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According to the European Central Bank, hedge funds=bird flu. Ralph Atkins and Chris Giles report in the Financial Times:
Hedge funds have created a "major risk" to global financial stability for which there are no obvious remedies, the European Central Bank warned yesterday in one of the bluntest official statements yet on the rapidly growing sector.In a clear hint of rising official nervousness about the multi-billion-dollar industry, the ECB ranked an "idiosyncratic collapse of a key hedge fund or a cluster of smaller funds" in the same category as a possible bird flu pandemic as the type of shock that could trigger fresh disruption in financial markets.
The ECB's remarks will play to the hostility felt by some European political leaders over the growing influence of hedge funds. Last year, they were described as "locusts" by Franz Müntefering, now the German deputy chancellor. . .
The ECB's comments came in the Frankfurt-based central bank's latest "financial stability review", which, for the first time, included a special section on hedge funds.
The review highlighted an increasing tendency by funds to mimic strategies followed by others. It noted that the correlation of hedge fund returns had "surpassed levels seen just before the near collapse of Long Term Capital Management in 1998".
Pointing to the herd instinct among hedge funds, the special section in the review concluded: "The increasingly similar positioning of individual hedge funds . . . is another major risk for financial stability, which warrants close monitoring despite the essential lack of any possible remedies."
Read the whole report here.
Posted by dan at 09:14 AM
William Wallis and Doug Cameron report in the Financial Times that a Dubai-based company has taken control of a large private U.S. homebuilder. Congressional investigations are sure to follow.
Emaar, the Dubai-based property developer, made his first foray into the US on Thursday with the $1.05bn acquisition of WL Homes, one of the country’s largest privately-held housebuilders.The Dubai group is behind many of the showpiece developments in the fast-growing Gulf emirate, and the purchase of WL Homes - which focuses on the luxury market - fits in with the recent expansion of Emaar’s housing business in the Middle East and south Asia.
The US group’s John Laing Homes business is one of the fastest-growing housebuilders in the US, though new sales have waned across the industry in recent months, notably in the premium market. The slowdown has depressed shares of listed builders and deterred private groups from pursuing flotations, though has raised speculation of further industry consolidation.
John Laing’s sales climbed 66 per cent last year to $1.63bn as closings rose more than 40 per cent to 2,891.
Emaar will retain senior management at California-based John Laing, which was acquired from a joint venture controlled by the UK group of the same name in a management buyout in 2001. The company is being bought from senior management and a private-equity unit of GMAC.
Posted by dan at 09:11 AM
It's almost as if Ford and General Motors are trying to lose market share in the world's most lucrative auto market. Micheline Maynard and Nick Bunkley report in the New York Times.
Sales figures reported Thursday showed that Toyota, Honda and other Asian manufacturers claimed a record 40 percent of the American market in May, when sales of fuel-efficient vehicles like the Toyota Corolla, Honda Civic and Hyundai Sonata all rose 20 percent or more compared with May 2005.For Detroit companies, which have continued to aggressively market their costly new sport utility vehicles and pickup trucks despite the high gas prices, market share last month dropped to 52.9 percent — their second-lowest in history.
It was their smallest level since last October, when sales plummeted after the companies stopped offering employee-discount promotions for all consumers. . . .
Honda reported an 11.4 percent increase in May, pushed by both the Civic and the new Fit, a subcompact that went on sale in April. . .
Some dealers, Mr. Colliver said, reported seeing customers follow delivery trucks into their showroom lots in hopes of nabbing a Fit — something that has not happened since the original Civic went on sale in the 1970's. . .
In all, industry sales for May dropped 4.6 percent compared with 2005, according to Ward's InfoBank. Car sales rose nearly 2 percent, but sales of S.U.V.'s, pickups and minivans fell 10.2 percent.
Toyota, the company causing the most trouble for Detroit, took a record 15.9 percent of the American market in May, when its sales rose 12.3 percent from 2005.
For the second month in a row, it outsold DaimlerChrysler, including Chrysler and Mercedes, to rank as the third-biggest company in the United States.
Oh, and by the way, Toyota last month sold 16,896 hybrid vehicles last month, about 7 percent of total sales.
Posted by dan at 07:58 AM
And the prize for most cliches in a single paragraph goes to Michael Roth., chief executive officer of ad giant IPG, which has undergone more futile reconstructions in recent years than a plastic surgery addict. Stuart Elliott reports in the New York Times:
Since the disclosure almost four years ago of accounting irregularities, which sent Interpublic into a profound slump, executives have been trying a variety of measures to bolster its revenue and profit margins. Among the changes have been several Interpublic agency mergers, almost all deemed failures."We're doing this from strength, not from weakness, which distances it from previous transactions," Mr. Roth said. "This is one plus one equals three, as opposed to trying to fix a problem child."
If this is what passes for original thinking and communication skills at an ad firm, it's no wonder IPG has been losing clients.
Posted by dan at 07:54 AM
Randall Smith reports in the Wall Street Journal that Wall Street CEOs are selling lots of stock in their own companies.
Sales of brokerage-company stocks by top Wall Street executives have drawn scrutiny since the recent market downturn.Although some analysts warn the sales could signal caution about the near-term outlook for brokerage stocks and the market as a whole, others say they merely reflect stock-based compensation systems that result in executives selling shares on a routine basis.
Three executives at Lehman Brothers Holdings Inc., led by Chief Executive Richard S. Fuld Jr., drew criticism last month for selling a total of 750,000 shares in March after exercising stock options to buy the shares.
They just dump the stock the minute they get it," analyst Richard Bove of Punk Ziegel & Co. said of the recent Lehman sales. They occurred only a few weeks before one of the three executives, Chief Administrative Officer David Goldfarb, told investors the stock was "attractive" to buy, Mr. Bove said in an interview.
"He's telling us to go buy in the open market," Mr. Bove said of Mr. Goldfarb. "Why isn't he buying?" In a report to clients last week, Mr. Bove said the Lehman sales were "unsettling." Mr. Fuld alone has sold more than $200 million of stock over the past two years, most of it after exercising options.
Lehman said its "senior executives routinely liquidate some of their holdings each year," both to exercise expiring options and pay taxes on options and stock awards. The executives receive more than 50% of their compensation in stock, boosting their holdings each year, Lehman added, and the "vast preponderance" of their wealth remains in Lehman stock, aligning their interests with shareholders. Employees own 30% of the firm.
The issue of stock sales by Wall Street CEOs is a sensitive one because the executives' holdings symbolize the firm's success and an executive who sells risks sending a mixed message to investors about his company's prospects.
"Stock sales by insiders at brokerage firms have become an issue since brokerage stocks have performed very poorly in the marketplace in recent weeks," Mr. Bove said in his report May 22. Stocks of most major Wall Street firms are down 9% to 14% from their peaks in April and May.
Some financial firms, such as Citigroup Inc. and Merrill Lynch & Co., require senior executives to hold 75% or more of the stock they receive as compensation, as a demonstration of commitment to the firms' future. Such compensation may take the form of stock or stock options, which are rights to acquire shares at a set price.
Merrill Lynch CEO Stan O'Neal recently sold more shares than he just acquired in a February option-exercise. In late February, he exercised options to acquire 439,380 Merrill shares. He soon sold 472,132 shares, reflecting the shares he had just acquired plus others he already owned.
Mr. O'Neal still holds 1.2 million Merrill shares plus 2.1 million unexercised options, Merrill says. So while his latest sale was well within the 75% rule, it still made him "a net seller," Mr. Bove noted
Posted by dan at 10:22 AM
How do you say, "I get to keep 20 percent of the profits" in Urdu?
Farhan Bokhari reports in the Financial Times that Pakistan's first private equity fund has been launched.
The launch this week of Pakistan's first private equity fund has bolstered the confidence of foreign investors heading to the south Asian country in search of opportunitiesarising from the economic recovery.Abraaj Capital of Dubai and Karachi-based BMA Capital, sponsors of the $300m fund, claim their lead could encourage additional investments worth up to $1bn during the next four years.
Posted by dan at 10:20 AM
The Financial Times notes that wages in China are rising sharply.
"Shenzhen will raise its mandatory minimum wage by as much as 20 per cent with effect from next month in a move that is likely to be followed by other cities in China's Pearl River Delta manufacturing heartland.In an announcement posted on its website, the city's labour bureau said the minimum monthly wage insides its special economic zone, which borders Hong Kong, would be increased 17 per cent to Rmb 810 ($101.) Outside the zone, the minimum wage will rise 20 per cent to Rmb700."
Fellows at the Chinese analogue of the Competitive Enterprise Institute are surely preparing position papers showing that the prospect of workers earning $1,200 a year will reverse all of China's economic gains.
Posted by dan at 10:15 AM
Could it be that even the rich are now finding themselves pushing against their limits to consume? Tiffany reported that in the first quarter, same-store sales in the U.S. fell 1 percent, and sales at its New York flagship store--that temple of extreme consumption--fell 7 percent.
Posted by dan at 10:13 AM
Even as critics of Sarbanes-Oxley urge that we declare victory and start dismantling onerous reporting requirements, Patricia Kowsmann reports in the Wall Street Journal that companies have not quite mastered their financial domains.
"Financial restatements by U.S. public companies increased during the first quarter from a year earlier, led by financial services and technology companies, according to early results of studies conducted by a research firm.Although Glass Lewis & Co. hasn't released official numbers, research analyst Mark Grothe said preliminary analysis of the quarter indicates restatements this year probably will reach 1,000 down from 1,195 in 2005."
Posted by dan at 10:14 AM
Charles Forelle and James Bandler continue their investigation into fishy stock-option grants in the Wall Street Journal. And it leads them to Richard Scrushy, the former CEO of HealthSouth who had the misfortune to continually hire crooked CFOs. They report:
Richard Scrushy, the former chief executive of HealthSouth Corp., repeatedly received stock options dated at low points in the company's stock price, a review of securities filings shows, raising questions about the company's options-granting practices.Patterns of hitting frequent lows in options pricing have also turned up at a number of companies facing probes by federal regulators or prosecutors seeking to learn if the grants were backdated to make them more advantageous to recipients. Some two dozen companies are under federal scrutiny, and about a dozen executives or directors at some of those companies have left their posts in recent weeks.
Mr. Scrushy is long gone from HealthSouth, fired by its board in 2003 after accounting fraud brought the rehabilitation-hospital company to the brink of bankruptcy. More than a dozen subordinates pleaded guilty to participating in the $2.7 billion fraud. At his trial last year, Mr. Scrushy was acquitted of all 36 counts against him.
But his legal troubles aren't over. The Securities and Exchange Commission has a civil lawsuit against him, and he is standing trial in a bribery case. HealthSouth and Mr. Scrushy are engaged in drawn-out hostilities: The company is suing him for his alleged role in the fraud, and he is suing the company for wrongful termination. . . .
Mr. Scrushy apparently never exercised any of the unusually timed options between 1995 and 2002, although he did exercise a large number of options granted earlier. Upon his firing, the company declared all his outstanding options forfeited. In his suit, Mr. Scrushy is trying to get back his options and other kinds of compensation. . . .
The pattern of 11 grants Mr. Scrushy received between 1995 and 2002 is improbably fortuitous. Two carried the lowest closing price of the year in which they were granted. Three more were dated at quarterly lows. An additional grant was dated at a monthly low, at the bottom of a sharp V in share price.A Wall Street Journal analysis, using a methodology that looks only at postgrant-date price appreciation, finds the odds of Mr. Scrushy's grant pattern having occurred by chance is around one in 10,000. That's a low probability, but it doesn't rise to the level of significance of 11 other executive's patterns examined by the Journal in recent months using the same methodology. Many of the 11 companies that issued these grants are now facing federal scrutiny or have launched internal inquiries or both.
Posted by dan at 10:09 AM
The OECD says Germany's economy is weak because German companies are strong.
Posted by dan at 10:06 AM
Greg Mankiw has some fun at my expense, as well he should. He's also posted on his blog the text of his op-ed in today's Wall Street Journal, which bears some close reading. In the early part of this decade, Mankiw worked in the White House as it conspired with the Republican Congress to inflict serious damage on the nation's balance sheet--slashing taxes, generally on the wealthy, again and again; letting the AMT spread further to the middle class; and engaging in an orgy of government spending that included the creation of a massive new open-ended prescription druge entitlement.
So what does Mankiw offer to help clean up the mess? Regressive taxes. Forget about returning to the income and investment tax regime that seemed to work awfully well the 1990s. Nope. Raise taxes on gas, on carbon, and on cigarettes and alcohol. "Maybe we should consider higher taxes on smoking, drinking, gambling and other activities about which people lack self-control." (In that vein, should we also enact a higher taxes on Republican fiscal hawks who have demonstrated a serious lack of self-control when it comes to aligning tax revenues with spending?)
But lets not just stick it to the poor, he writes. Lets stick it to the higher earners who live in Democratic-leaning coastal states. Mankiw advocates broadening the tax base by effectively raising federal taxes on people who live in high tax states and by scaling back the mortgage deduction.
Oh, and Mankiw has another idea. Old folks should work longer before they collect retirement benefits. "If we raise the age of eligibility for retirement benefits, people could still retire early, but they would do so on their own nickel, rather than the taxpayer's." Given the state of savings, the median size of 401(K) plans, and the ongoing pension cram-down, a nickel is precisely what many older workers will have to retire on.
In theory, raising the retirement age or the eligibility age for collecting Social Security isn't a bad idea. But that would mean something like a sea change in the way corporate America views it's older workers. When most workers hit their late 50s and early 60s, companies generally prefer to buy them out, fire them, or ease them into retirement so they can replace them with younger, more eager beavers who will work for less. It would be nice if we could all grow old on the job, enjoy ironclad job security, and see our wages rise every year. But not all of us can be tenured professors at Harvard.
Posted by dan at 09:36 AM
Talk about grading on a curve. Kevin Hassett (whose words I have pledged to eat) argues that compared to the other jokers in the Bush cabinet, outgoing Treasury Secretary John Snow is an "A" student.
Posted by dan at 09:34 AM
Mark Turner reports in the Financial Times that John Bolton is one hip dude.
After a recent Security Council resolution on Lebanon, John Bolton, the iconoclastic US ambassador to the United Nations, invoked the wisdom of the Rolling Stones to assembled reporters."You can't always get what you want," he intoned, "but if you try sometimes, you just might find you get what you need."
Indeed. Tune in next week when Bolton quotes "Brown Sugar" while discussing his boss, Condi Rice; justifies a refusal to commit new funds to a health initiative by riffing lines from "Beast of Burden"; and greets U.K. Foreign Minister Jack Straw by growling the chorus from "Jumping Jack Flash."
Posted by dan at 08:46 AM
The Financial Times editorial page has a brilliant piece of advice for President Bush: he should appoint a qualified person with stature to replace John Snow as Treasury Secretary.
Now it looks like he may just do that, and that, contrary to the argument I made in April, Bush has been able to find a Class A Wall Street type willing to take the job.
Posted by dan at 08:41 AM
Another small landmark in Mexico's slow-motion evolution. Adam Thomson reports ($ required) in the Financial Times.
Advent International, the global buy-out firm, will today announce the acquisition of Milano, Mexico's biggest discount clothes retailer, for $200m in a deal financed with a high proportion of debt against future cashflow.The purchase, which was funded with $110m of equity and $90m of debt, is understood to be Mexico's first private equity-backed deal in the middle market to use significant borrowing against cashflow.
Santiago Castillo, at Advent's Mexico office, told the FT: "We think this marks the start of a new trend that will allow us to incorporate cashflow leverage in our transactions in Mexico and Latin America."
Advent led a syndicate of investors, including funds from Capital International, BBVA Proyectos Empresariales and the Netherlands Development Finance Company to buy 100 per cent of Milano.
Standard Bank of South Africa and Scotiabank of Canada co-led a group of Mexican and international banks in providing debt in the form of acquisition financing and working capital facilities.
The deal's significant use of leverage based mainly on Milano's future cashflow is a clear sign of investors' growing faith in Mexico's economy.
Posted by dan at 08:38 AM
Jonathan Birchall reports ($ required) in the Financial Times that British grocery chain Tesco, which is expanding into the U.S., is looking for toxic bachelors, cads, serial monogamists, and other types who have a tendency to avoid commitment:
Tesco, the world’s third largest grocer, has listed “maintaining union-free status” and “union avoidance activities” among the responsibilities of senior managers of its planned new network of stores on the US west coast.Language in two job descriptions indicates that Tesco – which has a close partnership with its UK union – is set to follow the non-union example of Wal-Mart, Whole Foods, Trader Joe’s and others in the US, adding to the pressure on the United Food and Commercial Workers (UFCW) in southern California.
An advert for a new employee relations director, said “the incumbent has primary responsibility for management of employee relations; maintaining non-union status and union avoidance activities”.
Posted by dan at 08:35 AM
Kevin Allison reports ($ required) in the Financial Times that rising commodity prices are spurring computer recyclying.
"[But] the soaring price of copper is giving renewed impetus to flagging efforts to recycle electronic waste. According to the Silicon Valley Toxics Coalition, an anti-pollution watchdog, copper accounts for about 7 per cent of the total weight of an average PC.Mining companies and specialised recyclers have been expanding their crushing services to recover valuable metals and safely isolate contaminants from electronic waste.
“[The Chinese] are paying top dollar for any copper that comes out of US recycling streams,” says Brian Brundage, chief executive of Intercon Solutions, one of the biggest US electronic recyclers.
Posted by dan at 08:26 AM
Nanette Byrnes writes in Business Week ($ required) that many corporate pensions have become less underfunded.
"Thanks to rising interest rates, some $58 billion in company contributions, and an 11% returnon investments, employer-sponsored U.S. pension plans are climbing out of their deficit ditch. An analysis by UBS Securities strategist David Bianco predicts plans are doing so well that the aggregate underfunding at S&P 500 companies will be nearly erased by yearend, assuming that interest rates remain near current levels and the S&P index gets to 1400. . . .Bianco says the shortfall may already be as low as $40 billion, a remarkable advance over last year's $145 billion (itself down from $202 billion in 2002."
Good news, but that S&P 1400 is quite a big if.
Posted by dan at 08:22 AM
Ben Stein -- Ben Stein! -- smacks down supply-siders in the New York Times. Money graph:
On the right side of the aisle, there is breathtaking confusion about supply-side economics. Treasury Secretary John W. Snow has been touring the money programs on television, touting the effects of the Bush tax cuts on federal revenues, "explaining," as one might say, that this proves that supply-side theory really does work and you really can get something for nothing. He is partly right, in the same sense that you could borrow a bit more than $4 trillion to buy stocks and then tell people you are worth $4 trillion — if you don't count the money you owed.
Posted by dan at 08:19 AM