Buffett Takeover Reduces Successor’s Need for ‘Amazing Insight’
Share Business ExchangeTwitterFacebook| Email | Print | A A A By Andrew Frye
Nov. 3 (Bloomberg) -- Warren Buffett’s takeover of Burlington Northern Santa Fe Corp. may reduce his successor’s need for “amazing insight” to lead Berkshire Hathaway Inc.
The deal for the largest U.S. railroad gives Buffett the “elephant”-sized acquisition he’s been looking for to deploy accumulated earnings from Berkshire’s insurance units and investments. Buffett who is vetting candidates for CEO of the company he built over four decades, called his biggest purchase “an all-in wager” on the future of the U.S. economy.
“He knew long ago that his time was limited,” said David Carr, chief investment officer at Oak Value Capital Management Inc. in Chapel Hill, North Carolina. Buffett, 79, has been structuring the company so that it doesn’t have to rely on the next leader for “making deals that require amazing insight.”
Buffett, the world’s most celebrated investor, adds a business in Burlington that was profitable every quarter for at least a decade and remains shielded from competition by its rail network. The purchase marks a shift from Buffett’s strategy in the recession of drawing down Omaha, Nebraska-based Berkshire’s cash hoard, valued at more than $24 billion at the end of June, to finance firms including Goldman Sachs Group Inc.
Berkshire agreed to pay $26 billion for the stake in Fort Worth, Texas-based Burlington it didn’t already own and assume $10 billion in net debt.
‘Opportunities Have Changed’
“It’s kind of like dumbing down the asset base,” said Jeff Matthews, author of “Pilgrimage to Warren Buffett’s Omaha” and founder of the hedge fund Ram Partners LP in Greenwich, Connecticut. “It suggests that the long-term opportunities have changed, and going forward Berkshire is not much more than a general call on the American economy, whereas in the past it was a call on Buffett’s investment acumen.”
The deal culminates a search by Buffett that sent him to Europe looking for possible acquisitions and lamenting in letters to shareholders that he and Vice Chairman Charles Munger couldn’t find companies they considered large enough to meaningfully add to annual earnings. Buffett didn’t return a message seeking comment left with his assistant Carrie Kizer.
Burlington, with pretax income of $3.37 billion on revenue of $18 billion last year, would be Berkshire’s second-largest operating unit by sales. Berkshire’s McLane unit, which delivers food to stores and restaurants by truck, earned $276 million on revenue of $29.9 billion in 2008. Berkshire’s largest business overall is insurance, including the Geico Corp. unit.
Sokol, Jain
By expanding operations outside of finance, Berkshire’s operations more closely match the expertise of David Sokol, chairman of Berkshire’s energy business, said Alice Schroeder, the author of “The Snowball,” an authorized biography of Buffett, and a Bloomberg News columnist. Buffett added to Sokol’s duties this year by naming him to head Berkshire’s money-losing plane-leasing unit.
Sokol and Buffett’s reinsurance lieutenant Ajit Jain are among Berkshire executives included on media lists of potential successors. Buffett hasn’t publicly said who will replace him.
Buffett has joked that he built Berkshire so it could be run by a cardboard cutout or the bust of Benjamin Franklin that Munger keeps in his office, Schroeder wrote in the book.
Berkshire will continue to generate cash, giving Buffett the chance to make additional deals in years to come, said Gerald Martin, a finance professor at American University’s Kogod School of Business in Washington.
“I don’t think he’s ready to give up control,” Martin said. The Burlington deal is “classic Buffett, I think he’s found a good buy at a good time with a company that has good earnings prospects.”
Buffett built Berkshire into a $150 billion company buying firms that he deems to have durable competitive advantages. His largest purchases include the 1998 deal for General Reinsurance Corp. for more than $17 billion. Buffett expanded into power production with the purchase of MidAmerican Energy Holdings Co., and last year bought Marmon Holdings Inc., the collection of more than 100 businesses, from the Pritzker family. Marmon’s Union Tank Car unit manufactures and leases railroad cars.
To contact the reporters on this story: Andrew Frye in New York at afrye@bloomberg.net;
Last Updated: November 3, 2009 14:56 EST
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Buffett Takes 10 Days to Seal Biggest Deal in Career
Wednesday 4 November 2009
The inflation in China's mainland cast a shadow over Chinese economic performance.
MARKET WATCH NO. 27, 2008
--------------------------------------------------------------------------------
Date：2008-7-9 10:33:00
Source：[BiMBA] Browse：[106] Comments：[0]
TO THE POINT: The inflation in China's mainland cast a shadow over Chinese economic performance. Most recently, it was further jacked up by rising electricity and refined oil prices. The mainland refined oil prices were edging up in line with international levels, putting more pressure on consumers. One-year iron ore prices also lifted substantially up 96.5 percent. China Development Bank was determined to buy more Barclays shares, ignoring market uncertainties. Merrill Lynch warned of risk growth in 2009.
By LIU YUNYUN
Chain Effects of Oil Price Hikes
Chinese mainland refined oil price hikes have caused a series of chain effects on both major oil consumption enterprises as well as people’s lives, resulting in jitters about inflation.
Beginning on June 20, the benchmark gasoline and diesel oil retail prices were marked up by 1,000 yuan ($145) per ton, while the price of aviation kerosene was up by 1,500 yuan ($218) per ton.
The Central Government controls refined oil prices. The last time such hikes took place was last November, when international crude oil price reached around $90 per barrel. The international oil price has surged nearly 50 percent since then.
Inflation is expected to go up along with oil prices. Merrill Lynch & Co. Inc.published a report on June 20, arguing that, although the National Development and Reform Commission (NDRC) forbids price increases in public utilities and taxies, the impact of such hikes will be quickly passed on to consumers through other channels, especially food prices in urban areas. Merrill Lynch thus raised its annual consumer price index inflation forecast in 2008 to 7.5 percent from the previous 6.9 percent.
Impact on listed companies: Share prices of two mainland oil giants-China Petroleum & Chemical Corp. and PetroChina Co.-climbed upon the news. The markets expected the price hikes would cover some of their losses in the refined oil section, though it was still one third less than that of the international prices.
Other A-share listed companies were not so optimistic. Some complained the price hike would push up their production costs, and pose a negative impact on their revenue. For instance, Jiangsu Qionghua Hi-tech Co. Ltd. published a notice on June 23, noting this round of price hikes would add 1.15 million yuan ($164,000) to their costs in the second half of this year.
On airlines: Chinese airlines will have to bear the biggest burden. Tianxiang Investment Consulting Co. Ltd. estimated in its June 20 report that airlines’ profitability will deteriorate. The whole aviation industry is expected to spend an extra 10 billion yuan ($1.43 billion) on fuels. Earnings per share of Air China Co. Ltd., China Southern Airlines Co. Ltd., and China Eastern Airlines Corp. Ltd. will go down 0.15 yuan, 0.75 yuan and 0.45 yuan respectively, according to Tianxiang Investment Consulting.
However, National Business Daily cited an anonymous NDRC official stating that the government would come to the rescue. It was reportedly to raise fuel surcharge up to 50 percent of the original prices to offset losses incurred by airlines. Tianxiang argued the surcharge hike could only cover 60 percent of the cost surge.
On public transportations and railways: The prices of public transportation, taxi and railways were forbidden to rise, according to an NDRC emergency notice on June 23. It ordered local governments to strictly check the chain effects of oil and electricity price hikes.
The NDRC urged operators to find other ways to increase profitability, and vowed to cut tolls for vehicles carrying agricultural products.
Compromising on Iron Ore
China’s leading steel mill, Baosteel Corp. Ltd. agreed with Australian suppliers to an increase of 96.5 percent on iron ore prices, much higher than the 65-71 percent increase set with Brazilian suppliers. The agreement was reached after months of arduous negotiation as suppliers required higher freight fee.
Analysts expected the earnings of Chinese steel mills would go down, but the mills would quickly pass the cost surge onto consumers to offset the rising cost. The move would eventually jack up the runaway inflation.
Baosteel agreed on June 23 to pay 96.5 percent more to Australian Rio Tinto’s Pilbara Blend Lump for 12 months beginning April 1, 2008. In February, Baosteel had agreed to pay 65-71 percent more to Brazil’s Cia Vale do Rio Doce for ore fines.
The Australian side argued the shipping cost from Australia to China was much lower than that from Brazil to China, thus demanded a higher shipping fee from the Chinese side.
Baosteel stated in a notice to Xinhua News Agency that the iron ore price was set after “friendly negotiation,” and showed “both sides’ commitment to safeguarding sound market order and maintaining long-term friendly cooperation.”
Major suppliers are calling the shots in deciding iron ore prices, posing enormous pressure on domestic steel makers. Judging by Japanese experience, the Chinese companies should buy stocks and aim to become one of the major shareholders of suppliers, therefore they will be able to share the profit of rising iron ore prices, said Shan Shanghua, Vice Secretary of China Iron and Steel Association.
CDB Defied Market Turbulence
Amid global financial market turmoil, China Development Bank (CDB) stated it would increase its presence in the British bank Barclays Plc by acquiring more of Barclays shares.
Barclays, Britain’s fourth largest lender, announced on June 25 it would raise approximately 4.5 billion pounds ($9 billion) through the issue of 1.58 billion new ordinary shares.
CDB did not reveal how much more it would spend on Barclays. But a CDB official said the decision was aimed at consolidating the bank’s position as Barclays’ biggest shareholder and showing its confidence in the British bank’s strategy and prospects, according to Xinhua News Agency.
Barclays Chief Executive Officer John Varley said in a press conference he would use half the proceeds to bolster the bank’s capital adequacy, while the rest will be used for other business opportunities, including possible acquisitions, increasing consumer lending in Asia, and investment banking in the United States.
However, the depressing international financial markets had increased uncertainties for this transaction. CDB became a major shareholder of Barclays last year, and is now holding 3.1 percent of Barcalys’ shares. CDB bought Barclays shares at about 7.2 pounds, but the latter’s share prices has dropped half to around 3.3 pounds at present.
Xi Yangjun, financial professor at Shanghai University of Finance and Economics, believed it was a golden opportunity to buy Barclays shares. “The bank’s share price is at a very low level, mainly because of the subprime mortgage crisis. But the bank’s internal management did not show any problem,” said Xi.
Easing Energy Tension
China’s first coalbed methane (CBM) pipeline is expected to function at the end of this year, after which CBM will run from Shanxi Province to the east part of the country.
China National Petroleum Corp. (CNPC) announced the pipeline, 35 km long, would be capable of carrying 3 billion cubic meters of CBM each year.
CBM is a new energy source with no pollution and high in caloric value. It is a form of natural gas extracted from coal beds. In recent decades it has become an important source of energy in the United States, Canada, and other countries.
CNPC stated that natural gas supplies will fall 60 billion cubic meters short of demand in China by 2010. “The project will make use of CBM in a more economic way and supplement sources for the west-east gas pipeline and ease the gas supply strain,” CNPC said in a public statement on its website.
From BEIJING REVIEW:
http://www.bjreview.com/business/txt/2008-06/30/content_130473_2.htm
--------------------------------------------------------------------------------
Date：2008-7-9 10:33:00
Source：[BiMBA] Browse：[106] Comments：[0]
TO THE POINT: The inflation in China's mainland cast a shadow over Chinese economic performance. Most recently, it was further jacked up by rising electricity and refined oil prices. The mainland refined oil prices were edging up in line with international levels, putting more pressure on consumers. One-year iron ore prices also lifted substantially up 96.5 percent. China Development Bank was determined to buy more Barclays shares, ignoring market uncertainties. Merrill Lynch warned of risk growth in 2009.
By LIU YUNYUN
Chain Effects of Oil Price Hikes
Chinese mainland refined oil price hikes have caused a series of chain effects on both major oil consumption enterprises as well as people’s lives, resulting in jitters about inflation.
Beginning on June 20, the benchmark gasoline and diesel oil retail prices were marked up by 1,000 yuan ($145) per ton, while the price of aviation kerosene was up by 1,500 yuan ($218) per ton.
The Central Government controls refined oil prices. The last time such hikes took place was last November, when international crude oil price reached around $90 per barrel. The international oil price has surged nearly 50 percent since then.
Inflation is expected to go up along with oil prices. Merrill Lynch & Co. Inc.published a report on June 20, arguing that, although the National Development and Reform Commission (NDRC) forbids price increases in public utilities and taxies, the impact of such hikes will be quickly passed on to consumers through other channels, especially food prices in urban areas. Merrill Lynch thus raised its annual consumer price index inflation forecast in 2008 to 7.5 percent from the previous 6.9 percent.
Impact on listed companies: Share prices of two mainland oil giants-China Petroleum & Chemical Corp. and PetroChina Co.-climbed upon the news. The markets expected the price hikes would cover some of their losses in the refined oil section, though it was still one third less than that of the international prices.
Other A-share listed companies were not so optimistic. Some complained the price hike would push up their production costs, and pose a negative impact on their revenue. For instance, Jiangsu Qionghua Hi-tech Co. Ltd. published a notice on June 23, noting this round of price hikes would add 1.15 million yuan ($164,000) to their costs in the second half of this year.
On airlines: Chinese airlines will have to bear the biggest burden. Tianxiang Investment Consulting Co. Ltd. estimated in its June 20 report that airlines’ profitability will deteriorate. The whole aviation industry is expected to spend an extra 10 billion yuan ($1.43 billion) on fuels. Earnings per share of Air China Co. Ltd., China Southern Airlines Co. Ltd., and China Eastern Airlines Corp. Ltd. will go down 0.15 yuan, 0.75 yuan and 0.45 yuan respectively, according to Tianxiang Investment Consulting.
However, National Business Daily cited an anonymous NDRC official stating that the government would come to the rescue. It was reportedly to raise fuel surcharge up to 50 percent of the original prices to offset losses incurred by airlines. Tianxiang argued the surcharge hike could only cover 60 percent of the cost surge.
On public transportations and railways: The prices of public transportation, taxi and railways were forbidden to rise, according to an NDRC emergency notice on June 23. It ordered local governments to strictly check the chain effects of oil and electricity price hikes.
The NDRC urged operators to find other ways to increase profitability, and vowed to cut tolls for vehicles carrying agricultural products.
Compromising on Iron Ore
China’s leading steel mill, Baosteel Corp. Ltd. agreed with Australian suppliers to an increase of 96.5 percent on iron ore prices, much higher than the 65-71 percent increase set with Brazilian suppliers. The agreement was reached after months of arduous negotiation as suppliers required higher freight fee.
Analysts expected the earnings of Chinese steel mills would go down, but the mills would quickly pass the cost surge onto consumers to offset the rising cost. The move would eventually jack up the runaway inflation.
Baosteel agreed on June 23 to pay 96.5 percent more to Australian Rio Tinto’s Pilbara Blend Lump for 12 months beginning April 1, 2008. In February, Baosteel had agreed to pay 65-71 percent more to Brazil’s Cia Vale do Rio Doce for ore fines.
The Australian side argued the shipping cost from Australia to China was much lower than that from Brazil to China, thus demanded a higher shipping fee from the Chinese side.
Baosteel stated in a notice to Xinhua News Agency that the iron ore price was set after “friendly negotiation,” and showed “both sides’ commitment to safeguarding sound market order and maintaining long-term friendly cooperation.”
Major suppliers are calling the shots in deciding iron ore prices, posing enormous pressure on domestic steel makers. Judging by Japanese experience, the Chinese companies should buy stocks and aim to become one of the major shareholders of suppliers, therefore they will be able to share the profit of rising iron ore prices, said Shan Shanghua, Vice Secretary of China Iron and Steel Association.
CDB Defied Market Turbulence
Amid global financial market turmoil, China Development Bank (CDB) stated it would increase its presence in the British bank Barclays Plc by acquiring more of Barclays shares.
Barclays, Britain’s fourth largest lender, announced on June 25 it would raise approximately 4.5 billion pounds ($9 billion) through the issue of 1.58 billion new ordinary shares.
CDB did not reveal how much more it would spend on Barclays. But a CDB official said the decision was aimed at consolidating the bank’s position as Barclays’ biggest shareholder and showing its confidence in the British bank’s strategy and prospects, according to Xinhua News Agency.
Barclays Chief Executive Officer John Varley said in a press conference he would use half the proceeds to bolster the bank’s capital adequacy, while the rest will be used for other business opportunities, including possible acquisitions, increasing consumer lending in Asia, and investment banking in the United States.
However, the depressing international financial markets had increased uncertainties for this transaction. CDB became a major shareholder of Barclays last year, and is now holding 3.1 percent of Barcalys’ shares. CDB bought Barclays shares at about 7.2 pounds, but the latter’s share prices has dropped half to around 3.3 pounds at present.
Xi Yangjun, financial professor at Shanghai University of Finance and Economics, believed it was a golden opportunity to buy Barclays shares. “The bank’s share price is at a very low level, mainly because of the subprime mortgage crisis. But the bank’s internal management did not show any problem,” said Xi.
Easing Energy Tension
China’s first coalbed methane (CBM) pipeline is expected to function at the end of this year, after which CBM will run from Shanxi Province to the east part of the country.
China National Petroleum Corp. (CNPC) announced the pipeline, 35 km long, would be capable of carrying 3 billion cubic meters of CBM each year.
CBM is a new energy source with no pollution and high in caloric value. It is a form of natural gas extracted from coal beds. In recent decades it has become an important source of energy in the United States, Canada, and other countries.
CNPC stated that natural gas supplies will fall 60 billion cubic meters short of demand in China by 2010. “The project will make use of CBM in a more economic way and supplement sources for the west-east gas pipeline and ease the gas supply strain,” CNPC said in a public statement on its website.
From BEIJING REVIEW:
http://www.bjreview.com/business/txt/2008-06/30/content_130473_2.htm
Risk versus Uncertainty: Known knowns, known unknowns and unknown unknowns
Risk versus Uncertainty: Frank Knight’s “Brute” Facts of Economic Life
By William Janeway
Published on: Jun 07, 2006
Dr. William H. Janeway, Vice Chairman, Warburg Pincus, received his doctorate in economics from Cambridge University where he was a Marshall Scholar. He was Valedictorian of the Class of 1965 at Princeton University. Prior to joining Warburg Pincus in 1988, where he was responsible for building the Information Technology practice, he was Executive Vice President and Director at Eberstadt Fleming. Dr. Janeway is a director of BEA Systems, Manugistics, Scansoft and UGS. He is also a member of the board of directors of the Social Science Research Council and a member of the board of Trustees of Cambridge in America, University of Cambridge. He is a Founder Member of the Board of Managers of the Cambridge Endowment for Research in Finance (CERF).
“…there are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns—the ones we don’t know we don’t know.”—Donald Rumsfeld
“Ah, what a dusty answer gets the soul, When hot for certainties in this our life”—George Meredith
Donald Rumsfeld’s characteristically idiosyncratic gloss on George Meredith’s existential meditation attracted derision across many constituencies. But Rumsfeld summarized a way of structuring our understanding of the world that has profound and immediate relevance. Most particularly, over the past generation, the application of increasingly powerful and sophisticated computerized statistical analysis has interacted with the work of theoreticians of finance to transform the capital markets in the U.S. and around the world. Our mastery of “known unknowns”—i.e., well-defined probabilities—has increased enormously, transformationally. The measurement and management of “risk” has become a major concern of all financial institutions and their regulators, especially since the collapse of Long Term Capital Management (LTCM) in 1998. At the same time, proposals to privatize Social Security and, more generally, to rely on “risk-managed” financial markets for economic security find their theoretical rationalization in the teachings of “modern” finance. And yet, as Rumsfeld and Meredith assert in their very different ways, there is another category of the world’s possible outcomes that lies beyond the reach of modern, market-based, risk management techniques.
More than eighty years ago, Frank Knight set out to parse the difference between risk and uncertainty and the significance of that difference. In Risk, Uncertainty and Profit, Knight distinguished between three different types of probability, which he termed: “a priori probability”; “statistical probability” and “estimates”. The first type “is on the same logical plane as the propositions of mathematics”; the canonical example is the odds of rolling any number on a die. “Statistical probability” depends upon the “empirical evaluation of the frequency of association between predicates” and on “the empirical classification of instances”. When “there is no valid basis of any kind for classifying instances”, only “estimates” can be made.1 In contemporary Bayesian parlance, in the first case, the probability distribution of the prior and all its moments are known definitionally; in the second case they are specified by statistical analysis of well-defined empirical data; in the third case such data as exists do not lend themselves to statistical analysis.
This last case is what interested Knight the most, as an economist exploring the world of business and the nature of profit in that world. Knight identified the “confusion” between “the problem of intuitive estimation” with “the logic of probability”, whether a priori or statistical2:
The liability of opinion or estimate to error must be radically distinguished from probability or chance of either type, for there is no possibility of forming in any way groups of instances of sufficient homogeneity to make possible a quantitative determination of true probability. Business decisions, for example, deal with situations which are far too unique, generally speaking, for any sort of statistical tabulation to have any value for guidance. The conception of an objectively measurable probability or chance is simply inapplicable…3
“[A]t the bottom of the uncertainty problem in economics”, Knight noted, “is the forward-looking character of the economic process itself.” 4 The post-Keynesian economist Paul Davidson defined the problem as the inapplicability of the “ergodic axiom”:
The economic system is moving through calendar time from an irrevocable past to an uncertain and statistically unpredictable future. Past and present market data do not necessarily provide correct signals regarding future outcomes. This means, in the language of statisticians, that economic data are not necessarily generated by an ergodic stochastic process. Hicks has stated this condition [in language that prefigures Rumsfeld] as: “People know that they just don’t know”.5
When Knight turned to the role of profit as the reward to the entrepreneur for bearing inevitable uncertainty, he characterized these facts of economic life in the most stark of terms:
Profit arises out of the inherent, absolute unpredictability of things, out of the sheer, brute fact that the results of human activity cannot be anticipated and then only in so far as even a probability calculation in regard to them is impossible and meaningless.6
I have documented what Frank Knight meant by “uncertainty” to clarify what is at stake in applying the calculus of financial “risk” to issues of economic and, indeed, social security. More than fifty years ago, “mainstream” economics launched itself on the grand project to formalize the principles of economics in rigorous mathematics. Unsurprisingly, such a system was as incapable of incorporating Knight’s “uncertainty” as it was of addressing the “extreme precariousness” of expectations and confidence described so eloquently in Chapter 12 of Keynes’ General Theory.7 For a time, the “rational expectations hypothesis” (REH) served as a sort of placeholder for serious consideration of the fundamental issues that Knight addressed and the consequences of which Keynes explored. It is not, I believe, an excessive caricature of REH to say that it turns on the assumptions that (1) all market participants have equal access to the same data; (2) all market participants share one model of how the world works, application of which translates data into meaningful and actionable information; and (3) that model happens to be “the truth” (and is identified recursively with “mainstream” general equilibrium theory). In this world, bubbles and panics cannot exist. All risks can be priced and insured or effectively hedged through the construction of appropriate contingent, derivative securities markets which are assumed to exist.
Application of REH to the capital markets of real economies generates a problem. REH defines a market in which the only occasion for any participant to trade is an externally generated “shock”: price volatility, identified with market risk, should be very low and aligned with the incidence of such shocks. However, empirical studies of the capital markets have identified three “puzzles”: the volatility of stock prices is too great, the risk-free interest rate is too low, and the “equity risk premium” (the return from investing in stocks compared with owning risk-free debt) is far too high to be compatible with REH. And the cluster of capital market shocks around the turn of the millennium seems to have decisively challenged the usefulness of a theory that hardly appeared consistent with the Asian Flu, the Russian Default, the collapse of LTCM, and the great NASDAQ boom and bust. In consequence, a variety of imaginative approaches are being actively deployed to understand the empirical “puzzles” generated by the attempt to explain—or, rather, explain away—the functioning of the capital markets through the application of REH.8 In different ways, this work, which serves to confirm the common sense of the market, is implicitly (sometimes explicitly) re-engaging with Knight, as it variously incorporates such building blocks for theory as “heterogeneous beliefs”, “endogenous uncertainty” and “fat-tailed Bayesian priors”.
When the domain of interest is dominated by uncertain estimates, your (more or less well informed) guess is as good as mine. This is what makes horse races—and securities markets. But, in the case of the stock market, what do you and I each need to guess? In his classic deployment of the metaphor of the “beauty contest”, Keynes captured the challenge:
…[P]rofessional investment may be likened to those newspaper competitions in which the competitors have to pick out the six prettiest faces from a hundred photographs, the prize being awarded to the competitor whose choice most nearly corresponds to the average preferences of the competitors as a whole; so that each competitor has to pick, not those faces which he himself finds prettiest, but those which he thinks likeliest to catch the fancy of the other competitors, all of whom are looking at the problem from the same point of view. It is not a case of choosing those which, to the best of one’s judgment, are really the prettiest, nor even those which average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be.9
Keynes never reduced his intuition, informed by his years of successful investing, to a formal, empirically testable model; indeed, before the development of stochastic calculus and game theory, it may not have been possible for him to do so. But the disparity between financial reality and modern, mathematically formalized economic theory has long been observable to those who have cared to look. A short generation ago, Frank Hahn began a series of lectures on money and finance with an observation pertaining to the social construction of the asset we call “money”:
The most serious challenge that the existence of money poses to the theorist is this: the best developed model of the economy cannot account for it.10
The “precautionary” motive for holding cash is among those enumerated by Keynes in his analysis of liquidity preference and has a long history in the literature on money and banking. Hahn and Solow, in their collaborative Critical Essay on Modern Macroeconomic Theory, elaborate on this:
Uncertainty enters the demand for money in two ways. First, it affects the calculation of the relative advantage of different assets including money. It also enters through considerations of liquidity or flexibility. Transaction costs will make it costly to change a portfolio choice once made. Agents know that as the future unfolds…their probability calculations will change. There is thus a probability that a portfolio choice, once made, is not optimal in light of what will be learned. This consideration, when combined with transaction costs, leads to a premium on “liquid” or low-transaction-cost assets…It is not hard to see how all of this provides a motive for holding money.11
Hahn, alone and with Solow, was observing the disparity between the Arrow-Debreu model and its derivatives—wherein all markets can simultaneously clear because all contingencies can be efficiently and effectively hedged—with the institutionalized reality of cash holdings across all observable economic systems.
Of course, this appreciation of the fine calculations by rational agents as they assess their (changing) optimal portfolios need not conceal the relevance of such analysis to the circumstance of the “agents” who face utter financial loss from the collapse of an Enron or the impact of a Katrina. Holding cash is how people self-insure against the uninsurable uncertainties of economic life, as distinct from the insurable risks. The proliferation of social security systems across the developed world since Bismarck’s innovation in 1891 further confirms the inability of markets to generate adequate hedges, sufficient in scale and distributed fairly enough to pre-empt successful appeal to the political process by market participants threatened with ruin. The evident failure of the Bush administration’s efforts at social security “reform” suggests that, in the nation where market forces are most explicitly respected, popular recognition persists that effective insurance against life’s uncertainties ultimately depends upon the power of the state.
If social security is the explicit institutionalization of state insurance against economic and financial uncertainty, more deeply rooted still in the institutional history of capitalism is the central bank’s role as lender of last resort. In 1873, Walter Bagehot, editor of The Economist, laid out in Lombard Street an analytical description of the British financial system as it had evolved to date. His most controversial and lasting contribution was the detailed discussion of “the duties which the Bank of England is bound to discharge as to its banking reserve”. It was controversial because
…first…the Bank has never by any corporate act or authorized utterance acknowledged the duty, and some of its directors deny it; …second (what is even more remarkable) no resolution of Parliament, no report of any Committee of Parliament (as far as I know), no remembered speech of a responsible statesman, has assigned or enforced that duty on the Bank; third (what is more remarkable still), the distinct teaching of our highest authorities has often been that no public duty of any kind is imposed on the Banking Department of the Bank…12
Bagehot provided a succinct definition of and rationale for the Bank’s “duty”:
…the Bank of England is bound…not only to keep a good reserve against a time of panic, but to use that reserve effectively when that time of panic comes. The keepers of the Banking reserve…are obliged then to use that reserve for their own safety. If they permit all other forms of credit to perish, their own will perish immediately and in consequence.13
In the central bank-less United States, the story of how the Panic of 1907 initiated the process that led seven years later to the creation of the Federal Reserve is well known. Equally well known is the world-historical failure of the Federal Reserve to perform its Bagehotian duty in the cumulative crisis of 1931-33: perhaps if the Governors of the Federal Reserve in 1931 had been proprietors of a private banking institution, they would have appreciated that unchecked financial panic means economic ruin. What is not well-known is the story of the first successful exercise of Bagehot’s “duty” by the Federal Reserve some sixty years later. In June 1974, in the context of the first Oil Crisis and the loss of presidential authority due to Watergate, Chairman Arthur Burns—not the most highly regarded of American central bankers—responded to the failure of the German Herstatt Bank and the consequent foreign exchange settlement crisis by quietly but effectively invoking the provisions of the Federal Reserve Act that authorized the regional Reserve Banks to accept as collateral any assets (including , as I recall, desks and chairs) of their member banks. Since 1987, the evolution of the “Greenspan Put” has finally institutionalized the Fed’s role of lender of last resort in an uncertain world.
Access to liquidity, then, is how we seek to deal with Knight’s brute fact. But liquidity is a most perverse substance. First-generation purveyors of “modern portfolio theory” modeled liquidity as a stable attribute of particular securities, statistically derived from observation of price and volume data over time. But, as the partners, clients and counter-parties of LTCM all learned, liquidity—and such other statistical properties of securities as correlations—are, in fact, the variable attributes of markets. And the worst of it is this: liquidity declines more than proportionally with the intensity of the demand for it. The more you need cash, the higher the price you have to pay to get it. And when average opinion comes to believe that average opinion will decide to turn assets into cash, then liquidity may be confidently expected to go to zero. By definition, no market can hedge this risk; no individual participant is rich enough not to need the hedge.
Bagehot defined the need and the remedy that Greenspan has finally institutionalized in America and for the world. But, if the uncertainty that each market participant, each citizen, faces is underwritten by the one power that can create all the liquidity any may require on demand, then the balance between greed and fear has been shifted and shifted materially. The “moral hazard” that arises when the insured farmer no longer need apply himself assiduously to keep his barn from burning becomes a generalized influence on all calculating economic agents. Some 75 years ago, Andrew Mellon gave President Hoover the definitive rationale for refusing to respond to the financial crisis:
Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate…People will work harder, live more moral lives.” 14
Mellon’s construct is helpful, at least to the student looking back if not to the well-meaning but bewildered President he was confronting. For it poses the stark choice that both generates and informs political discussion in this domain. A social science that evades Knight’s brute facts and Mellon’s correspondingly brutal prescription will contribute little to those seeking to formulate pragmatic responses to Meredith’s dusty answer. A social science that builds on Knight’s deep intuitions can contribute much.
http://privatizationofrisk.ssrc.org/Janeway/
By William Janeway
Published on: Jun 07, 2006
Dr. William H. Janeway, Vice Chairman, Warburg Pincus, received his doctorate in economics from Cambridge University where he was a Marshall Scholar. He was Valedictorian of the Class of 1965 at Princeton University. Prior to joining Warburg Pincus in 1988, where he was responsible for building the Information Technology practice, he was Executive Vice President and Director at Eberstadt Fleming. Dr. Janeway is a director of BEA Systems, Manugistics, Scansoft and UGS. He is also a member of the board of directors of the Social Science Research Council and a member of the board of Trustees of Cambridge in America, University of Cambridge. He is a Founder Member of the Board of Managers of the Cambridge Endowment for Research in Finance (CERF).
“…there are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns—the ones we don’t know we don’t know.”—Donald Rumsfeld
“Ah, what a dusty answer gets the soul, When hot for certainties in this our life”—George Meredith
Donald Rumsfeld’s characteristically idiosyncratic gloss on George Meredith’s existential meditation attracted derision across many constituencies. But Rumsfeld summarized a way of structuring our understanding of the world that has profound and immediate relevance. Most particularly, over the past generation, the application of increasingly powerful and sophisticated computerized statistical analysis has interacted with the work of theoreticians of finance to transform the capital markets in the U.S. and around the world. Our mastery of “known unknowns”—i.e., well-defined probabilities—has increased enormously, transformationally. The measurement and management of “risk” has become a major concern of all financial institutions and their regulators, especially since the collapse of Long Term Capital Management (LTCM) in 1998. At the same time, proposals to privatize Social Security and, more generally, to rely on “risk-managed” financial markets for economic security find their theoretical rationalization in the teachings of “modern” finance. And yet, as Rumsfeld and Meredith assert in their very different ways, there is another category of the world’s possible outcomes that lies beyond the reach of modern, market-based, risk management techniques.
More than eighty years ago, Frank Knight set out to parse the difference between risk and uncertainty and the significance of that difference. In Risk, Uncertainty and Profit, Knight distinguished between three different types of probability, which he termed: “a priori probability”; “statistical probability” and “estimates”. The first type “is on the same logical plane as the propositions of mathematics”; the canonical example is the odds of rolling any number on a die. “Statistical probability” depends upon the “empirical evaluation of the frequency of association between predicates” and on “the empirical classification of instances”. When “there is no valid basis of any kind for classifying instances”, only “estimates” can be made.1 In contemporary Bayesian parlance, in the first case, the probability distribution of the prior and all its moments are known definitionally; in the second case they are specified by statistical analysis of well-defined empirical data; in the third case such data as exists do not lend themselves to statistical analysis.
This last case is what interested Knight the most, as an economist exploring the world of business and the nature of profit in that world. Knight identified the “confusion” between “the problem of intuitive estimation” with “the logic of probability”, whether a priori or statistical2:
The liability of opinion or estimate to error must be radically distinguished from probability or chance of either type, for there is no possibility of forming in any way groups of instances of sufficient homogeneity to make possible a quantitative determination of true probability. Business decisions, for example, deal with situations which are far too unique, generally speaking, for any sort of statistical tabulation to have any value for guidance. The conception of an objectively measurable probability or chance is simply inapplicable…3
“[A]t the bottom of the uncertainty problem in economics”, Knight noted, “is the forward-looking character of the economic process itself.” 4 The post-Keynesian economist Paul Davidson defined the problem as the inapplicability of the “ergodic axiom”:
The economic system is moving through calendar time from an irrevocable past to an uncertain and statistically unpredictable future. Past and present market data do not necessarily provide correct signals regarding future outcomes. This means, in the language of statisticians, that economic data are not necessarily generated by an ergodic stochastic process. Hicks has stated this condition [in language that prefigures Rumsfeld] as: “People know that they just don’t know”.5
When Knight turned to the role of profit as the reward to the entrepreneur for bearing inevitable uncertainty, he characterized these facts of economic life in the most stark of terms:
Profit arises out of the inherent, absolute unpredictability of things, out of the sheer, brute fact that the results of human activity cannot be anticipated and then only in so far as even a probability calculation in regard to them is impossible and meaningless.6
I have documented what Frank Knight meant by “uncertainty” to clarify what is at stake in applying the calculus of financial “risk” to issues of economic and, indeed, social security. More than fifty years ago, “mainstream” economics launched itself on the grand project to formalize the principles of economics in rigorous mathematics. Unsurprisingly, such a system was as incapable of incorporating Knight’s “uncertainty” as it was of addressing the “extreme precariousness” of expectations and confidence described so eloquently in Chapter 12 of Keynes’ General Theory.7 For a time, the “rational expectations hypothesis” (REH) served as a sort of placeholder for serious consideration of the fundamental issues that Knight addressed and the consequences of which Keynes explored. It is not, I believe, an excessive caricature of REH to say that it turns on the assumptions that (1) all market participants have equal access to the same data; (2) all market participants share one model of how the world works, application of which translates data into meaningful and actionable information; and (3) that model happens to be “the truth” (and is identified recursively with “mainstream” general equilibrium theory). In this world, bubbles and panics cannot exist. All risks can be priced and insured or effectively hedged through the construction of appropriate contingent, derivative securities markets which are assumed to exist.
Application of REH to the capital markets of real economies generates a problem. REH defines a market in which the only occasion for any participant to trade is an externally generated “shock”: price volatility, identified with market risk, should be very low and aligned with the incidence of such shocks. However, empirical studies of the capital markets have identified three “puzzles”: the volatility of stock prices is too great, the risk-free interest rate is too low, and the “equity risk premium” (the return from investing in stocks compared with owning risk-free debt) is far too high to be compatible with REH. And the cluster of capital market shocks around the turn of the millennium seems to have decisively challenged the usefulness of a theory that hardly appeared consistent with the Asian Flu, the Russian Default, the collapse of LTCM, and the great NASDAQ boom and bust. In consequence, a variety of imaginative approaches are being actively deployed to understand the empirical “puzzles” generated by the attempt to explain—or, rather, explain away—the functioning of the capital markets through the application of REH.8 In different ways, this work, which serves to confirm the common sense of the market, is implicitly (sometimes explicitly) re-engaging with Knight, as it variously incorporates such building blocks for theory as “heterogeneous beliefs”, “endogenous uncertainty” and “fat-tailed Bayesian priors”.
When the domain of interest is dominated by uncertain estimates, your (more or less well informed) guess is as good as mine. This is what makes horse races—and securities markets. But, in the case of the stock market, what do you and I each need to guess? In his classic deployment of the metaphor of the “beauty contest”, Keynes captured the challenge:
…[P]rofessional investment may be likened to those newspaper competitions in which the competitors have to pick out the six prettiest faces from a hundred photographs, the prize being awarded to the competitor whose choice most nearly corresponds to the average preferences of the competitors as a whole; so that each competitor has to pick, not those faces which he himself finds prettiest, but those which he thinks likeliest to catch the fancy of the other competitors, all of whom are looking at the problem from the same point of view. It is not a case of choosing those which, to the best of one’s judgment, are really the prettiest, nor even those which average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be.9
Keynes never reduced his intuition, informed by his years of successful investing, to a formal, empirically testable model; indeed, before the development of stochastic calculus and game theory, it may not have been possible for him to do so. But the disparity between financial reality and modern, mathematically formalized economic theory has long been observable to those who have cared to look. A short generation ago, Frank Hahn began a series of lectures on money and finance with an observation pertaining to the social construction of the asset we call “money”:
The most serious challenge that the existence of money poses to the theorist is this: the best developed model of the economy cannot account for it.10
The “precautionary” motive for holding cash is among those enumerated by Keynes in his analysis of liquidity preference and has a long history in the literature on money and banking. Hahn and Solow, in their collaborative Critical Essay on Modern Macroeconomic Theory, elaborate on this:
Uncertainty enters the demand for money in two ways. First, it affects the calculation of the relative advantage of different assets including money. It also enters through considerations of liquidity or flexibility. Transaction costs will make it costly to change a portfolio choice once made. Agents know that as the future unfolds…their probability calculations will change. There is thus a probability that a portfolio choice, once made, is not optimal in light of what will be learned. This consideration, when combined with transaction costs, leads to a premium on “liquid” or low-transaction-cost assets…It is not hard to see how all of this provides a motive for holding money.11
Hahn, alone and with Solow, was observing the disparity between the Arrow-Debreu model and its derivatives—wherein all markets can simultaneously clear because all contingencies can be efficiently and effectively hedged—with the institutionalized reality of cash holdings across all observable economic systems.
Of course, this appreciation of the fine calculations by rational agents as they assess their (changing) optimal portfolios need not conceal the relevance of such analysis to the circumstance of the “agents” who face utter financial loss from the collapse of an Enron or the impact of a Katrina. Holding cash is how people self-insure against the uninsurable uncertainties of economic life, as distinct from the insurable risks. The proliferation of social security systems across the developed world since Bismarck’s innovation in 1891 further confirms the inability of markets to generate adequate hedges, sufficient in scale and distributed fairly enough to pre-empt successful appeal to the political process by market participants threatened with ruin. The evident failure of the Bush administration’s efforts at social security “reform” suggests that, in the nation where market forces are most explicitly respected, popular recognition persists that effective insurance against life’s uncertainties ultimately depends upon the power of the state.
If social security is the explicit institutionalization of state insurance against economic and financial uncertainty, more deeply rooted still in the institutional history of capitalism is the central bank’s role as lender of last resort. In 1873, Walter Bagehot, editor of The Economist, laid out in Lombard Street an analytical description of the British financial system as it had evolved to date. His most controversial and lasting contribution was the detailed discussion of “the duties which the Bank of England is bound to discharge as to its banking reserve”. It was controversial because
…first…the Bank has never by any corporate act or authorized utterance acknowledged the duty, and some of its directors deny it; …second (what is even more remarkable) no resolution of Parliament, no report of any Committee of Parliament (as far as I know), no remembered speech of a responsible statesman, has assigned or enforced that duty on the Bank; third (what is more remarkable still), the distinct teaching of our highest authorities has often been that no public duty of any kind is imposed on the Banking Department of the Bank…12
Bagehot provided a succinct definition of and rationale for the Bank’s “duty”:
…the Bank of England is bound…not only to keep a good reserve against a time of panic, but to use that reserve effectively when that time of panic comes. The keepers of the Banking reserve…are obliged then to use that reserve for their own safety. If they permit all other forms of credit to perish, their own will perish immediately and in consequence.13
In the central bank-less United States, the story of how the Panic of 1907 initiated the process that led seven years later to the creation of the Federal Reserve is well known. Equally well known is the world-historical failure of the Federal Reserve to perform its Bagehotian duty in the cumulative crisis of 1931-33: perhaps if the Governors of the Federal Reserve in 1931 had been proprietors of a private banking institution, they would have appreciated that unchecked financial panic means economic ruin. What is not well-known is the story of the first successful exercise of Bagehot’s “duty” by the Federal Reserve some sixty years later. In June 1974, in the context of the first Oil Crisis and the loss of presidential authority due to Watergate, Chairman Arthur Burns—not the most highly regarded of American central bankers—responded to the failure of the German Herstatt Bank and the consequent foreign exchange settlement crisis by quietly but effectively invoking the provisions of the Federal Reserve Act that authorized the regional Reserve Banks to accept as collateral any assets (including , as I recall, desks and chairs) of their member banks. Since 1987, the evolution of the “Greenspan Put” has finally institutionalized the Fed’s role of lender of last resort in an uncertain world.
Access to liquidity, then, is how we seek to deal with Knight’s brute fact. But liquidity is a most perverse substance. First-generation purveyors of “modern portfolio theory” modeled liquidity as a stable attribute of particular securities, statistically derived from observation of price and volume data over time. But, as the partners, clients and counter-parties of LTCM all learned, liquidity—and such other statistical properties of securities as correlations—are, in fact, the variable attributes of markets. And the worst of it is this: liquidity declines more than proportionally with the intensity of the demand for it. The more you need cash, the higher the price you have to pay to get it. And when average opinion comes to believe that average opinion will decide to turn assets into cash, then liquidity may be confidently expected to go to zero. By definition, no market can hedge this risk; no individual participant is rich enough not to need the hedge.
Bagehot defined the need and the remedy that Greenspan has finally institutionalized in America and for the world. But, if the uncertainty that each market participant, each citizen, faces is underwritten by the one power that can create all the liquidity any may require on demand, then the balance between greed and fear has been shifted and shifted materially. The “moral hazard” that arises when the insured farmer no longer need apply himself assiduously to keep his barn from burning becomes a generalized influence on all calculating economic agents. Some 75 years ago, Andrew Mellon gave President Hoover the definitive rationale for refusing to respond to the financial crisis:
Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate…People will work harder, live more moral lives.” 14
Mellon’s construct is helpful, at least to the student looking back if not to the well-meaning but bewildered President he was confronting. For it poses the stark choice that both generates and informs political discussion in this domain. A social science that evades Knight’s brute facts and Mellon’s correspondingly brutal prescription will contribute little to those seeking to formulate pragmatic responses to Meredith’s dusty answer. A social science that builds on Knight’s deep intuitions can contribute much.
http://privatizationofrisk.ssrc.org/Janeway/
Investment under market and climate policy uncertainty
This paper investigates the impact of learning about the commitment of government to a climate policy regime in a real options framework. Two types of uncertainty are distinguished:
- market-driven price volatility around a mean price and
- bifurcating price trajectories mimicking uncertainty about changing policy regimes.
On the other hand, policy uncertainty induces the producer to wait and see whether the government will further commit to climate policy. This waiting is a real options effect.
In other words, if learning about government commitment is more valuable than investing into mitigation technologies immediately, the option value exceeds the value of the technology and investment will be postponed. This might lead to supply shortages and limited diffusion of less carbon-intensive technology.
http://www.sciencedirect.com/science?_ob=ArticleURL&_udi=B6V1T-4S26RY3-1&_user=10&_rdoc=1&_fmt=&_orig=search&_sort=d&_docanchor=&view=c&_searchStrId=1076869927&_rerunOrigin=google&_acct=C000050221&_version=1&_urlVersion=0&_userid=10&md5=211ffe0641bd2bfe5faa9d97f7816e5b
An example of project planning and budgeting
Uncertainties
This section discusses the degree of uncertainties in respect of a development of the Southeast Shore of False Creek, based on the Creekside Landing concept. Please note that the cost estimates quoted are order of magnitude, and detailed design will be required to enable more reliable cost estimates to be produced.
Cash Flow and Capital Requirement
A substantial expenditure will have to be made before revenue can be generated. A summary of the projected expenditures and capital requirement is as follows:
Read further here: http://vancouver.ca/ctyclerk/cclerk/970424/kwokreport/report07.htm
This section discusses the degree of uncertainties in respect of a development of the Southeast Shore of False Creek, based on the Creekside Landing concept. Please note that the cost estimates quoted are order of magnitude, and detailed design will be required to enable more reliable cost estimates to be produced.
Cash Flow and Capital Requirement
A substantial expenditure will have to be made before revenue can be generated. A summary of the projected expenditures and capital requirement is as follows:
Read further here: http://vancouver.ca/ctyclerk/cclerk/970424/kwokreport/report07.htm
Wedding: Spend Less But Love As Much
Spend Less But Love As Much
By Quynh Thu
Friday, October 16,2009,17:41 (GMT+7)
Saigon is entering its wedding season as marrying couples are preparing for their lifetime moment
Jacqueline Felton, 30, and Michael Aldred, 29, the two romantic police officers in Devon, England, became world-famous in September after Reuters featured their wedding story on September 9. The couple had intended to enter the wedlock one year earlier on August 8, 2008. However, they decided to switch their wedding reception party to the famous 999 emergency number because the triple 9 date was only once every 100 years and they had the once-in-a-lifetime chance. Reuters reported that about 20,000 couples worldwide chose the “999” date for their marriages.
Several marrying couples in HCM City were part of the figure. Yet most others have waited patiently for a later date as the wedding season in this city has come. Although Saigonese brides and grooms marry each other throughout the year, the “wedding season,” which attracts the largest number of couples in Saigon, starts from October of one year and extends to January of the following year just before Tet, the Lunar New Year.
In Canada, for example, many couples get married in summer because the weather is fine. Then, why is this time around toward the end of the year the “official mating season” in Saigon?
Saigon Stories has found at least two reasons for the date. First, although Saigonese are living in a modern society, they still in one way or another stick to tradition. The wedding date is believed by many to be important and thus should be on “lucky days.” More often than not, couples have a fortuneteller pick a date for their marriages. As a tradition, “lucky days” for wedding are often in the last months of the lunar year (from October to January of the year that follows).
The second reason is even more convincing in Saigon Stories’ opinion. As wedding ceremonies are a significant event marrying couples and their families in Vietnam could afford only with meticulous—or to be more precise, exhausting in most of the cases—preparations, it takes them a long time until the end of the year to get everything ready.
What is special about the 2009 wedding season versus the previous years?
Well, the current economic hardship is forcing brides and grooms to think twice when it comes to their wedding budget. Therefore, restaurants across the city are offering promotions to couples.
What is special about wedding parties in HCM City is that there are many establishments specializing in this kind of business. They have big restaurants which are specifically designed to host wedding receptions, and they have been running lucrative business.
Reuters reported that about 100 people attended the Aldreds’ wedding ceremony. This turnout is expected of some wedding reception parties in HCM City. However, the average number of guests to a wedding party here is often higher. Consequently, the costs of the reception party normally account for the largest proportion couples spend for their wedding.
This year, the economic sector which may have incurred the biggest losses is possibly the jewelry business. Data show that last year, sales of diamond jewels tumbled by a third on the year before because couples had to tighten the purse strings. This year, the market remains flat at best, if not worse. On the gold market, record gold price hikes have definitely dented jewel sales compared with the previous years although jewel manufacturers hope that this wedding season could help reverse to a certain extent plunging sales during the first months of the year.
If you’re still a newcomer to HCM City, you may wonder what people normally do during a wedding reception at a restaurant. This is also the first difference between a wedding ceremony in HCM City and one in a Western country where wedding parties are sometimes held in the garden or backyard of a house.
Coming to a wedding ceremony here in HCM City, invited guests will first meet the bride and groom who are often standing at the entrance to welcome them. After being greeted by the couple, guests will meet receptionists sitting behind a table on which a box is placed so that guests can put in complimentary money for the couple. Guests can give gifts, too. But nowadays, cash is preferred at wedding receptions. Some notes should be given to the receptionists: They are either close relatives or the closest friends of the bride or the groom because they have to keep the money and the gifts.
Guests then get seated at the tables in the hall, waiting for the official ceremony. At due time, the bride and groom will appear hand in hand to proceed to the stage. The difference from a Western wedding ceremony is that the bride’s father does not accompany her. Instead, after the couple has already been on the stage, their parents will be invited to join them. One of the parents, often the groom’s father, will make a speech expressing thanks to all guests.
Next, the new wife and husband are toasted in champagne and together they cut the wedding cake which is often very big and multistage. Then everybody can enjoy meals served by waiters and waitresses at the restaurant. In the meantime, the bride and the groom, often accompanied by their parents, will come to every table to thank guests in person.
Saigon Stories can also pick some differences between the above wedding procedures and those in a Western wedding ceremony. Although Vietnamese marrying couples love each other as much as their Western counterparts do, Vietnamese brides and grooms do not exchange kisses during their parties (but they surely do later).
As expected, music forms part of the joy of a wedding ceremony both here and abroad. While dancing often finishes off a Western wedding party, a music band and several singers are invited to perform at a party in HCM City. Another note: With the dancing, a Western wedding reception may extend until, say, two o’clock in the morning; one in HCM City would often end 10 p.m. at most.
Economic crises may force people to spend less but they cannot force them to have less love. We hope so for marrying couples.
http://english.thesaigontimes.vn/Home/lifestyle/sgstory/6995/
By Quynh Thu
Friday, October 16,2009,17:41 (GMT+7)
Saigon is entering its wedding season as marrying couples are preparing for their lifetime moment
Several marrying couples in HCM City were part of the figure. Yet most others have waited patiently for a later date as the wedding season in this city has come. Although Saigonese brides and grooms marry each other throughout the year, the “wedding season,” which attracts the largest number of couples in Saigon, starts from October of one year and extends to January of the following year just before Tet, the Lunar New Year.
In Canada, for example, many couples get married in summer because the weather is fine. Then, why is this time around toward the end of the year the “official mating season” in Saigon?
The second reason is even more convincing in Saigon Stories’ opinion. As wedding ceremonies are a significant event marrying couples and their families in Vietnam could afford only with meticulous—or to be more precise, exhausting in most of the cases—preparations, it takes them a long time until the end of the year to get everything ready.
What is special about the 2009 wedding season versus the previous years?
Well, the current economic hardship is forcing brides and grooms to think twice when it comes to their wedding budget. Therefore, restaurants across the city are offering promotions to couples.
What is special about wedding parties in HCM City is that there are many establishments specializing in this kind of business. They have big restaurants which are specifically designed to host wedding receptions, and they have been running lucrative business.
Reuters reported that about 100 people attended the Aldreds’ wedding ceremony. This turnout is expected of some wedding reception parties in HCM City. However, the average number of guests to a wedding party here is often higher. Consequently, the costs of the reception party normally account for the largest proportion couples spend for their wedding.
This year, the economic sector which may have incurred the biggest losses is possibly the jewelry business. Data show that last year, sales of diamond jewels tumbled by a third on the year before because couples had to tighten the purse strings. This year, the market remains flat at best, if not worse. On the gold market, record gold price hikes have definitely dented jewel sales compared with the previous years although jewel manufacturers hope that this wedding season could help reverse to a certain extent plunging sales during the first months of the year.
If you’re still a newcomer to HCM City, you may wonder what people normally do during a wedding reception at a restaurant. This is also the first difference between a wedding ceremony in HCM City and one in a Western country where wedding parties are sometimes held in the garden or backyard of a house.
Coming to a wedding ceremony here in HCM City, invited guests will first meet the bride and groom who are often standing at the entrance to welcome them. After being greeted by the couple, guests will meet receptionists sitting behind a table on which a box is placed so that guests can put in complimentary money for the couple. Guests can give gifts, too. But nowadays, cash is preferred at wedding receptions. Some notes should be given to the receptionists: They are either close relatives or the closest friends of the bride or the groom because they have to keep the money and the gifts.
Guests then get seated at the tables in the hall, waiting for the official ceremony. At due time, the bride and groom will appear hand in hand to proceed to the stage. The difference from a Western wedding ceremony is that the bride’s father does not accompany her. Instead, after the couple has already been on the stage, their parents will be invited to join them. One of the parents, often the groom’s father, will make a speech expressing thanks to all guests.
Next, the new wife and husband are toasted in champagne and together they cut the wedding cake which is often very big and multistage. Then everybody can enjoy meals served by waiters and waitresses at the restaurant. In the meantime, the bride and the groom, often accompanied by their parents, will come to every table to thank guests in person.
Saigon Stories can also pick some differences between the above wedding procedures and those in a Western wedding ceremony. Although Vietnamese marrying couples love each other as much as their Western counterparts do, Vietnamese brides and grooms do not exchange kisses during their parties (but they surely do later).
As expected, music forms part of the joy of a wedding ceremony both here and abroad. While dancing often finishes off a Western wedding party, a music band and several singers are invited to perform at a party in HCM City. Another note: With the dancing, a Western wedding reception may extend until, say, two o’clock in the morning; one in HCM City would often end 10 p.m. at most.
Economic crises may force people to spend less but they cannot force them to have less love. We hope so for marrying couples.
http://english.thesaigontimes.vn/Home/lifestyle/sgstory/6995/
The story behind the US$1-billion revenue of gold trading floors in Vietnam
Not All That Glitters Is Gold
By Hai ly
Friday, October 30,2009,00:55 (GMT+7)
A gold trading floor with healthy liquidity should enable investors to place and match orders equal to thousands of taels each when gold prices jump or plunge
The story behind the US$1-billion revenue of gold trading floors
For the first time in history, gold prices exceeded US$1,050 an ounce, prompting the international and local media to predict that they may climb to US$1,100-1,200. Many individual investors on gold trading floors have incurred losses by betting on falling prices. “When prices first rose, a number of investors did not attempt to cut losses, but continue selling gold. However, a prolonged period of price increase has eroded their endurance. When global prices underwent a correction phase, investors could no longer withstand the losses. At that time, banks also started to step in. Together with owners of gold trading floors, they have dealt with the accounts of these investors,” said Nguyen Duc Thai Han, deputy general director of the Asia Commercial Bank (ACB).
Reaching US$1 billion
Unlike the sale of gold bars, the operations of most gold trading floors currently fall under two categories. Some gold trading floors such as those operated by SBJ (Sacombank Jewelry) and ACB allow investors to engage in mutual transactions. Others, meanwhile, require investors to place their orders with the owners of the trading floors, who will, in turn, place these orders with international trading floors. Their revenue is hard to measure. Both investors and management agencies should be concerned about the actual liquidity of domestic gold trading floors. Some trading floors put their daily order-matching volumes at 200,000-300,000 taels, or even 400,00 taels. The total revenue reaped by gold trading floors reaches US$1 billion per day, which far outshines that of the stock market.
Reality, however, is not so shiny. A close look at order-matching volumes at some gold trading floors has provided some surprising insights. In general, the value and volume of gold traded soars when gold prices fluctuate drastically. This also holds true for stocks and many material commodities. However, at many gold trading floors, trading volumes actually surge when global gold prices vary little. It is possible that owners of gold trading floors have placed orders worth hundreds or thousands of taels apiece when price disparity is insignificant, so as to generate staggering revenue. This, in turn, makes gold trading floors more competitive and appealing to investors. Investors may then open accounts at gold trading floors which capture their attention.
Should this be the case, are the actual trading volumes at domestic gold trading floors as enormous as many people think? A gold trading floor with healthy liquidity should enable investors to place and match orders equal to thousands of taels each when gold prices jump or plunge. How many gold trading floors actually satisfy this criterion? Or are they manipulating their revenue to lure investors?
It is vital for the authorities, especially the State Bank of Vietnam (SBV), which compiles and implements regulations governing gold trading floors, to accurately evaluate the scale of these floors. What is the appropriate deposit for gold trading? How much gold should banks keep to ensure liquidity? What about trading gold on accounts held by credit institutions? These are all controversial issues. There should also be regulations concerning the financial capabilities and business skills of both owners of gold trading floors and investors. At present, local gold prices move in tandem with their global counterparts and are also influenced by international speculation. Gold trading, therefore, comes with both high returns and high risks. Is this activity suitable for all investors? Unless the authorities can provide a satisfactory answer to this question, effectively managing gold trading floors is an uphill task.
On the other hand, the revenue which banks reap from gold trading floors also varies as gold prices fluctuate. The turnover comes from three sources:
1. trading fees of some VND2,000 per tael (or VND4,000 per tael if they are collected from both buyers and sellers);
2. overnight loans of gold and the dong, offered to gold trading accounts at gold trading floors (this activity is not related to mobilizing and lending loans as credit);
3. trading gold, domestically or otherwise, via accounts or purchase of gold bars.
For instance, ACB’s revenue generated by gold trading topped VND1 trillion last year, including VND1.4-1.5 billion of daily trading fees. ACB has been a member of the Dubai gold trading floor for three months, where the bank carries out its own transactions rather than those requested by its individual investors. This move has also sheltered ACB against drastic changes in the domestic gold market.
In developed countries, individuals access international stock, bond, foreign currency and gold markets, from the U.S. and Europe to Australia and Japan via brokers. This is not yet the case in Vietnam, where the necessary conditions have not been in place. Still, the proliferation of domestic gold trading floors makes it important for the Government to manage such activity efficaciously when it is allowed. Misleading revenue figures posted by gold trading floors will ineluctably trigger unhealthy competition and hamper the interest of investors.
http://english.thesaigontimes.vn/Home/business/trade/7199/
By Hai ly
Friday, October 30,2009,00:55 (GMT+7)
A gold trading floor with healthy liquidity should enable investors to place and match orders equal to thousands of taels each when gold prices jump or plunge
The story behind the US$1-billion revenue of gold trading floors
For the first time in history, gold prices exceeded US$1,050 an ounce, prompting the international and local media to predict that they may climb to US$1,100-1,200. Many individual investors on gold trading floors have incurred losses by betting on falling prices. “When prices first rose, a number of investors did not attempt to cut losses, but continue selling gold. However, a prolonged period of price increase has eroded their endurance. When global prices underwent a correction phase, investors could no longer withstand the losses. At that time, banks also started to step in. Together with owners of gold trading floors, they have dealt with the accounts of these investors,” said Nguyen Duc Thai Han, deputy general director of the Asia Commercial Bank (ACB).
Reaching US$1 billion
Unlike the sale of gold bars, the operations of most gold trading floors currently fall under two categories. Some gold trading floors such as those operated by SBJ (Sacombank Jewelry) and ACB allow investors to engage in mutual transactions. Others, meanwhile, require investors to place their orders with the owners of the trading floors, who will, in turn, place these orders with international trading floors. Their revenue is hard to measure. Both investors and management agencies should be concerned about the actual liquidity of domestic gold trading floors. Some trading floors put their daily order-matching volumes at 200,000-300,000 taels, or even 400,00 taels. The total revenue reaped by gold trading floors reaches US$1 billion per day, which far outshines that of the stock market.
Reality, however, is not so shiny. A close look at order-matching volumes at some gold trading floors has provided some surprising insights. In general, the value and volume of gold traded soars when gold prices fluctuate drastically. This also holds true for stocks and many material commodities. However, at many gold trading floors, trading volumes actually surge when global gold prices vary little. It is possible that owners of gold trading floors have placed orders worth hundreds or thousands of taels apiece when price disparity is insignificant, so as to generate staggering revenue. This, in turn, makes gold trading floors more competitive and appealing to investors. Investors may then open accounts at gold trading floors which capture their attention.
Should this be the case, are the actual trading volumes at domestic gold trading floors as enormous as many people think? A gold trading floor with healthy liquidity should enable investors to place and match orders equal to thousands of taels each when gold prices jump or plunge. How many gold trading floors actually satisfy this criterion? Or are they manipulating their revenue to lure investors?
It is vital for the authorities, especially the State Bank of Vietnam (SBV), which compiles and implements regulations governing gold trading floors, to accurately evaluate the scale of these floors. What is the appropriate deposit for gold trading? How much gold should banks keep to ensure liquidity? What about trading gold on accounts held by credit institutions? These are all controversial issues. There should also be regulations concerning the financial capabilities and business skills of both owners of gold trading floors and investors. At present, local gold prices move in tandem with their global counterparts and are also influenced by international speculation. Gold trading, therefore, comes with both high returns and high risks. Is this activity suitable for all investors? Unless the authorities can provide a satisfactory answer to this question, effectively managing gold trading floors is an uphill task.
On the other hand, the revenue which banks reap from gold trading floors also varies as gold prices fluctuate. The turnover comes from three sources:
1. trading fees of some VND2,000 per tael (or VND4,000 per tael if they are collected from both buyers and sellers);
2. overnight loans of gold and the dong, offered to gold trading accounts at gold trading floors (this activity is not related to mobilizing and lending loans as credit);
3. trading gold, domestically or otherwise, via accounts or purchase of gold bars.
For instance, ACB’s revenue generated by gold trading topped VND1 trillion last year, including VND1.4-1.5 billion of daily trading fees. ACB has been a member of the Dubai gold trading floor for three months, where the bank carries out its own transactions rather than those requested by its individual investors. This move has also sheltered ACB against drastic changes in the domestic gold market.
In developed countries, individuals access international stock, bond, foreign currency and gold markets, from the U.S. and Europe to Australia and Japan via brokers. This is not yet the case in Vietnam, where the necessary conditions have not been in place. Still, the proliferation of domestic gold trading floors makes it important for the Government to manage such activity efficaciously when it is allowed. Misleading revenue figures posted by gold trading floors will ineluctably trigger unhealthy competition and hamper the interest of investors.
http://english.thesaigontimes.vn/Home/business/trade/7199/
Wood Market Picks Up Speed in Vietnam
By Pham Quang Dieu & Nguyen Quoc Chinh
Thursday, October 29,2009,16:21 (GMT+7)
After a long period of robust growth, Vietnam’s wood export revenue plunged by nearly 10% for the first time. However, wood export has posted encouraging month-on-month performance, which has shown signs of recovery.
- It takes three to four months to purchase timber and process it to meet orders. As these orders are usually placed in the first eight months of a year, the last four months often see export revenue peak.
- Figures from 2007 and 2008 showed that wood export earnings in the last four months were 12.57% higher than in the previous four months and 17.81% higher than in the first four months.
- Although the global financial crisis adversely affected wood export in late 2008, export value in the last four months were still 11.6% higher than in the previous four months and 21.07% higher than in the first four months.
Moreover, wood export policies implemented by Vietnam and wood-importing countries also play a part. For instance, in June 2008, the U.S. Congress passed the Farm Bill with stringent regulations on the origin of wood products imported into this country. In April 2009, the Lacey Bill on the origin of foreign wood and wood products in the U.S. also came into effect and imposed more challenges as the timber which Vietnam purchases from Myanmar, Laos and Cambodia is often of dubious origin.
- imported materials and
- demand from main export markets.
Opportunities in a crisis: Lessons from the past
In any crisis, there are also opportunities. Here is an article of lessons from the past.
UK buy-out market starting to reflect increasing market uncertainties
16 Oct 2001.
Source: AltAssets.
Conditions in the UK buy-out market are beginning to reflect the increasing uncertainty in financial markets since the global economic downturn was given extra impetus by last month's terrorist attacks on the US, according to the latest research from Royal Bank Private Equity and Unquote UK Watch.
Both the number and the value of deals in the £10m-plus buy-out market dipped significantly in September. Deal value fell to £21.3bn in the twelve months to the end of September, compared with a nine-year high of £23.5bn in late summer. The number of deals fell from a high of 155 in May and June to 132 in September.
Price/earnings ratios also showed a declining trend and are now at levels not seen since 1996. They are currently at just below 11, compared with more than 12 or 13 for most of the past five years.
Mark Nicholls, managing director of Royal Bank Private Equity, said: ‘The decline in the number of deals and downward trend in p/e ratios revealed by the UK Watch statistics confirms the trend we have seen in the market over the last six months when growing uncertainties had already made their mark on the valuations that private equity players are putting on target companies.'
He said the situation appeared to have deteriorated since the middle of September but insisted business had not ground to a halt and there was still some activity.
‘In spite of an unpredictable economic situation, deals are still being looked at and investments made; there will continue to be companies seeking to dispose of non-core businesses and investors who see growth opportunities in them,' Nicholls said.
Copyright © 2001 AltAssets
http://www.altassets.net/private-equity-news/by-region/europe/article/nz332.html
UK buy-out market starting to reflect increasing market uncertainties
16 Oct 2001.
Source: AltAssets.
Conditions in the UK buy-out market are beginning to reflect the increasing uncertainty in financial markets since the global economic downturn was given extra impetus by last month's terrorist attacks on the US, according to the latest research from Royal Bank Private Equity and Unquote UK Watch.
Both the number and the value of deals in the £10m-plus buy-out market dipped significantly in September. Deal value fell to £21.3bn in the twelve months to the end of September, compared with a nine-year high of £23.5bn in late summer. The number of deals fell from a high of 155 in May and June to 132 in September.
Price/earnings ratios also showed a declining trend and are now at levels not seen since 1996. They are currently at just below 11, compared with more than 12 or 13 for most of the past five years.
Mark Nicholls, managing director of Royal Bank Private Equity, said: ‘The decline in the number of deals and downward trend in p/e ratios revealed by the UK Watch statistics confirms the trend we have seen in the market over the last six months when growing uncertainties had already made their mark on the valuations that private equity players are putting on target companies.'
He said the situation appeared to have deteriorated since the middle of September but insisted business had not ground to a halt and there was still some activity.
‘In spite of an unpredictable economic situation, deals are still being looked at and investments made; there will continue to be companies seeking to dispose of non-core businesses and investors who see growth opportunities in them,' Nicholls said.
Copyright © 2001 AltAssets
http://www.altassets.net/private-equity-news/by-region/europe/article/nz332.html
Managing risk in a turbulent economy an ever-increasing challenge for farmers
Managing risk in a turbulent economy an ever-increasing challenge for farmers
Nov 2, 2009 12:16 PM, By Paul L. Hollis, Farm Press Editorial Staff
Anyone reading this well knows that even when the U.S. general economy is humming along at a brisk pace, farming — and managing the inherent risk — is a tremendous challenge. When the economy is tanking, and the commodity markets are made even more complex by the involvement of various hedge and index funds, the risk becomes greater.
Mississippi State University Extension Economist John Anderson had some interesting things to say about managing risk in a turbulent economy during an Extension marketing meeting this past summer.
The volatility of commodity markets, especially in the past couple of years, have created many risks for producers, says Anderson, adding that his primary concern as an economist is that some farmers really haven’t recognized the nature of commodity markets.
An example of this volatility can be seen in the dramatic swings in wheat and corn prices, just in the last two years, he says. “Whatever commodity we’re talking about, we’ve been dealing with a lot of price volatility. Corn went from $8 down to about $4.50 per bushel, but many producers see this and say that corn is still at historically high levels. We need to understand the nature of commodity markets because they have unique characteristics that make the situation dangerous for producers.”
Pointing out some of these unique characteristics is what makes an economist a sort of “wet blanket,” says Anderson, and helps economics earn the nickname, “the dismal science.” But it is necessary that producers become familiar with these characteristics.
The first characteristic of a commodity market, he says, is that there are a large number of producers, and these producers are producing and marketing an undifferentiated product. In other words, if you’re growing corn, your corn is pretty much the same as another grower’s corn. Also, in a commodity market, there is no ability to set prices — producers are strictly price takers.
“And what really makes me a wet blanket is when I tell you that in the long-run, economic profits in a commodity market are zero,” says Anderson. “This is because costs of production quickly adjust when profits are high. Costs go up quickly. Corn was at a good price, but costs adjusted to $8 per bushel.”
Back in 2005, he says, if a producer could look ahead and predict $4.50 corn, he would have thought he wouldn’t be able to spend all of the money he’d make. But now, this same producer is thinking there’s no way he can make money with $4.50 corn.
“All costs have gone up, and that’s why this price volatility is so difficult to deal with,” says Anderson. “While $7 or $8 corn is great, you have to be prepared for when it goes back down. You can get burned on the cost side.”
The implications for producers of these volatile markets are many, he says, including that there is far less margin for error than in the past. “There’s more money on the table in each production cycle, and the consequences of being on the wrong side of the markets is much more severe. There are major input risks as well as output price risks, and there are fewer tools for managing the input risks than there are for managing the output side.”
This is why it’s important that farmers aggressively manage costs at all times, says Anderson. Producers today are good, efficient managers, but they can’t become complacent, he adds. Also, the short gains from high-price periods need to be used to build equity.
“One of my pet peeves is when we talk about ‘new price plateaus,’ because that encourages growers to go out and buy a lot of new equipment,” he says.
There also are implications for policy makers in these volatile markets, says Anderson. “One of these is that policy efforts aimed at raising prices through increasing demand — such as bioenergy policy — will not improve farm profits in the long run. From the supply side, this phenomenon is usually recognized as the technology treadmill. But from the demand side, the effect is usually downplayed or ignored.”
It also needs to be recognized, he says, that there really is no such thing as a new price plateau in the commodity markets. “A persistent increase in price reflects a persistent increase in the cost of production. If there’s a new price plateau, then there’s a new cost plateau underneath it. We get into a lot of trouble thinking prices will be high for the next five years.”
e-mail: phollis@farmpress.com
http://southeastfarmpress.com/news_archive/risk-management-1102/
Nov 2, 2009 12:16 PM, By Paul L. Hollis, Farm Press Editorial Staff
Anyone reading this well knows that even when the U.S. general economy is humming along at a brisk pace, farming — and managing the inherent risk — is a tremendous challenge. When the economy is tanking, and the commodity markets are made even more complex by the involvement of various hedge and index funds, the risk becomes greater.
Mississippi State University Extension Economist John Anderson had some interesting things to say about managing risk in a turbulent economy during an Extension marketing meeting this past summer.
The volatility of commodity markets, especially in the past couple of years, have created many risks for producers, says Anderson, adding that his primary concern as an economist is that some farmers really haven’t recognized the nature of commodity markets.
An example of this volatility can be seen in the dramatic swings in wheat and corn prices, just in the last two years, he says. “Whatever commodity we’re talking about, we’ve been dealing with a lot of price volatility. Corn went from $8 down to about $4.50 per bushel, but many producers see this and say that corn is still at historically high levels. We need to understand the nature of commodity markets because they have unique characteristics that make the situation dangerous for producers.”
Pointing out some of these unique characteristics is what makes an economist a sort of “wet blanket,” says Anderson, and helps economics earn the nickname, “the dismal science.” But it is necessary that producers become familiar with these characteristics.
The first characteristic of a commodity market, he says, is that there are a large number of producers, and these producers are producing and marketing an undifferentiated product. In other words, if you’re growing corn, your corn is pretty much the same as another grower’s corn. Also, in a commodity market, there is no ability to set prices — producers are strictly price takers.
“And what really makes me a wet blanket is when I tell you that in the long-run, economic profits in a commodity market are zero,” says Anderson. “This is because costs of production quickly adjust when profits are high. Costs go up quickly. Corn was at a good price, but costs adjusted to $8 per bushel.”
Back in 2005, he says, if a producer could look ahead and predict $4.50 corn, he would have thought he wouldn’t be able to spend all of the money he’d make. But now, this same producer is thinking there’s no way he can make money with $4.50 corn.
“All costs have gone up, and that’s why this price volatility is so difficult to deal with,” says Anderson. “While $7 or $8 corn is great, you have to be prepared for when it goes back down. You can get burned on the cost side.”
The implications for producers of these volatile markets are many, he says, including that there is far less margin for error than in the past. “There’s more money on the table in each production cycle, and the consequences of being on the wrong side of the markets is much more severe. There are major input risks as well as output price risks, and there are fewer tools for managing the input risks than there are for managing the output side.”
This is why it’s important that farmers aggressively manage costs at all times, says Anderson. Producers today are good, efficient managers, but they can’t become complacent, he adds. Also, the short gains from high-price periods need to be used to build equity.
“One of my pet peeves is when we talk about ‘new price plateaus,’ because that encourages growers to go out and buy a lot of new equipment,” he says.
There also are implications for policy makers in these volatile markets, says Anderson. “One of these is that policy efforts aimed at raising prices through increasing demand — such as bioenergy policy — will not improve farm profits in the long run. From the supply side, this phenomenon is usually recognized as the technology treadmill. But from the demand side, the effect is usually downplayed or ignored.”
It also needs to be recognized, he says, that there really is no such thing as a new price plateau in the commodity markets. “A persistent increase in price reflects a persistent increase in the cost of production. If there’s a new price plateau, then there’s a new cost plateau underneath it. We get into a lot of trouble thinking prices will be high for the next five years.”
e-mail: phollis@farmpress.com
http://southeastfarmpress.com/news_archive/risk-management-1102/
Where's the U.S. economy headed?
Where's the U.S. economy headed?
Nov 2, 2009 10:37 AM,
By Forrest Laws, Farm Press Editorial Staff
"We don't know how much of that is cash for clunkers or the tax credit for first-time home buyers. We're also likely to see continued high unemployment numbers until companies begin to do more hiring."
U.S. farmers and consumers who are trying to figure out what the future holds aren’t getting much help from Washington these days. As a result, they may need to pick out some economic indicators that could help them chart their course.
Ernie Goss, professor of economics at Creighton University in Lincoln, Neb., identified some of those indicators while giving members of the American Society of Farm Managers and Rural Appraisers his take on the current economic outlook at the ASFMRA’s 80th annual meeting in Denver.
“We’re all sitting on the sidelines, trying to figure out what’s happening,” said Goss, a graduate of the University of Tennessee who has held a number of public and private economic positions over the years. “I’ve never seen this much uncertainty over government policy and the national economy.”
While that might be a good scenario for economists and lawyers, it gives little comfort to farmers and other small business owners and consumers, said Goss. The uncertainty over the so-called cap and trade legislation, health care reform and tax increases are causing nightmares for much of America.
“I also have a small consulting business, and I’m sitting here thinking ‘Should I hire now, should I hire later; should I buy a car now, should I buy a car later; should I buy a house now, should I buy a house later?” he said.
“We have millions of people sitting on the sidelines, and the chief, No. 1 economic problem we’re facing now is the lack of clarity. We don’t know the answers to those kinds of questions.”
Goss said the Commerce Department report issued when he spoke Thursday (Oct. 29) was “a very good sign.” The government reported that the nation’s gross domestic product grew by 3.5 percent in the third quarter of 2009.
“We don’t know how much of that is cash for clunkers or the tax credit for first-time home buyers,” he said. “We’re also likely to see continued high unemployment numbers until companies begin to do more hiring.”
Goss, one of 200 economists who took out a full page ad saying “We are not all Keynesians,” that appeared in the New York Times and the Wall Street Journal earlier this year, said he believes the government’s fiscal policies have not helped the economy all that much.
“Yes, the economy needed some stimulus; there’s no doubt about that,” he said. (Followers of the British economist John Maynard Keynes believe government spending or economic stimulus packages are the key to pulling the economy out of a recession/depression.) “Whether it was the right stimulus package is the question?
“It may be that if the government had allowed some of these big companies like AIG and General Motors to fail, it would have hurt, but we might also have a lot of this behind us now. We also wouldn’t have $11.2 trillion in federal debt.”
So what indicators should you be looking for in the coming months?
• The employment report for October will be released Nov. 6. “I expect the report to show job losses (above 200,000 persons) for a 24th straight month and an increase in the unemployment rate by 0.2 percent,” he said. “If the report goes above10 percent unemployment, that would be very bad. A good report would be only 100,000 jobs.”
• First time and continuing claims for unemployment insurance. This report is released every Thursday. “First time claims above 550,000 will be bearish,” he said. “I expect this number to drop below 500,000 by December (http://www.doe.gov/.)
• The first and most important indicator for November will be the Mid-America and U.S. October Purchasing Manager Institute’s survey released Nov. 2 (http://www.outlook-economic.com/ and http://www.ism.ws/.) “A drop in the national will be bearish (under 50 will be very, very bearish.”
• Goss suggests you keep an eye on the yield for 10-year U.S. Treasuries. If this yield approaches 4 percent within the next month, the Federal Reserve Board will be “between a rock and a hard place.” The rapidly rising yields reflect: 1) Concerns regarding the large increases in the U.S. budget deficit; 2) Rising inflation expectations; and 3) Investors have reduced their risk perceptions and are pulling money out of treasuries and putting it into equity markets (“a good thing”). (http://finance.yahoo.com/)
• Investors will be closely watching retail sales to detect a weak consumer reading. A weak consumer market will be a bad signal for the holiday buying season.
e-mail: flaws@farmpress.com
http://southeastfarmpress.com/news/american-economy-1102/index.html?imw=Y
Nov 2, 2009 10:37 AM,
By Forrest Laws, Farm Press Editorial Staff
"We don't know how much of that is cash for clunkers or the tax credit for first-time home buyers. We're also likely to see continued high unemployment numbers until companies begin to do more hiring."
U.S. farmers and consumers who are trying to figure out what the future holds aren’t getting much help from Washington these days. As a result, they may need to pick out some economic indicators that could help them chart their course.
Ernie Goss, professor of economics at Creighton University in Lincoln, Neb., identified some of those indicators while giving members of the American Society of Farm Managers and Rural Appraisers his take on the current economic outlook at the ASFMRA’s 80th annual meeting in Denver.
“We’re all sitting on the sidelines, trying to figure out what’s happening,” said Goss, a graduate of the University of Tennessee who has held a number of public and private economic positions over the years. “I’ve never seen this much uncertainty over government policy and the national economy.”
While that might be a good scenario for economists and lawyers, it gives little comfort to farmers and other small business owners and consumers, said Goss. The uncertainty over the so-called cap and trade legislation, health care reform and tax increases are causing nightmares for much of America.
“I also have a small consulting business, and I’m sitting here thinking ‘Should I hire now, should I hire later; should I buy a car now, should I buy a car later; should I buy a house now, should I buy a house later?” he said.
“We have millions of people sitting on the sidelines, and the chief, No. 1 economic problem we’re facing now is the lack of clarity. We don’t know the answers to those kinds of questions.”
Goss said the Commerce Department report issued when he spoke Thursday (Oct. 29) was “a very good sign.” The government reported that the nation’s gross domestic product grew by 3.5 percent in the third quarter of 2009.
“We don’t know how much of that is cash for clunkers or the tax credit for first-time home buyers,” he said. “We’re also likely to see continued high unemployment numbers until companies begin to do more hiring.”
Goss, one of 200 economists who took out a full page ad saying “We are not all Keynesians,” that appeared in the New York Times and the Wall Street Journal earlier this year, said he believes the government’s fiscal policies have not helped the economy all that much.
“Yes, the economy needed some stimulus; there’s no doubt about that,” he said. (Followers of the British economist John Maynard Keynes believe government spending or economic stimulus packages are the key to pulling the economy out of a recession/depression.) “Whether it was the right stimulus package is the question?
“It may be that if the government had allowed some of these big companies like AIG and General Motors to fail, it would have hurt, but we might also have a lot of this behind us now. We also wouldn’t have $11.2 trillion in federal debt.”
So what indicators should you be looking for in the coming months?
• The employment report for October will be released Nov. 6. “I expect the report to show job losses (above 200,000 persons) for a 24th straight month and an increase in the unemployment rate by 0.2 percent,” he said. “If the report goes above10 percent unemployment, that would be very bad. A good report would be only 100,000 jobs.”
• First time and continuing claims for unemployment insurance. This report is released every Thursday. “First time claims above 550,000 will be bearish,” he said. “I expect this number to drop below 500,000 by December (http://www.doe.gov/.)
• The first and most important indicator for November will be the Mid-America and U.S. October Purchasing Manager Institute’s survey released Nov. 2 (http://www.outlook-economic.com/ and http://www.ism.ws/.) “A drop in the national will be bearish (under 50 will be very, very bearish.”
• Goss suggests you keep an eye on the yield for 10-year U.S. Treasuries. If this yield approaches 4 percent within the next month, the Federal Reserve Board will be “between a rock and a hard place.” The rapidly rising yields reflect: 1) Concerns regarding the large increases in the U.S. budget deficit; 2) Rising inflation expectations; and 3) Investors have reduced their risk perceptions and are pulling money out of treasuries and putting it into equity markets (“a good thing”). (http://finance.yahoo.com/)
• Investors will be closely watching retail sales to detect a weak consumer reading. A weak consumer market will be a bad signal for the holiday buying season.
e-mail: flaws@farmpress.com
http://southeastfarmpress.com/news/american-economy-1102/index.html?imw=Y
Futures market uncertainties increase risks for wheat growers
Futures market uncertainties increase risks
Sep 3, 2008 2:06 PM, By Roy Roberson
Farm Press Editorial Staff
Many wheat growers in the Southeast who expected to reap big profits from high prices for the 2007-2008 crop ended up disappointed with the price they received and disillusioned with the Chicago Board of Trade.
Speaking at the recent 71st annual meeting of the North Carolina Feed Industry Association, Randy Gordon says the CME (Chicago Mercantile Exchange) which now owns the Chicago Board of Trade admits the wheat futures contract is broken.
Gordon, who is vice-president of communications and government affairs for the National Grain and Feed Association, says the same trends are beginning to be seen in corn and many wonder whether soybeans will be next. Gordon says elevator managers and feed mills have lost confidence in futures markets as a risk management tool.
“Down to the farmer level there is little confidence futures prices are a true barometer of what supply and demand conditions are for crop and commodity values,” Gordon says. “Losing the ability to forward contract crops significantly increases what is already a huge risk in farming.”
Gordon explains that investors who manage long-only index funds have invested billions of dollars in both agriculture and energy commodities. All these investors do is continually roll contracts from one delivery date to the next, never planning to take delivery of the commodity.
“At the close of trading in late July, in the soft wheat market in Chicago, there was more than a $2.50 difference in cash prices and futures prices — unprecedented levels. And, the prediction is that this difference or basis price, may go as high as $3 in the wheat market, which is an untenable situation for grain buyers,” Gordon says.
The futures market has created tremendous pressure on the industry to continue to fund margin calls that occur as buyers try to maintain hedge positions. This situation has severely limited forward contracting. Many, if not most lenders, are reluctant to extend contracts longer than 30-60 days, according to Gordon.
Elevator managers have begun asking, and in some cases insisting, that farmers share some of the margin cost, if they want to contract for longer periods of time. Elevators just can’t afford to continue to do business as usual.
“Lenders are trying to stick with grain buyers, but it’s a tough call on them as well. The risks involved in financing margin requirements, even inventory purchases, have caused some long-term lenders to pull back,” Gordon says.
“At the last meeting of the CME, they publicly admitted for the first time their wheat futures contract is broken. It’s been a long time coming, but they now admit the problem that grain buyers have warned was happening over the past couple of years. The CME is now reaching out to the grain industry to try and fix the problem,” Gordon adds.
Red winter wheat is the poster boy for futures market trading with differences in cash and futures prices consistently topping $2. In corn the price differential as of late July was 45 cents and less for soybeans. “The great fear is that corn and beans will go the way of wheat, which would be catastrophic for grain buyers, grain growers and ultimately consumers,” according to Gordon.
Possible solutions the National Grain and Feed Association and other grain industry associations are looking at include:
• Increasing storage rates at delivery warehouses to try and force price convergence to occur.
• Establish a side by side ag index fund.
• Encourage, or force takers of deliveries to load out the commodity as specified in the contract.
• Add more delivery locations, making delivery a more reasonable option.
• Establish a cash settlement contract.
There are a number of possible solutions, but no magic bullet right now, Gordon admits. One of the major stumbling blocks that needs to be fixed, he contends, is that long-term index funds, large retirement funds and other large financial investors in agricultural commodities have very limited reporting responsibilities to the Commodity Futures Trading Commission, which oversees the futures market.
“There are numerous ways for these large investment managers to report the value of their index funds — all perfectly legal. What this says is that we have a broken reporting system, too,” Gordon says.
One option is to get the USDA Commodity Credit Association to provide loan guarantees to lenders who extend credit to elevators and feed mills for hedging commodities. It’s a different wrinkle, but indicative of how critical the problem is for grain buyers.
“Farmers would love to contract out into the 2009 crop season to capture some of these high commodity prices. The risk to elevator managers and feed mills is just too great to allow that to happen, unless some dramatic changes are made,” Gordon says.
The biggest fear lenders have in financing grain buying and marketing is that farmers will walk away from contracts and simply not deliver. It’s hard from a grower’s perspective to contract corn, for example, at $3 a bushel and see prices at over $7 a bushel.
“The best insurance policy against failure to deliver is always to include the National Grain and Feed Association’s arbitration rules in contracts with growers. It’s not an ironclad guarantee, but a good insurance policy against going to court. Even if cases go to court, most courts have ruled that arbitration agreements are valid and both the grower and buyer tend to come out better,” Gordon says.
The commodity market woes have attracted the attention of the U.S. Congress. An unprecedented bill recently was approved by the House Agriculture Committee. This legislation would require the Commodity Futures Trading Commission issue within 60 days rules on how to prevent excessive speculation on ag and energy futures markets.
With virtually every input cost to farmers tied directly to the price of their product, fixing the futures market is critical. Without a viable futures market for grain, the risks may be too high from some farmers to stay in business.
e-mail: rroberson@farmpress.com
http://southeastfarmpress.com/grains/commodity-markets-0904/
Sep 3, 2008 2:06 PM, By Roy Roberson
Farm Press Editorial Staff
Many wheat growers in the Southeast who expected to reap big profits from high prices for the 2007-2008 crop ended up disappointed with the price they received and disillusioned with the Chicago Board of Trade.
Speaking at the recent 71st annual meeting of the North Carolina Feed Industry Association, Randy Gordon says the CME (Chicago Mercantile Exchange) which now owns the Chicago Board of Trade admits the wheat futures contract is broken.
Gordon, who is vice-president of communications and government affairs for the National Grain and Feed Association, says the same trends are beginning to be seen in corn and many wonder whether soybeans will be next. Gordon says elevator managers and feed mills have lost confidence in futures markets as a risk management tool.
“Down to the farmer level there is little confidence futures prices are a true barometer of what supply and demand conditions are for crop and commodity values,” Gordon says. “Losing the ability to forward contract crops significantly increases what is already a huge risk in farming.”
Gordon explains that investors who manage long-only index funds have invested billions of dollars in both agriculture and energy commodities. All these investors do is continually roll contracts from one delivery date to the next, never planning to take delivery of the commodity.
“At the close of trading in late July, in the soft wheat market in Chicago, there was more than a $2.50 difference in cash prices and futures prices — unprecedented levels. And, the prediction is that this difference or basis price, may go as high as $3 in the wheat market, which is an untenable situation for grain buyers,” Gordon says.
The futures market has created tremendous pressure on the industry to continue to fund margin calls that occur as buyers try to maintain hedge positions. This situation has severely limited forward contracting. Many, if not most lenders, are reluctant to extend contracts longer than 30-60 days, according to Gordon.
Elevator managers have begun asking, and in some cases insisting, that farmers share some of the margin cost, if they want to contract for longer periods of time. Elevators just can’t afford to continue to do business as usual.
“Lenders are trying to stick with grain buyers, but it’s a tough call on them as well. The risks involved in financing margin requirements, even inventory purchases, have caused some long-term lenders to pull back,” Gordon says.
“At the last meeting of the CME, they publicly admitted for the first time their wheat futures contract is broken. It’s been a long time coming, but they now admit the problem that grain buyers have warned was happening over the past couple of years. The CME is now reaching out to the grain industry to try and fix the problem,” Gordon adds.
Red winter wheat is the poster boy for futures market trading with differences in cash and futures prices consistently topping $2. In corn the price differential as of late July was 45 cents and less for soybeans. “The great fear is that corn and beans will go the way of wheat, which would be catastrophic for grain buyers, grain growers and ultimately consumers,” according to Gordon.
Possible solutions the National Grain and Feed Association and other grain industry associations are looking at include:
• Increasing storage rates at delivery warehouses to try and force price convergence to occur.
• Establish a side by side ag index fund.
• Encourage, or force takers of deliveries to load out the commodity as specified in the contract.
• Add more delivery locations, making delivery a more reasonable option.
• Establish a cash settlement contract.
There are a number of possible solutions, but no magic bullet right now, Gordon admits. One of the major stumbling blocks that needs to be fixed, he contends, is that long-term index funds, large retirement funds and other large financial investors in agricultural commodities have very limited reporting responsibilities to the Commodity Futures Trading Commission, which oversees the futures market.
“There are numerous ways for these large investment managers to report the value of their index funds — all perfectly legal. What this says is that we have a broken reporting system, too,” Gordon says.
One option is to get the USDA Commodity Credit Association to provide loan guarantees to lenders who extend credit to elevators and feed mills for hedging commodities. It’s a different wrinkle, but indicative of how critical the problem is for grain buyers.
“Farmers would love to contract out into the 2009 crop season to capture some of these high commodity prices. The risk to elevator managers and feed mills is just too great to allow that to happen, unless some dramatic changes are made,” Gordon says.
The biggest fear lenders have in financing grain buying and marketing is that farmers will walk away from contracts and simply not deliver. It’s hard from a grower’s perspective to contract corn, for example, at $3 a bushel and see prices at over $7 a bushel.
“The best insurance policy against failure to deliver is always to include the National Grain and Feed Association’s arbitration rules in contracts with growers. It’s not an ironclad guarantee, but a good insurance policy against going to court. Even if cases go to court, most courts have ruled that arbitration agreements are valid and both the grower and buyer tend to come out better,” Gordon says.
The commodity market woes have attracted the attention of the U.S. Congress. An unprecedented bill recently was approved by the House Agriculture Committee. This legislation would require the Commodity Futures Trading Commission issue within 60 days rules on how to prevent excessive speculation on ag and energy futures markets.
With virtually every input cost to farmers tied directly to the price of their product, fixing the futures market is critical. Without a viable futures market for grain, the risks may be too high from some farmers to stay in business.
e-mail: rroberson@farmpress.com
http://southeastfarmpress.com/grains/commodity-markets-0904/
How to handle market uncertainty
Wednesday November 4, 2009
How to handle market uncertainty
Personal Investing - By Ooi Kok Hwa
AFTER the strong rally over the past seven months, the market is finally undertaking some corrections. Some investors may not fully comprehend why the stock market moved up when the companies reported bad financial results, but tumbled when the companies started to show better financial performance. (Comment: There were many periods in the past when market movements were down when the economy was doing well, and vice versa.)
We need to understand that the market had discounted the good news. Some of those good financial results were already reflected in the stock prices. The stock market cycle always moves ahead of the economic cycle.
During the Great Depression in 1929, the stock market recovered eight months ahead of the real economic recovery. Even though some investment experts say the worst is far from over, we notice that a lot of economic indicators are pointing to an economic recovery.
However, the economic growth may not move as fast as the stock market. As a result, while the economy continues to recover, stock prices need to come down to reflect the fundamentals of the companies. (Comment: Overcome this short term uncertainties by taking a long term horizon in your investments.)
This explains why once investors started to realise that the stock prices could not be supported by the fundamentals of some companies, especially blue-chip stocks, the stock prices had to come down to reflect the true value of companies.
Nevertheless, based on our analysis, most listed companies in Malaysia showed great recovery in their second quarter of 2009 financial results against the results in the first quarter as well as the fourth quarter of 2008.
We need to understand that there are many disturbing factors that affect the stock prices, but not reflect the fundamentals of companies. From the perspective of behavioural finance, investors’ expectations and emotions have great influence on stock prices. Two factors influence investors’ expectations – past experience and new information.
In the absence of new information, investors will use past trends to extrapolate into the future. As a result, the stock prices may persist in trend for a while before the next market reversal. This may cause the market to overreact to good financial results as shown by some companies.
According to Fischer Black, some investors tend to be affected by noise that makes it difficult for them to act rationally. (Comment: This is to the benefit of those who are able to value the stocks and not act in folly with the market.) He defines noise as what makes our observations imperfect as well as keeps us from knowing the expected return on a stock.
Some investors, due to lack of self control and proper financial training, may misinterpret economic information and sometimes be carried away by the stock market emotion. Investors may feel uneasy over the recent strong market performance. However, they will still choose to follow the market trend even though they feel their judgment may be wrong. In behavioural finance, we label this as conformity in which we are inclined to follow the example of others even though we do not believe in the action.
The above phenomenon of stock prices being valued beyond the fundamentals of the companies is applicable to some selected blue-chip stocks. Nevertheless, Bursa Malaysia does have plenty of second- and third-liner stocks which are still selling at cheap valuations. Investors may want to take the current market corrections to accumulate them for the long-term.
We need to relate the current stock prices to the intrinsic value of the companies. Some investment tools like price-to-earnings ratio, dividend yield and price-to-book ratio will assist us in filtering out some good companies for investment.
Even though there are a lot of uncertainties along the way to full financial recovery, we feel that investors may view the recent corrections as good opportunities to build their long-term investment portfolios. For those who have been looking for investment returns higher than fixed deposit rates, there are still a lot of stocks that are paying handsome dividend yield of more than 4% and yet selling at cheap prices.
One of the most important investing principles is to have the discipline to hold long term. We should not pay too much attention to the fluctuation of stock prices; instead, we need to focus on the earning power of the companies as it is one of the most important drivers in deriving the intrinsic value of a company.
As a result of the financial crisis, even though a lot of companies are showing great recovery, their performance and prices are still lower than their peak level during the year in 2007. If the overall economy and the companies’ performance recover to 2007 level, their current stock prices may be a good entry level.
● Ooi Kok Hwa is an investment adviser and managing partner of MRR Consulting.
http://biz.thestar.com.my/news/story.asp?file=/2009/11/4/business/5035143&sec=business
How to handle market uncertainty
Personal Investing - By Ooi Kok Hwa
AFTER the strong rally over the past seven months, the market is finally undertaking some corrections. Some investors may not fully comprehend why the stock market moved up when the companies reported bad financial results, but tumbled when the companies started to show better financial performance. (Comment: There were many periods in the past when market movements were down when the economy was doing well, and vice versa.)
We need to understand that the market had discounted the good news. Some of those good financial results were already reflected in the stock prices. The stock market cycle always moves ahead of the economic cycle.
During the Great Depression in 1929, the stock market recovered eight months ahead of the real economic recovery. Even though some investment experts say the worst is far from over, we notice that a lot of economic indicators are pointing to an economic recovery.
However, the economic growth may not move as fast as the stock market. As a result, while the economy continues to recover, stock prices need to come down to reflect the fundamentals of the companies. (Comment: Overcome this short term uncertainties by taking a long term horizon in your investments.)
This explains why once investors started to realise that the stock prices could not be supported by the fundamentals of some companies, especially blue-chip stocks, the stock prices had to come down to reflect the true value of companies.
Nevertheless, based on our analysis, most listed companies in Malaysia showed great recovery in their second quarter of 2009 financial results against the results in the first quarter as well as the fourth quarter of 2008.
We need to understand that there are many disturbing factors that affect the stock prices, but not reflect the fundamentals of companies. From the perspective of behavioural finance, investors’ expectations and emotions have great influence on stock prices. Two factors influence investors’ expectations – past experience and new information.
In the absence of new information, investors will use past trends to extrapolate into the future. As a result, the stock prices may persist in trend for a while before the next market reversal. This may cause the market to overreact to good financial results as shown by some companies.
According to Fischer Black, some investors tend to be affected by noise that makes it difficult for them to act rationally. (Comment: This is to the benefit of those who are able to value the stocks and not act in folly with the market.) He defines noise as what makes our observations imperfect as well as keeps us from knowing the expected return on a stock.
Some investors, due to lack of self control and proper financial training, may misinterpret economic information and sometimes be carried away by the stock market emotion. Investors may feel uneasy over the recent strong market performance. However, they will still choose to follow the market trend even though they feel their judgment may be wrong. In behavioural finance, we label this as conformity in which we are inclined to follow the example of others even though we do not believe in the action.
The above phenomenon of stock prices being valued beyond the fundamentals of the companies is applicable to some selected blue-chip stocks. Nevertheless, Bursa Malaysia does have plenty of second- and third-liner stocks which are still selling at cheap valuations. Investors may want to take the current market corrections to accumulate them for the long-term.
We need to relate the current stock prices to the intrinsic value of the companies. Some investment tools like price-to-earnings ratio, dividend yield and price-to-book ratio will assist us in filtering out some good companies for investment.
Even though there are a lot of uncertainties along the way to full financial recovery, we feel that investors may view the recent corrections as good opportunities to build their long-term investment portfolios. For those who have been looking for investment returns higher than fixed deposit rates, there are still a lot of stocks that are paying handsome dividend yield of more than 4% and yet selling at cheap prices.
One of the most important investing principles is to have the discipline to hold long term. We should not pay too much attention to the fluctuation of stock prices; instead, we need to focus on the earning power of the companies as it is one of the most important drivers in deriving the intrinsic value of a company.
As a result of the financial crisis, even though a lot of companies are showing great recovery, their performance and prices are still lower than their peak level during the year in 2007. If the overall economy and the companies’ performance recover to 2007 level, their current stock prices may be a good entry level.
● Ooi Kok Hwa is an investment adviser and managing partner of MRR Consulting.
http://biz.thestar.com.my/news/story.asp?file=/2009/11/4/business/5035143&sec=business
Monetising land bank assets a good move
Tuesday November 3, 2009
Monetising land bank assets a good move
Commodities Talk- By Hanim Adnan
ARE prime land bank assets in the Klang Valley still “hard” commodities to come by these days?
Perhaps not, given the Government’s green light for its agencies to monetise their fixed assets as a new source of revenue and to maximise earnings.
Fixed assets include land, infrastructure and buildings, intellectual property, live assets and moveable assets, such as goods and inventory.
Among the candidates are plantation-related government agencies like the Malaysian Rubber Board (MRB), Risda, Felcra and Felda, which are large owners of land given the diversified nature of their respective crops they own or help manage for local smallholders under various schemes.
Even the headquarters of these agencies are nestled in Kuala Lumpur’s prime Golden Triangle area. According to sources, the land-bank assets of the plantation-based government agencies in Malaysia could easily top RM20bil.
Top officials from these agencies have openly admitted that offers are pouring in, in the form of acquisitions/joint ventures to develop their prime land bank as well as leasing of public buildings from various government-linked companies and major private corporations.
MRB, which is estimated to own over RM1bil worth of land bank nationwide, had indicated to StarBiz that it was aiming to monetise part of its assets in Rubber Research Institute (RRI) in Sungei Buloh as well as in Jalan Ampang.
Another rubber agency, Risda, is also evaluating offers for its prized small pockets of land in Jalan U Thant and Jalan Ampang given their high commercial value in the Golden Triangle. Risda, however, is believed to be in no hurry to let go of its Jalan Ampang land and still biding for the right time.
Previously, Risda had also successfully monetised its 40,000ha in Sungai Petani and transformed it into a lucrative residential property project.
So far, the three most talked-about parcels of land likely to be developed are those in Jalan Ampang Hilir, Jalan Cochrane and RRI’s Sungei Buloh.
A recent report, quoting sources, said that Malaysian Resources Corp Bhd and its single-largest shareholder, the Employees Provident Fund, had been given the green light to acquire and develop a land of “an unspecified size” in Jalan Cochrane and Jalan Ampang Hilir.
The rationale for the Government’s move to allow its agencies to monetise their assets, especially those non-core ones, should be applauded as it would enable the agencies to sustain or increase their revenue and become less dependent on government allocation and subsidies.
That said, the public, however, wants government auctions – especially of its land or other assets – to be conducted via an open-tender system rather than through direct negotiation for the sake of transparency.
There have been claims that many closed-door negotiations to sell government-related assets are often subject to abuse, inefficiency and misallocation of funds.
● Hanim Adnan is assistant news editor at The Star. She often wonders whether transparency is always the best policy.
Monetising land bank assets a good move
Commodities Talk- By Hanim Adnan
ARE prime land bank assets in the Klang Valley still “hard” commodities to come by these days?
Perhaps not, given the Government’s green light for its agencies to monetise their fixed assets as a new source of revenue and to maximise earnings.
Fixed assets include land, infrastructure and buildings, intellectual property, live assets and moveable assets, such as goods and inventory.
Among the candidates are plantation-related government agencies like the Malaysian Rubber Board (MRB), Risda, Felcra and Felda, which are large owners of land given the diversified nature of their respective crops they own or help manage for local smallholders under various schemes.
Even the headquarters of these agencies are nestled in Kuala Lumpur’s prime Golden Triangle area. According to sources, the land-bank assets of the plantation-based government agencies in Malaysia could easily top RM20bil.
Top officials from these agencies have openly admitted that offers are pouring in, in the form of acquisitions/joint ventures to develop their prime land bank as well as leasing of public buildings from various government-linked companies and major private corporations.
MRB, which is estimated to own over RM1bil worth of land bank nationwide, had indicated to StarBiz that it was aiming to monetise part of its assets in Rubber Research Institute (RRI) in Sungei Buloh as well as in Jalan Ampang.
Another rubber agency, Risda, is also evaluating offers for its prized small pockets of land in Jalan U Thant and Jalan Ampang given their high commercial value in the Golden Triangle. Risda, however, is believed to be in no hurry to let go of its Jalan Ampang land and still biding for the right time.
Previously, Risda had also successfully monetised its 40,000ha in Sungai Petani and transformed it into a lucrative residential property project.
So far, the three most talked-about parcels of land likely to be developed are those in Jalan Ampang Hilir, Jalan Cochrane and RRI’s Sungei Buloh.
A recent report, quoting sources, said that Malaysian Resources Corp Bhd and its single-largest shareholder, the Employees Provident Fund, had been given the green light to acquire and develop a land of “an unspecified size” in Jalan Cochrane and Jalan Ampang Hilir.
The rationale for the Government’s move to allow its agencies to monetise their assets, especially those non-core ones, should be applauded as it would enable the agencies to sustain or increase their revenue and become less dependent on government allocation and subsidies.
That said, the public, however, wants government auctions – especially of its land or other assets – to be conducted via an open-tender system rather than through direct negotiation for the sake of transparency.
There have been claims that many closed-door negotiations to sell government-related assets are often subject to abuse, inefficiency and misallocation of funds.
● Hanim Adnan is assistant news editor at The Star. She often wonders whether transparency is always the best policy.
Tuesday 3 November 2009
PPB may use sugar proceeds to invest in Wilmar China
PPB may use sugar proceeds to invest in Wilmar China
Tags: HKEX | OSK Research | PPB Group Bhd | Wilmar China | Wilmar International
Written by Melody Song
Tuesday, 03 November 2009 11:17
KUALA LUMPUR: PPB GROUP BHD [] may utilise the RM1.29 billion proceeds from the sale of its sugar refining and trading business in Malaysia, to subscribe for shares in Wilmar China, according to OSK Research.
The research firm believes that by investing in Wilmar China, which is planning an initial public offering (IPO) on the Hong Kong Exchange (HKEX), PPB will get “a bigger bang for the buck”, compared to buying additional shares in Wilmar International Ltd.
PPB had in an announcement last Friday said it would channel the proceeds to make strategic investments rather than distribute them as special dividends to shareholders.
The announcement was pertaining to PPB’s proposed divestment to Felda Global Ventures Holdings Sdn Bhd of all its sugar refining and trading business in Malaysia, comprising a 100% stake in Malayan Sugar Manufacturing Sdn Bhd, 50% stake in Kilang Gula Felda Perlis Sdn Bhd and 5,797ha of land in Perlis, for a total consideration of RM1.29 billion.
According to OSK, PPB currently owns 18.22% stake in Wilmar International, which is planning to float its China operation under Wilmar China on the HKEX.
“If PPB were to raise its investment in Wilmar International, it would only be able to buy an additional 1.3% based on the current price,” said OSK in a note yesterday, citing that PPB’s chairman had mentioned the group would only raise stakes in Wilmar International if the price were right.
“We doubt that the proceeds would be used to buy into Wilmar International given that the additional stake (of 1.3%) will only raise PPB’s pre-tax profit by RM59.5 million (based on our estimates) compared to about RM165 million (in pre-tax profits) forgone from its sugar refining and trading business. Moreover, PPB is already equity-accounting Wilmar International’s contribution,” noted OSK.
Hence, the research firm believed that the company would rather invest the proceeds to subscribe for the IPO shares of Wilmar China.
OSK said PPB’s 18.22% stake in Wilmar International is worth RM17.86 billion compared to its own market capitalisation of RM17.95 billion.
“Assuming zero value for its other businesses, PPB’s revised net asset value (RNAV) is estimated at RM19.29 billion, taking into consideration its net cash of RM140.96 million and the sale proceeds of RM1.29 billion. Hence PPB is trading at a narrow 7% discount to its RNAV,” said OSK.
PPB closed 20 sen or 1.32% higher at RM15.34 yesterday.
This article appeared in The Edge Financial Daily, November 3, 2009.
Tags: HKEX | OSK Research | PPB Group Bhd | Wilmar China | Wilmar International
Written by Melody Song
Tuesday, 03 November 2009 11:17
KUALA LUMPUR: PPB GROUP BHD [] may utilise the RM1.29 billion proceeds from the sale of its sugar refining and trading business in Malaysia, to subscribe for shares in Wilmar China, according to OSK Research.
The research firm believes that by investing in Wilmar China, which is planning an initial public offering (IPO) on the Hong Kong Exchange (HKEX), PPB will get “a bigger bang for the buck”, compared to buying additional shares in Wilmar International Ltd.
PPB had in an announcement last Friday said it would channel the proceeds to make strategic investments rather than distribute them as special dividends to shareholders.
The announcement was pertaining to PPB’s proposed divestment to Felda Global Ventures Holdings Sdn Bhd of all its sugar refining and trading business in Malaysia, comprising a 100% stake in Malayan Sugar Manufacturing Sdn Bhd, 50% stake in Kilang Gula Felda Perlis Sdn Bhd and 5,797ha of land in Perlis, for a total consideration of RM1.29 billion.
According to OSK, PPB currently owns 18.22% stake in Wilmar International, which is planning to float its China operation under Wilmar China on the HKEX.
“If PPB were to raise its investment in Wilmar International, it would only be able to buy an additional 1.3% based on the current price,” said OSK in a note yesterday, citing that PPB’s chairman had mentioned the group would only raise stakes in Wilmar International if the price were right.
“We doubt that the proceeds would be used to buy into Wilmar International given that the additional stake (of 1.3%) will only raise PPB’s pre-tax profit by RM59.5 million (based on our estimates) compared to about RM165 million (in pre-tax profits) forgone from its sugar refining and trading business. Moreover, PPB is already equity-accounting Wilmar International’s contribution,” noted OSK.
Hence, the research firm believed that the company would rather invest the proceeds to subscribe for the IPO shares of Wilmar China.
OSK said PPB’s 18.22% stake in Wilmar International is worth RM17.86 billion compared to its own market capitalisation of RM17.95 billion.
“Assuming zero value for its other businesses, PPB’s revised net asset value (RNAV) is estimated at RM19.29 billion, taking into consideration its net cash of RM140.96 million and the sale proceeds of RM1.29 billion. Hence PPB is trading at a narrow 7% discount to its RNAV,” said OSK.
PPB closed 20 sen or 1.32% higher at RM15.34 yesterday.
This article appeared in The Edge Financial Daily, November 3, 2009.
Latexx 3Q net jumps 130% to RM14m
Latexx 3Q net jumps 130% to RM14m
Tags: Latexx Partners Bhd | third quarter
Written by Financial Daily
Tuesday, 03 November 2009 11:16
KUALA LUMPUR: LATEXX PARTNERS BHD [] posted a net profit of RM14.27 million for the third quarter ended Sept 30, 2009, a 130% jump from RM6.2 million a year earlier, boosted by increased sales and improved overall efficiency through lower overheads, operational and supervision costs.
Revenue came in at RM80.84 million, up 29% from RM62.65 million previously, driven by recent capacity expansion and aggressive marketing strategy, as well as overall cost savings. The group declared a second interim tax-exempt dividend of one sen per share for FY09.
For the nine-month period, net profit jumped 311% to RM34.83 million from RM8.47 million last year, while turnover improved 47% to RM225.59 million compared with RM153.4 million previously.
In a statement to the stock exchange yesterday, the glove maker said it was confident that the growth achieved in the past 18 months would be sustained in tandem with the growth of world demand for medical gloves. Latexx also said its capacity expansion was on track, with the installation of an additional eight double-formers production lines expected to be completed and fully operational by year-end.
This will bring the company’s total capacity to six billion pieces per annum.
“In addition, CONSTRUCTION [] of an additional production plant adjacent to existing production facilities has commenced. It is expected to increase our total capacity by another three billion pieces per annum within the next two years,” said Latexx.
This article appeared in The Edge Financial Daily, November 3, 2009.
Tags: Latexx Partners Bhd | third quarter
Written by Financial Daily
Tuesday, 03 November 2009 11:16
KUALA LUMPUR: LATEXX PARTNERS BHD [] posted a net profit of RM14.27 million for the third quarter ended Sept 30, 2009, a 130% jump from RM6.2 million a year earlier, boosted by increased sales and improved overall efficiency through lower overheads, operational and supervision costs.
Revenue came in at RM80.84 million, up 29% from RM62.65 million previously, driven by recent capacity expansion and aggressive marketing strategy, as well as overall cost savings. The group declared a second interim tax-exempt dividend of one sen per share for FY09.
For the nine-month period, net profit jumped 311% to RM34.83 million from RM8.47 million last year, while turnover improved 47% to RM225.59 million compared with RM153.4 million previously.
In a statement to the stock exchange yesterday, the glove maker said it was confident that the growth achieved in the past 18 months would be sustained in tandem with the growth of world demand for medical gloves. Latexx also said its capacity expansion was on track, with the installation of an additional eight double-formers production lines expected to be completed and fully operational by year-end.
This will bring the company’s total capacity to six billion pieces per annum.
“In addition, CONSTRUCTION [] of an additional production plant adjacent to existing production facilities has commenced. It is expected to increase our total capacity by another three billion pieces per annum within the next two years,” said Latexx.
This article appeared in The Edge Financial Daily, November 3, 2009.
Risks and Rewards on China's New Stock Board
Risks and Rewards on China's New Stock Board
Reuters/China DailyCompany delegates of GEM, also known as ChiNext, at the listing ceremony Friday. Values of the newly listed companies surged.
By DAVID BARBOZA
Published: November 2, 2009
SHANGHAI — The opening of a Nasdaq-style stock board in China is already being seen as a watershed moment for the country’s capital markets, providing new but volatile opportunities for mainland Chinese investors and an alternative source of financing for start-up companies.
On Monday, the second day of trading on the ChiNext board, 25 of the 28 listed shares fell, many by the daily limit of 10 percent, while the benchmark MSCI index of Asia-Pacific shares outside Japan fell about 1 percent
Over all, shares fell about 8.5 percent on ChiNext, but the drop came after a day of gains that were astronomical and amid expectations that shares on the new board would be subject to big ups and downs. On Friday, the first day of trading on ChiNext, a secondary board of the Shenzhen stock exchange, the shares of some companies soared as much as 210 percent.
The first batch of the 28 companies listed — including film producers, software makers and pharmaceutical companies — raised about $2 billion in their initial public offerings, far more than the companies had hoped.
By the end of trading Monday, the combined market value of the companies was almost $19 billion, creating fortunes for the founders and initial investors in those companies.
China is already the world’s biggest market for initial public offerings this year, and its resurgent economy is flush with capital and investors with a big appetite for risk.
But trading experts have long complained that the mainland’s stock market system is seriously flawed, partly because of a misallocation of capital.
State-run banks lend primarily to state-owned companies, which tend to be inefficient. Listings on the Shanghai stock exchange and the main board of the Shenzhen exchange are dominated by government enterprises. Because there are few opportunities for stock listings on the mainland, young private mainland companies generally list their shares in Hong Kong, which operates under rules separate from the mainland’s, or overseas on the Nasdaq or New York Stock Exchange.
The government hopes to change that with the creation of ChiNext. The government is seeking to create a more efficient capital market system, one that would steer investment capital to small and midsize private enterprises — companies that can help reshape the economy through technology and innovation, rather than low-price exports.
“This is potentially a major game changer in China’s high-tech industry,” said Yu Zhou, a professor at Vassar College in Poughkeepsie, New York. “For about 10 years, the biggest problem for China’s innovative companies was finance. You know, it is veA Chinese investor monitors screens showing share prices at a security firm in Wuhan, central China's Hubei province on November 2, 2009. More than two-thirds of the shares listed on China's newly launched Nasdaq-style board ended limit-down on profit-taking on November 2, in only the second session after a wild debut last week, as twenty of the 28 stocks listed on the Shenzhen-based ChiNext fell by the daily trading limit of 10 percent, and analysts said there was room for further correction. CHINA OUT AFP PHOTOry hard for them to get loans from state-owned banks.”
Although ChiNext is tiny when compared with the Shanghai and Hong Kong stock exchanges, regulators hope it will eventually compete with Nasdaq and entice more Chinese companies to list with it.
ChiNext is also expected to give a boost to venture capital and private equity markets in mainland China, which have been hampered by a system that until now has not provided investors with what industry insiders call an exit strategy — a way of eventually cashing out of their investments in small companies through a domestic stock market.
There are big challenges to creating a stock board similar to Nasdaq, which includes companies like Microsoft, Intel and Google. For instance, volatile stock prices and high valuations could hurt the new board’s credibility with entrepreneurs and investors.
Chinese investors are known to speculate, favoring momentum buying and selling rather than the underlying fundamentals of a company, analysts say. Indeed, the casinolike nature of the Shanghai stock exchange and the main Shenzhen board, combined with government intervention, have added to the volatility of the mainland markets.
Analysts warn that ChiNext could also be prone to similar speculative frenzies.
Andy Xie, an economist who formerly worked at Morgan Stanley, is already calling ChiNext a “V.I.P. table on top of a big casino.”
Chang Chun, an expert on financial markets at the China Europe International Business School in Shanghai, said that China needed a market to serve start-ups, but “the issue is the maturity of Chinese investors.”
Before trading opened Friday, he said, regulators created rules to guard against excessive volatility and even warned investors that they would crack down on aggressive speculation. Still, the opening Friday — with 28 companies beginning to trade at once — was marked by wild price swings.
The buying was so feverish that regulators, trying to calm the market, temporarily suspended trading of the 28 companies at different points, and analysts warned of the risks posed by excessive speculation and inflated stock prices.
One cause of concern was the huge valuations of the first batch of stocks.
The average company on ChiNext has a price-earnings ratio of about 100 meaning investors are paying $100 for every $1 of 2008 earnings. By comparison, the Nasdaq 100 index has a price-earnings ratio of 23.6, according to Bloomberg.
ChiNext stocks are also priced far above Shanghai-listed stocks, which have long been considered inflated by the standards of more mature markets.
Hundreds of Chinese companies are eagerly awaiting their turn to list on the ChiNext, and many analysts say the exchange will fill an important need: directing financing toward smaller start-ups that help rebalance economic growth. Ms. Zhou at Vassar said she had heard that there were more than 1,000 companies in Beijing’s high-technology district alone that met the requirements for listing shares on the ChiNext board.
http://www.nytimes.com/2009/11/03/business/global/03yuan.html?pagewanted=2&ref=business
Reuters/China DailyCompany delegates of GEM, also known as ChiNext, at the listing ceremony Friday. Values of the newly listed companies surged.
By DAVID BARBOZA
Published: November 2, 2009
SHANGHAI — The opening of a Nasdaq-style stock board in China is already being seen as a watershed moment for the country’s capital markets, providing new but volatile opportunities for mainland Chinese investors and an alternative source of financing for start-up companies.
On Monday, the second day of trading on the ChiNext board, 25 of the 28 listed shares fell, many by the daily limit of 10 percent, while the benchmark MSCI index of Asia-Pacific shares outside Japan fell about 1 percent
Over all, shares fell about 8.5 percent on ChiNext, but the drop came after a day of gains that were astronomical and amid expectations that shares on the new board would be subject to big ups and downs. On Friday, the first day of trading on ChiNext, a secondary board of the Shenzhen stock exchange, the shares of some companies soared as much as 210 percent.
The first batch of the 28 companies listed — including film producers, software makers and pharmaceutical companies — raised about $2 billion in their initial public offerings, far more than the companies had hoped.
By the end of trading Monday, the combined market value of the companies was almost $19 billion, creating fortunes for the founders and initial investors in those companies.
China is already the world’s biggest market for initial public offerings this year, and its resurgent economy is flush with capital and investors with a big appetite for risk.
But trading experts have long complained that the mainland’s stock market system is seriously flawed, partly because of a misallocation of capital.
State-run banks lend primarily to state-owned companies, which tend to be inefficient. Listings on the Shanghai stock exchange and the main board of the Shenzhen exchange are dominated by government enterprises. Because there are few opportunities for stock listings on the mainland, young private mainland companies generally list their shares in Hong Kong, which operates under rules separate from the mainland’s, or overseas on the Nasdaq or New York Stock Exchange.
The government hopes to change that with the creation of ChiNext. The government is seeking to create a more efficient capital market system, one that would steer investment capital to small and midsize private enterprises — companies that can help reshape the economy through technology and innovation, rather than low-price exports.
“This is potentially a major game changer in China’s high-tech industry,” said Yu Zhou, a professor at Vassar College in Poughkeepsie, New York. “For about 10 years, the biggest problem for China’s innovative companies was finance. You know, it is veA Chinese investor monitors screens showing share prices at a security firm in Wuhan, central China's Hubei province on November 2, 2009. More than two-thirds of the shares listed on China's newly launched Nasdaq-style board ended limit-down on profit-taking on November 2, in only the second session after a wild debut last week, as twenty of the 28 stocks listed on the Shenzhen-based ChiNext fell by the daily trading limit of 10 percent, and analysts said there was room for further correction. CHINA OUT AFP PHOTOry hard for them to get loans from state-owned banks.”
Although ChiNext is tiny when compared with the Shanghai and Hong Kong stock exchanges, regulators hope it will eventually compete with Nasdaq and entice more Chinese companies to list with it.
ChiNext is also expected to give a boost to venture capital and private equity markets in mainland China, which have been hampered by a system that until now has not provided investors with what industry insiders call an exit strategy — a way of eventually cashing out of their investments in small companies through a domestic stock market.
There are big challenges to creating a stock board similar to Nasdaq, which includes companies like Microsoft, Intel and Google. For instance, volatile stock prices and high valuations could hurt the new board’s credibility with entrepreneurs and investors.
Chinese investors are known to speculate, favoring momentum buying and selling rather than the underlying fundamentals of a company, analysts say. Indeed, the casinolike nature of the Shanghai stock exchange and the main Shenzhen board, combined with government intervention, have added to the volatility of the mainland markets.
Analysts warn that ChiNext could also be prone to similar speculative frenzies.
Andy Xie, an economist who formerly worked at Morgan Stanley, is already calling ChiNext a “V.I.P. table on top of a big casino.”
Chang Chun, an expert on financial markets at the China Europe International Business School in Shanghai, said that China needed a market to serve start-ups, but “the issue is the maturity of Chinese investors.”
Before trading opened Friday, he said, regulators created rules to guard against excessive volatility and even warned investors that they would crack down on aggressive speculation. Still, the opening Friday — with 28 companies beginning to trade at once — was marked by wild price swings.
The buying was so feverish that regulators, trying to calm the market, temporarily suspended trading of the 28 companies at different points, and analysts warned of the risks posed by excessive speculation and inflated stock prices.
One cause of concern was the huge valuations of the first batch of stocks.
The average company on ChiNext has a price-earnings ratio of about 100 meaning investors are paying $100 for every $1 of 2008 earnings. By comparison, the Nasdaq 100 index has a price-earnings ratio of 23.6, according to Bloomberg.
ChiNext stocks are also priced far above Shanghai-listed stocks, which have long been considered inflated by the standards of more mature markets.
Hundreds of Chinese companies are eagerly awaiting their turn to list on the ChiNext, and many analysts say the exchange will fill an important need: directing financing toward smaller start-ups that help rebalance economic growth. Ms. Zhou at Vassar said she had heard that there were more than 1,000 companies in Beijing’s high-technology district alone that met the requirements for listing shares on the ChiNext board.
http://www.nytimes.com/2009/11/03/business/global/03yuan.html?pagewanted=2&ref=business
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