Prolly Dead: PRC's $23B Bid for US Micron Technology

♠ Posted by Emmanuel in ,, at 9/04/2015 01:30:00 AM
China out! Keeping Micron Technology "safe" from the Reds.
It is no real mystery as to why the Chinese remain keen on buying American technology firms. Having mixed success in product upgrading on their own, they are keen to acquire foreign knowledge--through outright purchase of US firms if necessary. However, the old canard of "national security" keeps being raised by American politicians that Chinese buying US technology concerns would lead to these equipment makers festooning products meant for the American market with all sorts of snooping devices. 

The irony, of course, is that Americans have been observed spying on Asians--including Japanese firms--and not necessarily the other way around. Ah well, to today's story: a few weeks back, state-owned Tsinghua Unigroup--founded by graduates of Tsinghua University like Silicon Valley firms were by Stanford/Berkeley alumni or Cambridge UK firms by alumni from that famed university--gave hints about buying US memory chip giant Micron. Apparently, the Chinese wanted to upgrade their memory chip-making abilities:
State-owned Tsinghua Unigroup is considering an approach for chipmaker Micron in what would be China’s biggest bid for a US company. Unigroup on Tuesday said that a deal was “still under discussion”, but Micron carries an enterprise value — equity plus net debt — of $23bn, making that the likely starting valuation for any offer.
It's illustrative that the largest Chinese purchase of a US firm is of a pork producer--not exactly the heights of technological sophistication. Give US politicians any whiff of a technology or energy bid from the Chinese and it's soon scuttled:
China’s biggest deal was the $7.1bn purchase of pork producer Smithfield by Shuanghui International, which was renamed WH Group.
The apparent interest in Micron comes after China’s efforts to improve its domestic chipmaking industry gained fresh impetus last year with the creation of a Rmb120bn ($20bn) state-backed fund to support deals and improvements in the sector. Ministers at the time said that having a world class domestic industry was strategically important to China’s competitiveness and to its IT security. Chinese chipmaking champions such as SMIC have for years competed with the likes of Taiwan’s TSMC but have failed to establish a reputation for equal quality...

China-backed deals have come unstuck in the past. In 2005, Washington blocked an $18.5bn offer from Cnooc, the state-owned oil major, for US crude group Unocal, on security grounds. Cnooc’s successful $15.2bn bid in 2012 for Canada’s Nexen remains the country’s biggest outbound deal.
Which brings us to more recent news that the bid--never officially declared anyway--looks dead in the water. From Doug Young of Forbes:
I wrote several weeks ago that a bid by China’s Unigroup to buy U.S. memory chip giant Micron Technology had become the victim of politics, and now it appears the deal is finally dead. Or at least it’s on life support, with little hope of resuscitation. That’s my interpretation, following the latest reports that say Unigroup’s chairman has given remarks that look quite pessimistic after returning to China from a last-ditch U.S. visit to try to save the deal.

This deal looked quite interesting when it was first reported back in July, and would have been worth some $23 billion, marking the biggest-ever acquisition of a U.S. company by a Chinese counterpart. But political sensitivities quickly surfaced due to Micron’s status as the biggest U.S. maker of memory chips used in most electronic devices and also in the defense industry.

The situation was further complicated by timing, since the U.S. is preparing for presidential elections next year and China is often an easy target for candidates to attack during that period. As the icing on the cake, Unigroup is also stigmatized by its close association with Tsinghua University, China’s leading science university that has close ties with Beijing and is often used for government-led programs to develop new technologies.

Perhaps the U.S. media have already dismissed this particular deal, since the latest reports were only carried in Chinese and were based on information from a second-hand source familiar with Unigroup Chairman Zhao Weiguo’s recent U.S. trip. Foreign media previously said that Unigroup officials were headed to the U.S. to try to salvage a deal, though this is the first report on the outcome.
My take is simple: Tsinghua Unigroup sent a few executives to float the idea of an acquisition of Micron stateside--especially among US policymakers. With all the "national security" BS rehashed in their faces, they decided the deal had next to no chance of going through. Besides, it would subject the Chinese corporation's leadership to intense scrutiny. So the idea's been canned for now.

CCP Mythology: KMT, Not Reds, Fought Japan in WW2

♠ Posted by Emmanuel in , at 9/02/2015 03:10:00 PM
Tanks, missiles, armored personnel carriers...and beautiful women on the march: it's PRC parade time.
If you repeat a lie often enough, then you have to sustain it through further deception thereafter. One of the most curious bits of hagiography for the People's Republic of China leadership is that they led the way in fighting the imperial forces of Japan during WWII. Like in the rest of Asia, it certainly wasn't a pleasant time for those under the boot of Nippon's "Greater East Asia Co-Prosperity Sphere." That is why, seventy years later, the Chinese Communist Party still feels a compelling need to reinvent history in their favor to paint themselves as liberators from those vile foreign invaders. That the Japanese treated everyone else horribly is beyond question, but the claim that the CCP was instrumental in defeating Japan does not bear simple scrutiny.

Tomorrow, PRC sympathizers the world over descend on Beijing for the 70th year commemoration of the end of WWII--and therefore Japanese occupation. The questionable bit is that it wasn't the no-good dirty Generalissimo Chiang Kai-shek who took the fight to Japan, but the communists. However, no self-respecting and impartial historian will support that view.
However, along with criticizing Japan, Xi and the PBSC also used the Victory Day celebrations to praise the CCP itself. As Shannon writes, the Victory Day holiday “also served as a celebration of the Chinese Communist Party’s role in defeating Japan — and more than that, in saving China from its century of humiliation…. Xi credited the CCP with spearheading the movement to unite all of China’s people in opposition to Japan. To Xi Jinping, the deciding factors in the war were the ‘great national spirit’ of the Chinese people — particularly, their patriotism — and the leadership of the CCP.”

None of this is particularly new. The CCP has long claimed credit for having tirelessly defended China from the Imperial Japanese army. This couldn’t be further from the truth, however[...]Japan’s invasion of China saved the CCP from Chiang Kai-shek and the KMT, and ultimately allowed Mao to defeat the KMT in the ensuing civil war. Indeed, by the end of 1934, the CCP was on the verge of extinction after KMT troops delivered another heavy blow to the Red Army in Jiangxi Province, which forced the Party to undertake the now infamous Long March to Xi’an in the northwestern province of Shaanxi. Chiang initially pursued the Communist forces, and would have almost certainly delivered a final blow to the CCP if war with Japan could have been delayed. As it turned out, Chiang was not able to put off the war with Japan any longer, and domestic and international pressure forced him to accept a tacit alliance with the CCP against Japan.

At the onset of the war, then, the CCP was not in any position to defend anyone from the formidable Japanese military. In fact, it wasn’t even in a position to defend itself from the KMT. The initial battles of the second Sino-Japanese War in southern China were the largest ones, and the KMT fought them alone.

This would be the trend of the entire war. As two scholars note, “From 1937 to 1945, there were 23 battles where both sides employed at least a regiment each. The CCP was not a main force in any of these. The only time it participated, it sent a mere 1,000 to 1,500 men, and then only as a security detachment on one of the flanks.There were 1,117 significant engagements on a scale smaller than a regular battle, but the CCP fought in only one. Of the approximately 40,000 skirmishes, just 200 were fought by the CCP, or 0.5 percent.”
The damning thing is that Chou En-lai admitted as much to the Russians: 
By the CCP’s own accounts during the war, it barely played a role. Specifically, in January 1940 Zhou Enlai sent a secret report to Joseph Stalin which said that over a million Chinese had died fighting the Japanese through the summer of 1939. He further admitted that only 3 percent of those were CCP forces. In the same letter, Zhou pledged to continue to support Chiang and recognize “the key position of the Kuomintang in leading the organs of power and the army throughout the country.” In fact, in direct contradiction to Xi’s claims on Wednesday, Zhou acknowledged that Chiang and the KMT “united all the forces of the nation” in resisting Japan’s aggression.
The mythology still resounds today as KMT veterans who actually fought the Japanese but did not decamp to Taiwan after the communist takeover have been treated very shabbily:
Chinese veteran Sun Yibai doesn’t have much time for the Communist Party’s claim to have led China to victory against Japan in World War II. “The Communist Party didn’t fight Japan,” said the sprightly 97-year-old, who once served as a translator with the storied Flying Tigers aviation brigade. “They made up a whole bunch of stories afterward, but it was all fabricated.”

That view challenges a basic premise underpinning this week’s lavish celebrations in Beijing of the 70th anniversary of Japan’s defeat: That Mao Zedong’s communists were the saviors of the nation, battling against Japanese forces that began occupying parts of China in 1931 before launching a full-blown invasion in 1937.

Veterans such as Sun have long found themselves on the wrong side of that narrative. Their service with the Kuomintang led to imprisonment, persecution and often death in the years after the 1949 communist revolution. Now mostly in their 90s, they’re living out their remaining years shunned and forgotten by all but a few who care to hear their stories.

“Nobody cares about veterans like me. Nobody cares. People just forget what happened in the past,” Sun said during an interview in his Beijing apartment, which is stuffed wall-to-wall with books and old photos.
In the economic sphere, you find parallels of this inherent urge to reinvent certain facts to make the Communists appear as saviors of all that ails China. With PRC-sourced turmoil roiling global markets, authorities have tried propping up their stock markets through cash injections late in the trading day to avoid the ignominy of their own people losing faith in the Communist leaders' ability to engineer bull markets out of deteriorating economic conditions:
Hopes that China's leaders would ensure a favourable backdrop in the stock market for Thursday's military parade proved to be wrong — despite yet another strong rally in the final minutes of Wednesday trading.

The Shanghai Composite notched a third straight decline just ahead of a four-day holiday weekend to commemorate the "victory of the Chinese people's war of resistance against Japanese aggression." With minutes to go the market entered positive territory, but then ended 0.2 per cent down. Still, that's a small loss compared to the 4.7 per cent decline early in the day.

Last week market participants and people familiar with the matter said the state intervened to provide a backdrop of rising markets when Beijing hosts the huge military parade on Thursday. For the past six sessions the Shanghai Composite staged a late-day rally, but each day this week the climb only dulled the overall damage.
I believe that market participants' discomfort also stems from the Communist's insatiable urge for reinvention: what if all these years and years of economic growth in China were just as fake as the Reds "defeating" the Japanese? 

Minting Gold Coins: The Monies of ISIS

♠ Posted by Emmanuel in , at 8/31/2015 01:30:00 AM
Coming soon to an antiques dealer near you? Awaiting ISIS currency.
Recent gyrations in global markets have demonstrated to some observers the idea of gold as a safe haven doesn't hold. As investors the world over were gripped in fear, the price of the gold went...precisely nowhere fast. So much for seeking the safety of gold:
Gold is still well above the more than five-year closing low of $1,084 struck August 5 but the safe haven buying amid the panic on markets did not materialize to the extent many bulls had hoped. Georgette Boele of ABN Amro in a Thursday research note argues that gold did not enjoy a stronger rally because the weaker Chinese economic outlook "outweighed safe have demand."
To be fair to gold bugs, the current lack of inflationary pressures in the world economy also works against gold's role as a hedge against inflation. That said, you may be curious to find out that there are also rather more sinister forces out there who believe that precious metals provide a bulwark against the machinations of central bankers and other nefarious characters. For today's latest gold-loving conspiracy theorists, try ISIS:
Forget the printing press. In readying for the rollout of Islamic State’s new money, goldsmiths and silver smelters have been toiling away. The jihadist group on Saturday touted “the return of the gold dinar” in an hour-long video issued by its media wing, al Hayat. Islamic State’s policy-making Shura Council last year tasked its Beit al Mal, or treasury, with minting the coins, which come in several denominations made of gold, silver and copper.
 Death to America! Or is that the Federal Reserve to be precise?
The currency is meant to break the shackles of “the capitalist financial system of enslavement, underpinned by a piece of paper called the Federal Reserve dollar note,” the group said in the video. It didn’t explain where the coins were being minted, nor how they’ll be distributed or replace currencies circulating in the territory the group occupies in parts of Iraq and Syria.

Islamic State first announced its intention to issue its own money in November, five months after it seized the northern Iraqi city of Mosul and its leader Abu Bakr al-Baghdadi announced a caliphate. The move was seen by analysts as part of the group’s efforts to build the institutions of a functioning state.

The jihadists have amassed a war chest of millions of dollars, partly through collecting taxes, and by seizing oil refineries. Bank and jewelry store robberies, extortion, smuggling and kidnapping for ransom are other important sources of revenue for the group, which metes out brutal punishment to anyone who opposes its rule, including beheadings and crucifixions.
So, for weirdo collectors of currency, how do you obtain ISIS gold coins? That's a little trickier. After all, ISIS is classed not as a "state" but as a "terrorist organization" by the United States and others. As such, there are no legitimate "exchange rates" to speak of.
Minting the coins is relatively easy, Jameel said, as goldsmiths in Mosul imported machines from Italy in recent years, each one able to produce about 5,000 coins a day. The metals probably come from banks the group seized, ransoms, the homes of Christians and other minorities who fled, he said...

Each coin bears an inscription that reads, “The Islamic State, a caliphate based on the doctrine of prophecy.” The 1-dinar coin also shows seven stalks of wheat, which the group said is meant to represent “the blessing of spending in the path of Allah.” The five-dinar coin bears the image of a map of the world.

Oil, the group said in the video, will now only be sold for gold.
Ho-hum, add these folks to the very long list of dollar/America-haters. One thing you can be sure of is that ISIS won't be issuing passports, though. Still, there's a lot of (gruesome) novelty value with ISIS currency already...if you can find it.

Novelty Acts: Western Hedge Funds in China

♠ Posted by Emmanuel in , at 8/28/2015 12:12:00 PM
Cushy whitefella hedge fund types are prolly right in avoiding possible PRC re-education for speculation.
As I write, I am listening to the debut album of Col. Bruce Hampton (Ret.) and the Aquarium Rescue Unit. Pop completists will know about this novelty act, whose musical chops did not get in the way of stage antics like having some guy mini-putt golf throughout the show. Antics aside, this is a well-drilled band, and live numbers such as "Yield Not to Temptation," "Working on a Building," and "Basically Frightened" are oddly apt for today's post. Sample lyrics: I'm basically frightened / Of politicians with no hobbies.

For, in modern-day China, we also find novelty acts. There, they're called "Western hedge funds" [ooh, exotic!] Given the control freak nature of the PRC leadership--nowhere else in the world will you see a government so gung-ho to prop up its stock markets for a military parade--it's odd that these folks would be allowed to operate at all when they will use nearly every tactic to eke out gain even if market stability suffers. China's leaders don't like volatility, nossir--especially at the hands of Western financialist-evildoers.
   
But, like the Aquarium Rescue Unit, the remarkable thing is that Western hedge funds do exist in China--albeit in a hush-hush, uneasy situation. Enter the QDLP scheme:
Almost two years after the Shanghai launch of the Qualified Domestic Limited Partnership – a pilot programme that gives foreign hedge funds access to China – the rules are unclear to many in the industry. Effie Vasilopoulos, a partner at the Hong Kong office of law firm Sidley Austin, said Chinese regulators never officially invited hedge fund managers to participate, and did not release the rules that applied to the QDLP programme or the names of participants.
Who are these guys...and what do they do in China, exactly? You will have to dig deep to find out:
The names of participants did not surface until they had filed applications for feeder hedge funds that raise assets in China for investment into offshore hedge funds, and they were only found by those who knew where to look. Oaktree Capital filed such an application for a feeder hedge fund at the end of July, becoming the fifth one to emerge with a fund. It was one of six that had been hand-picked by Chinese regulators to participate in the first round of QDLP. Canyon Partners, Citadel, Man Group and Och-Ziff Management all launched their products earlier in 2015, leaving only Winton Capital with no fund under the QDLP.
Many question why you should even bother setting up shop in China when there are few potential investors in hedge funds...
Kurt Ersoy, the chief executive of Segantii Capital Management, which is based in Hong Kong and manages one of Asia’s largest hedge funds, the Segantii Asia Pacific Equity Multi-Strategy fund, said he had not considered QDLP for asset raising. “Looking at the headlines, it seems to be the case that assets are harder to raise than expected,” he added.

Vasilopoulos said: “It is not a product that the market is familiar with. It took perhaps longer than the government expected for the market to get to know these products, to embrace them.” Hedge fund managers themselves have been reluctant to discuss their progress under the QDLP, and still less has been heard from the authorities in Shenzhen and Qingdao.
...and, this being control freak China, there is a whole lot you can't do whether tacitly or explicitly stated:
But some typical hedge fund tactics might not go down well. Chinese hedge funds, locally known as “sunshine funds”, face restrictions on short selling, margin financing, how they can trade futures and commodities and how they can use derivatives to hedge their exposure. Vasilopoulos said this was still a “major problem” for hedge funds, but added that the arrival of sophisticated foreign hedge funds could prompt Chinese regulators to revise their rules on financial instruments.
The thought of hedge fund managers being sent to prison or, heaven forbid, re-education camps is what comes to mind. After all, what worse enemies of the people can you think of than running dogs of capitalism threatening to undermine China's self-styled harmonious society? If you like financial adventurism, though, there is much to recommend a career being a hedge fund manager in China.

Hong Kong's Stocks: Now Cheaper Than Pakistan's

♠ Posted by Emmanuel in , at 8/27/2015 12:51:00 PM
Islamabad or bust: HK stocks can now be bought more cheaply than Pakistan's.
Having a powerful economy in your orbit, Big Brother style, has its benefits and drawbacks. For the longest time, the Hong Kong Stock Exchange (HKSE) has benefited from riding China's slipstream: Late last year, mainland China overtook Japan in terms of market capitalization to become the second-largest stock market in the world. Then, with the Chinese stock market gathering momentum, Hong Kong's was poised to become the third largest stock exchange after the mainland's.

However, you know what has transpired since: the PRC-inflated stock market bubble has popped to dramatic effect, causing turmoil in financial markets the world over. Nowhere has this turmoil been felt more than in Hong Kong. After being tipped to overtake Japan, Hong Kong's stock market has dropped so much that its average price-to-earnings (P/E) ratio has fallen below that of, er, Pakistan. You read that right--Pakistan of chronic Taliban insurgency, political instability, and balance of payments crises:
The benchmark gauge for $4.3 trillion of shares was valued at 9.8 times reported earnings on Thursday, a 44 percent discount to the MSCI All-Country World Index. That’s the cheapest level among developed markets worldwide and compares with a multiple of 10.2 for Pakistan’s KSE 100 Index. Russia’s Micex has the lowest valuation among major markets, trading at about 9.5 times profits.
Partly, the low valuations are due to the  HKSE being loaded with financial stocks that don't trade at exceptionally high P/E ratios unlike, say, technology or biotech stocks:
“This is really the time to buy from a long-term investor’s perspective,” said Rahul Chadha, co-chief investment officer at Mirae Asset Global Investments in Hong Kong. “You’re not seeing a hard landing in China. In the next couple of quarters as you see the economy stabilize at lower levels, people will take a fresh look at the market.”

The Hang Seng measure’s 46 percent weighting in financial stocks, which tend to trade at low price-to-earnings ratios, may make the market appear cheaper than it really is. While China Construction Bank Corp. is valued at 5.3 times earnings as of Thursday in Hong Kong, the median multiple of shares on the city’s exchange is 11.5. That’s 17 percent higher than the index.
What more can I add? Mainland China giveth; mainland China taketh away. One day your market capitalization is about to exceed Japan's, stock the next day your stocks are priced more cheaply than Pakistan's.

You Pretend to Work, Putin Pretends to Pay You

♠ Posted by Emmanuel in , at 8/25/2015 01:30:00 AM
The "resilient" Russian job market.
The self-deprecating joke among the lumpenproletariat in the USSR near its end was that they pretended to work, while the Soviet Union pretended to pay them. I suppose that not much has changed with the supposed end of the Communist era: as oil and commodities prices have fallen, so too have the fortunes of today's Russia. Then, as now, there remains an urge to put on a brave face in front of the [insert your choice of usually foreign villains here] who are blamed for its misfortunes.

Hence the curious case of rosy employment figures in today's Russia amid a commodities bust:
Soviet workers knew they got a raw deal, and they played along. “We pretend to work, and they pretend to pay us,” went a popular saying. About a million job gains into Russia’s recession, the bargain still holds, with salaries plunging at a pace unprecedented under President Vladimir Putin. Data set to be released this week will probably show unemployment holding at less than half the rate in the euro region, which has had nine consecutive quarters of growth. It’s a sign of a tacit deal that has ravaged productivity and limited economic flexibility.
The way to buoy Russian employment figures is to disguise underemployment, abetted by some of the toughest laws for letting workers go:
With Russia in the clutches of an economic crisis as domestic demand implodes after a currency collapse and sanctions over Ukraine, the jobless rate is less than it was before the neighboring country’s conflict erupted last year. Instead of easing the consumer plight, the stretched labor market betrays an economy geared toward ensuring social stability and ill-prepared to meet the challenges of an aging and shrinking workforce, content to punt the issue until the next crisis. “Choosing between radical reforms and stability, the government will favor stability,” said Vladimir Tikhomirov, chief economist at BCS Financial Group in Moscow. “That’s a Soviet-like choice--to conserve the current system with its problems, though to provide stability.”

During communism, unemployment was all but outlawed. What Putin has now are some of Europe’s most restrictive labor rules and employers still stinging from the dressing-down received for idling plants during the last recession six year ago. Protections against firing individual workers are among the strictest in Europe, according to the Organization for Economic Cooperation and Development.
The resulting resilience of the labor market is doing little to make up for a plunge in people’s spending power, reinforcing vulnerabilities that include the lowest productivity in Europe. Employers are opting for salary cuts, part-time work and unpaid vacations.

During the crisis in 2008-2009, unemployment peaked at 9.4 percent. While it has now risen from a record low of 4.8 percent a year ago, the effect is less dramatic. The rate grew to 5.5 percent in July from 5.4 percent a month earlier, according to the median of 18 estimates in a Bloomberg survey. The statistics office may report the data on Wednesday.
I guess old habits die hard. The hammer and sickle never really went away. 

Meet the New S&P 500 Catholic Values Index

♠ Posted by Emmanuel in , at 8/23/2015 09:40:00 PM
Is Catholic capitalism an oxymoron? Let the fund managers and investors decide.
Ah, more of the economics of popery. Lovely stuff to contemplate, methinks. Despite being Catholic, I am not entirely sure what the religion's impact is on the wider world. For instance, Pope Francis' recent economically- and environmentally-focused encyclical has largely fallen upon deaf ears in the United States--even those who are Catholic:
Pope Francis released a 180-page indictment of capitalism and climate change that has fallen, for the most part, on deaf ears in the U.S. Just 31 percent of Americans know that the pope has made fights against global warming and poverty top issues, according to a national poll conducted by the Associated Press, the University of Chicago, and Yale University. Catholics reported familiarity with Pope Francis’s agenda in slightly larger numbers—40 percent—but a majority of the faithful remain unaware of the pontiff’s high-profile issues. His policy on climate change was released with great fanfare in June.

The new poll begins to answer some questions—posed by those paying attention, at least during the yearlong runup to the release of Laudato Si’, or “Praise Be to You,” the pope’s encyclical letter to bishops. Observers have puzzled over how effective, or even willing, the pope’s front-line personnel would be at propagating his message. Would dioceses actually put the document before parishioners? Turns out not many have, at least not yet. Just 37 percent of U.S. Catholics who went to church in late June and July heard the encyclical mentioned, compared with 12 percent of other Christians, according to the poll.
No matter; here's another entry in the mammon 'n' religion sweepstakes. You have undoubtedly heard of socially responsible investing, or putting your hard-earned money to work in companies that treat people, the environment and so on right by prioritizing corporate social responsibility. In the ever-widening market for ethical funds, here comes your latest entry: the S&P Catholic Values Index that evaluates companies by their adherence to the US Conference of Catholic Bishops socially responsible investment guidelines. What follows is the press blurb:

----------------
S&P Dow Jones Indices (S&P DJI), one of the world's leading providers of financial market indices, announced the launch of the S&P 500® Catholic Values Index which is designed to include the companies within the S&P 500 whose business practices adhere to the Socially Responsible Investment Guidelines as outlined by the United States Conference of Catholic Bishops (US CCB) and exclude those that do not. The Index has been licensed to Global X for product development. 
The S&P 500 Catholic Values Index is the first Catholic index based on such a prominent benchmark as the S&P 500. Constituents are screened to exclude companies who are involved in the following activities that are perceived to be inconsistent with Catholic values as set out by the US CCB, such as:
  • Biological weapons, chemical weapons, cluster bombs, landmines
  • Nuclear weapons – any exposure to whole systems and strategic par
  • Conventional Military sales – companies that have their primary business activity as military products
  • Child labor employment in the company's operation or in supply chain
----------------

I am sure that tobacco and (fossil fuel-based) energy also take their lumps. The real questions are, however, [a] whether funds pop up that match their placements to this index and [b] if there are investors out there who would be interested in placing their money in such funds.

Depreciating Currencies: What Follows Kazakh Tenge?

♠ Posted by Emmanuel in at 8/21/2015 01:30:00 AM
Another commodity currency under pressure: the Kazakh tenge.
Are we having an Asian financial crisis flashback? It certainly seems so to me with emerging markets being rocked on an almost-daily basis. We certainly look to have the ingredients in place: falling stocks, falling currencies, and falling bonds. The Chinese giving in to the temptations of depreciation--something it didn't do during the aforementioned Asian financial crisis--may be exacerbating matters.

So, who's next in line? Of all countries, Kazakhstan devalued  its tenge just yesterday, adding to the negative sentiment on minor currencies.  Or, in foreign exchange-speak, "exotic" currencies which are not traded in large volumes in international markets. For a long time, Kazakhstan tried to limit currency movements in a narrow band--like China. Then, all of a sudden, it gave up and let its currency float freely, subsequently falling 23%. First, a bit more on Kazakhstan's action:
On most days, Kazakhstan finds itself in the backwaters of financial markets. Yet, it’s this central Asian nation that has delivered the latest shock to global currency trading.

Thursday’s 23 percent plunge in the tenge after Kazakhstan abandoned control of its exchange rate revealed a sense of urgency among policy makers: they had tried a managed depreciation just a day earlier. The escalation signaled to investors that it has become too costly for developing nations to defend their currencies. Vietnam also devalued the dong, while freely traded currencies such the South African rand and Turkey’s lira extended losses.
And now for the longer list of candidates--11 to be exact:
  1. Saudi Arabia’s riyal: Armed with $672 billion in foreign reserves, Saudi Arabia, the world’s largest oil exporter, has enough capacity to hold the peg, according to Deutsche Bank AG. Nonetheless, speculators are betting on a break of the currency regime as crude oil tumbled to a seven-year low. The forwards, contracts used by traders to bet on or hedge against future price moves, fell to the weakest since 2003, implying about a 1 percent decline in the riyal over the next 12 months.
  2. Turkmenistan’s manat: This oil-exporting nation with close economic ties to Russia devalued its currency by 19 percent in January. Stockholm-based SEB AB forecasts a further weakening of as much as 20 percent in the next six months.
  3. Tajikistan’s somoni: The nation has close ties with Kazakhstan, which accounts for about 11 percent of trade, and SEB expects a depreciation of 10 to 20 percent.
  4. Armenia’s dram: The currency has lost 15 percent in the past 12 months, compared with a 46 percent drop in the ruble. A quarter of the country’s trade is with Russia.
  5. Kyrgyzstan’s som: The weaker tenge will put pressure the som because of this country’s ties to Kazakhstan, according to BMI Research.
  6. Egypt’s pound: The country has limited investors’ access to foreign currencies amid a shortage since the 2011 Arab Spring protests. Traders are betting the pound will weaken about 22 percent in a year, according to 12-month non-deliverable forwards.
  7. Turkey’s lira: It’s one of the world’s worst-performing currencies since China’s devaluation on Aug. 11. An escalation in political violence and the probability of early elections compound the issues.
  8. Nigeria’s naira: Policy makers in this oil-exporting nation are trying to hold the currency at a level most see as too high. Trading in forwards indicate the currency will fall more than 20 percent against the dollar over the next year.
  9. Ghana’s cedi: Also an oil exporter, though its main problems are mainly fiscal imbalances, rising inflation and increasing debt.
  10. Zambia’s kwacha: The country is heavily exposed to China as copper accounts for about 70 percent of exports.
  11. Malaysia’s ringgit: The currency slid to a 17-year low on Thursday and foreign-exchange reserves fell below the $100 billion mark for the first time since 2010.

Lose $51B? No Big Deal for Swiss Central Bank

♠ Posted by Emmanuel in , at 8/20/2015 01:30:00 AM
Buy euros (EUR) and sell Swiss francs (CHF): that was what the Swiss National Bank (SNB) was doing until early this year when the cost of keeping Swiss exports competitive vis-a-vis those of Europe by effectively pegging CHF to EUR became unsustainably high. Hence, when Switzerland's central bank stopped pushing down the value of the franc to match the euro, the result was a massive loss on its accumulated foreign exchange--mostly euro--holdings.

But how much was the loss? Try $51B for size. Even for a wealthy--albeit rather small--country like Switzerland, that's nothing to sneeze at. Still, the effects of such a loss on monetary policy are limited since its economic situation remains largely the same: an overly strong CHF would dent export performance compared to its devalued European competition:
Losing 50 billion francs ($51 billion) in half a year might seem like a big deal, unless you're the Swiss National Bank. For the majority of economists in Bloomberg's monthly survey — 15 of 23 — the record shortfall reported last month doesn't matter for SNB policy. That still leaves a sizable group in the other camp; one concern is that such a loss could make it harder for President Thomas Jordan to push back against any market pressure on the franc with interventions.

The SNB has already cut its deposit rate far below zero — charging banks to hold their money — and built up hundreds of billions of francs in reserves, by defending a currency cap until January this year and now through occasional forays into the market. If losses mount, investors could start to buy francs to a greater degree if they question the SNB's firepower.
So, it's a market test for Swiss intervention capabilities. That said, there's little choice other than tho pursue open-market operations (AKA intervention) after monetary policy tools have been exhausted:
The loss "limits the credibility of the SNB to pursue a monetary policy that might come with short term financial losses," Bank J. Safra Sarasin Ltd Chief Economist Karsten Junius said. "Unlimited foreign-currency interventions are therefore not credible as markets would regard them as unsustainable..."

According to the survey, the SNB has limited room left on the interest-rate front to keep the franc in check, meaning interventions are likely to retain their importance. The SNB can take its deposit rate, currently at minus 0.75 percent, to minus 1.25 percent, according to the survey...

"From a monetary point of view, the loss does not matter," said Maxime Botteron, economist at Credit Suisse Group AG. "The SNB can still operate with negative equity."
Central banking in an age of deflation may not seem as fun as it seems. I too would like to give negative deposit rates, but a $51B loss remains hard to swallow no matter who you are. 

The Devil Buys Prada in Brazil Where It's Cheaper

♠ Posted by Emmanuel in , at 8/18/2015 03:44:00 PM
Prada é mais barato em São Paulo.
Arbitrage in buying luxury goods worldwide is something of an interest of mine--and a global hobby for the well-to-do shopper. Where's the least-expensive option for buying the latest in-demand fashion goods? Chinese mainlanders go to Hong Kong to take advantage of cheaper luxury goods there due to lower duties and taxes. How about in the Americas, though? Apparently, something similar is going on right now as discerning American luxury buyers flock to Brazil of all places to take advantage of the latter's weakening economy, which has resulted in cheaper luxury goods.

But wait a minute, you say: Shouldn't a weaker Brazilian real result in more rather than less expensive imported luxury goods? Well, not quite in this case:
Cartier and Louis Vuitton, those global symbols of opulence, suddenly look like bargains in one of the world’s economic trouble spots: Brazil. Because of a plunge in the value of Brazil’s currency, the real, many marquee-name luxury products are now cheaper in Sao Paulo than they are in New York.
The key thing is that luxury item sellers in Brazil are temporarily tolerating smaller profit margins given higher import and sales taxes.They will eat those for now. So, the net result for now is that it's cheaper to buy name-brand luxury items in Brazil than in New York:
The disparity provides another example -- albeit a rarefied one -- of how the collapse in the real is rippling through the nation’s economy. Prices of many imports, from mobile phones to wine, have surged because of the weak real, adding to economic angst as Brazil heads for its worst recession in a quarter century.

But many high-end items have actually gotten cheaper in dollar terms because of a quirk of the luxury-goods industry. Louis Vuitton, Prada and many others don’t adjust prices very often, and many tolerate narrower profit margins in Brazil to partially offset high import levies and sales taxes. “It’s truly a momentary phenomenon,” said Nadya Hamad, the manager of a Louboutin shoe store at the JK Iguatemi mall in Sao Paulo. “We used to get complaints about how much more expensive things were here. Now our customers are coming in saying how much cheaper it is.”
How much cheaper is it in Sao Paolo than in New York? More comparable items come out costing less in the South American megacity:
How much cheaper? A tour of a few malls found that among almost two dozen high-end items, 19 are cheaper here than in New York, based on Thursday’s exchange rate. Savings ranged from a few dollars to about $1,000 on a pair of Louboutin crystal-encrusted New Very Riche Strass stilettos. Other bargains included Ferragamo ties, Tiffany watches, Prada wallets and Louis Vuitton purses.
So, head to Brazil for the beaches, the nightlife, the upcoming Olympics and, if you can't wait until next year, the luxury shopping. Tell the Brazilian boutiques that Emmanuel of the IPE Zone sent you (dahling), although I can only guess what their reaction will be.