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(1) Garuda poised for phoenix-like rebirth with IPO

 January 4 2011 The Financial Times In Hindu mythology, Garuda is the large bird that carries the god Vishnu on his passage through the heavens. But Garuda Indonesia, the Jakarta-based state-owned airline, looks much more like the phoenix, the fire bird of classical Greek mythology that rises afresh from its own ashes. Bann Ba nned ed for for year years s fr from om Euro Europe pean an airs airspa pace ce beca becaus use e of its its poor poor safe safety ty public lic off offeri ering ng to ra rais ise e abou aboutt reco re cord rd,, Garu Garuda da has announ announced ced an initia initiall pub

$500m for 35.6 per cent of the equity, giving the company a market value of  about $1.4bn. A successful IPO would be an immense relief for Emirsyah Satar, Garuda’s chief executive, who has overseen a five-year restructuring. But it is also an important moment for Indonesia, the country with the world’s largest Muslim population, as it seeks to step up foreign investment in spite of poor corporate governance and endemic corruption. In many ways, Garuda has a good story to tell. Unprofitable up to 2006, the th e airl airlin ine e re repo port rted ed ne nett inco income me of Rp Rp15 152b 2bn n ($ ($16 16.9 .9m) m) for for 2007 2007,, and and hit hit Rp1,018bn in 2009 in spite of a dip in revenues caused by the financial crisis.   The The air irli line ne rela relaun unch ched ed serv servic ices es to Europ urope e in mi midd-20 2010 10 wit with flig flight hts s to Amst Am ster erda dam m and and is rene renewi wing ng it its s fl flee eet: t: 24 new new airc aircra raft ft arri arrive ved d last last year year,, including 23 Boeing 737s. It has a new uniform, new IT systems, and is starting to collect awards, including the “World’s Most Improved Airline” tag at last year’s Skytrax awards, which track passenger satisfaction. But the IPO nearly did not happen. An earlier restructuring between 1998 and 2001 left the airline starved starved of cash, and with a terrif terrifying ying pile of $800 $800m m in debt repayments due between 2005 and 2009, according to a person with knowledge of the situation. With its problems mounting – three of its six Airbus A330 aircraft were


grounded by 2005 because of maintenance problems – Garuda tried to do a deal with the Indonesian government under which it would have received a $140m cash infusion and support for future debt repayments. But the airline got no guarantees and only $100m – just enough to keep it going.   The The

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independ inde pendent ent adviser adviser,, was nightma nightmarish rishly ly complex complex.. The cre credito ditors rs include included d a dozen banks, several Indonesian state-owned enterprises, a group of hedge funds and other private investors, and the UK, French and German export credit agencies. Two groups of lenders held out until mid-December before signing up. Garuda eventually paid down or bought back $391m in debt, and agreed a revised payment schedule for another $477m, which is expected to be cleared by 2016, paid for in part from the proceeds of the IPO. Garuda officials thought about testing the water earlier – there was talk of an IPO as early as 2007, and it was at one stage firmly pencilled in for the first half of 2009. But you do not IPO a sick puppy, as a person close to the airline puts it.  You also do not IPO an airline with a rotten safety record, and Garuda has the European regulators to thank for forcing an improvement in safety culture after banning all 51 Indonesian airlines in 2007. The ban followed a slew of  deadly accidents, including a Garuda crash in Yogyakarta that killed 21 people. None of the airlines offered European services at the time, but all have been deeply affected by the rapid improvement in local regulation that followed. Only time will tell whether Garuda has comprehensively overcome its poor Euro rope pean ans s lif lifte ted d th their eir ba ban n in 20 2009 09 only only aft after safe sa fety ty reco record rd.. But But the Eu

stringent checks, while Australia’s regulator, highly sensitive to its neighbour’s transport safety issues, has also given the airline a clean bill of health.

  The Garuda IPO, being managed by Citigroup and UBS, is auspiciously timed. Indonesia’s fast-growing fast-growing economy is attracting attracting significant interest from foreign investors, with the benchmark share index up 46 per cent last year,


helped by $2.18bn in foreign portfolio inflows, more than double the level in 2009.  The aviation background is helpful too: profitability is rising with Asia’s V-sh Vshap aped ed econ econom omic ic reco recove very ry,, an and d both both pass passen enge gerr numb number ers s and and airl airlin ine e valuations are growing. Several airlines tapped the markets successfully last year, including Tiger Airways, controlled by Singapore Airlines, which raised $178m in January, and Cebu Pacific, which raised 23.3bn pesos ($532m) in October in the Philippines’ biggest IPO.   The There is a dow downsid nside e: Indo ndonesi sia a ha has s a woe woeful record on corpor porate governance and corruption. The Asia Corporate Governance Association said recently that Indonesia had failed to prevent insider trading, while “judges can almost always be had for a price”.

 That reputation will dismay some, but it would be a surprise if it derailed the IPO. The big bird has been through the fire and ashes. Now it looks like time for the rebirth.

(2) Facebook on the countdown to IPO

 January 7 2011 The Financial Times  The most anticipated stock market debut since Google was set in motion this week, as Facebook laid the ground for a possible public listing little more than a year from now.  The social networking site also turned heads with a plan to raise as much as $2bn in extra capital, valuing the young company at $50bn and throwing a fresh spotlight on the fast-growing private market in internet company shares. Facebook and Goldman Sachs, which led the latest fundraising round, refu re fuse sed d to comm commen entt on the the grou ground nd-b -bre reak akin ing g deal deal,, or the the like likely ly pr prog ogre ress ss towards an IPO.  The Wall Street bank has put up $375m of its own money, alongside an


addit ad ditio iona nall $1 $125 25m m fr from om Russi Russian an inter interne nett inve invest stme ment nt firm firm DST. DST. In add addit itio ion, n, Goldman invited wealthy private individuals among its own clients to put up a further $1.5bn.   The latest valuation on Facebook marks a five-fold increase since May 2009, when DST’s first investment in the company put a value on it of $10bn – a figure seen as extravagant even at the time.  The secretive nature of the transaction, and the fact that it was limited to a privileged few, has drawn criticism in some corners of Silicon Valley, where it has been seen as an attempt by Facebook founder Mark Zuckerberg to avoid full ull public blic scrutiny tha hatt comes with going publ public ic.. The pri privat ate e $2bn arrangement stands in sharp contrast to the course taken by Google in 2004, when it raised $1.2bn in an initial public offering. Rather than turn to Wall Street to handle its financing, the search company all but cut Wall Street out of the deal with an unusual auction format that was designed to let as wide a number of people as possible apply for shares.  The criticisms have stung Facebook executives. Defenders of the company claim that Facebook already believed it was on a course that would require it to be far more open about its finances, and that the particular arrangements of  the Goldman deal would make no difference at all to those considerations. With early employees leaving the company and selling shares, the number of outside shareholders was already on course to rise above 500 before the end of 2011, breaching the limit above which companies in the US have to publish full details of their finances, one person familiar with the situation said.   That, in turn, has set the likely IPO clock ticking. Other companies that triggered the disclosure rule in the past, including Google, have chosen to use it as the moment to seek a full public stock listing.

(3) Facebook splits soaring stock 

October 1 2010 The Financial Times Facebook has issued a five-to-one stock split in an attempt to put its pershare value on par with other private companies.


 The value of  Facebook stock has soared in recent months as traders on the so-called “secondary market” have paid as much as $76 per share, giving the privately held company an implied valuation of $33.7bn. “The stock has risen to a point where we wanted to bring it back into a range similar to other private companies,” said Jonny Thaw of Facebook. “The stock has risen significantly in the last couple of years.”   The rising value of Facebook’s shares is creating complications for the company. External trades factor into the company’s own internal valuation, which in turn affects affects the pricing and quantity of restricted stock units awarded to new employees. “Facebook has tried to clamp down on sales of stock by its own employees,” said Brian Erb, partner Ropes and Gray, a law firm that works with privat priv ate e compa companie nies s to price price their their stoc stock. k. “T “They hey’r ’re e proba probably bly no nott part particu icular larly ly happy about shares being sold on the secondary market.” However, Howeve r, Mr Erb said the split might in fact make the stock more liquid on the secondary market. “It’s a little odd that they would want to reduce the stoc st ock k pr pric ice, e, whic which h migh mightt make make it li litt ttle le easi easier er to trad trade e on the the seco second ndar ary y market,” he said.  The split applies to both common stock and preferred shares, which have additional rights. It also applies to stock options and restricted stock units, which employees can redeem in the event of a public flotation or sale of the company. While st While stock ock spl split its s ofte often n come come short shortly ly befor before e an initi initial al pub public lic of offe feri ring, ng, Facebook has indicated that it is not preparing for an IPO any time soon. Instead, Mr Erb said the split was likely designed to make it easier for Facebook to give new employees a meaningful number of restricted stock units. “The stock price has gotten so high that optically the number of shares probably isn’t looking too great to new employees,” said Mr Erb. “People would


rather have 1,000 shares worth $10 than 100 shares worth $100.” Mr Thaw said the split – the third that Facebook has given its shareholders shareholders – “gives larger grants to employees without dilution to existing shareholders”. It coincides with the premiere of   The Social Network , a film about the founding of Facebook that has been dismissed by Facebook as fiction.

(4) Private Equity's Fashion Hits and Misses

April 23, 2010, The BusinessWeek A rich deal may whet buyout firms' appetite for luxury Private equity and fashion are a bad combo, kind of like pairing a Dior dress with Ugg boots. That at least was the established wisdom until March, whe hen n Ap Apax ax Par artn tner ers s sold old Tomm Tommy y Hil ilfi fige gerr fo forr $3 bill billiion on,, quin quintu tupl plin ing g its its investment in the American clothier in just four years. The rich payoff may inspire other investment firms to sharpen their fashion sense.  There's  There' s no shortage of potent potential ial acquisition targets. targets. A $22.8 $22.8 billion drop in worldwide luxury spending since 2007 has left players such as fashion house Gianfranco Ferré and suitmaker Brioni Roman Style cash-starved. Buyout firms have more than $500 billion to spend. "There are many companies that have owners own ership hip pro problem blems, s, exec executi ution on problem problems, s, familyfamily-driv driven en issues, issues, successi succession on issues, all triggers for transactions," says Christian Stahl, a partner at Apax. Still, it may take more than the Apax deal to erase the memory of some big bi g disa disapp ppoi oint ntme ment nts. s. Amon Among g the the most most high high-p -pro rofi file le stum stumbl bles es is Perm Permir ira a Advisers' acquisition of the Valentino Fashion Group, which encompasses the haute couture house whose gowns are perennial red-carpet staples as well as German label Hugo Boss. In 2007, at the peak of the buyout boom, Londonbase ba sed d Pe Perm rmira ira paid paid $7.2 $7.2 bil billio lion n for for Valen Valentin tino, o, money money it may may ha have ve trou trouble ble recouping. The departure of founder Valentino Garavani, the recession, and the nearly $3 billion in debt Permira piled on have hurt profitability. The buyout fund's largest backer, SVG Capital, has written down its initial investment by


53%. Valentino's owners have also had to inject an additional $336 million into the company. Permira's struggles are instructive. Private equity's heavy use of debt to finance deals is especially ill-suited to a business where revenue streams are unpredictable and subject to what's known as fashion risk. Sharp managers can work to imp improve cas ash h flow low, trim produc duction co cos sts, and overhaul distribution, but that may not be enough. "There's a creative and soft aspect to the industry that's not really controllable," says Stahl. "It's not a manufacturing business, and some people have paid a high price for not being mindful of  that."  Then there's the time factor. Private equity's preferred three- to five-year investment period usually isn't long enough "to reposition or develop a brand," says Mario Boselli, president president of the National Chamber of Italian Fashion. Texas Pacific Group, for instance, spent nine years buffing Swiss shoemaker Bally International before selling it in 2008. Perhaps the biggest obstacle to successful deals is the fact that many famil fa milyy-run run busine business sses es are are unwil unwilli ling ng to cede cede contr control ol to financ financial ial inv inves esto tors rs.. Private equity accounted for less than 20% of all mergers and acquisitions in fashion in 2009, down from 27% in 2007. In Italy, the luxury houses Prada, Giorgio Armani, and Roberto Cavalli have all spurned overtures from buyout firms in recent years. "Apax hit the jackpot," says Alessio Candi of the Milanbased luxury consulting firm Pambianco. "But attractive targets, which would consider opening their capital to fund growth, are hard to find."   The The bott bottom om li line ne:: Fi Find ndin ing g the the nex extt Hilf Hilfig iger er wo won' n'tt be ea easy sy in a business





welcoming to financial buyers.







(5) Share buybacks or M&A: what to do with extra cash

September 28 2010 The Financial Times   The growing cash piles on company balance sheets have reopened the debate about whether to spend the money on acquisitions, or return it to shareholders through buybacks and dividends. After Af ter the mega-merger mega-merger fever of the recent recent debt boom, many investors investors are highly sceptical of value-destroying deals and would prefer to see any spare cash come back to them. However, they are also acutely aware that, unless companies spend on expansion, they run the risk of losing market share and allowing competitors to gain ga in a hea head-s d-sta tart rt.. An Analy alyst sts s at UBS UBS ar argue gue that that cond conditi itions ons are are now now ripe ripe for for buybacks from well-positioned companies, given that revenue and earnings momentum is strong and deleveraging is well advanced for those who used the economic crisis to put their balance sheets in order. order. UBS’s research found that of the 30 buybacks announced in Europe so far this year, 62 per cent have outperformed the FTSE Eurofirst 300 index with an ave vera rage ge of 3.1 pe perr cent cent.. Buy uyba back cks s anno annou unc nced ed in 2008 2008 an and d 200 009 9 al also so outperformed by 16.1 per p er cent a and nd 19.9 per cent, respectively respectively.. “Companies in an acquisition mode failing to execute on their mergers and acqui ac quisit sitio ions ns ambit ambition ions, s, rath rather er than than ri risk sk ap appea pearin ring g spend spend-ha -happy ppy,, may well well consider returning the cash to shareholders,” the UBS team argued. For example,  Yara, the Norway-based Norway-based fertiliser group, announced it would return NKr3.4bn ($570m) to shareholders after losing the $5bn bid battle for   Ter Terra ra of the US to rival rival CF Indu Industr stries ies.. Mea Meanwhi nwhile, le, ABB, the Swiss-Sw Swiss-Swedis edish h electrical engineering group, has said it wants to make acquisitions, but if  these do not materialise this year, it will consider returning some of its funds to shareholders.


US compa companie nies, s, exclud xcluding ing finan financia cials ls,, ar are e curre current ntly ly ho holdi lding ng $1,8 $1,840 40bn bn in cash, the highest level as a percentage of assets since the 1960s – and are looking at share buybacks. According to Bank of America Merrill Lynch, there have been 343 new auth au thor oris isat atio ions ns for for $178 $178bn bn in bu buyb ybac acks ks so far far this this ye year ar.. If all all of thos those e go through, thr ough, projected projected over a full year it would be the highest volume – at $898bn $898bn – since 2007, it said. Last year, there were only $128bn-worth of buybacks. Among those companies that recently announced $1bn-plus buybacks were CVS Caremark, Viacom and Monsanto.  There are several reasons for buying back shares. Forr some, a buyback programme Fo programme is seen as a useful way of returnin returning g cash to inve invest stor ors s with withou outt maki making ng the the per permane manent nt comm commit itme ment nt impl implie ied d by an increas incr eased ed div divide idend nd.. Co Compa mpanie nies s that that enjoy enjoy high high free free cash cash flow flow are are able able to enhance their growth in earnings per share by buying back their shares when capital growth might otherwise be difficult or expensive for them to achieve. It can also be used as a way of indicating that companies consider their shares to be undervalued. In practice, though, it is not at all certain that the amount of money a company puts into the market through a buyback is equal to the increase in crease in value that shareholders enjoy. enjoy. At the least, the expected share price gain can take months or even longer to mate materi riali alise se,, and can can never never be disen disenta tangl ngled ed from from other other mark market-mo et-movin ving g factors. But in the past, some investors have been critical of share buybacks, claiming they are unimaginative. Others do not want to receive their returns in the form of a higher share price, which can be reaped only on the sale of shares. That is when M&A comes in as the alternative. Usin Us ing g sp spar are e ca cash sh on an ac acqu quis isit itio ion n is one one of the the quic quick kes estt ways ways for for a company to increase increase its top-line top-line growth. growth. BHP Billiton’s $39bn all-cash bid for


PotashCorp of Canada has divided analysts over whether it is a good use of  money for the Anglo-Australian Ang lo-Australian miner miner.. Analy Ana lyst sts s at Nomur Nomura, a, ho howe weve ver, r, reckon eckon that that a buyba buyback ck,, rath rather er th than an the the acquisition of Potash, could provide 11 times greater returns for shareholders in 2011. Nomura estimates that the Anglo-Australian’s miner’s current bid of  $130 a share would add 2 per cent to BHP’s EPS in 2011, while a buyback of  equal value would add 22 per cent.  To achieve the same EPS accretion to the proposed bid, the Japanese bank said BHP would need to carry out a share buyback scheme of roughly $6bn. BHP has publicly said it will remain remain disciplined in its pursuit of Potash – but then, management teams always say that, usually right before they increase their offer.  That is what Irene Rosenfeld, chief executive of  Kraft, said she did earlier this year when she acquired Cadbury, the UK confectionery company. In spite of this, in a highly unusual move, Kraft’s $19.1bn bid was criticised by Warren Buff Bu ffet ett, t, whose hose Be Berk rksh shir ire e Hatha athawa way y grou group p is the the food food mak maker’s er’s lar largest gest shar sh areh ehol older der.. Mr Buffe Buffett tt argue argued d that that Kraf Kraftt over overpa paid id fo forr the the asset asset.. Kraf Kraft’ t’s s management, inevitably, disagreed. In the company’s 2010 proxy filing, it said Ms Rosenf osenfeld eld showe showed d “e “exc xcept eptio ional nal” ” leader leadershi ship p in execu executi ting ng the the deal deal and and “specifical “specif ically ly noted noted her commitm commitment ent to financia financiall discipli discipline ne as evidence evidenced d by maintaining our investment-grade rating, accretion to cash earnings in the second full year and our current dividend”. Ms Rosenfeld’s Rosenfeld’s acquisition acquisition may prove prove to come good. But when it comes to deciding how to deploy spare cash, it is clear there is no perfect solution that makes all investors happy. Meanwhile, those companies that choose M&A over a share buyback can be sure their shareholders will want to ensure they are not spending their cash on yet another deal that will prove value destroying when the next downturn comes.


(6) Microsoft Said to Plan Debt Sale, May Boost Dividend

September 14, 2010 The Businessweek Microsoft Corp. is planning to sell debt this year to pay for dividends and share repurchases because too much of its cash is held overseas, according to a person familiar famil iar with the matter. matter.  The company would try to raise as much as it can without jeopardizing its debt rating of AAA, the highest possible, said the person, who declined to be named because the plans are confidential and not completed. Microsoft could probably issue as much $6 billion more in debt without putting its rating at risk, according to data compiled by Bloomberg. Chief Executive Officer Steve Ballmer is under pressure to return some of  the company’s $36.8 $36.8 billion in cash and short term investments to investors in the th e for form of divi divide dend nds s or sh shar are e buyb buybac acks ks.. Much Much of that that is he held ld over overse seas as,, requiring Microsoft to pay taxes on money brought home. The software maker would follow Home Depot Inc. and Dell Inc., which issued bonds this month as investment-grade borrowing costs hover near ne ar record lows. “They obviously think their stock is cheap and getting debt is cheap, so why wh y not issue issue de debt, bt,” ” sa said id Ja Jaso son n Brady Brady,, a managi managing ng dire direct ctor or at Thor Thornbu nburg rg Investment Management. The company can issue at least $5 billion of new debt without putting its rating at risk, he said. Thornburg, in Santa Fe, New Mexico, oversees more than $56 billion, including Microsoft shares.  Timing of Offering A debt offering may come before the end of the company’s fiscal year, which closes next June, and could come as soon as this calendar year, the person said. Microsoft, based in Redmond, Washington, fell 16 cents to $24.95 at 9:51


a.m. New York York time in Nasdaq Stock Market trading. Microsoft Micr osoft had about $22 billion in free free cash flow last fiscal year with about half of that in the U.S. and half overseas, overseas, the person said. The company’s debt is rated Aaa by Moody’s Investors Service and AAA by Standard & Poor’s. Peter Wootton, a spokesman for Microsoft, declined to comment. Heather Bellini, an analyst at ISI Group in New York, wrote in a Sept. 12 research note that she expects a debt offering of as much as $10 billion “in the near term.” That figure is probably too high, said the person familiar with Microsoft’s plans. Bellini also said she expects the company, whose board is meeting in the next ne xt seve severa rall week weeks s to disc discus uss s di divi vide dend nd an and d buyb buybac ack k poli policy cy,, to rais raise e its its quar qu arte terl rly y di divi vide dend nd 4 cent cents s to 17 cent cents s a shar share. e. Bell Bellin inii esti estima mate tes s that that 26 percent of Microsoft’s cash balance is located in the U.S. ‘Cheap’ Financing Executives of the company are weighing share repurchases and dividend increases to boost the stock, which had fallen 18 percent this year before today. Chief Financial Officer Peter Klein faced questions at a Sept. 7 Citigroup Inc. conference on why Microsoft doesn’t take on more debt to expand share buybacks or fund a major increase in the quarterly dividend, currently at 13 cents a share. Asked by an attendee about raising “cheap debt financing” and using it for a buyback, Klein replied: “That is certainly one important factor in our overall strategy strat egy related to capital structure. structure. It’s obvious obviously ly a topic we’ve been thinking about a lot right now n ow.” .” Klein declined to say whether that step was “likely or unlikely” until he is able to speak to Microsoft’s board.


Micrros Mic osof oftt star starte ted d payi paying ng a divide dividend nd in 2003 2003 and and offer offered ed a $3-a $3-a-sh -shar are e special dividend in 2004. Buyback History  The company has repurchased more than $78 billion in stock since fiscal 2006 and is in the middle of a $40 billion buyback allowance that runs through 2013. A decision to take on more debt, raise the dividend or increase the buyback plan would involve board approval. Microsoft sold its first debt in May 2009, a $3.75 billion offering, in a bid to diversify its capital structure and add to its cash pile for acquisitions, capital expenses and share buybacks. The sale was comprised of $2 billion of 2.95 percent, 5-year notes; $1 billion of 4.2 percent, 10-year debt; and $750 million of 5.2 percent, 30-year bonds. Morre recen Mo ecentl tly, y, in June June,, Micr Micros osof oftt said said it wo woul uld d se sell ll $1.1 .15 5 bi bill llio ion n of  convertible senior notes due in 2013 and will use the proceeds to retire some of its commercial paper.   The The aver averag age e yiel yield d on inve invest stme ment nt-g -gra rade de debt debt was was 3.89 .89 pe perrce cent nt as of  yesterday and reached as low as 3.74 percent on Aug. 24, according to Bank of  America Merrill Lynch’s U.S. Corporate Master index. in dex.   (7) Dividend theory

April 4 2010 The Financial Times

Nowhere do actions speak louder than words than in business. One of the best ways to understand whether a company is being run efficiently and in the best interests of shareholders is to watch what it does with its cash. What to make, therefore, of Starbucks of Starbucks’’ announcement last week that it intends to pay a dividend for the first time since it went public?


Assum As suming ing tax tax neutr neutrali ality ty,, inv invest estors ors in theo theory ry shou should ld not not care care wheth whether er companies compani es pay a dividend or not. (That is why a share price falls when a stock goes go es ex ex-di -divid viden end). d). All othe otherr thing things s being being equal equal too, too, compa companie nies s shoul should d be indif in differ feren entt as to whe whethe therr they they ho hoar ard d cash cash or raise raise equit equity. y. What What matt matter ers, s, therefore, is opportunity cost. Would the internal rate of return generated for shareholders be larger if cash was put to work by management or paid out?   Timin Timing g is ever everyt ythin hing. g. Forg Forget et the the hogw hogwas ash h that that risi rising ng divid dividend ends s are are a positive signal. Sometimes they are, sometimes they aren’t. If a company has been be en grow growin ing g ra rapi pidl dly y with with lo low w paypay-ou outt rati ratios os and and sudd sudden enly ly in incr crea ease ses s its its dividend, investors should question whether management is running short of  investment ideas. This is what should be asked of Starbucks – now targeting a 35-40 per cent pay-out ratio – although management swears it still has plenty of cash for investment.   The Therre is noth nothin ing g wr wron ong g wi with th a co comp mpan any y goin going g ex-g ex-grrowth owth prov provid ided ed it recognises the fact by running its businesses for cash and, if it wishes, paying it out. There are two classic management mistakes to watch out for, however. Fir irst st is a gr grow owin ing g co comp mpan any y up uppi ping ng divi divide dend nds s and and buy buy-bac -backs ks whil while e not not reinvesting enough in its business. Here investors should make sure capital expenditure-to-sales ratios do not start falling. The second, more common, mistake is mature or declining companies deluding themselves that they are still growth stocks. Starbucks appears to have avoided both extremes. Beware companies that do not.

(8) U.S. Companies Eye British Takeovers

 July 5, 2010 The BusinessWeek British companies such as AstraZeneca, BAE Systems, and Balfour Beatty could become takeover targets for U.S. buyers thanks to the weaker pound,


says S&P American companies are preparing to launch daring takeover bids for a host of Britain's biggest corporate names – including possibly BAE Systems (AZN)) – thanks to the weakness of the pound against (BAESY) BAESY) and AstraZeneca (AZN the dollar. Sterling has lost about a quarter of its value against the dollar in the last twotw o-an andd-aa-ha half lf year years, s, and and comb combin ined ed with with the the feeb feeble le reco recove very ry in th the e UK  econ ec onom omy, y, Brit Britis ish h fi firm rms s ha have ve beco become me mu much ch chea cheape perr for for Amer Americ ican an suit suitor ors s looking for a good deal. Following the controversial takeover of Cadbury earlier this year by the US KFT), ), and the buyout of Gatwick Airport by an American food giant Kraft ((KFT private equity firm, analysts at Standard & Poor's predicted last week that a number of well-known UK companies, including AstraZeneca, BAE Systems and the contractor Balfour Beatty (BAFBF (BAFBF), ), could soon fall into American hands. "AstraZeneca and BAE are both in sectors where US groups have lots of  cash and where they are looking to make acquisitions," said Mike Thompson, managing director of strategy and risk at S&P. "AstraZeneca, for example, has a value of about $65bn [£43bn], but this is no longer that daunting for US firms. UK drug groups have a good profile for American rivals and if you $160bn, consider that the likes of Johnson & Johnson ( JNJ)  JNJ) has a value of about $160bn, you can see where a deal could come from." Spokesm Spok esmen en for Ast AstraZ raZene eneca, ca, BAE Syst Systems ems and Balfour Balfour Bea Beatt tty, y, anothe anotherr group on S&P's list, all refused to comment on the report, but it is ultimately the owners of these companies that will have the final say. If the offer is high enough, the City will bite. Highly priced deals are undoubtedly good news for UK shareholders, shareholders, often pension funds, and for the executives of targeted companies, who can rely on a big bonus from their new bosses for oiling the takeover process. But while the City, and the coalition and Labour governments have largely cheered on


the deals, unions have warned that the impact on jobs is likely to be severe. Last September, Cadbury spurned Kraft's advances before giving the deal the green light in January after an improved £11.5bn offer. On the day Kraft's bid bi d was was re recom comme mende nded d by the the Cadbu Cadbury ry bo boar ard, d, Kraf Kraft' t's s chair chairma man n and chief  chief  executive executi ve Irene Rosenfield Rosenfield said: "We have great respect for Cadbury's brands, heritage and people. We believe they will thrive as part of Kraft Foods." Days after agreeing the price, Ms Rosenfield's company announced that it planned to close Cadbury's Somerdale factory factory near Bristol, which it had earlier said it would save. The U-turn led to censure from the Takeover Panel and Lord Mandelson, who was Business Secretary. As many as 400 jobs were earmarked for redundancy. Paul Kenny, general secretary of the GMB union, said yesterday: "For far too long there has been an assumption that who owns what does not matter, but it certainly does. Where cutbacks have to be made, it is people in outlying overseas plants, like those in the UK, that are hit with job losses. We will be work wo rkin ing g with with the the new new ow owne ners rs of comp compan anie ies s to en ensu sure re that that this this does does not not happen and use every sinew to ensure that these companies have a successful future."  The GMB says it is in talks with officials at American Sugar Refining, Refining, which  TATYY), ), one of the confirmed last week that it was in talks with Tate & Lyle ( TATYY sugar industry's biggest names for the past 150 years, to buy its refining business in London's Docklands. Docklands. A sale would end the group's association association with the sugar industry as it switches its attention to the food ingredients market. It is not just just well ll-k -kno now wn nam names that are being ing sna snapped pped up by the Americans. Last week Scott Wilson Group, a mid-tier engineer, toasted a 290pa-share offer from its US peer URS (URS ( URS), ), which represents a 233 per cent premium to the group's valuation before it disclosed that takeover talks were taking place. The premium is the second highest paid for a British company in the past 10 years, but while URS said that it would look to protect engineering  jobs, is conceded that "efficiencies" would be made in several areas.


CDGPY), ), a FTSE-250 listed power company, At the same time, Chloride ((CDGPY said sa id that that it woul would d acc accept ept a £9 £997 97m m offer offer from from its its Amer America ican n riva rivall Emer Emerso son n EMR). ). Speculation about a deal has helped to double the value of  Electric ((EMR Chloride in just the past six months, while Brit Insurance, one of the City's most recognisable names, has now twice spurned the advances of the US buyout firm Apollo. In many cases, it is investment banks that help to drive the mergers and acqui ac quisit sitio ions ns (M&A (M&A)) mark market et by ident identify ifying ing takeo takeove verr targ target ets s for for clien clients ts,, and picking up huge fees in return. Mike Thompson of Standard & Poor's ((MHP MHP)) said that banks were partly behind the recent takeover surge. "For the report, we tried to get into the heads of the M&A bankers," he said. "The case for buying the companies on our list is being made left and right by the bankers, and with the sovereign debt crisis in Europe stymying the level of the pound, many of  these arguments will be looking more attractive." Last week, data group Thomson Reuters (  TRI) TRI) said that the US investment GS)) topped the list of worldwide M&A advisers in the first bank Goldman Sachs ((GS half of the year. And analysts predict that the trend of corporate Britain falling into US hands is likely to continue for some time. "Largely as a result of the financial crisis and the dollar's perceived position as a safe haven, sterling's losses are nott to be reve no revers rsed ed any any ti time me soon soon," ," sa said id Gran Grantt Lewi Lewis, s, head head of ec econ onom omic ic research at Daiwa Securities ((DSEEY DSEEY). ). "Looking back, sterling was undoubtedly overvalued and with the rebalancing that is needed in the UK economy, it is diff di ffic icul ultt to see see st ster erli ling ng ri risi sing ng mu much ch high higher er than than its its curr curren entt leve levell fo forr th the e foreseeable future."

(9) JC Penney adopts ‘poison pill’ shareholder plan

October 18 2010 The Financial Times


Penney,, the US department store chain, on Monday adopted a “poison “poison    JC Penney pill” shareholders rights plan, following the acquisition of more than 25 per cent of its shares by Pershing Square, the activist hedge fund, and Vornado, Vornado, the real estate investment company.  The company said it had adopted the agreement agreement,, which has a one-year term, “to promote fair and equal treatment of ... stockholders in connection with any initiative to acquire control of the company, and in light of recent rapid accumulations of a significant percentage of the company’s outstanding common stock.” Pershing Square, headed by William Ackman, and Vonado have said they plan











management, and that they invested in the company because they considered its shares undervalued. Neither has yet made public any strategy proposals, although Mr Ackman rema re marke rked d at an inves investo tors rs’’ pr prese esent ntat atio ion n th this is mont month h th that at the the re reta taile ilerr ha had d a stro st rong ng brand rand,, and held held a re real al es esttate ate port portfo foli lio o tha hatt was was bett better er than than its its competitors. In 2008, Mr Ackman used a stake in Target, the mass discounter, to argue that th at the the reta retail iler er shou should ld spin spin off off it its s re real al esta estate te hold holdin ings gs into into a sepa separa rate te business, and use the money to buyback shares. He eventually launched a proxy battle, but failed to secure seats on Target’s board.  JC Penney’s poison pill would dilute the holdings of Pershing if it were to

add to 16.5 per cent stake in the company it already holds. It would also be triggered if any other party acquires more than 10 per cent of the stock. Vornado’s stake is currently 9.9 per cent. If triggered, existing shareholders would in effect have the right to buy half  price shares, while the acquiring party that triggered the agreement would not.  JC Penney’s shares were trading at mid-morning on Monday in New York at


$32.98, down just over 2 per cent. The shares were trading below $20 in late September, before Pershing Square and Vornado began their buying spree.  JC Penney is being advised by Barclays Capital and Goldman Sachs.  

(10) Samsung buys Dutch group in return to M&A  January 20 2011 The Financial Times Samsung Electronics has bought a Dutch maker of display technology

for e-readers in the latest sign the world’s biggest technology company by sales is overcoming a long aversion to mergers and acquisitions.   The The dea deal to bu buy y Li Liqu quav aviista sta il illu lust stra rate tes s Sams Samsun ung’ g’s s move move away way from from insistence on making components in-house and a recognition that it will need to grow through international acquisitions. Samsung has been notoriously wary of such expansion since its unsuccessful purchase of AST in the late 1990s.   The The So Sout uth h Korea orean n co comp mpan any y was was forc forced ed to clos close e the the Cali Califo forn rnia ia-b -bas ased ed computer maker after a mass defection of research talent and a string of  losses. Liqua Liq uavi vist sta’ a’s s dis displa play y te tech chnol nology ogy is use used d for for devic devices es such such as e-read e-reader ers, s, mobile phones and media players. Samsung is not producing panels for e-readers yet but it may enter this business using Liquavista’s panels, analysts said.  The Liquavista deal, for which Samsung did not disclose financial details, comes hard on the heels of a similar agreement to buy Medison, a South Korean medical equipment maker.

“There seems to be a clear change in their approach towards growth as they try to diversify their business by entering new areas,” said Kang Chungwon, an analyst at Daishin Securities. “They can secure technology through org rga ani nic c growt rowth h but but it takes akes ti time me.. They hey are cons consid ide ering ring M&A M&As for for more more


efficiency and time-saving and I think they will become more aggressive in chasing such opportunities, given their huge cash reserves.” Consumer   Choi Gee-sung, Samsung’s chief executive, confirmed at the Consumer Electronics Show in Las Vegas earlier this month that the company would seek more overseas acquisitions. “As Samsung is involved in many business areas, it cannot do them all alone. It needs many partners,” he said.

Samsung Samsun g appe appear ared ed willi willing ng to retu return rn to M&A M&A in 20 2008 08 by acqui acquiri ring ng the intellectual property assets of Clairvoyante, a US licensing company. The year before it bought Transc Transchip, hip, a small Israeli non-memory chip developer, its first cross-border acquisition in a decade. One of the greatest challenges for integration with other companies has been Samsung Samsung’s ’s highly highly conserv conservativ ative e and KoreaKorea-cent centred red corporat corporate e culture culture,, which has resulted in difficulty integrating international staff. Samsung has ready funds available for M&A, with Won21,790bn ($19.4bn) in cash and cashpledged equivalent as of the end of theby third quarter. parent Samsung Group to invest Won23,300bn 2020 in newIts business areas, such as green technology and healthcare. (11) Downside of the rise in sterling

October 29 2010 The Financial Times News that sterling has regained its poise against the euro this week is not necessarily necessa rily cause for celebrat celebration ion for British British investors, as a stro strong ng pound could handicap the returns of UK investment portfolios.  This week, sterling reversed its course against the euro and was up slightly against the US dollar following reports that the UK’s gross domestic product inched up by 0.8 per cent in the last three months, higher than had been expected. By the week’s close, the pound had risen 1.66 per cent to $1.59 against the dollar and gained 2.1 per cent to £0.87 against the euro and was 0.9 per cent stronger at Y128.75 against the yen. But financial advisers are warning investors that a strong pound could threaten their equity positions.


“Giv “G iven en ar aro ound und twotwo-th thir irds ds of UK stoc stockm kmar arke kett reven evenue ues s come come from from overseas, then a strong pound is generally seen as disadvantageous,” says  Justin Modray, founder of the advisory firm Candidmoney.com. In the past year, sterling’s relative weakness against most other heavilytraded currencies has helped Britons invested in overseas stock markets as it enhanced currency gains when their equity stakes were translated back into sterling. In recent quarters, the weak pound also boosted the earnings of Londonlisted large caps with an international focus such as Vodafone, Unilever and the pharmaceutical firm GlaxoSmithKline. Sterling also received a boost after Standard & Poor’s revised upward its outlook for the UK from “negative” to “stable” and reaffirmed Britain’s AAA sovere sove reign ign debt debt ra rati ting ng in the the wake wake of the the coal coaliti ition on gove govern rnme ment nt’s ’s spend spending ing review. “The “T he GDP GDP dat data was was twice wice as good good as they hey tho houg ught ht and and as a resu result lt,, suddenly sterling has a bit of strength behind it,” says Stephen Hughes, chief  analyst with the broker currencies.co.uk.  There are some upsides to a stronger pound, however. One is that any rise in its price makes raw materials and other imports cheaper for UK firms to buy, which improves profit margins. In theory, a stronger pound also eases inflation by reducing the cost of  imported goods and fuel, as oil is priced in US dollars. Buyers looking to obtain overseas properties at a discount also see more favourable market conditions as a result. And British tourists are more likely to head to New York for the Christmas sales as well. A number of bulls believe the outlook for sterling is improving. But even optimistic currency analysts think that its path to recovery will be rocky and


that sterling might trade at a range of $1.55 to $1.60 and €1.13 to €1.2 for some time. “It will be a way off before the pound rises significantly higher,” says Dunca Du ncan n Higg Higgins ins,, senio seniorr cu curr rren ency cy analy analyst st with with Caxto Caxton n FX. FX. A hi hiccu ccup p in th the e markets, market s, inflation or the introduction introduction of anothe anotherr round of quantitativ quantitative e easing – or government debt buyback programmes – by the Bank of England would be enough to knock sterling off its course, currency analysts agree. Caxton FX’s Higgins predicts that sterling will re-gain ground against the US dollar and the euro by December. “I think around Christmas time, you’ll see sterling trade at consistently higher levels.” But Paul Mackel, a currency currency strategist with HSBC, disagrees. disagrees. He thinks the fundamentals for sterling still look weak by many measures. “Yes, the growth figures for the UK economy might have been better than expected, but there are still some holes in the story. Will construction be able to hold up, for example?” he asks. “I think a healthy dose of scepticism about sterling is necessary. Investors are in a state of confusion. I still fear that markets will be looking to sell the currency.” Sterling’s value tumbled by more than 5 per cent against the US dollar, the euro and a clutch of other currencies between August and this month as a result of pessimism about the UK economy, according to strategists at World First. Sterling’s weakness this year has only been overshadowed by the poor performance of the US dollar.  This month, the greenback hit a 15-year low against the yen in intraday trade and lost ground across the board as the prospect of further monetary policy loosening in the US weighed on the currency. But it also gained ground this week after investors cut short positions on the curr curre enc ncy y on sp spec ecul ulat atio ion n that that the Fede Federa rall Reser eserve ve woul ould take ake less less aggressive action to stimulate the economy at its policy meeting next week.


Given the sharp swings in prices, currency movements are notoriously difficult to foresee, so investors should aim to have exposure to a range of UK  and an d in inte tern rnat atio iona nall comp compan anie ies, s, advi advise sers rs stre stress ss.. Buyi Buying ng into into fund funds s wher where e currency risk is hedged appeals to cautious investors as well. “I al alwa ways ys th think ink that that cu curr rren encie cies s are are hard hard to ta targe rget, t, especi especiall ally y in fun funddorien or ienta tate ted d po port rtfo folio lios, s,” ” says says Ti Tim m Coc Cocke keri rill, ll, head head of re resea searc rch h with with Ashco Ashcour urtt Rowan Asset Management. “And, of course, what’s gained by one currency is lost somewhere else by another.” (12) Let there be light Hedge funds face greater scrutiny and more consolidation

Nov 22nd 2010 The Economist People at hedge funds speak fondly of their industry’s feral roots. “Hedge funds used to be set up by two guys in a back alley with a flashlight,” says one veteran. veter an. Kenneth Griffin, the boss of Citadel, Citadel, decided to launch a fund after he tr trad aded ed bon bonds ds from from his colle college ge do dorm rmit itor ory y room room,, acco accordi rding ng to indust industry ry lore lore.. Hedge funds are infamous for being scrappy and secretive.  This has started to change, however. Hedge funds used to celebrate their ability to rake in “absolute returns” no matter the economic environment. But that promise proved false when they plunged by 19% in 2008. This shook investors. So did Bernie Madoff’s Ponzi scheme, which came to light that same year. In response, investors started to ask for more transparency and more thorough due diligence before writing big cheques.

Hello, SEC

 To restore confidence, hedge funds have tried to shed their reputation for being fly-by-night operations. They want to be seen as established, reliable businesses. Managers used to update investors quarterly only to inform them of the fund’s performance; performance; now they take pains to explain the fund’s strategy. Funds have also invested more in reporting systems to help woo investors.


  Th This trend rend for for the hedg hedge e-f -fun und d indu indust strry to aban abando don n its its opac opacit ity y wi will ll accelerate over the coming year. Hedge funds have always operated without much government oversight, but from 2011 that will no longer be the case. A provision in America’s financial-reform bill requires all hedge funds with $150m or more under management (a fairly small amount by industry standards) to register with the Securities and Exchange Commission (SEC), designate or hire a compli complian ance ce offic officer er and ma maint intain ain thor thorou ough gh tradi trading ng reco record rds. s. This This must must al alll happen by July 2011. It will mark a new era for hedge funds, which fought against SEC registration. As a result of this regulation, oversight of hedge-fund activities will be greater, as will the cost of launching and operating a fund. Some smaller hedge funds will close or sell themselves to larger ones  This will lead to another trend in 2011: consolidation. Hiring a compliance officer and spending more on internal operations will be a financial burden, particularly at a time when fund-raising is difficult. Some smaller hedge funds will close or sell themselves to larger ones. Others will arrange to share backoffice operations with a larger fund in exchange for a cut of their returns. The result will be an industry that shrinks in number of funds and sees more assets going to the giants, away from less established shops.  This consolidation may ultimately affect the returns that hedge funds will be able to achieve in the coming years. The most impressive gains in the industry indust ry have typical typically ly come from the smallest, youngest funds, which tend to be more nimble and entrepreneurial. The question of what to expect from funds’ returns, and whether they will normalise at pre-crisis levels, will play out over the next few years. One thing, however, should encourage investors to “go long” on hedge funds in 2011: it surely can’t be as devastating as 2008.

(13) Once again, cheap money is driving up asset prices

 Jan 7th 2010 The Economist


 THE opening of the Burj Khalifa, the world’s tallest building, in Dubai on   January 4th had symbolic as well as architectural significance. Skyscrapers have long been associated associated with the ends of financial booms. The Empire State Building opened in 1931, two years after the Wall Street crash. The Petronas towers in Kuala Lumpur were unveiled in 1998, in the depths of the Asian crisis. Such towers are commissioned when money is cheap and optimism about economic growth is at its height; they are often finished when the champagne has gone flat.  The past three decades have been good for skyscraper-building. The cost of borrowing money, in nominal terms, has fallen sharply (see chart 1). Small wonder that one bubble after another has appeared in financial markets, with the sub ubje ject cts s of inve invest stor ors’ s’ dr drea eams ms rangi anging ng from from emer emergi ging ng mark market ets s and technology stocks in the 1990s to residential housing in the decade just ended. Nor is it surprising, with money so cheap, that consumers and companies have indulged in regular borrowing sprees.

When investors borrow money in order to buy assets, they push prices even ev en hig higher her.. Bu Butt this this also also ma makes kes mark market ets s vulne vulnera rable ble to sudde sudden n bus busts ts,, as investors sell assets to pay their debts. The credit crunch of 2007-08 was the result of this process, with the debts greater and the price swings more violent than at any time in the past 30 years. Critics argue that central banks, by focusing on consumer- rather than asset-price inflation, have encouraged bubbles to grow by keeping interest rates too low. By intervening when markets fall, but doing little to curb them when they rise, they have offered investors a one-way bet. Such critics are worried that, in their eagerness to bring the credit crunch to an end, the authorities may be making the same mistake again. Official shor sh ortt-te term rm inte intere rest st ra rate tes s ar are e belo below w 1% in mu much ch of the the deve develo lope ped d worl world. d. Emerging markets, through their currency pegs, tend to import these easy-


money policies, even though most of them are growing faster than the rich economies are. Low rates have certainly persuaded investors to move money out of cash. Investors withdrew $468.5 billion from money-market funds in the course of  2009. The “carry trade”—borrowing in low-yielding currencies to invest in highyielding ones—is back in full swing. The Australian dollar has been a popular beneficiary. Equity markets have rebounded strongly: the MSCI world index is more than 70% higher than its March low. Even bigger gains were seen in emerging markets, with the Brazilian, Chinese and Indonesian bourses all more than doubling, in dollar terms, last year. Those rallies have by themselves helped boost economic sentiment and have brought to a halt the vicious spiral of  2008, in which falling markets forced investors to offload assets at fire-sale prices. At the same time, in the English-speaking markets of America, Australia and Britain, the stabilisation of house prices has bolstered consumers’ balancesheets. Again, low interest rates have been a crucial supporting factor. Optimists argue that the markets are now in a sweet spot. The global economy is recovering, with most developed countries coming out of recession in the third quarter of 2009. The authorities, concerned about the fragility of  the recovery, will be reluctant to raise interest rates in the near term. Thus investors have been given a licence to buy risky assets.

Spotting the signs Is this this poli policy cy appr pproach oach cr crea eatting ing yet yet anot anothe herr set set of bubb bubble les? s? Some Some,, incl in clud udin ing g Alan Alan Gr Gree eens nspa pan, n, ch chai airm rman an of th the e Fede Federa rall Rese Reserv rve e duri during ng the the euphoria of the 1990s and early 2000s, believe that bubbles can be spotted onl nly y in retro etrosp spec ectt. Othe Others rs,, such such as Jere Jeremy my Gran Granttham ham of GM GMO, O, a fund fund--


management group, argue that they can be identified by a surge in prices (and valuations) to way above their previous trends. In the the mode modell of mark market et ma madn dnes ess s outl outlin ined ed by Hy Hyma man n Mins Minsky ky,, a 20th 20th-century American economist, and by Charles Kindleberger in his book “Manias, Panics, and Crashes”, bubbles start with a “displacement”—a shock to the financial system, perhaps in the form of a new technology such as railways or the th e inter interne net. t. This This prov provide ides s the “narr “narrat ative ive”— ”—th the e rati rationa onale le th that at persu persuade ades s investors to join in. They start to believe that this time around things will be different and that asset prices can reach new heights.   The next stage is rapid growth in credit, which inflates the bubble. As investors borrow money to buy the asset in question, the resulting price rise makes the narrative more credible. At the peak, however, investors no longer pay much attention to fundamentals, buying simply on the belief that prices must rise further. further. This stage is marked by very high valuations and by popular enthu ent husia siasm sm for for asse assett pu purc rchas hases es—ma —mark rked ed in th the e 1920 1920s s by shoes shoeshi hine ne boys boys passing on share tips and in the early 2000s by the popularity of property programmes on television. Eventually, like a Ponzi scheme, a bubble runs out of new buyers. Prices slump. “Euphoria” gives way to the final stage, “revulsion”—until the cycle can begin again. How do today’s markets look in the light of that model? The best place to start is in the developed world. There has been a “displacement”, in that the credit crunch caused central banks to slash rates and led governments to unveil schemes to support banks, guarantee assets and allow budget deficits to soar. Whereas investors were highly risk-averse in late 2008, they have been encouraged to take their money out of cash and to invest in higheryielding assets like equities and corporate bonds. But although money is cheap, there has been no sign of the private-sector private-sector cred cr edit it grow growth th that that mark marks s bubb bubble le phas phases es.. Inde Indeed ed,, smal smalll busi busine ness sses es stil stilll


complain that bank loans are hard to find. In the euro area, the broad measure of money supply has even fallen in the past 12 months. In America, broad money grew at an annualised rate of only 1.2% in the six months to November. As further evidence that there is no bubble, bulls point to the relatively modes mo destt le leve vell of pros prospec pecti tive ve price price-ea -earni rnings ngs rati ratios os;; the the MSCI MSCI worl world d index index is trading on a multiple of 14 based on prospective earnings in 2010, according to Soci Société été Gén Généra érale, le, aro around und the long-te long-term rm average average.. However However,, prospec prospectiv tive e multiples can be very dependent on the optimism of the analysts who make the forecasts—and such analysts are in the business of selling shares. A better long-term measure is the cyclically adjusted price-earnings ratio, which averages profits over the previous ten years (see chart 2). On this measure, measur e, valuations are nowhere near the 2000 peak. They are, however, still pret pr etty ty high high by his histo tori rical cal st stan anda dards rds;; Smith Smither ers s & Co Co,, a firm firm of consu consult ltan ants ts,, reckons they are nearly 50% above their long-term average. Even now, after a dismal decade for shares, Wall Street is offering a dividend yield of only just over 2%, compared with a long-term average of 4.5%. In housing, a measure based on rents shows that American prices are back to fair value but prices in Britain, France, Spain and Australia are all 30-50% above their historic averages. Low mortgage rates (and government schemes to head off foreclosures) have stopped prices falling to the lows of previous downturns.   That said, although prices remain higher than average, private investors have shown little of the enthusiasm they exhibited in past bubbles. Activity in the housing market is subdued. Investors withdrew $36 billion from developedmarket equity funds in the course of 2009, according to EPFR Global, a data group. Emerging optimism More plausible candidates for bubble status can be found in emerging markets. The rally in the developed markets has been driven by relief that a


second Depression has been avoided, rather than by any great optimism about a new era. But emerging-market exports have survived the crisis remarkably well. They were clobbered in late 2008, when the collapse of Lehman Brothers sent the corporate sector into shock and many businesses slashed their order book bo oks. s. Cruc Crucial ially ly,, howe howeve ver, r, Ch China ina exper experien ienced ced not not much much mo more re th than an a mild mild slowdown and recovered to grow by around 8% in 2009. As investors look to the future, emerging markets have many advantages over their developed rivals. One, plainly, is higher potential rates of economic grow gr owth th.. Anot Anothe herr is th that at ma many ny emer emergi ging ng econ econom omie ies s have have st stro rong nger er fisc fiscal al posi po siti tion ons s than than th thei eirr West Wester ern n ri riva vals ls;; they they are are the the cred credit itor ors s fina financ ncin ing g the the American budget deficit.   The balance of power has already shifted. In 2003 the stockmarkets of  America, Britain and Japan formed 73% of the value of the MSCI all-country index; by the end of 2009 this proportion was just 59%. Enthusiasts like Jerome Boot Bo oth h of As Ashm hmor ore, e, a fund fund-m -man anag agem emen entt grou group, p, argu argue e that that this this tren trend d will will continue, because emerging economies’ stockmarkets are underweighted in world indices, given their share of global GDP. As the world rebalances, Mr Booth argues, investors from emerging economies will increasingly want to channel their savings to their own markets, rather than financing Western gove go vern rnme ments nts.. West Wester ern n inves investo tors rs are are alrea already dy show showin ing g an inte intere rest st in th these ese markets: investors shifted $64.5 billion into emerging-market funds last year.   This optimism explains why emerging markets now trade at a premium (measured by the ratio of market prices to the accounting value of assets) over devel dev elope oped d marke markets ts.. In the the past, past, such such prem premium iums s have have usual usually ly presa presaged ged a setback. In addition, emerging markets are seeing much faster credit growth than their developed rivals. In China, for example, broad-money growth in the 12 months to November was almost 30%. Such growth is the logical result of  pegging a currency to the dollar, and thus importing a monetary policy which may be right for America but which is too loose for the fast-growing Chinese


econ ec onom omy. y. Some Some of th that at cred credit it grow growth th is leak leakin ing g in into to asse assett mark market ets. s. The The Chine Ch inese se pre premi mier er,, We Wen n Jiaba Jiabao, o, sa said id in la late te De Dece cembe mberr that that the the gove govern rnme ment nt would use taxes and interest rates to stabilise the property market. House prices in Hong Kong are more than 50% above fair value, according to The Economist’s estimate. Though they are not yet back at 2007 valuations, it is easy to imagine that emerging markets will develop bubbles if a combination of low interest rates and pegged currencies continues. Another area where a bubble might be developing is in gold. Gold is an unlikely cause of euphoria, given that investors use it as a bolthole when they worry about inflation, currency depreciation or financial chaos. But the metal has seen a speculative peak before, most notably in 1980, when its price touched $835 an ounce, before losing two-thirds of its nominal value over the next 20 years.  The main rationale for buying gold at the moment is that, in the face of the credit crunch, most governments would like to see their currencies depreciate depreciate to boost their exports. If paper money is being “debased”, that is bullish for gold, an asset that central banks cannot create more of and that is no one else’s liability.  The gold bugs may be right. But the price has already quadrupled from its low and suffers from no real valuation constraints; it has no yield or earnings against which to measure it, so it is hard to say when it is “expensive”. Dylan Grice, an analyst at Société Générale, Générale, has mischievously mischievously suggested that, if the Bretton Woods system (under which the Fed was obliged to exchange its stock of dollars for gold with other central banks) were operating today, bullion would trade at $6,300 an ounce.

An age-old problem It seems likely that, if developed countries keep interest rates low for a long time, bubbles will emerge somewhere. The argument against tightening


policy now is a strong one, given the fragile state of the economic recovery. But to central banks it always is, whether the economy is healthy or not.

It is hard to imagine any circumstances in which the authorities will have the foresight (or the courage) to prick a bubble. It cannot be done when the economy is weak. And when the economy is strong, as it was in the late 1990s, central banks argue that higher asset prices are justified (back then, by the productivity improvements brought by the internet). Central bankers tend to see higher asset prices as a validation of their policies and to shy away from “second guessing” the markets. Ben Bernanke, the Fed’s chairman, argued in a recent speech that better regulation, rather than tighter monetary policy, would have been the key to pricking the American housing bubble in the past decade. Plans for preventing future bubbles may depend on controlling the banks, rather than setting the general level of interest rates. Higher loan-to-value ratios would avoid the excesses of subprime lending while higher capital ratios would prevent banks lending too much at the peak of the cycle. If the authorities can do little to stop a bubble inflating, what can they do if  markets market s suffer a further further relapse? Interest rates cannot be reduced further and it is hard to see the markets tolerating even bigger budget deficits. That leaves quantitative easing (QE), the policy under which central banks create money to buy assets, usually government bonds. Even that may have its limits, if private investors decide to sell government bonds as fast as central banks try to buy them. Bears argue that the global economy is already far too dependent on government stimulus. “Every basis point of [American] growth in [the third quarter] came from government stimulus, directly and indirectly,” says David Rosenb Ros enberg erg of Gluskin Gluskin Sheff, Sheff, a Can Canadia adian n asset-m asset-manag anageme ement nt firm. firm. Schemes Schemes such as “cash for clunkers” temporarily boosted car sales but these quickly


slip slippe ped d agai again n once once gove govern rnme ment nt subs subsid idie ies s stop stoppe ped. d. The The late latest st exam exampl ple e occurred when pending American home sales fell by 16% in November in anticipation of the end of a homebuyers’ tax credit (which has since been extended until the end of April).   These subsidies depend, in large part, on the ability of governments to fund huge deficits at relatively low cost. And that is perhaps the biggest issue of the moment.

A matter of life and debt On the one hand, the gap between short-term interest rates and long-term bond yields is extraordinarily high. That allows banks, in particular, to borrow at low rates from the central banks and invest the proceeds in government debt; the same trick was used to rebuild bank profits in the early 1990s. Russell Napier, a market historian and an analyst at CLSA, a broker, thinks that purc pu rcha hases ses by a combi combinat natio ion n of As Asia ian n cen centr tral al banks banks and and devel develope opedd-wo world rld comm co mmer erci cial al bank banks s are are ca caus usin ing g a bu bubb bble le to deve develo lop p in go gove vern rnme ment nt-b -bon ond d markets. Investors may be looking to Asia for inspiration. Japan has run huge deficits for 20 years and still has ten-year bond yields of under 1.5%. If investors think the American economy is in for a similar period of stagnation, then Treasurybond yields of almost 4% (see chart 3) look attractive. On the the ot othe herr ha hand nd,, some some poin pointt to the the huge huge grow growth th in ce cent ntra rall bank banks’ s’ balance-sheets and to the use of QE. This indirect monetisation of the budget deficit is, in their view, just another way of debasing the currency. The Fed’s entry for “total factors supplying reserve funds” has jumped from $942 billion in the week before the collapse of Lehman Brothers to almost $2.3 trillion. In Britain, the Bank of England’s QE programme has, in effect, financed the entire government deficit for one year.


But both the Fed and the Bank of England seem to be winding down their QE programmes and these may not be around to support bond prices next year. However, there is scant trace of any rapid reduction in budget deficits, at least in Britain and America. Governments that have attempted to tackle them, such as Ireland’s, have faced protests and strikes. As a rule, governments find it far easier to increase their debt than to reduce it. In the absence of rapid economic growth, debt reduction usually means a period of austerity, a hard thing to swallow, especially when the creditors are foreign. Iceland’s president has just refused to approve a deal repaying debts to Britain and the Netherlands in the face of public opposition.

Governments also fear that premature fiscal tightening might only send the economy back into recession. That was the mistake made by the Roosevelt administration in 1937 and by the Japanese in 1997, when they raised the consumption tax. Finance ministers may be unwilling to take unpopular courses of action until the rating agencies downgrade their debt or the market forces the issue, by pushi pushing ng bond bond yield yields s shar sharply ply highe higher. r. Al Alre ready ady,, ther there e ha have ve been been signs signs of  market impatience with some countries, such as Greece, which have been slow to address the problem. Investors may eventually demand coherent strategies from from the the Amer America icans ns and and the the Briti British; sh; Pi Pimc mco, o, proba probably bly th the e most most influe influenti ntial al private-sector bond investor, said this week that Britain faced a cut in its credit rating without a credible debt-reduction plan.  The markets are beset by a series of contradictions. They are dependent on extraordinary extraordinary amounts of government government stimulus. But that stimulus stimulus is in turn ultimately ultimat ely dependent on the willingness of markets to finance governments governments at low rates. They should be willing to do so only if they believe that growth prospects are poor and inflation will stay low. But if they believe that, investors should be unwilling to buy equities and houses at above-average valuations. At


some time—maybe in 2010—those contradictions will have to be resolved. And that will trigger another nasty bout of volatility. Correction: We originally suggested that higher loan-to-value ratios would

avoid the excesses of subprime lending. Of course it's lower loan-to-value ratios that would have this effect. This was corrected on January 11th 2010.

(14) The Long-Term Effect of the Greek Euro Crisis

March 9, 2010 The New York Times PARIS — The Greek debt crisis will change the way the euro zone works, but probably not in the direction that the single currency’s founding fathers had hoped. When they negotiated the Maastricht Treaty in the early 1990s, Helmut Kohl Ko hl,, Franç François ois Mitt Mitter erra rand nd an and d Ja Jacqu cques es Delo Delors rs believ believed ed that that the the Euro Europea pean n Monetary Union would lead inevitably to a closer political union with more federal governance. But flaws uncovered by Greece’s fiscal jam seem more likely to entrench a twotw o-cla class ss sy syst stem em in which which “g “gro rown wn-up -ups, s,” ” led by Germ Germany any,, exer exertt ever ever more more control over wayward “children” like Greece. It is possible, possible, though less likely, that domestic factor factors s could prevent Berlin from helping to rescue a euro zone member in trouble, leaving Greece to turn to the International Monetary Fund for emergency funding. Also, it is conceivable that a country unable or unwilling to make the sacrifices prescribed by Brussels, Berlin or Washington could default or seek to reschedule its debts.


 That would not necessarily lead to the defaulter’s leaving the euro zone, let alone prompt the collapse of the single currency. But it would set off a chain reaction of bank solvency problems requiring emergency solutions for which the European Union is ill prepared. In Br Brus usse sels ls,, pred predic icta tabl bly, y, the the ta talk lk is of the the need need for for clos closer er econ econom omic ic governance, new powers of surveillance for the European Commission and its statistics office and perhaps the creation of a European lender of last resort.  José Manuel Barroso, the commission president, proposed last week giving the E.U. executive new powers to recommend economic overhaul programs to individual countries, and to name and shame laggards by sending warnings in cases of inadequate responses.

But Germany, the biggest European economy, has made it clear that it does not want E.U. scrutiny of its own export-oriented policies, which generate big current account surpluses that economists say are partly responsible for widening imbalances in the euro zone. Prime Minister Yves Leterme of Belgium wants a European debt agency that would issue common bonds enabling all euro zone countries to borrow at the sa sam me cost. That too is a non onst sta arter in German eyes and equa qually lly unacceptable to the Dutch and Finns. Larger fiscal transfers within the European Union or the 16-nation euro zone look impossible because of post-crisis retrenchment. Economists like Daniel Gros of the Center for European Policy Studies and  Thomas  Thoma s Mayer of Deutsche Deutsche Bank have proposed a European monetary fund to design desi gn and run I.M.F. I.M.F.-st -style yle assista assistance nce progra programs ms for euro-a euro-area rea countri countries es in difficulty. But it is hard to see how such ambitious ideas could be implemented without treaty changes unanimously approved by the 27 E.U. states.


  That seems too difficult to contemplate after years of agony in getting ratification of the Lisbon Treaty, which amended the original E.U. agreements. A two-class euro zone has been a reality since 2004, when E.U. budgetdiscipline rules were suspended, then rewritten, to avoid sanctions against France and Germany after they repeatedly breached the deficit limit.  The Greek crisis has strengthened that trend, whether or not Athens ends up being bailed out by its partners. Greece has been placed under E.U. fiscal tutelage, but no such intrusion has been imposed on France, for example, which has a deficit of more than twice the E.U. ceiling of 3 percent of gross domestic product. Any fina inanci ncial backi king ng for Greece would most lik likely be an ad hoc hoc arrangement, with Germany calling the shots as Europe’s de facto lender of  last resort.   This two-class euro zone will cause resentment and aggravate mistrust between big and small states, north and south. That is how power works in the real world, but the Union was created to do things differently. Domestic political opposition or the German constitutional court may yet make it impossible for Berlin to join a rescue. A euro zone country unable to raise affordable funds on the markets would then face a choice of going to the I.M.F., defaulting, or seeking to reschedule its debt. Euro zone leaders have made such a taboo of bringing in outside enforcers that to do so now would send a message that the family was incapable of  coping with its own problems. A default, even of a small economy like that of Greece, could cause a chain of bank insolvencies and hit the euro. That is why the German political and financial establishment would probably have to back a bailout, despite public


fury. Such an event might shock the European Union into closer integration. But it would more likely prompt sticklers for fiscal discipline, like Germany and the Dutch, to retreat further into national-interest policies.

 The most improbable option is that a country might walk away from the euro zone.  The price would be enormous, and there is no serious discussion of this in Greece or other euro states under pressure — only in countries and among people who opposed monetary union all along or forecast that it would end in tears.

(15) The Bloodbath of British Banks

 January 2009 The BusinessWeek Following a huge loss by RBS on Jan. 19, investors turned against other City of London bastions, including Lloyds, Barclays, and even HSBC

Roya Ro yall Bank Bank of Scot Scotla land nd (RBS.L) RBS.L) anno announ unce ced d the the bigg bigges estt loss loss in Br Brit itis ish h corp co rpor orat ate e hist histor ory y ye yest sterd erday ay.. Th The e news news tr trigg igger ered ed fear fears s the the bank bank would would be nationalised










overshadowing the Government's latest financial bailout. RBS stunned the market by predicting a loss of up to £28bn for 2008, writing off as much as £8bn of toxic assets and £20bn from the value of  acquisitions, including the disastrous takeover of the Dutch bank ABN Amro in


2007. The scale of the losses raised fears that RBS would be fully nationalised and that other banks, such as Barclays, could find themselves controlled by the state. Shares in Barclays (BCS ( BCS)) and the new Lloyds ( LLOY.L LLOY.L)) group also fell. The Government


first forced


intervene in


with a £50bn

recapitalisation of the major UK banks. RBS, which owns NatWest, Direct Line and Cout Coutts ts,, the Quee Queen' n's s ba bank nk – was was alrea lready dy 58 per per cent cent owne owned d by the Government after it came close to collapse in October. The bank, which was one of the world's 10 biggest, swapped £5bn of preference shares held by the Government for new ordinary shares, giving the state a 70 per cent stake in the bank and making it more secure. RBS shares lost two-thirds of their value, closing at just 11.6p. Stephen Hester, the bank's chief executive, said full nationalisation was a possibility and had been discussed "only as something we all wished to avoid". But with the economy so fragile, nationalisation was possible, he added. Alth Al thou ough gh some some Labo Labour ur MPs MPs ca call lled ed for for full full stat state e owne owners rshi hip, p, mini minist ster ers s insisted that was not their goal. But the Chancellor, Alistair Darling, did not rule out the move as a last resort, saying: "The Government has to continue to do whatever is necessary to get credit flowing."   The The colla ollaps pse e in bank bank sha share res s was was em emba barr rras assi sing ng for for mini minis sters ters,, who yest ye ste erday rday mo morn rnin ing g hail hailed ed a sh shor ortt-l -liv ived ed rise rise in share hare price rices s afte afterr they hey announced their second rescue package. Last night, they insisted their plan was about saving the economy, not the banks, and that share prices were not in their minds when they drew up the latest measures.  The Government's first bailout in October was meant to restore confidence by injecting more cash into the banks to protect against losses. But shocking results from Bank of America, Deutsche Bank and others last week showed markets became worse than ever in December, battering the values of risky investments and loans stuck on lenders' balance sheets.


 The Treasury announced a raft of new measures yesterday, designed to furtherr support confidence in the system and get the banks lending to support furthe support house ho useho holds lds an and d compa companie nies. s. The The plan plan includ included ed agree agreeing ing to sell sell the the banks banks guar gu aran ante tees es agai agains nstt lo loss sses es on toxi toxic c asse assets ts,, exte extend ndin ing g a Bank Bank of Engl Englan and d scheme that lets banks swap illiquid securities for Government bonds, and underwriting new issues of mortgages and other loans parcelled up as bonds to boost funding. Gordon Brown, who said he was "angry" about RBS's excessive lending, added: "I am not going to stand idly by and let people go to the wall because of ir irre resp spon onsi sibl ble e mist mistak akes es of a few few bank banker ers. s."" He deni denied ed the the new new sche scheme me amounted to a "blank cheque" but could not estimate how much taxpayers' money would be at risk. City experts said the gamble could run into hundreds of billions of pounds. George Osborne, the shadow Chancellor, said: "It is the clearest possible admission that the first bailout of the banks has failed and now they have no option but to attempt a second bailout – a bailout whose size we still don't know, whose details remain a mystery and whose ultimate cost to the people of Britain will only be known when this Government has long gone."   Jane Coffey, head of equities at Royal London Asset Management, said: "These were helpful measures but there was a realisation with RBS coming clean that this problem is even bigger than people had thought. What these measures haven't done is get rid of concern about toxic assets because they don't cover the worst of the stuff." Banking stocks were traded in huge volumes, indicating a mass flight from the sector, with nearly 743 million RBS shares changing hands and a total of  1.2 billion bank shares traded.

David Davi d Buik, uik, of BGC BGC Partn artne ers, rs, sa said id:: "What What has has frig fright hten ened ed us all all this his afte af tern rnoo oon n are are the the volu volume mes s – peop people le lo look okin ing g to ge gett out. out. This This is grow grownn-up up turnover."


Lloyds Banking Group shares shares tumbled on their first day of trading, losing a third, after Lloyds TSB bought Halifax Bank of Scotland (HBOS) last week in a government-brokered deal to save HBOS from imploding. Investors fear that HBOS's losses on credit investments and commercial property could seriously damage Lloyds. RBS's shocking loss hit confidence in Barclays, whose shares had already lost a quarter of their value on Friday and fell 10 per cent yesterday. Barclays is one of the biggest players in the debt markets that have damaged RBS. Many any inve invest stor ors s beli believ eve e Bar arcl clay ays s co coul uld d suff suffer er los osse ses s that that forc force e it to be nationalised, nation alised, though it issued a statement statement on Friday predicting predicting a £5.3bn profit for 2008, saying it was financially strong. Analysts at Dresdner Kleinwort said a possible future shortage of capital following further asset deterioration could eventually push [Barclays] into the arms of the Government if existing shareholders were unwilling or unable to provide yet further support and share price weakness persists. HSBC, the only UK bank not to raise new capital in the crisis, said it had no plans to accept government capital and could see no circumstances in which doing so would be necessary. Its shares fell by 6.5 per cent yesterday.

(16) The name's Bond. Eurobond The European Union finds an unexpected new hero in the financial markets

 Jan 20th 2011 The Economist

IN EUROPE over the past year, Bond has been the villain rather than the hero. Licensed to kill national economies, he brought down first Greece and then th en Irela Ireland. nd. Port Portug ugal al and and other others s are are no now w cowe coweri ring ng in fe fear ar.. This This Bond, Bond, it seems, is the agent of sinister Anglo-Saxon market forces seeking to destroy Europe’s single currency. Such is the story most commonly told since the start


of the euro zone’s sovereign-debt crisis. Of late, though, the villain has been partially rehabilitated. For the new Bond is now said to be a European federalist in disguise. As José Manuel Barroso, president of the European Commission, has claimed, “the markets are sending every day a very clear message that Europe has to work in a more coordin or dinat ated ed ma manne nnerr when when it come comes s to econo economic mic and and finan financia ciall issues issues.” .” JeanJeanClaude Juncker, president of the euro group of finance ministers, insists that the euro zone has “the confidence of the market”. market”. The proof, he says, was the strong demand for the commission’s first issue of bonds this month to raise money for Ireland’s bail-out, bail-ou t, at an interest rate of only 2.6%. Does the new Bond really want “more Europe”? Talk to market participants and the surprising answer is often yes. This is not out of love for the European dream, but rather out of fear of catastrophic losses. More decisive action is needed by the solvent north European countries, they are saying, to stop the crisis spreading right across the southern belt. After the launch of the euro in 1999 the bond markets were quick to shake off their doubts about the durability of monetary union without a common fiscal or economic policy. The risk of devaluation was gone and the chance of  default seemed tiny, to judge from the markets’ judgment that bonds issued by thrifty states were barely worth any more than those of profligate ones. It was only late in the global crisis, when Greece admitted to lying about its numbers,, that the markets numbers markets woke up from their torpor into a sudden panic over sovereign risk. Governments responded first by signing over vast emergency loans to Greece and then by creating an even vaster temporary loan facility (partly usin us ing g IM IMF F mone money) y).. They They drew drew on this his for for Irel Irelan and’ d’s s rece recent nt rescu escue. e. The temporary will now become permanent, requiring a change to the EU treaties, with a new system under which the euro zone can in future restructure the debts of insolvent countries that share the currency.  The commission is seeking to bolster what it calls “economic governance”: governance”:


tougher monitoring of the budgets and economic policies of euro members, with the authority to issue warnings and even impose penalties against those (including surplus countries) that do not comply with Brussels’s prescriptions.  The EU is now embarked on its “European semester”: the early submission of  national budget plans and reform programmes to Brussels for scrutiny and peer review before they go before national national parliaments. There is vague talk of  deeper deep er coo-o ordin rdinat atio ion n. The The Ge Germ rman ans s ha have ve spok spoken en of set setting ing a comm common on retirement age across the EU; the French want more tax harmonisation. All this goes far beyond what EU officials thought possible a year ago. Among other things, it will make Eurosceptic countries, notably Britain, far less likely ever to join the single currency. But will European governance assuage the bond markets? It has not so far. The markets’ view, as far as anyone can tell, is that the EU bail-out funds must be expanded to remove any doubt about their capac their capacit ity y to save save Port Portuga ugall and and Sp Spain ain.. Joint Joint Eurob Eurobond onds s for pa part rt of the sovereign sovere ign debt, called for by Mr Juncker and the Italian finance minister, minister, Giulio  Tremonti, might also reassure the markets. Above all, the markets want to see more common purpose from bickering European leaders.  Their political dispute centres on two questions. First, are the most solvent stat st ates es,, abov above e all all Ge Germ rman any, y, prep prepar ared ed to stan stand d behi behind nd and and if ne need ed be to subsi su bsidis dise e the less less solv solvent ent ones? ones? Second Second,, are are the the most most indebt indebted ed coun countr tries ies ready to endure economic pain—wage cuts, the end of cherished benefits and the imposition of labour-market labour-market reforms—to reforms—to balance the books and encourage growth? The more convincingly the answer “Yes” applies to both questions, the faster calm will be restored. But so far the response has been slow, hesitant and contradictory. Succ Su cces essf sful ul rece recent nt sale sales s of bond bonds s by Port Portug ugal al,, Spai Spain n and and Ital Italy y have have provided some relief. Germany says the EU should now seek an all-embracing deal, including on the size and scope of the bail-out fund, in time for the next summit in March. The commission retorts that the euro zone does not have the luxury of time: the markets have been “doped” by the opaque bond-buying by the European Central Bank (ECB), and probably by China and Japan, and need


a clearer signal of action. North is north and south is south

Do not expect the panic to be over soon. Northerners do not want to pay for the mess made by southerners. The olive belt cannot conceive of the harsh and unprotesting adjustment that Baltic countries have endured (with Estonia then leading the way into the euro). Many countries need years of austerity and an d re refo form rms s to rega regain in lo lost st comp compet etit itiv iven enes ess. s. Grea Greate terr co-o co-ord rdin inat atio ion n an and d exhortation may help. But Mr Barroso and Mr Juncker and their promise of  more European governance ultimately lack the persuasive power of the bond markets. Indeed, their plans will work only if markets remain alert, ready to  jump on any hints of backsliding. Calls for much greater “solidarity” from rich countries should therefore be treated warily, as should any suggestions that Brussels ought to seek to disarm markets market s by restricting restricting derivativ derivatives es trading or short-selling. short-selling. The new Bond could turn out to be Europe’s best friend in the end—but only if he is able to keep governments in fear for their lives.

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