than an injection of development funding.
A recent purchase of shares in Mount Gibson Iron by a Chinese state-owned enterprise, the Shougang group, has received a prickly response from the company.
Mount Gibson is expected to raise concerns with both the Takeovers Panel and the Foreign Investment Review Board.
On January 31 Shougang filed a notice with the Australian Securities Exchange disclosing an agreement to buy 9.7 per cent of Mount Gibson from the Russian Gazmetall group with an option to buy a further 10 per cent. It will pay the Russian company $408 million for the combined 19.7 per cent.
Mount Gibson has responded by pointing out that Shougang also has an interest in another Mount Gibson shareholder, APAC Resources, which has 20 per cent. Shougang's 18 per cent stake in APAC appears low enough to prevent Shougang being considered in control of both the Gazmetall and the APAC stakes, which could trigger a Corporations Act requirement for a full bid.
But Mount Gibson is gathering information about the history of the relationship between Shougang and APAC, both in terms of current links via third parties and the reasons for Shougang's decision last year to reduce its holding in APAC. Should such issues about the application of the Takeovers Code, which could crop up in transactions involving Australian investors, be raised with the Foreign Investment Review Board?
There is certainly nothing to stop Mount Gibson urging the board to consider the manner in which the investment was made, as well as the outcome. But more to the point will be Mount Gibson's arguments that unlike other emerging West Australian iron ore companies it is already a producer and is not in the market for development capital. It is likely to ask the board to consider whether Shougang, as a prospective customer for Mount Gibson's iron ore, might end up controlling the output.
In such cases the argument normally goes that this could be to the detriment of other customers and could depress the value Australia extracts from its natural resources.
This issue also cropped up this week after Chinalco bought its stake in Rio. Was it acting as a member of China Inc, in the interests of Chinese steelmaker customers of BHP and Rio?
Carpenter warned against a repeat of the unjustified "frenzy of fear" that greeted Japanese investment in the resources sector in the 1960s.
The Australia China Business Council's Hopgood-Brown is optimistic about the national response. Born in the United States, he moved to Australia 11 years ago after a long stint in Asia. "One of the great things about the society and the economy in Australia is that people have been able to take a much more dispassionate, objective view than in the United States and Europe of what it means to have an economy that's intertwined with the global economy," he says.
"Frequently in other countries there's a very politicised and not very objective debate."
This week the US presidential candidate Barack Obama said: "I am concerned if these … sovereign wealth funds are motivated by more than just market considerations, and that's obviously a possibility."
Last month the US Senate ordered an inquiry by the Government Accountability Office into government investment vehicles from Asia and the Middle East that have also taken large stakes in the US banks and finance houses Citigroup, Merrill Lynch and Bear Stearns.
Three weeks ago the German Economics Ministry confirmed it was considering a law that would allow Berlin to intervene in investments by funds controlled by foreign governments, and the European Commission has begun an inquiry into whether market stability is threatened by the increasing role of such funds. The issue of a co-ordinated regulatory approach is expected to be raised at a meeting of Group of Seven finance ministers in Tokyo today.
Meanwhile, it appears inevitable that Rudd and the Treasurer, Wayne Swan, who administers the foreign investment regime, have not received their last challenging application from a Chinese investor.
Five challenges
• Risk management
Decisions on how much risk to take in a fund and the management of that risk are critical to long-term value creation in a superannuation fund. Taking risk effectively requires good governance, to set strategy and monitor and control progress. Given that the investment world is dynamic and competitive, those governance resources need to be able to adapt to change in order to secure a competitive advantage.
• Focus on appropriate time horizon
The differences between short-term and long-term investing are significant. Most institutional funds have a long-term investment mission. The governance challenge is generally to manage to the long-term plan but be resilient to the short-term pressures that build up from time to time. Best-practice funds had built up a balance around these issues.
• Innovation capability
The concept of "early mover advantage" in the corporate world is well-known. In the context of investment markets, it relates to successfully identifying and accessing markets and asset classes early in the cycle, ahead of the crowd. Funds investing in newer, less popular asset classes, newer strategies, or newer managers face many challenges. This places significant demands on governance, not least from the challenge of peer pressure.
• Alignment with a clear mission
Institutional funds have difficulty with their mission. A particular complication for superannuation funds is their shared purpose. The role of a superannuation fund is to produce value propositions for both members and sponsors, but sometimes it will be difficult to satisfy both needs. A clear statement of goals is an important step to building alignment between the parties, so that the appropriate investment risk profile and strategy can be identified. Best-practice funds tend to have not only a clear primary objective, but a number of defined secondary objectives which enable all parties to match operational goals with the mission.
• Managing agents
In general, superannuation funds are not resourced to manage all of their activities in-house, and consequently employ agents in both advice and delegated roles. This exposes them to the risk that the goals of the agents do not align with those of the superannuation fund. Governance is critical to monitor and control these misalignments, particularly with a large line-up of managers. Best-practice funds are experts in managing these agents and building good alignment.
Data to keep stocks on edge with recession looming
Retail sales likely to highlight consumer woes; commodities resume surge
Feb. 9, 2008
NEW YORK (MarketWatch) -- Investors will closely monitor data next week, given concerns that a recession might already be at hand, while a renewed surge in commodities prices is raising concerns about the Federal Reserve’s ability to continue cutting interest rates to boost the economy.
“Anything that points to an economy that is [decelerating] is going to get a reaction,” said Owen Fitzpatrick, head of the U.S. equity group at Deutsche Bank. Of particular interest for investors will be January retail-sales data, to be released on Wednesday.
Stocks plunged on Tuesday, with the Dow industrials tumbling to their biggest drop in nearly a year, after news that the service sector, which constitutes 70% of the U.S. economy, contracted in January and signalled that a recession may be taking hold.
While traders sought bargains after Tuesday’s tumble, notably in technology shares, the major stocks indexes all finished with weekly losses of more than 4%.
Post-Fed rally fizzles
After sliding for three months as bad U.S. home loans led to a global financial crisis, the market had shown signs of recovery as the Fed aggressively brought down interest rates to 3% in less than two weeks.
“We had the November, December and January sell-off before the Fed, with its Superman costume on, came flying into town,” said Peter Boockvar, equity strategist at Miller Tabak.
“But the recession case continues to build and upside gains tougher and tougher to come by,” he added. “What we had was a bear-market rally, and this week’s pullback shows that. We’re now in no man’s land.”
While a number of Fed officials spoke about the economy and the credit crisis throughout the week, the market showed little reaction, preferring to keep its attention on hard economic data.
Commodities surge
Commodities such as oil, metals, sugar and wheat surged Friday for a variety of factors, including weather conditions in China, talk of cutbacks among oil producers and overall dwindling supplies.
“The surge in commodities prices serves as a reminder of the persistence of inflation, which has not abated much despite the deep economic slowdown in the United States,” said Tony Crescenzi, fixed-income strategist at Miller Tabak.
The surge in commodities highlights “the difficulties the Fed would have in cutting rates” down to 1% as it did from 2001 to 2003 after the bursting of the tech bubble, according to Crescenzi.
Interest rates tend to affect the economy with a lag, meaning that much-lower interest rates probably won’t start providing a boost to the economy until later this year. But by then, some investors fear that a resurgence of financial liquidity and still-high commodities prices will stoke inflation, making things harder for consumers.
Economic data
Next week, investors will turn to January retail sales on Wednesday for the latest snapshot on U.S. consumers.
With news that employment had fallen in January, fuelling fears of recession, the market also will pay particular attention to weekly jobless claims on Thursday. Friday will bring a New York manufacturing survey for February, industrial-production data and import prices for January, which might provide clues on inflation.
“If the U.S. economy drags down other economies, then commodities prices would come down,” said Paul Nolte, director of investments at Hinsdale Associates. “Commodities remain more of an international story, with foreign economies such as China growing at a rate that is faster than in the United States.”
Downbeat earnings
While earnings will likely again taking a backseat to economic and credit woes, another 44 companies from the S&P 500 will be reporting quarterly results. Those include Dow component General Motors Corp. on Tuesday and Coca Cola on Wednesday.
With 364 of the S&P 500 companies having already reported results, “earnings” in the past quarter are expected to have dropped 20.2% from the previous year, mostly due to the heavy impact of bad results by financial firms, according to Thomson Financial.
Excluding the financial sector, earnings are expected to have risen 11.7%.
Other weak sector earnings include materials, which are expected to be down 17%, hit by poor results at the likes of Alcoa Inc. and Freeport-McMoRan Copper & Gold Inc. Earnings at consumer-discretionary firms, weighed down by home builders, are expected to have fallen 15%.
Stronger sectors include technology, where earnings are expected to have risen 26%, led by software firms such as Oracle Corp. and Microsoft, as well as hardware firms such as IBM, Hewlett-Packard and Apple Inc.
But dark clouds may be gathering for earnings going forward. According to Thomson, first-quarter earnings estimates have continued to come down. The estimate for overall earnings growth for the current quarter now stands at 0.9%, compared with 2.2% at the start of the quarter.
“Financials are again the biggest culprits, but the trend is visible across the board for all of the S&P’s 10 sectors,” said John Butters, analyst at Thomson Financial.
Bear Stearns Is `Short' Subprime Mortgages $1 Billion
By Bradley Keoun
Feb. 8 (Bloomberg) -- Bear Stearns Cos., the U.S. securities firm that posted its first-ever loss last quarter on mortgage writedowns, has more than $1 billion of trades that profit if subprime home loans and bonds continue to deteriorate.
The ``short'' positions on subprime mortgage securities increased from $600 million at the end of November, Chief Financial Officer Sam Molinaro said today at an investor conference in Naples, Florida. The company also reduced its holdings of so-called collateralized debt obligations and underlying bonds, Molinaro said.
The sinking value of assets tied to mortgages led to Bear Stearns's fourth-quarter loss of $854 million, and Molinaro said today that one of the firm's biggest mistakes was ``not being conservative enough and bearish enough on the subprime market.'' The firm has reversed ``long'' subprime trades that stood at $1 billion at the end of August, Molinaro said.
``There's definitely a lot of short plays out there,'' said Mark Adelson, a founding member of Adelson & Jacob Consulting in Long Island City, New York. Some subprime bonds ``could easily be bad enough that they don't pay off a penny,'' said Adelson, a former Nomura Holdings Inc. mortgage analyst.
In an interview after Molinaro's remarks, Bear Stearns spokesman Russell Sherman said the New York-based firm's subprime trades are a ``hedge'' against potential losses on investments in higher-rated mortgages, he said.
Offsetting Positions
``We are using short positions to offset other long positions in our mortgage inventory,'' Sherman said. He didn't provide details on specific trades.
The company, the fifth-largest U.S. securities firm by market value, dropped 46 percent in New York trading last year, more than any Wall Street rival, leading James ``Jimmy'' Cayne to hand the chief executive officer role to Alan Schwartz last month.
Bear Stearns fell $2.36, or 2.8 percent, to $80.67 in composite trading on the New York Stock Exchange at 4:10 p.m.
Last year's performance by Bear Stearns contrasts with that of hedge fund manager John Paulson's Paulson & Co., which made $2.7 billion in fees in the first nine months of the year by betting against subprime-mortgage bonds as more borrowers fell behind on monthly payments.
Two Bear Stearns hedge funds that invested in securities tied to mortgages collapsed in July, prompting investors to shun the debt. Bear Stearns had to bail out the funds and take possession of many of the securities.
Less Exposure
``We have significantly reduced our exposures'' to the subprime mortgage market and CDOs, Molinaro said.
The world's largest banks and securities firms have reported at least $146 billion of writedowns and credit losses stemming from the ensuing credit-market contraction, according to Bloomberg data.
About 30 percent of Bear Stearns's fixed-income revenue comes from mortgages and related securities, according to estimates from Sanford C. Bernstein & Co. analyst Brad Hintz. The company's $1.9 billion mortgage writedown wiped out revenue in the three months ended Nov. 30.
Adelson said he would pay more attention to Bear Stearns's strategy shift if it were coming from Berkshire Hathaway Inc. Chairman Warren Buffett.
``I think of Warren Buffett as a guy who's almost always right, and at this stage of the game I don't think of Bear that way,'' Adelson said.
WSJ - INVESTORS hoping for calm after U.S. banks reported large write-downs last month are likely to be disappointed: European banks are about to come clean, and the outlook isn't pretty.
Today, Germany's Deutsche Bank AG reports fourth-quarter results. On Feb. 14, Switzerland's UBS AG, facing problems on several fronts, is expected to provide new details on the write-downs tied to U.S. real estate that the bank reported in limited scope last month.
Attention in the second half of the month turns to the U.K. Barclays PLC reports Feb. 19, and Royal Bank of Scotland Group PLC on Feb. 28. Neither has detailed its exposure to securities since late last year. They are expected to update investors on how much of their holdings could be at risk of falling in value because they are backed by financially weak bond insurers.
As banks globally grapple with souring investments tied to U.S. subprime mortgages, Europe's banks have added to the problems for investors because they differ in how they value their credit exposure.
Because they report after U.S. banks, Europe's giants are expected to shed light on new problems. Analysts are predicting write-downs for exposure to bond insurance, leveraged loans, commercial-mortgage securities, and 'alt-A' mortgages, which rank a step above subprime loans in terms of risk and borrower default.
'It will be difficult for them to give us very upbeat update guidance for next year,' said Jon Peace, banking analyst at Lehman Brothers. 'Investors have been unwilling to buy the banks because they don't know where the next bomb is.'
The DJ Stoxx 600 banks index, which is made up of 61 of Europe's biggest banks, has fallen 25% since September and 16% this year. In the U.S., the Keefe, Bruyette & Woods Bank Index, measuring two dozen U.S. financial-service companies, has fallen 17% since September and risen 0.4% this year. Further drops in Europe may be ahead.
Representatives for Deutsche Bank, UBS, Barclays and RBS declined to comment before their earnings reports.
In the U.K., the widening cost of credit default swaps -- contracts that act as insurance against bank defaults -- is raising banks' costs, noted Credit Suisse analyst Jonathan Pierce in a report yesterday. In the past week, for example, Barclays's credit default swaps have increased to 78.9 basis points from 65, according to London data firm Markit Group Ltd. That means it costs 78,900 euros, or about $117,000, a year to cover 10 million euros of Barclays debt against default. Credit swaps for smaller U.K. mortgage lenders are even higher, with Alliance & Leicester PLC now at 250 basis points, compared with 225 a week ago.
And in a fresh problem area for banks, commercial-mortgage-backed securities are declining in value, Mr. Pierce said. His report noted that Barclays owns GBP 10 billion ($19.6 billion) in such securities. UBS last week increased its fourth-quarter write-downs by $4 billion and, though the bank didn't detail the source of the additional costs, analysts believe that some are losses tied to commercial property.
'Clearly the data suggests continued nervousness in the credit markets,' Mr. Pierce wrote, telling investors to stay 'cautious' on U.K. banks.
Many of Europe's banks have been global leaders in packaging and selling complex debt pools such as collateralized debt obligations, and with investors no longer buying those products, banks are seeing revenue erode. Morgan Stanley estimates that credit revenue in U.K. investment-banking departments known as fixed-income, currencies and commodities, or FICC, will fall 30% to 40% this year. At Royal Bank of Scotland, credit accounted for about 13% of total FICC revenue in 2007, while credit accounted for nearly 8% of Barclays FICC revenue last year.
Ratings company Standard & Poor's, citing a slowdown in capital-markets revenue, changed its outlook for U.K. and European banks Barclays, Dresdner Bank AG, Deutsche and UBS from stable to negative on Jan. 30. Scott Bugie, an S&P analyst in Paris, said that a negative outlook means there is a roughly 33% chance that a bank's credit rating would be downgraded. If that happens, it becomes more expensive for a bank to sell debt.
Bank 'performance will decline, and the decline will last two years minimum,' Mr. Bugie said.
As a result, the costs for banks to raise money is rising. Issuing senior unsecured debt costs as much as 10 times as much as a year ago in some cases.
European banks also are expected to signal how rising costs are hurting earnings, and also if banks are increasing borrowing costs for consumers as a result. Some borrowing costs have 'absolutely ballooned,' said Jackie Ineke, Morgan Stanley credit analyst.
'The concern is that banks are far less willing to lend now due to the far higher cost of funding,' Ms. Ineke said.
WSJ - A new problem is rippling through credit markets: Many of the corporate loans used to finance giant buyouts in the past few years are reeling in secondary market trading, making it virtually impossible for banks to unload other commitments they have made. The loans of First Data Corp., which was taken private in September by Kohlberg Kravis Roberts & Co. for about US$28 billion, were sold into the market this past fall at a 4% discount to their par value; they now trade in the market at a steep 11.5% discount to par value. Loans of Freescale Semiconductor Inc., taken private by a consortium of private-equity firms in December 2006 for about US$28 billion, are trading at a 15.5% discount to their original value; Tribune Co., which was taken private in April by investor Sam Zell for US$8.2 billion, issued loans now trading a 26% discount.
The loans are known by investors as "leveraged loans," used by companies often with low credit ratings to raise money, often for buyouts. They are issued by banks and sold to investors like junk bonds, though leveraged loans tend to be safer because their investors get paid off in a bankruptcy before junk-bond investors. Double-digit declines in the market value of these loans are very unusual, and a big problem for many banks, which sit on a pipeline of US$152 billion in loans that they have promised to make but have yet to sell to investors. With the prices of existing loans tumbling, investors have little incentive to buy new loans unless they are sold at steep discounts, something banks are reluctant to do.
The result: More assets building up on bank balance sheets, growing tensions among rival bankers who had grown accustomed during the buyout boom to cooperating with each other and a deepening crisis in the market for buyout debt. The crisis started last summer, when investors turned up their noses at billions of dollars in buyout debt, just after many buyout firms and their bankers made commitments to history-making megadeals. Many investors say January was the worst performance for this market since those summer months.
Finance professor Edward Altman projects that high-yield, or "junk," bonds will default by a rate of 4.64% this year. That would be the highest rate since 2003 and a nine-fold increase from the 0.51% rate in 2007, which was the lowest rate since 1981. High-yield debt is typically used by lower credit-quality companies to fund operations and acquisitions.
Mr. Altman, whose so-called Altman-Z score is the market standard for predicting bankruptcy, sees as much as US$53 billion in high-yield debt defaulting in 2008, up from US$5.5 billion in 2007. Mr. Altman's study takes into account a company's original credit rating when it received its financing, historic default rates, the size of debts outstanding, and other factors.
Already in January, Mr. Altman estimated defaults hit US$3.2 billion, about 60% of the total for all of 2007. New high-yield issues totaled a near-record of US$141 billion in 2007, but almost US$100 billion of that was in the first six months of the year before the credit market slowdown took fuller hold. In a recent Federal Reserve survey of senior bank-loan officers, one-third of U.S. banks and two-thirds of foreign banks said they had tightened lending on commercial and industrial loans. Half the banks said they widened the spread between their cost of funds and what they charge corporate borrowers.
Besides the tight credit market, bond defaults could also be driven up by the large amount of high-yield debt coming due. As companies look to roll over this debt, they will either have to pay higher interest rates or will be shut out entirely by lenders. Mr. Altman estimates about US$160 billion in leveraged loans and about US$30 billion in high-yield bonds will come due this year, a similar amount in 2009, followed by even more between 2010 and 2013.
Given the highly vulnerable state of the US and European economies, what would happen to global growth if the Chinese juggernaut also started sputtering? Few investors or policymakers seem to be seriously contemplating this scenario.
China’s remarkable resilience to both the 2001 global recession and the 1997-98 Asian financial crisis has convinced almost everyone that another year of double-digit growth is all but inevitable. In fact, the odds of a significant growth recession in China – at least one year of sub-6 per cent growth – during the next couple of years are 50:50. With Chinese inflation spiking, notable backpedalling on market reforms and falling export demand, 2008 could be particularly challenging.
True, reality has consistently flattened China forecasters who are anything less than ebullient. With 11.4 per cent growth in 2007 and the Olympics coming up this summer, why should 2008 be different? With all due respect to the extraordinary recent performance of China’s managers, the country faces economic, financial, social and political landmines just like any other emerging market, with epic environmental problems to boot. And, throughout history, no emerging market has escaped bouts of crisis indefinitely.
Inflation of more than 6 per cent is the immediate problem. Those who think inflation is caused by too little pork rather than too much money are wrong. China’s relatively pegged exchange rate system has led the authorities to flood the economy with renminbi. Rampant money supply growth is the flipside of the country’s $1,400bn accumulation of foreign currency reserves. The real surprise is that inflation did not sprout earlier.
The authorities must stuff the inflation genie back in the bottle. It is not going to be easy in an economy where highly controlled financial markets render normal instruments of monetary control relatively ineffective.
Until now, China has avoided this problem, as millions of idle farm workers moved to the cities, keeping wages in check. But as many of the most able workers have already migrated, the challenge of filling China’s burgeoning factories is intensifying.
Protectionism is another growing risk. With income and wealth inequality rising throughout the developed world, politicians may start lashing out at China with trade sanctions on automobile parts, steel, paper products and, of course, textiles. China’s explosive export growth has made it far more vulnerable to a fall in exports than it was during the 2001 global recession.
Perhaps the greatest threat to China’s expansion, however, comes from pressures created by its own exploding inequality levels. According to World Bank statistics, income inequality in China has leapfrogged that of the US and Russia, which is no small feat. Rising inequality is placing enormous strains on the political system, as is evident from a recent sequence of ill-considered policies that have been aimed at mitigating the problem. The government’s recent attempt to fight food inflation by using price controls is a highly conspicuous example.
But so, too, is the dubious new labour law which, at least on paper, prevents companies from firing workers with 10 years or more experience. It is as if China hopes to transform itself into France. Indeed, the greatest danger to China’s economy is that, after years of market-oriented reform, the country’s leadership seems to be losing faith in markets and adopting policies such as rationing that turn back the clock to old-style communist days. With rising inflation, bloated investment and a soft global economy, now is hardly the time for China to make its system more inflexible. Historically, emerging markets get into trouble when policy reform is moving backwards at the same time as an economic or financial crisis is starting to unfold. Rather than try to deal with inequality by labour market fiat, the government would do better to improve the social safety net through provision of more and better healthcare and pensions.
Rather than deal with inflation through price caps, China should accelerate exchange-rate appreciation, thereby reining in money growth. If China were to slow dramatically, while growth in Europe and the US was still weak, recent low global interest rates, high commodity prices and strong global growth would be history. Global policymakers and investors who are losing sleep over US growth ought to pay more attention to rising risks coming from the other side of the globe.
By Richard McGregor in Beijing and Geoff Dyer in Shanghai 4 February 2008
The World Bank has cut its forecast for Chinese economic growth this year to 9.6 per cent – which would be nearly 2 percentage points lower than last year’s outcome – adding to a firming consensus that the economy will slow because of decelerating exports and a weakening global outlook.
The bank says in its quarterly report on the Chinese economy, however, that China is well-placed to manage the knock-on effects of any global slowdown because of a strong domestic economy and the government’s relatively buoyant financial position.
Indeed, the bank says a weaker global economy may dovetail with the aims of Chinese policymakers by relieving inflation pressures, their paramount concern, and restraining the contentious trade surplus.
The bank’s new forecast of 9.6 per cent for 2008, down from the 10.8 per cent it released last September, is towards the lower end of predictions in recent weeks by China economists.
“The slowdown in the global economy should affect China’s exports and investment in the tradable sector,” said David Dollar, the World Bank’s country director for China.
“However, the momentum of domestic demand should remain robust and a modest global slowdown could contribute to rebalancing of the economy.”
China’s economy grew by 11.4 per cent in 2007, the fifth consecutive year in which output has risen at double-digit rates.
Separately, on Monday, shares in mainland China soared more than 8 per cent after optimistic statements by government officials eased concerns about the damage done by the recent severe weather, which had fuelled fears of a slowdown in the economy.
Investors were also cheered by two new equity investment funds being approved, by the lifting of some restrictions on new bank credit and by indications that a huge planned fund-raising might be reduced.
In what appeared to be a co-ordinated effort by the government to try to boost investor confidence, several newspapers ran prominent articles citing upbeat government statements.
Zhu Hongren, a senior official at the main planning agency, said only part of the country had been affected by bad weather. “The impact on the entire economy is limited,” he said.
Investors also reacted to a stinging rebuke in an official newspaper of Ping An Insurance’s plans for a $22bn rights issue, which was announced last month and which contributed to the recent sharp decline in the market.
A commentary in the People’s Daily, the mouthpiece of the Communist party, criticised the company for giving only a vague justification for the fund-raising.
The Shanghai composite index, which had been down 30 per cent from the high it reached in October, rose 8.1 per cent to close at 4671.6 points.
U.S. drug regulators are re-evaluating the safety of Botox, best known as a wrinkle treatment, based on reports of serious ill effects, including several deaths among children taking Botox or a related drug.
In a public alert issued Friday, the Food and Drug Administration said Botox, along with a similar drug called Myobloc, has been linked to life-threatening symptoms such as strained breathing and severe difficulty in swallowing, which can lead to a form of pneumonia. The FDA is advising doctors to monitor patients for such reactions while it decides whether to strengthen warnings on the drugs' labels.
Many of the most serious reactions - deaths and hospitalizations - occurred among children treated for cerebral palsy-associated limb spasticity, the agency said. The drugs are not FDA-approved for that use in children or adults.
FDA-approved drugs often have off-label uses, where physicians take medications approved for one disease to treat another. This practice often benefits patients and drug manufacturers, but can increase risks.
The cosmetic use of Botox has made it one of the most recognized names in the pharmaceutical industry and a pop culture bellwether in a nation that defies aging. Manufacturer Allergan Inc. estimates it will yield as much as $1.4 billion in 2008.
Botox and Myobloc are each forms of a toxin produced by bacteria that can paralyze muscles and lead to botulism, a fatal food poisoning. But in small amounts, the injected toxins can calm muscle spasms. A third product, Botox Cosmetic, is FDA-approved to improve the appearance of wrinkles between the eyebrows.
The FDA said case reports under review suggest that the toxin may migrate from the point of injection more commonly than had been believed, and can cause symptoms of botulism. That danger had already been recognized on the drugs' labels, but only in patients treated for neuromuscular disorders.
"FDA now has evidence that similar, potentially life-threatening systemic toxicity from the use of botulinum toxin products can also result after local injection in patients with other underlying conditions," the agency report said. The serious symptoms were seen "following treatment of a variety of conditions using a wide range of botulinum toxin doses."
The drug watchdog group Public Citizen, which petitioned the FDA in January to issue broad warnings about Botox and Myobloc, said the agency's alert does too little to protect patients.
"It's not enough that the FDA publicly acknowledges the risk of using botulinum toxin; in fact, the agency did this much in a published article three years ago," said Sidney Wolfe, director of Public Citizen's Health Research Group. The organization wants the FDA to label the products with a "black box" warning - the agency's strongest form of warning. It also wants warning letters sent to individual doctors, as well as written guides that would be handed to patients each time they receive an injection.
Botox and Botox Cosmetic are products of Allergan Inc. of Irvine. Botox is approved for spasms of the eyelids, cervical dystonia or severe neck muscle spasms, and excess sweating. Myobloc, made by Solstice Neurosciences Inc. of South San Francisco, is approved for the treatment of adults with cervical dystonia.
Both Solstice and Allergan said the FDA announcement is not a final verdict on their drugs' side effects. Such "early communications" are issued with the advisory: "Posting this information does not mean that FDA has concluded there is a causal relationship between the drug products and the emerging safety issue."
Allergan said serious symptoms in the cases discussed by the FDA usually occurred when patients received higher doses, rather than the small amounts used in cosmetic injections.
"Since its approval, over a million people have been treated with Botox Cosmetic. In its entire history, there has never been a single reported death where a causal link to Botox Cosmetic was established," said Dr. Sef Kurstjens, Allergan's chief medical officer.
Shares in Allergan dropped nearly 6 percent to close at $63.30 on Friday. Solstice isn't publicly traded.
The FDA did not disclose how many deaths occurred in the cases under its review, but said none were adults. Some adults with serious symptoms were hospitalized.
In its petition to the FDA, Public Citizen said its own review of serious side effects reported to drug regulators turned up 180 cases where patients had trouble swallowing, inhaled food into their lungs or developed pneumonia. Of those 180, 16 died, including four children, the organization said. Public Citizen counted 12 deaths among adults.
The obscure China Development Bank is to be transformed from policy lender to international player
The China State Council’s plan to turn the China Development Bank into a commercial institution should transform what has been an obscure policy bank into a global financial player. It is also an indication of how China, besides routing investments through its sovereign investment fund, intends to use some of its massive US$1.4 trillion in foreign exchange reserves.
Approval should come soon for the 14-year-old bank to list on the stock market in the first half of this year, and it should quickly become both a major lender to the booming domestic market and an international investor following both its own commercial instincts and national policy objectives. And, while it may be obscure, it is already China’s most profitable bank and one of the biggest bond issuers in the country.
Even before the change, the bank has been aggressively carving out a foreign presence. As an indication of its ambitions, it acquired a stake in Barclays Bank last July, has invested in six overseas funds, including two worth a combined US$10 billion in Africa and Venezuela, and was about to bid for a stake in Citibank in January when the State Council vetoed the idea. It is looking eagerly for other foreign acquisitions.
It also has back-door clout. Its governor, Chen Yuan, is the only bank chief in China who is a full minister and member of the ruling State Council. Chen, 62, is the son of Chen Yun, a leading revolutionary organizer in the 1920s and 30s and one of the “Eight Immortals” of the Communist Party who was a senior policy maker for 50 years until his death in April 1995, at the age of 89.
The CDB was created in March 1994 to provide policy loans to major projects designated by the government, especially transport, communications, basic industries and infrastructure. These projects included the Three Gorges Dam and Shanghai Pudong airport. It does not take retail deposits and has only about 32 branches and four representative offices across the country.
Then a deputy governor of the central bank, Chen was put in charge of the CDB in 1998 and drove a rapid expansion of its loan portfolio to 2.3 trillion yuan at the end of 2006 from 1.04 trillion yuan in 2002. The surprise in all this was that such policy lending did not, as it had for the previous 40 years, mean losses but profits. Despite doubling its loan portfolio, the bank’s ratio of non-performing loans fell from 2.54 percent in 2002 to 0.75 percent at the end of 2006 and 0.59 per cent at the end of last year. It has posted a net profit every year, reaching 28 billion yuan in 2006, up from 12 billion yuan in 2002.
Chen lobbied hard to change the institution into a commercial bank, arguing that infrastructure projects could raise money on their own and were no longer dependent on policy loans. He said that China needed a well-funded financial institution as part of the state policy of overseas expansion.
His arguments convinced his colleagues in the State Council, who approved the bank’s US$3 billion purchase of a 3-percent Barclays stake. Last December the China Investment Corp announced that it was injecting US$20 billion into CDB, “to raise its capital adequacy ratio, reduce its vulnerability to risk and help its all-round commercialization.”
The State Council plan will allow the CDB to do middle and long-term financing and limited short-term business, but exclude it from retail and foreign exchange in order to differentiate it from other commercial banks. It will have two separate account books, one for national loans and the other for company loans: one will cover policy loans and the other commercial ones.
CDB has set up two funds, each with US$5 billion. One is the Sino-African Development Fund, to invest in, manage and advise projects in Africa. The other, the Sino-Venezuelan Fund, was set up at the request of President Hugo Chavez, who visited China last year. It provides loans to Venezuelan companies that export oil to China, which has become a major customer. Beijing is exploiting the West’s antagonism to Chavez to increase its oil purchases and economic presence in that country.
Chen’s most audacious play came last month when he proposed taking a stake in Citi after its heavy losses due to the sub-prime crisis. Such a large investment required the approval of the State Council, which was split. Some argued that this was a rare opportunity to buy a piece of one of the biggest American banks at a bargain price and that the share price would recover.
But the majority ruled against it, saying that CDB had not completed its transition into a commercial bank and did not have sufficient expertise to manage such an investment. Opponents also pointed out that Barclays’ share price has dropped one third since CBD bought it last July.
On January 15, Citigroup announced a net loss of US9.83 billion for the fourth quarter 2007, its biggest loss since 1998. Citi turned for funds to the Kuwait Investment Authority, Prince Alwaleed bin Talal of Saudi Arabia, the Government Investment Corporation of Singapore and other corporate investors.
In January, the CDB announced an investment of US$30 million for 8.57 percent of a new US$350 million Infinity I-China Fund, which has a 10-year term and will invest in high-technology companies.
The largest privately owned investment house in Israel, Infinity has managed US$500 million in an Israeli-Chinese technology fund since 1993, with offices in Tel Aviv, Suzhou, Hong Kong and New York.
This was CDB’s sixth overseas investment, following those in Africa and Venezuela and joint venture funds in Belgium, Italy and Asean. Last week the bank denied a report in the Chinese media that it would pay US$5 billion for a stake in United Bank for Africa, one of the four biggest banks in Nigeria.
CDB will be the first of three policy banks to list, probably in the first half of this year. The other two are China Everbright Bank and Agriculture Bank.
Yahoo Board Intends to Turn Down Microsoft's Unsolicited $44.6 Billion Takeover Bid
SAN FRANCISCO (AP) -- Yahoo Inc.'s board will reject Microsoft Corp.'s $44.6 billion takeover bid after concluding the unsolicited offer undervalues the slumping Internet pioneer, a person familiar with the situation said Saturday.
The decision could provoke a showdown between two of the world's most prominent technology companies with Internet search leader Google Inc. looming in the background. Leery of Microsoft expanding its turf on the Internet, Google already has offered to help Yahoo avert a takeover and urged antitrust regulators to take a hard look at the proposed deal.
If the world's largest software maker wants Yahoo badly enough, Microsoft could try to override Yahoo's board by taking its offer -- originally valued at $31 per share -- directly to the shareholders. Pursuing that risky route probably will require Microsoft to attempt to oust Yahoo's current 10-member board.
Alternatively, Microsoft could sweeten its bid. Many analysts believe Microsoft is prepared to offer as much as $35 per share for Yahoo, which still boasts one of the Internet's largest audiences and most powerful advertising vehicles despite a prolonged slump that has hammered its stock.
Yahoo's board reached the decision after exploring a wide variety of alternatives during the past week, according to the person who spoke to The Associated Press. The person didn't want to be identified because the reasons for Yahoo's rebuff won't be officially spelled out until Monday morning.
Microsoft and Yahoo declined to comment Saturday on the decision, first reported by The Wall Street Journal on its Web site.
Yahoo's board concluded Microsoft's offer is inadequate even though the company couldn't find any other potential bidders willing to offer a higher price.
Without other suitors on the horizon, Yahoo has had little choice but to turn a cold shoulder toward Microsoft if the board hopes to fulfill its responsibility to fetch the highest price possible for the company, said technology investment banker Ken Marlin.
"You would expect Yahoo's board to reject Microsoft at first," Marlin said. "If they didn't, they would be accused of malfeasance."
But by spurning Microsoft, Yahoo risks further alienating shareholders already upset about management missteps that have led to five consecutive quarters of declining profits.
The downturn caused Yahoo's stock price to plummet by more than 40 percent, erasing about $20 billion in shareholder wealth, in the three months leading up to Microsoft's bid.
Seizing on an opportunity to expand its clout on the Internet, Microsoft dangled a takeover offer that was 62 percent above Yahoo's stock price of just $19.18 when the bid was announced Feb. 1. Yahoo shares ended the past week at $29.20.
Led by company co-founder and board member Jerry Yang, Yahoo now will be under intense pressure to lay out a strategy that will prevent its stock price from collapsing again. What's more, Yang and the rest of the management team must convince Wall Street that they can boost Yahoo's market value beyond Microsoft's offer.
Yahoo's shares traded at $31 as recently as November, but have eroded steadily amid concerns about the slowing economy and frustration with the slow pace of a turnaround that Yang promised last June when he replaced former movie studio mogul Terry Semel as Yahoo's chief executive officer.
This isn't the first time that Yahoo has spurned Microsoft. The Redmond, Wash.-based company offered $40 per share to buy Yahoo a year ago only to be shooed away by Semel, according to a person familiar with the matter. The person didn't want to be identified because that bid was never made public.
Yahoo now may want that Microsoft to raise its price to at least $40 per share again. That would force Microsoft to raise its current offer by about $12 billion -- a high price that might alarm its own shareholders.
Microsoft's stock price already has slid 12 percent since the company announced its Yahoo bid, reflecting concerns about the deal bogging down amid potential management distractions, sagging employee morale and other headaches that frequently arise when two big companies are combined.
Although it isn't involved directly in the deal, Google is the main reason Yahoo is being pursued by Microsoft.
Yahoo has struggled largely because it hasn't been able to target online ads as effectively as Google.
Microsoft believes Yahoo's brand, engineers, audience and services will provide the company with valuable weapons in its so far unsuccessful attempt to narrow Google's huge lead in the lucrative Internet search and advertising markets.
As it examined ways to thwart Microsoft, Yahoo considered an advertising partnership with Google -- an alliance long favored by analysts who believe it would boost the profits of both companies. It was unclear Saturday if Yahoo's plans for boosting its stock price include a Google partnership, which would probably face antitrust issues.
A Microsoft takeover of Yahoo would also be scrutinized by antitrust regulators in the United States and Europe. The antitrust uncertainties could be cited as one of the reasons that Yahoo's board decided to spurn Microsoft.
LONDON (AFP) - OPEC could switch the pricing of oil from dollars into euros within a decade, secretary general Abdullah al-Badri told a weekly magazine.
The Organization of the Petroleum Exporting Countries could adopt the euro to combat the decline of the dollar, Badri told the Middle East Economic Digest (MEED), published in London.
"Maybe we can price the oil in the euro. It can be done, but it will take time," he said.
Badri told MEED the change could happen within a decade, the magazine said.
MEED recalled that OPEC is under pressure from its members, who have seen their earnings decline sharply since 2000 due to its use of the dollar. The US currency has fallen 44 percent in value against the euro in that time.
The publication of Badri's remarks coincided with the euro rising against the dollar on the foreign exchanges Friday. The euro peaked of 1.4547 dollars at around 1800 GMT, though it has since weakened.
"In oil exchanges in New York, Singapore or Dubai, you can see the currency is the euro or the yen," Badri said.
"But as long as we see the final sign in dollar, that means the pricing is in dollars.
"It took two world wars and more than 50 years for the dollar to become the dominant currency. Now we are seeing another strong currency coming into the (frame), which is the euro."
Some OPEC members, notably Iran and Venezuela, have been calling for the group to study the declining dollar's effect on their economies. Iran has already begun pricing most of its oil in euros.
MEED recalled that the pricing of oil in dollars is a sensitive topic. Saudi Arabia's Foreign Minister Prince Saud al-Faisal warned OPEC late last year that the dollar could plunge if OPEC publicly discussed abandoning it.
On Tuesday, Badri told reporters in London that several oil exporters were selling in dollars but buying other commodities in euros, calling the latter a strong currency.
The comments served to underline the difficulties currently facing oil exporting countries.
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China markets may be poised for losses after holiday
February 8 2008
NEW YORK, Feb 8 (Reuters) - The Year of the Rat is ready to spring a nasty little trap on investors in Chinese equities when trading in Hong Kong and Shanghai resumes after this week’s long holiday celebration.
A sharp decline in the two major Chinese stock indexes appears inevitable after U.S.-traded shares of overseas companies tumbled this week as signs of a recession grew.
Chinese ADRs, or American Depositary Receipts, were among the worst performers, in part because Chinese exporters rely so heavily on the U.S. market.
Shares that trade in local markets are now poised to play catch-up -- or more to the point, play catch-down -- with their ADR counterparts.
The Bank of New York’s index of leading American Depositary Receipts (ADRs) fell about 6 percent for the week, while the 30-share Dow Jones industrial average declined 4.4 percent.
On Friday, the index was down 0.37 percent, while the Dow was off 0.53 percent.
“I suspect that unless there’s some kind of recovery in equities around the world, (Chinese stocks) are going to open lower. That shouldn’t be much of a surprise,” said Donald H. Straszheim, vice chairman, Roth Capital Partners, LLC, in Los Angeles. “Evidence continues to accumulate that global growth is slowing and the U.S. is clearly slowing.”
Some of the hardest-hit Chinese ADRs included oil refiner PetroChina Co Ltd, based in Beijing, which was down 4.9 percent for the week; Yanzhou Coal Mining Co Ltd, down 7.1 percent for the week; and the Aluminum Corp of China Ltd, down 6.1 percent.
Other ADRs not dual listed in Shanghai and Hong Kong, but widely tracked in the Chinese market suffered even heavier losses.
China Internet search company Baidu.com Inc, down 13.2 percent this week, and China solar panel maker Suntech Power Holdings Co Ltd, down 18.9 percent.
The Shanghai Composite Index, which last traded on Feb. 5 and was already closed when Wall Street registered its worst daily loss in a year later in the global trading day, is due to reopen on Wednesday.
Meanwhile, Hong Kong’s Hang Seng Index, which last traded in a half-day session on Feb. 6 after getting buffetted by at least some of Wall Street’s downdraft, will reopen on Monday.
Global equity markets have been on the defensive all week on worries about a possible U.S. recession, but Chinese markets have yet to take the full brunt of the economic news that came this week.
Tuesday’s sell-off in U.S. stocks was the biggest since a global equity rout that started in China on just the second day back after last year’s new year holiday.
China could be especially hurt by a U.S. recession since it is a heavy exporter to the United States, manufacturing many products sold here by big U.S. companies including Wal-Mart Stores Inc.
Expectations of “weaker growth in China is already being reflected in some of those Chinese ADRs, and I think there will be more,” Straszheim said.
Friday marked the first anniversary of the emergence of the U.S. subprime turmoil, when news of profit warnings stemming from bad home loans hit U.S. markets.
On Feb. 27 last year, a drop in China’s market led a global equities sell-off. The Dow plunged more than 400 points that day, and a period of heavy market volatility ensued, but U.S. stocks soon recovered most of those losses.
“I think people will be anxiously watching what happens when China, Hong Kong, Korea reopen,” said John Praveen, chief investment strategist at Prudential International Investments Advisers LLC in Newark, New Jersey.
Among other U.S.-listed Chinese shares, Beijing-based Huaneng Power International Inc was down 4.4 percent and China Life Insurance Co Ltd lost 4.3 percent.
Enter the hungry dragon
February 9, 2008
China is ready to be a key player on the world investment stage, and Australian companies are firmly in its sights, writes Elisabeth Sexton.
This week's flying visit by the urbane, unflappable Xiao Yaqing delivered an unmistakable message: Chinese money is changing Australian business.
A $15 billion surprise raid on the share register of the miner Rio Tinto by the company Xiao runs, the state-owned aluminium producer Chinalco, was a dramatic means of confirming that the second wave of China's economic influence is under way.
It remains to be seen how Chinalco's abrupt interruption of BHP Billiton's drawn-out stalking of Rio plays out. Whichever way it ends, it is now suddenly clear to all local investors and companies that the Chinese have the funds and the guts to be big players in the stockmarket. And while the resources sector is attracting most attention, Chinese companies are also bobbing up on the registers of Australian industrial companies.
The purchase of 12 per cent of Rio's UK arm (via a joint venture vehicle to which US aluminium company Alcoa contributed $US1.2 billion) was the largest single foreign investment by a Chinese company.
It outranked Industrial & Commercial Bank of China's $US5.5 billion ($6.2 billion) purchase of 20 per cent of Standard Bank Group of South Africa in October and China Investment Corp's injection of $US5 billion into the Wall Street investment firm Morgan Stanley in December. Both involved the issue of new capital.
Unlike those moves, the investment in Rio shares, which equates to 9 cent of the dual-listed company, was not welcomed.
Standard Bank's chief executive, Jacko Maree, described his new 20 per cent shareholder as bringing "numerous complementary benefits to the relationship".
Morgan Stanley's chairman, John Mack, announcing the Chinese investment along with $US9 billion in write-downs related to the US mortgage market, said it would "enhance growth opportunities globally, while also building on Morgan Stanley's deep historic ties and market leadership in China".
In contrast, Rio's chairman, Paul Skinner, issued a brief statement. "This unsolicited development, of which we had no prior notice, reinforces our view of the long-term value of Rio Tinto," he said.
China's rapid industrial growth has already been credited with shielding Australia from much of the financial gloom enveloping the United States and Europe. Chinese demand for Australian commodities was a major factor in the Reserve Bank of Australia's decision on Tuesday to raise interest rates, while its US and European counterparts are cutting them.
In phase two, China will be more active.
With foreign reserves of $US1.5 trillion in December - almost double the $US819 billion recorded just two years earlier - and a generation of business leaders already familiar with transactions and joint ventures with Western companies, Chinese firms are ready to call the shots.
They are well placed to take advantage of what the Reserve Bank governor, Glenn Stevens, on Tuesday called "fragile" sentiment in international capital and equity markets.
The chairman of the Australia China Business Council, Kevin Hobgood-Brown, a Sydney lawyer, says China's new role in world markets is a natural progression as its economy develops.
"People have been predicting it for a number of years now, and it's only going to be particularly noticeable in the first years as that [investment] flow commences," Hobgood-Brown says.
"I think it's a healthy development because it means that China, like all developed economies, has a more multi-faceted stake in the success and strength of the global economy."
There is a difference between Chinese firms and their first-world counterparts that invest in global markets. The Chinese companies with the most clout are all owned by the Government. While this gives them privileged access to funds, often via government financiers such as the China Development Bank, it also brings a political dimension to their investments that is not always welcome in target countries.
Around the globe the rise in Chinese direct foreign investment is raising concerns that it is not being driven by commercial rationale but aimed at boosting Chinese development and employment, or other policy or strategic goals, at the expense of other countries.
Attracting particular attention is last year's establishment of the China Investment Corporation, a so-called sovereign wealth fund.
In a paper published in December, two Australian Treasury officials, Will Devlin and Bill Brummitt, defined these bodies as "any government-controlled fund that manages and invests government savings, regardless of the revenue source". The Future Fund set up by the Howard government with the proceeds of the last part of the Telstra privatisation is another example.
The China Investment Corporation was formally set up in September, although by then it had already made a big splash by injecting $US3 billion into the US investment firm Blackstone. The Chinese Government gave the corporation a starting kitty of $US200 billion and, according to its announcement of the Blackstone purchase, a mandate to be "an investment vehicle with respect to the foreign exchange reserve of the People's Republic of China".
Its 10 per cent stake in Blackstone is in non-voting shares. Similarly, Morgan Stanley said in December that the corporation would "have no special rights of ownership and no role in the management of Morgan Stanley, including no right to designate a member of the firm's board of directors".
On Thursday a US congressional committee called financial and market regulators to a hearing to debate whether the benefits of Chinese capital during the subprime crisis were outweighed by concerns about currency manipulation and the difficulty of supervising market activities by government bodies.
In Australia, "direct investments by foreign governments and their agencies" trigger the interest of the Foreign Investment Review Board irrespective of the size of the investment. (For non-government investors, the usual threshold is a 15 per cent stake.)
Any proposals for such investments "should be notified to the Government for approval", according to a summary of Australia's policy published by the Federal Treasury.
During a convoluted exchange with reporters after a meeting with China's Foreign Minister, Yang Jiechi, the Prime Minister, Kevin Rudd, said the policy of reviewing direct investments by foreign government agencies was "as relevant to the national interest considerations as anything else".
Rudd would not be drawn on whether Chinalco fell under the description of "foreign government agency".
"I presume this will be the subject of deliberations between the staff of the Foreign Investment Review Board and those seeking clarification of the facts from the Chinese investor," he said.
According to Chinalco's website, it is "one of the key state enterprises managed by the central government directly".
Ian McCubbin, a Melbourne lawyer, says all Chinese state-owned enterprises apply to the Foreign Investment Review Board as a matter of course. "The Australian Government's position is that all those well-known Chinese enterprises that are now investing in these major projects in Australia are all regarded by FIRB and other agencies as government enterprises for the purposes of that policy," says McCubbin, who heads the China practice at the law firm Deacons.
For 20 years the state-owned enterprises have been notifying the board about their proposals, and throughout that time "FIRB hasn't raised any national interest issues and the applications have simply been approved without much fanfare," McCubbin says. The regulator has been more concerned about the development of Australian assets than the ownership of the foreign investor, he says.
"The sort of issues that have been put to us might be whether a major resource in Australia might not be developed in an optimum way, or whether a timetable reflects Australia's best interests [where] an applicant company might have other projects of a similar nature around the world that might take priority."
Longstanding investments by Chinese state-owned enterprises include the stake in Victoria's Portland aluminium smelter, now 22 per cent, held by the investment conglomerate CITIC since 1985, and Rio's 1987 Channar iron ore joint venture with what is now Sinosteel, China's largest raw materials supplier and sales agent for steel mills.
But McCubbin says the applications to the Foreign Investment Review Board are coming much faster now, and are more commonly involving proposals to buy shares rather than joint venture stakes.
He cites three recent policy changes by a newly outward-focused Chinese Government driving the change, starting with the China Investment Corporation. His second factor is Beijing's recent change to the rules governing investments by its banks, particularly the China Development Bank. They are now encouraged to finance projects outside China.
The third factor is the Government's recent blessing for state-owned enterprises to invest directly in foreign stockmarkets.
"Over the last 12 months approvals from the National Development and Reform Commission and the other authorities in Beijing seem to have been freed up to all the state enterprises to participate in equity markets more easily," he says. "Now we are starting to look at the prospects of takeovers by Chinese companies."
In the past few months several companies listed on the Australian Securities Exchange have reported investment by Chinese companies.
A focus has been the mid-west region of Western Australia, where iron ore projects have caught the attention of steel companies, although others include the chemical manufacturer Nufarm and the China-focused dairy company Montec. In some cases the target companies are in the market for development finance and are happy to strike a deal with their future customers.
State premiers have been vocal supporters of development funding. The West Australian Premier, Alan Carpenter, whose state has benefited most from Chinese money, spoke up after Chinalco's move attracted criticism.
"I welcome Chinese investment in Western Australia," Carpenter said. "China has become our most important, our biggest, trade partner and much of the economic vitality and strength we are enjoying here is due to our relationship with China."
In the mid-west region near Geraldton a consortium of five Chinese companies, including Sinosteel and Ansteel, is backing a $3 billion port and rail project via an investment in the unlisted Yilgarn Infrastructure.
The Foreign Investment Review Board approved the Chinese involvement last month, and it is understood the application was considered within the standard 40-day process with no serious hiccups.
The Queensland Premier, Anna Bligh, in her previous role as infrastructure minister, met Chinalco's Xiao in September, when she granted a mining development licence for a $3 billion bauxite project in Cape York to Chinalco's subsidiary Chalco. At the time Bligh hailed the prospect of the largest single foreign investment in Queensland history, saying it would create thousands of jobs.
Many Foreign Investment Review Board applications contain supportive submissions from Australian partners or target companies. That is not always the case, if the investment involves a transfer of an existing shareholding rather than an injection of development funding.
A recent purchase of shares in Mount Gibson Iron by a Chinese state-owned enterprise, the Shougang group, has received a prickly response from the company.
Mount Gibson is expected to raise concerns with both the Takeovers Panel and the Foreign Investment Review Board.
On January 31 Shougang filed a notice with the Australian Securities Exchange disclosing an agreement to buy 9.7 per cent of Mount Gibson from the Russian Gazmetall group with an option to buy a further 10 per cent. It will pay the Russian company $408 million for the combined 19.7 per cent.
Mount Gibson has responded by pointing out that Shougang also has an interest in another Mount Gibson shareholder, APAC Resources, which has 20 per cent. Shougang's 18 per cent stake in APAC appears low enough to prevent Shougang being considered in control of both the Gazmetall and the APAC stakes, which could trigger a Corporations Act requirement for a full bid.
But Mount Gibson is gathering information about the history of the relationship between Shougang and APAC, both in terms of current links via third parties and the reasons for Shougang's decision last year to reduce its holding in APAC. Should such issues about the application of the Takeovers Code, which could crop up in transactions involving Australian investors, be raised with the Foreign Investment Review Board?
There is certainly nothing to stop Mount Gibson urging the board to consider the manner in which the investment was made, as well as the outcome. But more to the point will be Mount Gibson's arguments that unlike other emerging West Australian iron ore companies it is already a producer and is not in the market for development capital. It is likely to ask the board to consider whether Shougang, as a prospective customer for Mount Gibson's iron ore, might end up controlling the output.
In such cases the argument normally goes that this could be to the detriment of other customers and could depress the value Australia extracts from its natural resources.
This issue also cropped up this week after Chinalco bought its stake in Rio. Was it acting as a member of China Inc, in the interests of Chinese steelmaker customers of BHP and Rio?
Carpenter warned against a repeat of the unjustified "frenzy of fear" that greeted Japanese investment in the resources sector in the 1960s.
The Australia China Business Council's Hopgood-Brown is optimistic about the national response. Born in the United States, he moved to Australia 11 years ago after a long stint in Asia. "One of the great things about the society and the economy in Australia is that people have been able to take a much more dispassionate, objective view than in the United States and Europe of what it means to have an economy that's intertwined with the global economy," he says.
"Frequently in other countries there's a very politicised and not very objective debate."
This week the US presidential candidate Barack Obama said: "I am concerned if these … sovereign wealth funds are motivated by more than just market considerations, and that's obviously a possibility."
Last month the US Senate ordered an inquiry by the Government Accountability Office into government investment vehicles from Asia and the Middle East that have also taken large stakes in the US banks and finance houses Citigroup, Merrill Lynch and Bear Stearns.
Three weeks ago the German Economics Ministry confirmed it was considering a law that would allow Berlin to intervene in investments by funds controlled by foreign governments, and the European Commission has begun an inquiry into whether market stability is threatened by the increasing role of such funds. The issue of a co-ordinated regulatory approach is expected to be raised at a meeting of Group of Seven finance ministers in Tokyo today.
Meanwhile, it appears inevitable that Rudd and the Treasurer, Wayne Swan, who administers the foreign investment regime, have not received their last challenging application from a Chinese investor.
Five challenges
• Risk management
Decisions on how much risk to take in a fund and the management of that risk are critical to long-term value creation in a superannuation fund. Taking risk effectively requires good governance, to set strategy and monitor and control progress. Given that the investment world is dynamic and competitive, those governance resources need to be able to adapt to change in order to secure a competitive advantage.
• Focus on appropriate time horizon
The differences between short-term and long-term investing are significant. Most institutional funds have a long-term investment mission. The governance challenge is generally to manage to the long-term plan but be resilient to the short-term pressures that build up from time to time. Best-practice funds had built up a balance around these issues.
• Innovation capability
The concept of "early mover advantage" in the corporate world is well-known. In the context of investment markets, it relates to successfully identifying and accessing markets and asset classes early in the cycle, ahead of the crowd. Funds investing in newer, less popular asset classes, newer strategies, or newer managers face many challenges. This places significant demands on governance, not least from the challenge of peer pressure.
• Alignment with a clear mission
Institutional funds have difficulty with their mission. A particular complication for superannuation funds is their shared purpose. The role of a superannuation fund is to produce value propositions for both members and sponsors, but sometimes it will be difficult to satisfy both needs. A clear statement of goals is an important step to building alignment between the parties, so that the appropriate investment risk profile and strategy can be identified. Best-practice funds tend to have not only a clear primary objective, but a number of defined secondary objectives which enable all parties to match operational goals with the mission.
• Managing agents
In general, superannuation funds are not resourced to manage all of their activities in-house, and consequently employ agents in both advice and delegated roles. This exposes them to the risk that the goals of the agents do not align with those of the superannuation fund. Governance is critical to monitor and control these misalignments, particularly with a large line-up of managers. Best-practice funds are experts in managing these agents and building good alignment.
Source: Watson Wyatt/Oxford University.
Data to keep stocks on edge with recession looming
Retail sales likely to highlight consumer woes; commodities resume surge
Feb. 9, 2008
NEW YORK (MarketWatch) -- Investors will closely monitor data next week, given concerns that a recession might already be at hand, while a renewed surge in commodities prices is raising concerns about the Federal Reserve’s ability to continue cutting interest rates to boost the economy.
“Anything that points to an economy that is [decelerating] is going to get a reaction,” said Owen Fitzpatrick, head of the U.S. equity group at Deutsche Bank.
Of particular interest for investors will be January retail-sales data, to be released on Wednesday.
Stocks plunged on Tuesday, with the Dow industrials tumbling to their biggest drop in nearly a year, after news that the service sector, which constitutes 70% of the U.S. economy, contracted in January and signalled that a recession may be taking hold.
While traders sought bargains after Tuesday’s tumble, notably in technology shares, the major stocks indexes all finished with weekly losses of more than 4%.
Post-Fed rally fizzles
After sliding for three months as bad U.S. home loans led to a global financial crisis, the market had shown signs of recovery as the Fed aggressively brought down interest rates to 3% in less than two weeks.
“We had the November, December and January sell-off before the Fed, with its Superman costume on, came flying into town,” said Peter Boockvar, equity strategist at Miller Tabak.
“But the recession case continues to build and upside gains tougher and tougher to come by,” he added. “What we had was a bear-market rally, and this week’s pullback shows that. We’re now in no man’s land.”
While a number of Fed officials spoke about the economy and the credit crisis throughout the week, the market showed little reaction, preferring to keep its attention on hard economic data.
Commodities surge
Commodities such as oil, metals, sugar and wheat surged Friday for a variety of factors, including weather conditions in China, talk of cutbacks among oil producers and overall dwindling supplies.
“The surge in commodities prices serves as a reminder of the persistence of inflation, which has not abated much despite the deep economic slowdown in the United States,” said Tony Crescenzi, fixed-income strategist at Miller Tabak.
The surge in commodities highlights “the difficulties the Fed would have in cutting rates” down to 1% as it did from 2001 to 2003 after the bursting of the tech bubble, according to Crescenzi.
Interest rates tend to affect the economy with a lag, meaning that much-lower interest rates probably won’t start providing a boost to the economy until later this year. But by then, some investors fear that a resurgence of financial liquidity and still-high commodities prices will stoke inflation, making things harder for consumers.
Economic data
Next week, investors will turn to January retail sales on Wednesday for the latest snapshot on U.S. consumers.
With news that employment had fallen in January, fuelling fears of recession, the market also will pay particular attention to weekly jobless claims on Thursday. Friday will bring a New York manufacturing survey for February, industrial-production data and import prices for January, which might provide clues on inflation.
“If the U.S. economy drags down other economies, then commodities prices would come down,” said Paul Nolte, director of investments at Hinsdale Associates. “Commodities remain more of an international story, with foreign economies such as China growing at a rate that is faster than in the United States.”
Downbeat earnings
While earnings will likely again taking a backseat to economic and credit woes, another 44 companies from the S&P 500 will be reporting quarterly results. Those include Dow component General Motors Corp. on Tuesday and Coca Cola on Wednesday.
With 364 of the S&P 500 companies having already reported results, “earnings” in the past quarter are expected to have dropped 20.2% from the previous year, mostly due to the heavy impact of bad results by financial firms, according to Thomson Financial.
Excluding the financial sector, earnings are expected to have risen 11.7%.
Other weak sector earnings include materials, which are expected to be down 17%, hit by poor results at the likes of Alcoa Inc. and Freeport-McMoRan Copper & Gold Inc. Earnings at consumer-discretionary firms, weighed down by home builders, are expected to have fallen 15%.
Stronger sectors include technology, where earnings are expected to have risen 26%, led by software firms such as Oracle Corp. and Microsoft, as well as hardware firms such as IBM, Hewlett-Packard and Apple Inc.
But dark clouds may be gathering for earnings going forward. According to Thomson, first-quarter earnings estimates have continued to come down. The estimate for overall earnings growth for the current quarter now stands at 0.9%, compared with 2.2% at the start of the quarter.
“Financials are again the biggest culprits, but the trend is visible across the board for all of the S&P’s 10 sectors,” said John Butters, analyst at Thomson Financial.
Bear Stearns Is `Short' Subprime Mortgages $1 Billion
By Bradley Keoun
Feb. 8 (Bloomberg) -- Bear Stearns Cos., the U.S. securities firm that posted its first-ever loss last quarter on mortgage writedowns, has more than $1 billion of trades that profit if subprime home loans and bonds continue to deteriorate.
The ``short'' positions on subprime mortgage securities increased from $600 million at the end of November, Chief Financial Officer Sam Molinaro said today at an investor conference in Naples, Florida. The company also reduced its holdings of so-called collateralized debt obligations and underlying bonds, Molinaro said.
The sinking value of assets tied to mortgages led to Bear Stearns's fourth-quarter loss of $854 million, and Molinaro said today that one of the firm's biggest mistakes was ``not being conservative enough and bearish enough on the subprime market.'' The firm has reversed ``long'' subprime trades that stood at $1 billion at the end of August, Molinaro said.
``There's definitely a lot of short plays out there,'' said Mark Adelson, a founding member of Adelson & Jacob Consulting in Long Island City, New York. Some subprime bonds ``could easily be bad enough that they don't pay off a penny,'' said Adelson, a former Nomura Holdings Inc. mortgage analyst.
In an interview after Molinaro's remarks, Bear Stearns spokesman Russell Sherman said the New York-based firm's subprime trades are a ``hedge'' against potential losses on investments in higher-rated mortgages, he said.
Offsetting Positions
``We are using short positions to offset other long positions in our mortgage inventory,'' Sherman said. He didn't provide details on specific trades.
The company, the fifth-largest U.S. securities firm by market value, dropped 46 percent in New York trading last year, more than any Wall Street rival, leading James ``Jimmy'' Cayne to hand the chief executive officer role to Alan Schwartz last month.
Bear Stearns fell $2.36, or 2.8 percent, to $80.67 in composite trading on the New York Stock Exchange at 4:10 p.m.
Last year's performance by Bear Stearns contrasts with that of hedge fund manager John Paulson's Paulson & Co., which made $2.7 billion in fees in the first nine months of the year by betting against subprime-mortgage bonds as more borrowers fell behind on monthly payments.
Two Bear Stearns hedge funds that invested in securities tied to mortgages collapsed in July, prompting investors to shun the debt. Bear Stearns had to bail out the funds and take possession of many of the securities.
Less Exposure
``We have significantly reduced our exposures'' to the subprime mortgage market and CDOs, Molinaro said.
The world's largest banks and securities firms have reported at least $146 billion of writedowns and credit losses stemming from the ensuing credit-market contraction, according to Bloomberg data.
About 30 percent of Bear Stearns's fixed-income revenue comes from mortgages and related securities, according to estimates from Sanford C. Bernstein & Co. analyst Brad Hintz. The company's $1.9 billion mortgage writedown wiped out revenue in the three months ended Nov. 30.
Adelson said he would pay more attention to Bear Stearns's strategy shift if it were coming from Berkshire Hathaway Inc. Chairman Warren Buffett.
``I think of Warren Buffett as a guy who's almost always right, and at this stage of the game I don't think of Bear that way,'' Adelson said.
Banks To Break Bad News
Carrick Mollenkamp
8 February 2008
WSJ - INVESTORS hoping for calm after U.S. banks reported large write-downs last month are likely to be disappointed: European banks are about to come clean, and the outlook isn't pretty.
Today, Germany's Deutsche Bank AG reports fourth-quarter results. On Feb. 14, Switzerland's UBS AG, facing problems on several fronts, is expected to provide new details on the write-downs tied to U.S. real estate that the bank reported in limited scope last month.
Attention in the second half of the month turns to the U.K. Barclays PLC reports Feb. 19, and Royal Bank of Scotland Group PLC on Feb. 28. Neither has detailed its exposure to securities since late last year. They are expected to update investors on how much of their holdings could be at risk of falling in value because they are backed by financially weak bond insurers.
As banks globally grapple with souring investments tied to U.S. subprime mortgages, Europe's banks have added to the problems for investors because they differ in how they value their credit exposure.
Because they report after U.S. banks, Europe's giants are expected to shed light on new problems. Analysts are predicting write-downs for exposure to bond insurance, leveraged loans, commercial-mortgage securities, and 'alt-A' mortgages, which rank a step above subprime loans in terms of risk and borrower default.
'It will be difficult for them to give us very upbeat update guidance for next year,' said Jon Peace, banking analyst at Lehman Brothers. 'Investors have been unwilling to buy the banks because they don't know where the next bomb is.'
The DJ Stoxx 600 banks index, which is made up of 61 of Europe's biggest banks, has fallen 25% since September and 16% this year. In the U.S., the Keefe, Bruyette & Woods Bank Index, measuring two dozen U.S. financial-service companies, has fallen 17% since September and risen 0.4% this year. Further drops in Europe may be ahead.
Representatives for Deutsche Bank, UBS, Barclays and RBS declined to comment before their earnings reports.
In the U.K., the widening cost of credit default swaps -- contracts that act as insurance against bank defaults -- is raising banks' costs, noted Credit Suisse analyst Jonathan Pierce in a report yesterday. In the past week, for example, Barclays's credit default swaps have increased to 78.9 basis points from 65, according to London data firm Markit Group Ltd. That means it costs 78,900 euros, or about $117,000, a year to cover 10 million euros of Barclays debt against default. Credit swaps for smaller U.K. mortgage lenders are even higher, with Alliance & Leicester PLC now at 250 basis points, compared with 225 a week ago.
And in a fresh problem area for banks, commercial-mortgage-backed securities are declining in value, Mr. Pierce said. His report noted that Barclays owns GBP 10 billion ($19.6 billion) in such securities. UBS last week increased its fourth-quarter write-downs by $4 billion and, though the bank didn't detail the source of the additional costs, analysts believe that some are losses tied to commercial property.
'Clearly the data suggests continued nervousness in the credit markets,' Mr. Pierce wrote, telling investors to stay 'cautious' on U.K. banks.
Many of Europe's banks have been global leaders in packaging and selling complex debt pools such as collateralized debt obligations, and with investors no longer buying those products, banks are seeing revenue erode. Morgan Stanley estimates that credit revenue in U.K. investment-banking departments known as fixed-income, currencies and commodities, or FICC, will fall 30% to 40% this year. At Royal Bank of Scotland, credit accounted for about 13% of total FICC revenue in 2007, while credit accounted for nearly 8% of Barclays FICC revenue last year.
Ratings company Standard & Poor's, citing a slowdown in capital-markets revenue, changed its outlook for U.K. and European banks Barclays, Dresdner Bank AG, Deutsche and UBS from stable to negative on Jan. 30. Scott Bugie, an S&P analyst in Paris, said that a negative outlook means there is a roughly 33% chance that a bank's credit rating would be downgraded. If that happens, it becomes more expensive for a bank to sell debt.
Bank 'performance will decline, and the decline will last two years minimum,' Mr. Bugie said.
As a result, the costs for banks to raise money is rising. Issuing senior unsecured debt costs as much as 10 times as much as a year ago in some cases.
European banks also are expected to signal how rising costs are hurting earnings, and also if banks are increasing borrowing costs for consumers as a result. Some borrowing costs have 'absolutely ballooned,' said Jackie Ineke, Morgan Stanley credit analyst.
'The concern is that banks are far less willing to lend now due to the far higher cost of funding,' Ms. Ineke said.
Corporate Credit Risk
6 February 2008
WSJ - A new problem is rippling through credit markets: Many of the corporate loans used to finance giant buyouts in the past few years are reeling in secondary market trading, making it virtually impossible for banks to unload other commitments they have made. The loans of First Data Corp., which was taken private in September by Kohlberg Kravis Roberts & Co. for about US$28 billion, were sold into the market this past fall at a 4% discount to their par value; they now trade in the market at a steep 11.5% discount to par value. Loans of Freescale Semiconductor Inc., taken private by a consortium of private-equity firms in December 2006 for about US$28 billion, are trading at a 15.5% discount to their original value; Tribune Co., which was taken private in April by investor Sam Zell for US$8.2 billion, issued loans now trading a 26% discount.
The loans are known by investors as "leveraged loans," used by companies often with low credit ratings to raise money, often for buyouts. They are issued by banks and sold to investors like junk bonds, though leveraged loans tend to be safer because their investors get paid off in a bankruptcy before junk-bond investors. Double-digit declines in the market value of these loans are very unusual, and a big problem for many banks, which sit on a pipeline of US$152 billion in loans that they have promised to make but have yet to sell to investors. With the prices of existing loans tumbling, investors have little incentive to buy new loans unless they are sold at steep discounts, something banks are reluctant to do.
The result: More assets building up on bank balance sheets, growing tensions among rival bankers who had grown accustomed during the buyout boom to cooperating with each other and a deepening crisis in the market for buyout debt. The crisis started last summer, when investors turned up their noses at billions of dollars in buyout debt, just after many buyout firms and their bankers made commitments to history-making megadeals. Many investors say January was the worst performance for this market since those summer months.
Finance professor Edward Altman projects that high-yield, or "junk," bonds will default by a rate of 4.64% this year. That would be the highest rate since 2003 and a nine-fold increase from the 0.51% rate in 2007, which was the lowest rate since 1981. High-yield debt is typically used by lower credit-quality companies to fund operations and acquisitions.
Mr. Altman, whose so-called Altman-Z score is the market standard for predicting bankruptcy, sees as much as US$53 billion in high-yield debt defaulting in 2008, up from US$5.5 billion in 2007. Mr. Altman's study takes into account a company's original credit rating when it received its financing, historic default rates, the size of debts outstanding, and other factors.
Already in January, Mr. Altman estimated defaults hit US$3.2 billion, about 60% of the total for all of 2007. New high-yield issues totaled a near-record of US$141 billion in 2007, but almost US$100 billion of that was in the first six months of the year before the credit market slowdown took fuller hold. In a recent Federal Reserve survey of senior bank-loan officers, one-third of U.S. banks and two-thirds of foreign banks said they had tightened lending on commercial and industrial loans. Half the banks said they widened the spread between their cost of funds and what they charge corporate borrowers.
Besides the tight credit market, bond defaults could also be driven up by the large amount of high-yield debt coming due. As companies look to roll over this debt, they will either have to pay higher interest rates or will be shut out entirely by lenders. Mr. Altman estimates about US$160 billion in leveraged loans and about US$30 billion in high-yield bonds will come due this year, a similar amount in 2009, followed by even more between 2010 and 2013.
China may yet be economy to lose sleep over
By Kenneth Rogoff
4 February 2008
Given the highly vulnerable state of the US and European economies, what would happen to global growth if the Chinese juggernaut also started sputtering? Few investors or policymakers seem to be seriously contemplating this scenario.
China’s remarkable resilience to both the 2001 global recession and the 1997-98 Asian financial crisis has convinced almost everyone that another year of double-digit growth is all but inevitable. In fact, the odds of a significant growth recession in China – at least one year of sub-6 per cent growth – during the next couple of years are 50:50. With Chinese inflation spiking, notable backpedalling on market reforms and falling export demand, 2008 could be particularly challenging.
True, reality has consistently flattened China forecasters who are anything less than ebullient. With 11.4 per cent growth in 2007 and the Olympics coming up this summer, why should 2008 be different? With all due respect to the extraordinary recent performance of China’s managers, the country faces economic, financial, social and political landmines just like any other emerging market, with epic environmental problems to boot. And, throughout history, no emerging market has escaped bouts of crisis indefinitely.
Inflation of more than 6 per cent is the immediate problem. Those who think inflation is caused by too little pork rather than too much money are wrong. China’s relatively pegged exchange rate system has led the authorities to flood the economy with renminbi. Rampant money supply growth is the flipside of the country’s $1,400bn accumulation of foreign currency reserves. The real surprise is that inflation did not sprout earlier.
The authorities must stuff the inflation genie back in the bottle. It is not going to be easy in an economy where highly controlled financial markets render normal instruments of monetary control relatively ineffective.
Until now, China has avoided this problem, as millions of idle farm workers moved to the cities, keeping wages in check. But as many of the most able workers have already migrated, the challenge of filling China’s burgeoning factories is intensifying.
Protectionism is another growing risk. With income and wealth inequality rising throughout the developed world, politicians may start lashing out at China with trade sanctions on automobile parts, steel, paper products and, of course, textiles. China’s explosive export growth has made it far more vulnerable to a fall in exports than it was during the 2001 global recession.
Perhaps the greatest threat to China’s expansion, however, comes from pressures created by its own exploding inequality levels. According to World Bank statistics, income inequality in China has leapfrogged that of the US and Russia, which is no small feat. Rising inequality is placing enormous strains on the political system, as is evident from a recent sequence of ill-considered policies that have been aimed at mitigating the problem. The government’s recent attempt to fight food inflation by using price controls is a highly conspicuous example.
But so, too, is the dubious new labour law which, at least on paper, prevents companies from firing workers with 10 years or more experience. It is as if China hopes to transform itself into France. Indeed, the greatest danger to China’s economy is that, after years of market-oriented reform, the country’s leadership seems to be losing faith in markets and adopting policies such as rationing that turn back the clock to old-style communist days. With rising inflation, bloated investment and a soft global economy, now is hardly the time for China to make its system more inflexible. Historically, emerging markets get into trouble when policy reform is moving backwards at the same time as an economic or financial crisis is starting to unfold. Rather than try to deal with inequality by labour market fiat, the government would do better to improve the social safety net through provision of more and better healthcare and pensions.
Rather than deal with inflation through price caps, China should accelerate exchange-rate appreciation, thereby reining in money growth. If China were to slow dramatically, while growth in Europe and the US was still weak, recent low global interest rates, high commodity prices and strong global growth would be history. Global policymakers and investors who are losing sleep over US growth ought to pay more attention to rising risks coming from the other side of the globe.
China ‘on course for growth slowdown’
By Richard McGregor in Beijing and Geoff Dyer in Shanghai
4 February 2008
The World Bank has cut its forecast for Chinese economic growth this year to 9.6 per cent – which would be nearly 2 percentage points lower than last year’s outcome – adding to a firming consensus that the economy will slow because of decelerating exports and a weakening global outlook.
The bank says in its quarterly report on the Chinese economy, however, that China is well-placed to manage the knock-on effects of any global slowdown because of a strong domestic economy and the government’s relatively buoyant financial position.
Indeed, the bank says a weaker global economy may dovetail with the aims of Chinese policymakers by relieving inflation pressures, their paramount concern, and restraining the contentious trade surplus.
The bank’s new forecast of 9.6 per cent for 2008, down from the 10.8 per cent it released last September, is towards the lower end of predictions in recent weeks by China economists.
“The slowdown in the global economy should affect China’s exports and investment in the tradable sector,” said David Dollar, the World Bank’s country director for China.
“However, the momentum of domestic demand should remain robust and a modest global slowdown could contribute to rebalancing of the economy.”
China’s economy grew by 11.4 per cent in 2007, the fifth consecutive year in which output has risen at double-digit rates.
Separately, on Monday, shares in mainland China soared more than 8 per cent after optimistic statements by government officials eased concerns about the damage done by the recent severe weather, which had fuelled fears of a slowdown in the economy.
Investors were also cheered by two new equity investment funds being approved, by the lifting of some restrictions on new bank credit and by indications that a huge planned fund-raising might be reduced.
In what appeared to be a co-ordinated effort by the government to try to boost investor confidence, several newspapers ran prominent articles citing upbeat government statements.
Zhu Hongren, a senior official at the main planning agency, said only part of the country had been affected by bad weather. “The impact on the entire economy is limited,” he said.
Investors also reacted to a stinging rebuke in an official newspaper of Ping An Insurance’s plans for a $22bn rights issue, which was announced last month and which contributed to the recent sharp decline in the market.
A commentary in the People’s Daily, the mouthpiece of the Communist party, criticised the company for giving only a vague justification for the fund-raising.
The Shanghai composite index, which had been down 30 per cent from the high it reached in October, rose 8.1 per cent to close at 4671.6 points.
Drug regulators re-evaluating Botox's safety
Bernadette Tansey
February 9, 2008
U.S. drug regulators are re-evaluating the safety of Botox, best known as a wrinkle treatment, based on reports of serious ill effects, including several deaths among children taking Botox or a related drug.
In a public alert issued Friday, the Food and Drug Administration said Botox, along with a similar drug called Myobloc, has been linked to life-threatening symptoms such as strained breathing and severe difficulty in swallowing, which can lead to a form of pneumonia. The FDA is advising doctors to monitor patients for such reactions while it decides whether to strengthen warnings on the drugs' labels.
Many of the most serious reactions - deaths and hospitalizations - occurred among children treated for cerebral palsy-associated limb spasticity, the agency said. The drugs are not FDA-approved for that use in children or adults.
FDA-approved drugs often have off-label uses, where physicians take medications approved for one disease to treat another. This practice often benefits patients and drug manufacturers, but can increase risks.
The cosmetic use of Botox has made it one of the most recognized names in the pharmaceutical industry and a pop culture bellwether in a nation that defies aging. Manufacturer Allergan Inc. estimates it will yield as much as $1.4 billion in 2008.
Botox and Myobloc are each forms of a toxin produced by bacteria that can paralyze muscles and lead to botulism, a fatal food poisoning. But in small amounts, the injected toxins can calm muscle spasms. A third product, Botox Cosmetic, is FDA-approved to improve the appearance of wrinkles between the eyebrows.
The FDA said case reports under review suggest that the toxin may migrate from the point of injection more commonly than had been believed, and can cause symptoms of botulism. That danger had already been recognized on the drugs' labels, but only in patients treated for neuromuscular disorders.
"FDA now has evidence that similar, potentially life-threatening systemic toxicity from the use of botulinum toxin products can also result after local injection in patients with other underlying conditions," the agency report said. The serious symptoms were seen "following treatment of a variety of conditions using a wide range of botulinum toxin doses."
The drug watchdog group Public Citizen, which petitioned the FDA in January to issue broad warnings about Botox and Myobloc, said the agency's alert does too little to protect patients.
"It's not enough that the FDA publicly acknowledges the risk of using botulinum toxin; in fact, the agency did this much in a published article three years ago," said Sidney Wolfe, director of Public Citizen's Health Research Group. The organization wants the FDA to label the products with a "black box" warning - the agency's strongest form of warning. It also wants warning letters sent to individual doctors, as well as written guides that would be handed to patients each time they receive an injection.
Botox and Botox Cosmetic are products of Allergan Inc. of Irvine. Botox is approved for spasms of the eyelids, cervical dystonia or severe neck muscle spasms, and excess sweating. Myobloc, made by Solstice Neurosciences Inc. of South San Francisco, is approved for the treatment of adults with cervical dystonia.
Both Solstice and Allergan said the FDA announcement is not a final verdict on their drugs' side effects. Such "early communications" are issued with the advisory: "Posting this information does not mean that FDA has concluded there is a causal relationship between the drug products and the emerging safety issue."
Allergan said serious symptoms in the cases discussed by the FDA usually occurred when patients received higher doses, rather than the small amounts used in cosmetic injections.
"Since its approval, over a million people have been treated with Botox Cosmetic. In its entire history, there has never been a single reported death where a causal link to Botox Cosmetic was established," said Dr. Sef Kurstjens, Allergan's chief medical officer.
Shares in Allergan dropped nearly 6 percent to close at $63.30 on Friday. Solstice isn't publicly traded.
The FDA did not disclose how many deaths occurred in the cases under its review, but said none were adults. Some adults with serious symptoms were hospitalized.
In its petition to the FDA, Public Citizen said its own review of serious side effects reported to drug regulators turned up 180 cases where patients had trouble swallowing, inhaled food into their lungs or developed pneumonia. Of those 180, 16 died, including four children, the organization said. Public Citizen counted 12 deaths among adults.
Chinese bank emerges from the shadows
Mark O'Neill
4 February 2008
The obscure China Development Bank is to be transformed from policy lender to international player
The China State Council’s plan to turn the China Development Bank into a commercial institution should transform what has been an obscure policy bank into a global financial player. It is also an indication of how China, besides routing investments through its sovereign investment fund, intends to use some of its massive US$1.4 trillion in foreign exchange reserves.
Approval should come soon for the 14-year-old bank to list on the stock market in the first half of this year, and it should quickly become both a major lender to the booming domestic market and an international investor following both its own commercial instincts and national policy objectives. And, while it may be obscure, it is already China’s most profitable bank and one of the biggest bond issuers in the country.
Even before the change, the bank has been aggressively carving out a foreign presence. As an indication of its ambitions, it acquired a stake in Barclays Bank last July, has invested in six overseas funds, including two worth a combined US$10 billion in Africa and Venezuela, and was about to bid for a stake in Citibank in January when the State Council vetoed the idea. It is looking eagerly for other foreign acquisitions.
It also has back-door clout. Its governor, Chen Yuan, is the only bank chief in China who is a full minister and member of the ruling State Council. Chen, 62, is the son of Chen Yun, a leading revolutionary organizer in the 1920s and 30s and one of the “Eight Immortals” of the Communist Party who was a senior policy maker for 50 years until his death in April 1995, at the age of 89.
The CDB was created in March 1994 to provide policy loans to major projects designated by the government, especially transport, communications, basic industries and infrastructure. These projects included the Three Gorges Dam and Shanghai Pudong airport. It does not take retail deposits and has only about 32 branches and four representative offices across the country.
Then a deputy governor of the central bank, Chen was put in charge of the CDB in 1998 and drove a rapid expansion of its loan portfolio to 2.3 trillion yuan at the end of 2006 from 1.04 trillion yuan in 2002. The surprise in all this was that such policy lending did not, as it had for the previous 40 years, mean losses but profits. Despite doubling its loan portfolio, the bank’s ratio of non-performing loans fell from 2.54 percent in 2002 to 0.75 percent at the end of 2006 and 0.59 per cent at the end of last year. It has posted a net profit every year, reaching 28 billion yuan in 2006, up from 12 billion yuan in 2002.
Chen lobbied hard to change the institution into a commercial bank, arguing that infrastructure projects could raise money on their own and were no longer dependent on policy loans. He said that China needed a well-funded financial institution as part of the state policy of overseas expansion.
His arguments convinced his colleagues in the State Council, who approved the bank’s US$3 billion purchase of a 3-percent Barclays stake. Last December the China Investment Corp announced that it was injecting US$20 billion into CDB, “to raise its capital adequacy ratio, reduce its vulnerability to risk and help its all-round commercialization.”
The State Council plan will allow the CDB to do middle and long-term financing and limited short-term business, but exclude it from retail and foreign exchange in order to differentiate it from other commercial banks. It will have two separate account books, one for national loans and the other for company loans: one will cover policy loans and the other commercial ones.
CDB has set up two funds, each with US$5 billion. One is the Sino-African Development Fund, to invest in, manage and advise projects in Africa. The other, the Sino-Venezuelan Fund, was set up at the request of President Hugo Chavez, who visited China last year. It provides loans to Venezuelan companies that export oil to China, which has become a major customer. Beijing is exploiting the West’s antagonism to Chavez to increase its oil purchases and economic presence in that country.
Chen’s most audacious play came last month when he proposed taking a stake in Citi after its heavy losses due to the sub-prime crisis. Such a large investment required the approval of the State Council, which was split. Some argued that this was a rare opportunity to buy a piece of one of the biggest American banks at a bargain price and that the share price would recover.
But the majority ruled against it, saying that CDB had not completed its transition into a commercial bank and did not have sufficient expertise to manage such an investment. Opponents also pointed out that Barclays’ share price has dropped one third since CBD bought it last July.
On January 15, Citigroup announced a net loss of US9.83 billion for the fourth quarter 2007, its biggest loss since 1998. Citi turned for funds to the Kuwait Investment Authority, Prince Alwaleed bin Talal of Saudi Arabia, the Government Investment Corporation of Singapore and other corporate investors.
In January, the CDB announced an investment of US$30 million for 8.57 percent of a new US$350 million Infinity I-China Fund, which has a 10-year term and will invest in high-technology companies.
The largest privately owned investment house in Israel, Infinity has managed US$500 million in an Israeli-Chinese technology fund since 1993, with offices in Tel Aviv, Suzhou, Hong Kong and New York.
This was CDB’s sixth overseas investment, following those in Africa and Venezuela and joint venture funds in Belgium, Italy and Asean. Last week the bank denied a report in the Chinese media that it would pay US$5 billion for a stake in United Bank for Africa, one of the four biggest banks in Nigeria.
CDB will be the first of three policy banks to list, probably in the first half of this year. The other two are China Everbright Bank and Agriculture Bank.
Yahoo Board to Spurn $44B Microsoft Bid
By Michael Liedtke
8 February 2008
Yahoo Board Intends to Turn Down Microsoft's Unsolicited $44.6 Billion Takeover Bid
SAN FRANCISCO (AP) -- Yahoo Inc.'s board will reject Microsoft Corp.'s $44.6 billion takeover bid after concluding the unsolicited offer undervalues the slumping Internet pioneer, a person familiar with the situation said Saturday.
The decision could provoke a showdown between two of the world's most prominent technology companies with Internet search leader Google Inc. looming in the background. Leery of Microsoft expanding its turf on the Internet, Google already has offered to help Yahoo avert a takeover and urged antitrust regulators to take a hard look at the proposed deal.
If the world's largest software maker wants Yahoo badly enough, Microsoft could try to override Yahoo's board by taking its offer -- originally valued at $31 per share -- directly to the shareholders. Pursuing that risky route probably will require Microsoft to attempt to oust Yahoo's current 10-member board.
Alternatively, Microsoft could sweeten its bid. Many analysts believe Microsoft is prepared to offer as much as $35 per share for Yahoo, which still boasts one of the Internet's largest audiences and most powerful advertising vehicles despite a prolonged slump that has hammered its stock.
Yahoo's board reached the decision after exploring a wide variety of alternatives during the past week, according to the person who spoke to The Associated Press. The person didn't want to be identified because the reasons for Yahoo's rebuff won't be officially spelled out until Monday morning.
Microsoft and Yahoo declined to comment Saturday on the decision, first reported by The Wall Street Journal on its Web site.
Yahoo's board concluded Microsoft's offer is inadequate even though the company couldn't find any other potential bidders willing to offer a higher price.
Without other suitors on the horizon, Yahoo has had little choice but to turn a cold shoulder toward Microsoft if the board hopes to fulfill its responsibility to fetch the highest price possible for the company, said technology investment banker Ken Marlin.
"You would expect Yahoo's board to reject Microsoft at first," Marlin said. "If they didn't, they would be accused of malfeasance."
But by spurning Microsoft, Yahoo risks further alienating shareholders already upset about management missteps that have led to five consecutive quarters of declining profits.
The downturn caused Yahoo's stock price to plummet by more than 40 percent, erasing about $20 billion in shareholder wealth, in the three months leading up to Microsoft's bid.
Seizing on an opportunity to expand its clout on the Internet, Microsoft dangled a takeover offer that was 62 percent above Yahoo's stock price of just $19.18 when the bid was announced Feb. 1. Yahoo shares ended the past week at $29.20.
Led by company co-founder and board member Jerry Yang, Yahoo now will be under intense pressure to lay out a strategy that will prevent its stock price from collapsing again. What's more, Yang and the rest of the management team must convince Wall Street that they can boost Yahoo's market value beyond Microsoft's offer.
Yahoo's shares traded at $31 as recently as November, but have eroded steadily amid concerns about the slowing economy and frustration with the slow pace of a turnaround that Yang promised last June when he replaced former movie studio mogul Terry Semel as Yahoo's chief executive officer.
This isn't the first time that Yahoo has spurned Microsoft. The Redmond, Wash.-based company offered $40 per share to buy Yahoo a year ago only to be shooed away by Semel, according to a person familiar with the matter. The person didn't want to be identified because that bid was never made public.
Yahoo now may want that Microsoft to raise its price to at least $40 per share again. That would force Microsoft to raise its current offer by about $12 billion -- a high price that might alarm its own shareholders.
Microsoft's stock price already has slid 12 percent since the company announced its Yahoo bid, reflecting concerns about the deal bogging down amid potential management distractions, sagging employee morale and other headaches that frequently arise when two big companies are combined.
Although it isn't involved directly in the deal, Google is the main reason Yahoo is being pursued by Microsoft.
Yahoo has struggled largely because it hasn't been able to target online ads as effectively as Google.
Microsoft believes Yahoo's brand, engineers, audience and services will provide the company with valuable weapons in its so far unsuccessful attempt to narrow Google's huge lead in the lucrative Internet search and advertising markets.
As it examined ways to thwart Microsoft, Yahoo considered an advertising partnership with Google -- an alliance long favored by analysts who believe it would boost the profits of both companies. It was unclear Saturday if Yahoo's plans for boosting its stock price include a Google partnership, which would probably face antitrust issues.
A Microsoft takeover of Yahoo would also be scrutinized by antitrust regulators in the United States and Europe. The antitrust uncertainties could be cited as one of the reasons that Yahoo's board decided to spurn Microsoft.
OPEC could ditch dollars for euros: chief
Fri Feb 8, 7:10 PM ET
LONDON (AFP) - OPEC could switch the pricing of oil from dollars into euros within a decade, secretary general Abdullah al-Badri told a weekly magazine.
The Organization of the Petroleum Exporting Countries could adopt the euro to combat the decline of the dollar, Badri told the Middle East Economic Digest (MEED), published in London.
"Maybe we can price the oil in the euro. It can be done, but it will take time," he said.
Badri told MEED the change could happen within a decade, the magazine said.
MEED recalled that OPEC is under pressure from its members, who have seen their earnings decline sharply since 2000 due to its use of the dollar. The US currency has fallen 44 percent in value against the euro in that time.
The publication of Badri's remarks coincided with the euro rising against the dollar on the foreign exchanges Friday. The euro peaked of 1.4547 dollars at around 1800 GMT, though it has since weakened.
"In oil exchanges in New York, Singapore or Dubai, you can see the currency is the euro or the yen," Badri said.
"But as long as we see the final sign in dollar, that means the pricing is in dollars.
"It took two world wars and more than 50 years for the dollar to become the dominant currency. Now we are seeing another strong currency coming into the (frame), which is the euro."
Some OPEC members, notably Iran and Venezuela, have been calling for the group to study the declining dollar's effect on their economies. Iran has already begun pricing most of its oil in euros.
MEED recalled that the pricing of oil in dollars is a sensitive topic. Saudi Arabia's Foreign Minister Prince Saud al-Faisal warned OPEC late last year that the dollar could plunge if OPEC publicly discussed abandoning it.
On Tuesday, Badri told reporters in London that several oil exporters were selling in dollars but buying other commodities in euros, calling the latter a strong currency.
The comments served to underline the difficulties currently facing oil exporting countries.
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