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Thursday, October 29, 2009

US Economy grew...

Reports have it that the US economy grew by 3.5%. FT report.

It's jobless growth for the most part. It has been growing with regard to the cash for clunkers and other durable goods demand, as well as a tax incentive for home buyers.

Some economist's say that there must be, or it is desirable amount of joblessness and unemployment, for inflation's sake. But, to the extent to which there has been unemployment at over 8% in the USA, this is not the type of joblessness economist's are wanting.

Monday, October 26, 2009

What's been happening?

Nothing much but allot of the same thing.

Iran is "hiding" nukes. What else is new?

Banks are facing more pressure, and persons like George Soros want more regulation. Also, persons like Mervyn King of the Bank of England, wants to cut banker pay. Good luck with that, King.

I am of the opinion that if someone wants to pay you for a job and pay you well, you should be paid.

How should regulation look going forward for the financial services sector, however? There has been more talk than actual doing. The average voter has turned their station off of the talk about banking regulations and, if I may say so, they have forgotten about what was at the root of the crisis. Same old same old!

What about growth moving forward? Well, to me, it's growth for who? Seems as if Asia has gotten off of the first start if they were ever really that bad off. The tousism sector in Asia was hardest hit, due to the lack of travel due to the loss or the fear of loss of jobs. The manufacturing sector was also hit, because orders went down as sales dwindled-- it has picked up to some extent, but are there orders to the western European and North American countries, is another mix of confusion that we don't have the answers to.

I don't know why information, critical information is so hidden from investors and the public.

The IMF has forecasted and has tracked which economies are growing. However, they are not so rosy about Europe and North America. Reports have it that Germany and France have gotten back on track....but, we will have to wait and see if it is sustained.

Also, how they have gotten on track is yet another mystery. Manufacturing in Germany is at the lead, but still no idea as to where the orders are placed. The rest of the Euro-zone is still depressed. France was never as hard hit....French Exceptionalism? Perhaps!

Friday, October 23, 2009

China's growth...8.9%!

Compared by the same period last year, the economy grew at 8.9%. This is all hodge podge news, really. For example, is it real growth or simply nominal growth? Or, is the real growth based on factors that are endogenous to China, or dependent on real value to be returned in the long or short term from external partners?

FT Report: "China growth underlines rapid rebound!"

If they are dependent on western consumers, I don't see how they escape the real value trap; i.e., the trap that you may have sold a good at a nominal profit and also at a minor real price profit, but reap valueless returns compared to real price terms on what the good may be worth or in turn. Or, on the other end, the price of a good you purchased at the same pricing differentials, but value would be seeped away in the short term, leaving the buyer with short term debt and liquidity problems- all in the same time, making larger nominal gains, mixed in with minor real gains, valueless in terms of medium term or long term benefits.

For example, a company buys a stock at 20% more its nominal value in the market and actually makes a minor profit of 5% the real value. However, the price drops on that good by 50% in the short term, leaving the buyer strapped for cash and with no idea on how to offload the good to reap his profits back all at a higher nominal price of inflation.

A slight nuance to the value trap, just added the notion of nominal to real value depreciation.
Value Trap Investopedia definition

Monday, October 19, 2009

More terrorist's in the U.S. financial services industry?

What a trip. The FT reports that the Sri Lankan government has reported: " , the New York-based billionaire and hedge fund manager charged in an alleged insider trading scheme on Friday, was funding the Liberation Tigers of Tamil Eelam, which is considered a terrorist group by the US, the Sri Lankan government claimed on Sunday."

Last week it was the U.S. Treasury stating that no one is to do business with financier Bekkay Harrach and put him on a blact list of sorts, by naming him.

I knew the oil hungry barons and futures traders of the west would go ahead and dig a bigger ditch for Americans and people within the west. They all just enjoyed the high price of oil and now, you have wealthy financiers who are hundreds of thousands of dollars richer, who STILL hate the west-- financiers who they helped to make money.

I wonder if more of this name and shame will come about? Not accusing Raj Rajaratnam of anything. But, considering that terrorism is taken death serious nowadays, we have to look at it from a hard angle.

In any event, Raj is not middle eastern, but from south-east Asia. He is no oil baron and nothing to say that he is connected in any way to the middle east, like Harrach is. In addition, the Tamil Tigers are not really an enemy of America the way Al-Quiada is.

We will see...

Sunday, October 18, 2009

Is the global recession ending for 2009 and will 2010 be any better?

The IMF in a recent statement that the crisis is over, the worse is behind us, recovery is seen and the best is yet to come. Quoting the IMF in their World Economic Report in October, 2009 explicitly stated in the first chapter titled "The Global Recession is ending".

That may be true in some instances, but there is still very much to be done and perhaps, sadly, little than can be done to save much.

In light of this, can we expect a better 2010 in The Caribbean and larger developing world, in any event? It all depends on what other larger countries do and how much leeway we have with expanding interests past the traditional positions, if there is the notion of continued dependence on larger economies to lead the charge.

I remember one of my very first articles back at the end of 2008. It stated that the global economy would begin to rebound by Q3 this year. To some extent, I was correct, albeit that the rebound was not as upbeat as one would have read into my analysis and the growth is being led by Asia at large- China and South East Asia to be exact- as opposed to the traditional Triad (EU, USA and Japan).

Let's take a deeper look at some of the issues analysts have been looking at to gauge their outlook: manufacturing, retail sales and consumer confidence.

Led primarily by Asian markets, manufacturing has rebounded with little or no pick up in the USA or in Europe. The US G.19 Report over the last year has stabilized to lower production and expectations, to some 20% below that of 2006 and 2007. In Europe, the details are slightly more encouraging, due to the issue that emerging economies in the post soviet bloc's are still developing and commodities such as oil, coal and car manufacturing, are experiencing steady growth.

Coming into the end of the year, as it relates to consumer confidence indexes broadly, analysts are predicting that sales will experience an uptick due to the Christmas season. Retail sales have been coming along slowly, thanks’ to the cash for clunkers exercise in the USA and welfare programs in the USA and Europe; i.e., stimulus checks in the USA and added welfare spending in most of Europe as well as VAT relaxation.

However, are these issues primarily linked to the larger issues with the economy and recovery? Also, will this compendium of criterion, moving forward, be less or more affected by other conditions that impact them all? Should there be any real concern that after the Christmas season, consumer confidence will see comparable seasonal inclines?

To be fair, the USA and Europe are still not producing as much or as fast. Corporate defaults are at an all time high in Europe and are to be at a sustained default level, going into 2011 as well as into 2012 by some of the more dire predictions.

American production is up, but production volume is down. While also, job cuts, having worked to increase productivity levels by 10% to 15%.

For one, the issue of employment prospects and current employment rates is first and foremost.

The US just cut nearly 200 thousand private sector jobs in November, which was stated as the smallest job cut over a month period since 2008.

In Europe, The Employment in Europe report forms the analytical basis for the Joint Employment Report (JER) is slated to be out by December 9th, 2009. But, from the onset of the crisis, over 4 million.

Additionally, due to Europe's fervor for regulation, more private sector jobs are slated to be lost. Particularly with regulation in the financial services sector as well as regulation vis a vis carbon policy.

Reports up to April, 2009 from the International Labor Organization (ILO), also has global employment significantly down at -1.3%. This means that job growth has not only receded, but permanent jobs may have been lost across Europe and America, with modest gains in North Africa/Middle East and in East Asia.

In my estimation, the jobs lost over this recession, will never return to the traditional, real sectors of the developed markets the way it has been in the past in the USA and established Europe.

Higher technology, coupled with the uncertainty of the outlooks which are prompting managers to maintain labor costs, while reaping profits at the margins due to the higher productivity, will see to that.

It is up to, in turn, developing and emerging market countries to create traditional sector jobs to sustain growth into, what I would term, developed market economies “funking out".

Secondly, the issue of increased investment, particularly led by private equity is another issue to monitor for progress.

The reason why private equity should be monitored is because private equity is what was driving the market, pre crisis. In 2008, private equity fell by 40% over the previous year, directly correlated with recessionary economic growth, with no signs of increased activity as it relates to mergers and acquisitions, or improved conditions in large firms outside of high technology.

The worst of it with private equity is that as long as asset pricing remains unstable and the issue of market/mark to market evaluation remains uncertain, private equity will remain silent, if all circumstances remain constant over the short to medium term.

More importantly, and particularly with regard to the causes of this current crisis turned economic recession, the issues of a) credit flows and b) deflation due to conditions that can be described as an aggressive bear market, for not only stocks, but also for companies in distress, is also of importance.

The IMF does assert in the WEO that credit has started to flow and spreads have come down. That is somewhat good news, but expectations on lending conditions, as of July this year, are still down considerably.

There has been some movement in the Asian markets with regard to stock activity, but to the level where they were in 2006-07 is still yet to materialize. In fact, may never rebound.

Deflationary pressure is still a major concern, as it appears as if, while manufacturing is stable, purchases are down and output productivity has increased with minor layoffs.

To highlight for a moment of how we got here, the chain reaction of bad events started when credit stopped flowing through the banking sector, simultaneously with the decline in private equity activity, due mostly because major investors lost confidence in the system that was corrupted by risky assets- mortgage backed securities and collateralized debt obligations- where the risks were severely under appreciated.

Particularly, the market for housing backed securities, became detrimentally unstable due to the deteriorating economic conditions in America which, among other things, caused for houses to be "turned upside down" and equally, adjustable rates for low cost homes that were once very low in order to attract middle to low income families, were raised at a time of considerably high real inflation cost which caused massive defaults in mortgages- the price of gasoline and processed food, saw record prices in the years between 2004 to 2008, that had risen from $27.00 to $91.00 (USD) for oil and with the weighted average export shares of total food for 2002 to 2009 from 90.2 to 146.9 with the peak in 2008 to 190.9, as reported by the FAO's in their global food price index.

Currently, The Case-Shiller housing price index (HPI) state that are at -13% of what they were last year this time and -50% from their peak in 2006-2007 in the USA. The Financial Times (FT) HPI in the Eurozone is down for past 7 quarters leading up to Q1, 2009, with negative digit decreases steepening from Q1, 2008 to Q1, 2009 to -4.5%.

The key issue with all said previously, is that the regulatory regime and the way investment banks are allowed to do business, still has not changed. Not only does this indicate that disaster can strike again, but also if growth is to be led through the virtue of these windows, with lower employment and manufacturing prospects, in conjunction with the still uncertain nature of the very system that collapsed- let alone the uncertainty about impending regulations- there is nothing to suggest that robust growth is to be expected.

In another vein, while the Asian housing market was red hot throughout most of the 2000's leading into 2009, the reports for 2009 are allot less stated- which is quite concerning when leading institutions, are touting the Asian led recovery for the global economy. Examining national statistics on the residential market is still red hot in China, with a 17% year over increase in overall household investment and 13% year over increase in residential property and for commercial property there was a 73% rate of sales increase.

Figures throughout Asia are pretty modest compared with China, but one must take into consideration the issue with respect to sovereign national investment in housing in the socialist state, coupled with national savings surpluses and balance of payment surpluses, to fund the Chinese market during the downturn, in addition to the stimulus plan they introduced in 2008.

Let's all hope Asia does not follow the western model of economic management to a tee. Even though Asian officials have chastised western officials for their management, the fact of the matter is that they learned the tools and templates for economic management from western schools of thought.

Nevertheless, when we factor in the savings rates before the crisis started for Asia, it is not difficult to believe that spending, at least, in the region, will be higher than other continental markets with regard to home prices.

Overall, the major issue with regard to economic growth, globally, is who will there be growth for?

So, the recession is ending for some people. Asia seems to have never had a recession, let alone still in one. But, the recession is certainly not ending for many of us out there.

However, emerging and developing markets must take advantage of the permanent jobs losses and continue to develop nationally the traditional way, until they have "caught up" to developed markets- where ever that may end up.

Thursday, October 15, 2009

Treasury Designates Al-QA’IDA Member, Bekkay Harrach!

How much of a serious character you have to be, to be named by the US government as a terrorist and all Americans must cease and desist with any activities as it relates to you?

I normally get mail to my inbox from the US Treasury and other information sources that deal with finance and the economy, but never has one of those news letters, at least as far as I can recall, ever dealt with "naming" a terrorist and asking any of their citizens to cease and desist any activity with said person.

How serious must this "Bekkay Harrach" must be!

Tuesday, October 13, 2009

Vote on health care today...

I don't know what the Senate plans to do today, but it is expected that something will pass out of the committee on health care.

President Obama has held their feet to the fire. No more stalling and we are moving inches and inches closer to a deal, but without a public option.

My God it feels as if we are right there.

Friday, October 9, 2009

President Obama wins Nobel Prize....

Where in the world did this come from? Lose the Olympics, but win the Nobel Peace Prize? I don't get the international community...but, one does not have to do with the other, I guess!

Congrats to President Obama. In fact, the best is yet to come!

Tuesday, October 6, 2009

The notion of a secondary market for SME's in The Caribbean!

Access to capital for Small and Medium Sized Businesses (SME's) has been a consitent challenge for economies. Lack of adequate access to financing can have a serious effect on local businesses. For example, some companies borrow money for payroll. Some companies, borrow money, or, use leverage for various business expansions; e.g., a new warehouse, external trade expenses, upgrading equipment and the like.

What ever the reason, whether a company is large or small, access to capital is a component of doing business and national development. However, SME's, sometimes, find it difficult to secure financing through the formal market mechanisms; commercial banks, insurance companies or, in some cases, credit unions.

Financial institutions in the formal sector tend to ask for up to date financial activity of your company, a general outlook for your business as well as, in some cases and is now increasingly asked for, auditing of your company from an external, unbiased source.

Generally speaking, SME business structures tend to be family owned with the owners being very protective of the money floating around the till. They normally don't like any and everyone in their business, even though these family owned companies are very structured and do have to show some sort of financial fitness, for them to be presentable to lending institutions. Also, because they have "gotten this far without it", tend not to update their management and operational practices to suit rapid changing market trends- this lends to a financier's fear of your company's viability, if you happen not to have a sound succession plan, or if something drastic were to happen, for an extended period of time, to the organisation's chief executive.

In light of this, some companies go to the informal sector to access capital for their businesses; i.e., a multi-billionaire family member or friend who actually cares about your success, the local lotto dealer who happens to have a no strings attached policy, or the neighborhood "pharmacuetical provider", who has been champion on the one end for persons who need a little extra help and a "probable" boon to local authorities, depending on your level of cynicism, on the other.

To combat this, and to simultaneously develop national stock exchanges, some countries have moved towards putting in place a specialised capital market for SME's. The reason for constructing a secondary market - also called a Junior Market or an Alternative Market- is very straight forward; increase the avenues and access to financing for SME's

Some notable secondary markets in the world are The Alternative Market (Alt-M) in the United Kingdom, which has been in operation since 1995 and The American Stock Exchange, which has evolved over the years to find its niche in providing services to smaller capitalised (cap) and mid-cap companies.

However, recent developments in Jamaica give us some idea of how far the idea and the promotion of specialised markets for SME's has come. While the junior market on the Jamaican Stock Exchange (JSE) was "officially" launched in April of 2009 and several SME's have expressed interest being listed, none have yet do so.

This raises one critical issue with staring a secondary market; that being the overall actual interest in having one.

As said prior, there has been some reluctance on the part of SME's in Jamaica to want to be listed on the jr. market, for what ever reason- in addition to what was stated as their general structure earlier- even though an amount of SME's have initially expressed interest and worked with the JSE's steering committee on the matter. Considering, even relatively, SME's and micro-enterprises are a staple of developing, small markets, this does not neccesarily mean, however, that their CEO's have small and least developing outlooks on the economy or finance- even though they may not have the will to act promptly.

In order bypass this bottleneck, there must be, as a pre-requisite, pre existing arrangements with companies that not only indicate that they are ready to list on secondary market, but also made to pre-committ to being listed and steps taken to ensure that they are, operationally, ready to roll and understand the risks involved in relation to the overall standards any local stock exchange requires of them, when countries are looking forward starting a secondary market.

Basically, not only must the leg work with regard to the market research be done, but also provisions made for the agreements to be signed, in principle, with what the initiative is and what is expected from both parties and work towards this in the meantime before a secondary market is initialised.

Another issue is if whether or not there is any benefit from local investors who wish to buy shares in a small or mid-cap company, enough to expend resources on brokerage fees and manpower, to actually buy-in?

This can be easily mitigated if there is liberalisation in the financial services sector, which increases the amount of brokers in the industry that able to provide service and perhaps, tied into the formal sector providers already providing financial services in some form or fashion. There can be criteria for prospective brokers who wish to only buy small or big or both, respectively. With this regard, patient capital must be required as well as encouraged and the insurance backed plans and specialised vehicles, for investors, must and as a consequnece, be a product in play.

In addition, and dove-tailing off of broker/dealer expansion, a specialised secondary market must be relaxed with regard to the stringeny of the prospectus companies wishing to participate must put forth to the stock exchange, as well as sensitive to company ownership who wish to keep their company, predominatly, family owned and away from any hostile takeover.

Simply limmiting the amount of shares SME's are allowed to offer in their public offerings (IPO's) as a percentage of their market cap, would solve this issue- depending on the risk both investor and owner wish to take in their exchange, under other forms of specialised arrangements.

While there are other operational and developmental concerns, I have discovered that those mentioned in this article are foremost.

The benefits, overall, are evident and irrefutable. For starters, companies will have a reason and incentive to upgrade, especially if the local stock exchange offers, as a service, management consultancy services. The capital market would have a chance to expand and develop more sophisticated products. Wealth will be increased through returns to investors and through more efficient and accountable companies that learn to squeeze profit margings. And, more importantly, a greater amount of persons will, automatically, become more educated about financial services and matters.

Everyone wins-- or something to that effect!