Today's Financial News Courtesy of the Financial Times

Today's Financial News Courtesy of the Financial Times


Europe’s ‘periphery’ woes return to foreground
By Telis Demos in London
Copyright The Financial Times Limited 2010
Published: August 13 2010 09:31 | Last updated: August 13 2010 21:55
Copyright The Financial Times Limited 2010


Friday 21.15 BST. A positive economic surprise for a change – stronger than expected German GDP growth in the second quarter – has failed to lift sentiment as strength in Europe’s “core” only serves to highlight weakness in the “periphery” and the US.

The FTSE All-World stock index is down 0.1 per cent, as the S&P 500 index fell 0.4 per cent. European shares were mixed, with the UK higher and France and Germany lower. Crude oil is falling, giving up gains made during Asian trading.

Markets have been in sell-off mode following the wind-down of earnings season and a downgrade in the US Federal Reserve’s growth outlook. World stocks are down 4 per cent this week. Selling has eased a bit without significant new data, and the yen’s rise has cooled. Volumes in the US stock market, as an average of the last 30 days of trading, are at their lowest in six months.

But it appears that markets are still of a negative cast. Germany produced what Goldman Sachs termed a “blockbuster” quarter, and markets shrugged. German economic growth was faster than at any time since reunification in 1990. But thanks to the euro, Germany cannot stand alone – nearly 40 per cent of its exports are to the rest of the continent – and broader European fears are still on the rise.

The euro was weaker and German 10-year Bund yields hit an all-time low of 2.39 per cent. Spreads between German and Greek debt widened to their highest since the peak of the crisis in early May. Bond yields of the other “periphery” states, including Italy, all rose.

“It appears the market quickly realises that this is as good as it gets,” said Marc Chandler, global currency strategist at Brown Brothers Harriman.

Overall, eurozone GDP growth only matched expectations, adding 1 per cent in the second quarter, with France and southern Europe lagging substantially behind Germany. France grew just 0.6 per cent, though faster than forecast, while Greece’s GDP fell 1.5 per cent – shrinking a bit more than expected and still in a deep recession.

The Market Eye

Sometimes there is a distinction between fears: there is “risk-off” and “growth-off”. This is a growth-off day: If the US cannot help the “periphery”, it cannot help Germany any further. But there is also an element of “risk-off” on Friday: Investors perceive rising dangers in the European banking market. Ireland has been struggling with fresh banking worries, and its credit-default swap prices continued to rise on Friday to their highest since before the European stress tests. Stocks of Irish banks are falling steeply, dragging down European bank indices.

Overall perceptions of European banking risk are also on the rise. The spread on three-month futures for inter-bank loans on Thursday reached its highest level since last September. Investors in the euro seem to be focusing on that risk, with the euro now falling. The single currency has traded choppily as different drivers – interest rates, banking risk, growth fears or hopes – vie for traders’ attention.

“What today’s German figure also shows is the high degree of divergence within the eurozone, with the periphery clearly lagging the ‘core’,” said Dirk Schumacher, senior European economist at Goldman Sachs.

And despite Germany’s triumph, growth in the import-centric US may be even more important, and data there did not help to turnround expectations of a faltering recovery. Consumer prices grew faster than expected, contrary to deflationary expectations, but retail sales in July were slower than forecast. Consumer confidence improved, but inventories grew because sales were still slow.

“Fears about global slowdown again is of course what is really weighing on European sentiment. If the countries of the periphery want to stabilise, they will need some sort of growth. Without the US, that will be much harder,” said Lars Tranberg Rasmussen, senior analyst at Danske Bank.

• Europe. Defensive high-yielding shares are again on the rise – notably pharmaceuticals and telecoms stocks – driving returns in the UK, which is leading gains among the region’s main markets. The FTSE 100 index, which helped power a slight rise in European shares on Thursday, was up 0.2 per cent, enjoying a continued rebound in insurers following Prudential’s big gain in profits, plus a bid premium amid rumours that Vedanta is buying a stake in Cairn’s India assets.

Overall, the FTSE Eurofirst 300 index is up 0.2 per cent as safer large-cap shares outperform. ThyssenKrupp, Germany’s largest steelmaker, is higher after it reported expectations-beating profits.

But Germany’s Dax index is down by 0.4 per cent and France’s Cac 40 index 0.5 per cent lower. Both are export-led economies highly sensitive to the periphery, which is weakening. Ireland’s market leads declines, with its ISEQ index falling more than 1 per cent, brought down by its banking shares. Spanish shares are down 0.8 per cent.

• Asia. Stocks in the region were powered by stronger earnings reports. The Hang Seng index is up by 0.1 per cent. Mainland Chinese stocks were up 1.2 per cent on the Shanghai Composite index. Japan’s Nikkei 225 average rose 0.4 per cent and the S&P/ASX 200 index in Australia closed up 1.3 per cent.

• Currencies. The yen has continued its early weakness through choppy trading, thanks to persistent worries of possible intervention by the Bank of Japan. The yen is down 0.5 per cent at Y86.31 after falling for much of the session, trading above Y86 earlier.

The euro is down by 0.4 per cent against the dollar, at $1.2772. The pound is up 0.1 per cent at $1.5588.

• Debt. In addition to Ireland, Spain is also in the cross-hairs. The European Central Bank reported on Friday that, contrary to recent trends, Spanish banks’ borrowing from the ECB grew in July. Spanish 10-year bonds are higher by 6 basis points.

Fears are driving investors toward German bonds. Two-year Schatz yields dipped to as low as 0.60 per cent, their lowest since June. Schatz had resisted falling to the same record lows as US two-years, thanks to the ECB’s relatively hawkish stance on rates compared with the US Fed’s dovish turn. But as confidence in Europe weakens, following a strong July, Schatz yields are likely to be under pressure.

German 10-year Bund yields are also lower by 3 basis points at 2.39 touching their all-time low below 2.40 per cent. US 10-year Treasury yields were also lower, slipping 7 basis points to 2.68 per cent.

• Commodities. Benchmark US crude oil has given up its gains and is now down 0.4 per cent to $75.45 a barrel, adding to a nearly $6 loss over the past two sessions.

Gold led risk aversion, having been higher all session. Bullion is up 0.1 per cent at $1,215 an ounce as longer-term growth and inflation worries from looser monetary policy linger.

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Markets cling to the Fed as growth alert sounded
By Alan Beattie
Copyright The Financial Times Limited 2010
Published: August 13 2010 23:03 | Last updated: August 13 2010 23:03
http://www.ft.com/cms/s/0/acf9ba78-a70c-11df-90e5-00144feabdc0.html


It’s time to worry like it’s 2003. This week the Federal Reserve’s open market committee (FOMC) startled financial markets by raising its terror alert level over the economy and declaring it would keep buying bonds to maintain its loose-money stance.

A run of bad data has raised the probability that the US economy, having dragged itself up a ladder, is about to slither back down a snake. And as the gap between actual and potential output grows larger, so does the small but non-negligible chance that the US will enter outright deflation.

Just as during the last big deflation scare in 2003, uncertainty over monetary policy – particularly quantitative easing and other extraordinary measures – is catalysing violent market reactions. Two conclusions should be drawn. One, the Fed needs to be prepared for small changes in nuance provoking an outsize market response, sometimes in the wrong direction. Two, the field of play is a lonely place when monetary policy is struggling alone with fiscal policy sitting on the bench.

Though the Fed’s campaign to avoid deflation in 2003 was eventually successful, it wasn’t flawless. At one point, through mishandled messaging provoking market reactions, the Fed pulled off an inadvertent two-part trick: loosening monetary conditions at a meeting in May that left interest rates on hold, and then accidentally tightening conditions via an FOMC meeting in June which cut them.

The challenge only increases when markets are acting illogically, as they did this week. While a snapshot of current bond prices shows investors telling a fairly consistent and realistic story of low or no growth and inflation in the medium term, investors’ reaction to Tuesday’s announcement was not internally coherent.

Part of the immediate response was perfectly understandable. Long-term interest rates in the US continued to fall, the 10-year Treasury bond yield dropping below 2.8 per cent. That, at least, makes sense. The Fed controls short-term interest rates, and the statement told us something about how it will react – that, in the face of poor or weakening conditions, it will keep monetary policy loose for a long time. Dissent within the Fed about more radical measures is confusing the message – and potentially circumscribing the policy – but some of it is still evidently getting through.

More puzzling was the big reaction across lots of other markets – a general pullback from risk, with equities taking a battering. Looser monetary policy ought, if anything, to produce the opposite reaction. This looks like the work of one of the great investment fallacies – the false assumption of central bank omniscience, in this case that the Fed knows a lot more about the economy than anyone else.

One of the peculiar challenges that confront central bankers – and I used to be one – is countering the perception that they are privy to large amounts of private information. True, central banks talk to a lot of practitioners in the financial markets and the real economy and have a good insight into the short-term money markets from their own operations. But beyond that, they are usually working off the same numbers as everyone else. Yet in times of great uncertainty, investors will cling on to anything they can to form a view about the economy, including assuming the Fed knows more than they do.

It would help greatly if fiscal policy were pulling in the same direction as monetary, signalling that the central bank and the government will act to stimulate if growth weakens. Sadly, this is not forthcoming. Super-low bond yields show fiscal policy has more room for manoeuvre, but far too many people – congressional Republicans, Harvard historians moonlighting as economists, cable television pundits – seem to believe with almost no evidence that a debt crisis and possibly high inflation are just around the corner. According to this view, an anaemic economy shovelling extremely cheap money at the Treasury is somehow signalling it wants the government to stop borrowing.

This is a problem. We have been here before – during Japan’s long struggle with deflation in the 1990s and 2000s. Some of today’s debt crisis brigade have drawn the lesson that large-scale fiscal infusions do not work. In reality, as shown by Adam Posen of the Bank of England’s monetary policy committee, Japan became airborne in the early 2000s after the twin engines of fiscal and monetary policy were finally run together.

Before then, Japanese policy was disjointed and half-hearted. Serial-killing fiscal and monetary authorities repeatedly choked off growth whenever the economy flirted with recovery, and sometimes undid each other’s work. In the late 1990s, a peculiar semi-public confrontation unfolded in which the ministry of finance ordered the Bank of Japan to sell yen in foreign exchange markets to loosen monetary conditions. The bank, sceptical of the tactic, promptly undid the effects of intervention by buying back the yen in domestic money markets.

There is no such obvious disagreement between government and central bank in the US. But divisions elsewhere are destroying the coherence of fiscal policy. A stimulus-phobic Congress is blocking the White House. And with the recent departures of senior officials Peter Orszag and Christy Romer, there are signs of division and exhaustion within the administration’s economics team.

Stasis and wrongheadedness in fiscal policy makes the Fed’s job harder. The FOMC is not just trying to operate in highly uncertain circumstances with highly uncertain instruments but also has too much of the burden. Central bankers are no more omnipotent than they are omniscient. Investors, the public and the Congress may be forced painfully to find that out.

The writer is the FT’s international economy editor







Hurd could receive $40m severance pay
By Richard Waters in San Francisco
Copyright The Financial Times Limited 2010
Published: August 13 2010 23:03 | Last updated: August 13 2010 23:03
http://www.ft.com/cms/s/2/a04bb8ae-a706-11df-90e5-00144feabdc0.html


A loophole in Mark Hurd’s contract made it hard for Hewlett-Packard to dismiss him outright and added to pressure on the board to give him severance pay which could be worth nearly $40m despite his admission of ethical lapses, according to experts in boardroom practice.

The terms of the former HP chief executive’s employment did not lay out any specific circumstances in which the company would fire him “for cause”, which would have enabled it to avoid paying severance.

This contrasts with the contracts of most chief executives in the US, whose contracts usually lay out more detailed conditions on which they can be fired, including for breaches of a company’s ethical code of behaviour, said Nell Minow, a US corporate governance expert.

Mr Hurd resigned under pressure a week ago after admitting that he did not “live up to the standards and principles of trust, respect and integrity that I have espoused at HP”. The company said he had left by agreement with the board over expense violations and a “close personal relationship” with an external contractor that contravened its code of conduct.

Mr Hurd’s severance includes $12m in cash plus stock benefits. The value of the latter cannot yet be calculated, but the total package probably comes to about $40m, according to one person close to the situation. The Hurd pay-out has drawn criticism from governance experts and has already become a focus of the first shareholder lawsuit filed against HP over his departure.

“If it was really about Hurd submitting a misleading expense report, I’m sure they could have found a lawyer somewhere in America who thought that justified firing him without a dime of severance,” said Gary Lutin, a US shareholder activist.

HP’s board could have sought to fire Mr Hurd for cause even without a clear definition of circumstances in his contract, experts said. However, that would have made it far harder to defend any legal action from him later to recover his severance. “The squishier the definition, the harder it is to prove cause,” said Charles Elson, of the University of Delaware.

Even if Mr Hurd’s contract had not contained the loophole, HP would probably still have been unwilling to fire him over the ethical lapses he admitted to since it might have “led to a slugfest over the expenses”, Mr Elson said.



Latin American airlines to merge
By Jude Webber in Buenos Aires
Copyright The Financial Times Limited 2010
Published: August 14 2010 00:32 | Last updated: August 14 2010 00:32
http://www.ft.com/cms/s/0/06b7924a-a732-11df-90e5-00144feabdc0.html


Leading Latin American airlines LAN of Chile and TAM of Brazil have announced merger plans to form the world’s biggest airline in terms of market capitalisation in a bold bid to position themselves for future growth a fast-consolidating global industry.

“As the world industry consolidates we cannot stand still,” said Enrique Cueto, the CEO of LAN who will also be CEO of the new parent company, to be called Latam Airline Group.

He told a conference call that emerging markets, and Latin America in particular, were seeing dynamic growth in demand, adding: “Now is our time to capitalise on this trend.”

Under the non-binding memorandum of understanding signed on Friday, the two airlines – market leaders in their respective countries – will team up in a all-share deal which will see LAN offer 0.9 of its shares for every TAM share – a premium of some 47 per cent.

“This will create the largest airline globally in terms of market capitalisation, some $12bn,” said Nicky Courts, head of sales at Celfin Capital, a Santiago brokerage.

In terms of passenger airlines, it will rank 15th in revenue terms and the joint 10th in passenger numbers, according to LAN and TAM.

The two airlines, with combined 2009 revenues of $8.5bn, will each retain their own brands but operate under a merged parent company.

Shares will be listed in Chile and the US and it has plans to list on Brazil’s Bovespa. TAM share will be delisted. Mauricio Rolim Amaro, vice chairman of TAM, will be the group’s president.

Alejandro de la Fuente, LAN’s chief financial officer, told the conference call: “We are not only the right partners but we are partnering at the right time.”

The new group says it expects to achieve “real and achievable” annual synergies of $400m through alignment of passenger networks, growth in cargo operations in Brazil and internationally and cost savings.

The two airlines carried a combined 45m passengers and 832,000 tons of cargo in 2009. Merged, they will operate 115 destinations to 23 cities, with a fleet of 220 planes and 40,000 employees.

The companies say Latin America is seeing increased airline demand and the merger will allow faster growth and more profitability than either company could have achieved alone. Lan operates in Chile, Peru, Argentina and Ecuador, while TAM operates in Brazil and operates TAM Mercosur, which also serves Paraguay.

The new group sees growth coming from routes from Brazil to Europe and Africa; from Peru to North and Central America; new hubs to connect to Europe and the US; and in cargo, taking advantage of Lan’s expertise and TAM’s footprint.

The two companies have long been discussing closer co-operation and have code sharing deals, but Friday’s announcement of a merger was nonetheless a surprise. The deal is subject to regulatory and shareholder approval, which could take six to nine months, but executives said a binding deal should be agreed within two to three months.

However, the share ratios announced on Friday will not be subject to change.

“Together LAN and TAM will be able to offer new destinations that neither company could have supported on its own. This will position us to compete with the foreign carriers that continue to increase serviceds to our region,” said Maro Bologna, CEO of TAM, in the statement.

TAM’s controlling shareholders, Tam Empreendimentos e Participacoes, will retain control of the Brazilian company with an 80 per cent voting stake and will also own an undisclosed stake in LAN.

LAN’s controlling shareholders, Costa Verde Aeronautica SA and Inversiones Mineras del Cantabrico will also retain control of the Chilean airline, TAM said.

The airlines said the planned deal complied fully with Brazilian rules limiting foreign ownership to 20 per cent and they would comply if there were any changes to that in future.

TAM shares rose 27.6 per cent to close at 36.20 reais in Sao Paulo. LAN rose 7.7 per cent to 13,900 Chilean pesos in Santiago.

LAN is a member of the Oneworld alliance, while TAM is a member of Star Alliance, but the companies said it was two early to say how the question of alliances would be managed under the combined structure.

Additional reporting by Jeremy Lemer in New York






Oracle’s threat to Google mobile push
By Richard Waters in San Francisco
Copyright The Financial Times Limited 2010
Published: August 13 2010 18:36 | Last updated: August 13 2010 18:36
http://www.ft.com/cms/s/0/19f004f0-a700-11df-90e5-00144feabdc0.html


The legal war over software rights that Oracle launched against Google late on Thursday could hamper the internet company’s successful push into the smartphone market, industry analysts warned on Friday.

Oracle’s aggressive move was also a “nuclear deterrent” that would spread much more widely across the mobile devices industry, with long-term implications for many handset makers and carriers, said Mark Driver, an analyst at Gartner.

The lawsuit, filed in federal court in San Francisco, accuses Google of patent and copyright infringement over the inclusion of parts of Oracle’s Java software in its Android smartphone operating system.

Android, which Google makes available free of charge, has been taken up by handset makers including Motorola and HTC, and in the most recent quarter phones carrying the software overtook Apple’s iPhone in global sales.

Oracle acquired rights to Java, a set of tools that make it easier for software developers to write applications that run on many different operating systems, as part of its purchase of Sun Microsystems earlier this year.

The lawsuit shows that Oracle will seek to make more money from the rights to the widely used Java than Sun did, analysts said.

“You’re definitely going to get a stronger licence enforcement policy – and rightly so, perhaps,” said Al Hilwa, an analyst at IDC.

The lawsuit also serves as a warning to handset makers that are using Android and could tilt the balance in favour of other operating systems, including Microsoft’s Windows Phone 7 software, which is due to be launched later this year, Mr Hilwa said.

If Google is forced to pay Oracle for the use of its technology, it could lead it to charge for Android, also making the software less attractive to handset makers, he added.

Many handset makers already have a licence that allows them to use Java. The prospect that Android would continue to grow fast raised the danger for Oracle that it would lose its power to charge a royalty on many new handsets, said Mr Driver.

However, some experts also warned that Oracle’s lawsuit could backfire, encouraging companies to look for alternatives to the Java technology.

At the time it bought Sun, Oracle executives said they would tread carefully in how they exercised their Java rights, since a heavy-handed approach could undermine the software’s standing as a de facto industry standard.

Legal battles over patents are rare between the technology industry’s leading players. Most maintain large portfolios of rights and have enough mutual self-interest to agree broad cross-licensing deals that give companies access to each others’ patents.

Oracle’s attack on Google highlights the internet company’s relatively weak patent portfolio, Mr Driver said.

www.ft.com/google