Media

Digital-based media will increasingly command consumer time and spending over the next four years, according to global private equity company Veronis Suhler Stevenson (VSS).

In its annual report, Communications Industry Forecast 2005-2009, VSS forecasts the average person will spend 10 hours a day with media and that annual spending per person on media will break $1,000 by 2009.

The report identifies four main causes of the major shifts in spending patterns and consumption habits: technology innovation, the emergence of new media, quickening audience fragmentation, increasing demand for customisation and tighter focus on return on investment.

James Rutherfurd, executive vice-president of VSS, said: "We are facing a unique transformation of the communications industry, the likes of which have not been seen in decades. During the past five years, when this ‘new media order‘ began to take shape, we have seen a gradual shift of time spent away from advertising-based to consumer-supported media, as well as a steady transfer of spending away from traditional to new media advertising."

New media advertising is expected to continue to attract ad spend in 2005 with growth of 20.7 percent compared with only 3.2 percent for traditional media. Going forward, VSS believes marketers will shift more dollars to new media in a bid to reach younger consumers. Spending on new media is forecast to reach $68.62 billion by 2009, compared to traditional media‘s $192.28 billion.

Spending on consumer magazine advertising is expected to increase 5.5 percent to $12.79 billion in 2005, while copy sales are projected to increase 3.1 percent to $10.65 billion. Overall, ad spending on consumer magazines is forecast to grow at an accelerated pace during 2005-2009 when compared to 1999-2004 period.

Specialty media and marketing services, partly driven by customer publishing, is on track for another strong year in 2005, with an expected 7 percent gain in marketing spending to $275.11 billion.

Total spending on business-to-business magazines, including advertising and circulation, increased for the first time in four years in 2004 - growing 2.2 percent to $10.29 billion compared with a decline of 0.9 percent last year. Growth in the sector is expected to be modest in the coming years. Falling circulation will be partly offset by growing advertising.

Business e-media matures

Electronic media is clearly becoming more than an afterthought in the b2b marketing world. The original model for e-media in the ‘90s, according to VSS, was focused on generating advertising. But as e-media has matured, the model has become more comprehensive, including content and databases that serve as directories, as well as banner ads, paid search and classifieds.

During the first half of 2005, e-media was the fastest-growing part of b2b sector - representing 7 to 10 percent of total revenues, compared with 3 to 5 percent in 2000-2003. It‘s a trend VSS predicts will continue as more companies add online services and ROI measurements continue to improve.

Spending on e-media is forecast to grow at an annual rate of 18.7 percent from 2004 to 2009, reaching $3.47 billion. Recent industry acquisitions support this trend. In August, specialist business information provider, Incisive Media (currently operating in seven markets) bought Search Engine Strategies (SES) for $43.0m (£24.3m).

In the same month, United Business Media, whose global brands include PR Newswire, and CMP, acquired three online and events businesses for $56.5m. Another partnership in September saw Reed Business Information‘s form a relationship with eBay, to provide business users with provisional access to online construction information and data.

Markets

Bull markets are born out of pessimism, grow on scepticism, mature on optimism and die on euphoria" John Templeton

the painful lessons of the past:

F

Equity markets follow credit markets

Equity markets crack on average six months after credit markets do.

Credit spreads widened ahead of of the crashes in 87 and 2000.

However equity and credit markets are more conected today.


Why
One of the biggest arbitrage trades in financial markets history is the massive use of cheap debt to buy cheaper equity.

The arbitrage gap still exists so the bull market is still intact.

At the last peak the bond yield was nearly 9% and the earnings yield was just 3%.

St present the earnings yield for both has converged to about 6% on both.

BBB bonds yields might have to rise 2% points

At the earnings yield of 4 that would involve the PE rising from 17 to 25 which is a very bullish sceneraio

However liquidity is another factor

The growth of nations

South Korea 1970, already enjoyed a decade of growth at close to 10%. It continued to grow close to that rate for a another quarter.

India was almost sealed from the world economy. Indias annual growth in income per head has fallen.

The priority in development is strong growth, which industrialisation can deliver.

Industry is the sector in which rapid and sustained rises in productivity are feasible.

IAS 36 Goodwill amortisation

Writing off goodwikll has the limited virtue of limiting the acquisition price, becuase the amortisation required reduces net profits.
Under IAS an acquiring company no longer has to amortise the goodwill of the business it acquires.

Bank manager mode

The equity market has been in classic bank manager mode: pressing money on those who don't need it, and turning away those who do

mark-to-market

mark to market CDOs

FInancials 2 (US)

Consider that the Q2 median earnings growth for financials so far, based on companies that have reported, is 17%, according to Zacks. That's much slower than 2006's hefty gain, but 17% puts financials second in 2007's Q2 horse race, so far

Financials

In an age of globalized finance, the business of money has been spectacularly attractive, and the assumption will continue to prevail until it won't.

Numico

Danone expects only to beat its weighted cost of capital six or seven years after the deal.

Oil an equities

Oil up 43%
Long term futures interest at all time high
Last Years crude price pike helped to depress glovbal stocks.
Good for oril stocks but bad for equities

Growth versus value bias

For years desperately low real yields have pushed pension funds and life companies into risky assets, as a means to fulfill promises to pensioneers and policyholders.

If corporate spending pushed up real yields, promises can met with lower risk.

For pension funds higher real yields mean lower liabilities through a higher discount rate.

Institutions would no longer have ths same appetite for CLOs.

Utilities today command a higher multiple than ths market (17 times versus 13 times), due to the institutional hunger for - inflation proofed- yield, private equity and infrastructure funds.

Higher investment should result in higer earnings. In normal times growth commands a higher premium than value.

In the end we might see and end to the huge bias towards value rather than growth stocks which characterised the market since 2000.

Chips

Chip production relative to chip inventories, the "SPI" index, is set to rise steadily until April of '08, and the Philadelphia Semiconductor Index may follow upward.

Shimada says in the last decade, the SOX and other chip indexes have followed the rise and fall of the SPI pretty closely.

Spiralling affluency in emerging markets

Richemond article

Food prices will rise between 20-30%

over the next decade supported by the growth in bio fuels and increased food demand from emerging markets.

The US economy isd bouncing along ...

at a a steady underlying growth path.

Teh US might stioll be thrown either by continued bad news from housing or an overly sharp tightening of credit markets.

However, coprporate spending and the labour market at the moment seem to be very robust.

US quarterly outlook

S&P consensus earningsgrowth expectations are calling for only 4.4%, given that GDP is expected to grow 3.7%, compared with 7.8% in the first quarter on the back of a 0.7% growth of the economy.

Given overseas economic strngth, a weaker dollar and a share buybacks we are likely to see positive surprises.

2008
political uncertainties
growing economic nationalism
protectionist attituted in the US and Europe
Unfavourable change of taxes

Stocks and wages

The ability of American companies to produce powerful earnings growth thas come from the interrelated effects of
- globalisation
- technology/productivity/outsourcing/off-shoring and
- the decline of union power.

Since labouyr costs comprise roughly 70% of US corporate costs, there is a very tight inverse relationship between profits and labour costs.

Anything that mighht disrupt the labour/earnings equation ends up being crucial to the stock market outlook.

NAV reits

In the Us reits are trading 8% below net asset value.

Land Securities and Britosh Land are traing below NAV by as much as 20%.

This means is that sharehodlers suspect that NAVs could be heading downwards.

This is a particularly bearish sentiment given that the best propoerty companies tend to create value through

- development
- refurbishment and
- land deals,

even when times are hard.

Interest rate swap

insurance against rising interest rates in combination with mortgages

Capital ideas evolving

The ideas that currently govern the way money is invested

1. The concept of balancing risk and return through tracking the mean and variance of market of market prices


2. The Capital asset pricing model that divides the return of a securityt into "beta" of sensitivity to the market and "alpha" an uncorrelated return

3. The efficient market that holds that the market always attempts to incorporate all available information

4. Black Scholes: which makes it possible to piut a notional value on options

Behavioural Finance suibstuitue insights from experimental psychology for the assumption of traditional economists athat people always act rationally.

CFO 2

Today, CFOs must actively contribute to their company’s development.

It is no longer enough to be a wizard with the numbers.

As an independent business partner, the CFO must help the company and its businesses
to develop their strategy by making the financial implications of the strategy transparent.

In regular review meetings, he or she is pointing out whether the business is headed in the right direction, where changes are needed, and where risks or new opportunities are emerging.

Thus, the CFO drives the design of structures, systems, and processes.

From my personal perspective as the CFO of SAP, this means that I have to proactively support our transformation from a pure software-solution vendor to a provider of both business application software and a business process platform that is increasingly focused on volume business.

To proactively support the lines of business during this transformation, we need time to concentrate on strategic topics.

One way we are making that space is by migrating transactional and standardizable finance processes to shared service centers. Service level
agreements ensure that these processes, which form the backbone of any finance organization, reflect best
practices. This allows us to move from processing transactions to supporting decision-making and performance
management.

At the same time, however, there is inherent tension in the role of the CFO as he or she is not only a business partner. The other role is that of a steward who is responsible for safeguarding the interests of stakeholders.

There can be no compromise on compliance. The quality of corporate governance will be a source of differentiation in its own right.

What does this dual role imply from an HR perspective? Finance people must not limit themselves to the back room; they must be happy working in a customer-facing environment, but still in a compliant and disciplined way.

Therefore, the CFO must look for people who enjoy communicating and working in teams. If working in finance ever was purely administrative and repetitive, it certainly is no longer that today.

Stakeholders not only expect excellent corporate governance; they also want an objective, transparent picture of the company, its prospects, and its risks. To meet all these expectations, the CFO and the finance staff need a profound understanding of their company, what the drivers of its market value are, and which risks and opportunities it is faced with.

CFO

The CFO is pivotal to restoring public trust and that he or she has to serve as an important bridge between the CEO and the board on governing matters.

In addition the CFO must expand the role of economic corporate steward, daring to dissent when necessary, and must serve, in his or her strategist role, the CEO with effective insights on the affairs of the company and its businesses.

In a survey of CFO Europe, 71% of the CEOs reported, that their CFO is their closest business confident.

But the new CFO-mission is not an easy one. CFOs have to fulfil various, partly contradicting tasks in parallel. They have to

Re-establish corporate trust and business integrit

Protect the company’s bottom line

Enable for profitable growth and shareholder value creation

Do more with less (increase the efficiency and quality of financial operations)

1. Restoring corporate trust and business integrity through a world-class corporate financial infrastructure

After a series of corporate scandals (Enron, WorldCom etc.) trust of investors in corporations has sharply declined – a fact that is threatening a company’s capability to finance its activities and ultimately, its “license to operate”. The Chief Financial Officer (CFO) and the finance function is playing a leading role in restoring corporate trust and business integrity.

2. Protecting the bottom line through extended transparency and dynamic performance management

After the economic boom of the 1990s, when most companies focused on top line growth at nearly any cost, many corporate executives are facing today, in the actual global economic contraction, a major challenge: declining sales figures force them to reduce costs in order to protect their bottom line.

This is putting the CFO and his finance team into center stage.

But today’s highly competitive and dynamic markets require companies to do intelligent cost reduction - cost reduction that is not hurting their existing growth potential, intangible assets such as human capital, intellectual capital or customer and business partner relations, and that is not putting their future at risk.

For this, corporate executives, business managers and controllers require extended information about current performance and about future risks and new business opportunities – beyond the transparency the traditional P&L and Balance Sheet delivers.

CFOs must react by providing new analytic tools that deliver not only accurate and timely information on current financial performance, but also on its drivers across the entire business.

One of the main objectives is to enable for more accurate forecasts, not just of financial performance but also of the underlying business drivers. Rolling financial and business forecasts are forming the foundation for dynamic performance management that help managers and executive to achieve their company’s performance targets in a dynamic business environment.

3. Enabling for profitable growth and shareholder value creation in a challenging business environment

Today, value creation strategies based on M&A activities, as applied widely in the 1990s, have come to a limit: when assets exchange at full market price no value added is created.

Still in some cases M&A and financial dealings can create value, but only if combined with accuracy and discipline in the evaluation and integration phase.

For most companies however, shareholder value today comes from internally generated growth and/or resource, cost and capital efficiencies.

But efforts in both areas work out only, if applied continuously - quick wins are exceptions. This also requires accuracy and discipline – unique characteristics the CFO brings to the table in the corporate management team.

So it is no wonder, that CFOs are involved more than ever in (the more seldom) M&A activities, are playing a leading role in strategy planning and execution, and in long term efficiency and productivity management.

A best practice in strategy management and corporate performance management is a portfolio management approach that takes into account the entire bandwidths of risk/return and all operational value drivers on the business unit level below.

This requires much more transparency for corporate management of the business units risk/return prospects and their value drivers than the traditional budgeting and financial reporting approach. The CFO is called to establish this transparency and to implement the tools and procedures to enable top management to make better trade-off decisions and to make the link between corporate and business units more productive.

Also the ability to manage for internal growth requires a deeper cut into the business: CFOs have to help business mangers to understand the economics of their businesses in order to create profits and value. For instance, they have to help them to understand customer requirements from an economic perspective and to select the appropriate service levels and products accordingly (as a result, customers requiring low service might be guided to buy commodity products only online).

Resource and cost efficiency is usually the result of continuous optimization work rather than of a one off event. CFOs have to establish and implement the procedures and systems to make that happen – for instance through continuous benchmarking as part of the performance management process.

And finally CFOs have to make sure, that created value is properly communicated to the financial community so that it can be recognized by outsiders and is reflected in the company’s share price.

CFOs under pressure

As a result, the CFO, usually the senior corporate executives with the heaviest workload already, finds his agenda even more extended and the pressure is increasing.

But in order to be able to fulfil their new tasks, implement the required financial control, assure current and future financial performance, and reduce cost of finance and increase at the same time the productivity of finance, CFOs have to depart from how they ran their finance operation in the past. In addition, many companies have weaknesses in their existing finance operations.

Many companies have significant weaknesses in their financial operations

Many companies have focused their investments for business process and systems improvements/innovation in recent years on business operations (CRM, SRM, SCM). As a result, most companies have significant weaknesses in their financial operations and most CFOs are concerned to catch up:

They have little confidence in their ability to predict future financials performance and liquidity

They are using outdated, inefficient and not integrated budgeting tools

They have extended closing period

They have high levels of financial working capital bound in accounts receivables and bank accounts

They have high processing and service costs

According to a recent benchmark study of The Hackett Group, cost of world-class finance organizations is 2.4 times lower than at average firms (0.43 vs. 1.05 percent of revenue). This is creating a tough benchmark for many CFOs.

How to make it happen?

How can CFO’s achieve significant cost savings and provide high quality financial services at the same time?

Everything starts with better concepts. CFOs first have to come up with more intelligent process and organizational concepts for finance and then they have to find ways how to depart from where they are today in order to realize quick cost savings that free up resources needed for the next step.

Best in class companies do not spend more on technology than average companies to achieve cost efficiency and high quality financial services. In fact they spend even a little bit less (see figure 2).

The key to this is:

- more intelligent business,

- finance and IT concepts whereas business/finance concepts have to be the starting point – not technology.

Or, as Peter Drucker phrased it:

“A new information revolution I under way. […]. It is not a revolution in technology, machinery, techniques, software or speed. It is a revolution in CONCEPTS.

So far, for fifty years, Information Technology has centered on DATA – their collection, storage, transmission, presentation. It has focused on the “T” in “IT”. The new information revolutions focus on the “I”. They ask “What is the MEANING of information and its PURPOSE?”

Fixing the IT landscape problem in order to create the foundation of the new financial infrastructure

Already, most finance functions have made a significant shift – driven by investment in information systems and shared service centers – toward being less resource intensive, more efficient teams, particularly in the area of transaction processing, allowing increased emphasis on decision support. In the future, finance will be even leaner.

With many tasks delegated to business managers or handled by shared service centers or external outsourcers, the finance staff will act as coordinators and offer higher value, adding more strategic services.

Standardized, integrated processes and systems will be embedded within the business, and they will be available globally to users who can operate them without needing to be aware of where they are located and maintained.

The critical role of decision support may be fulfilled primarily by managers outside finance. Finance professionals will adopt a new training and coaching role to transfer appropriate skills and techniques. The result: finance will become more virtual (see figure 3).

When CFOs and their finance staff have outlined that vision and defined the appropriate programs they are often confronted with a critical problem: the existing IT landscape does not keep pace with this vision.

It even does not allow to move forward and to do the first step, because the grown IT landscape with too many different systems and a very heterogeneous portfolio of incompatible applications, data structures, interfaces etc. is binding to much IT resources.

As a result, IT is not able to support the new finance initiative in a satisfying way.

So many CFOs have agreed with their CIOs to fix the IT system landscape first.

The objective is clear: to consolidate ERP (Enterprises Resource Planning) other critical systems in the company in order to safe maintenance costs (reduce TCO – Total Cost of Ownership) and to leverage this process to consolidate also the finance organization, finance processes and reduce the number of different processes, data structures and interfaces.

The benefit can be significant. According to AMR Research, ERP consolidation can lead to an overall decrease in IT maintenance costs of 25%. Other sources report costs savings of even 30-50%.

Figure 3: Moving to a new financial infrastructure require companies to fix their existing IT landscape first

Figure 4: A finance transformation projects is first and foremost not an IT project – it starts and ends with business, finance and organizational concepts

Options insider trading

Well-timed bets on call options, the investment of choice for traders tipped off to deals before they're announced.

Market makers are getting hurt because they're obliged, in return for reduced fees from exchanges, to create liquidity by quoting prices at which they'll buy and sell securities.

The firms rely on statistical odds to make a small profit on the difference between the purchase and sale prices.

When a trader buys an options contract knowing that the price of the underlying stock will rise, the market maker can't win.

SEC Lawsuits

While the U.S. Securities and Exchange Commission has filed at least 22 insider-trading lawsuits this year, including a case involving TXU options, market makers say the agency is just scratching the surface.

Market makers account for 44 percent of the options contracts traded in the U.S., according to Chicago- based Options Clearing Corp., which guarantees all trades.

In addition to Greenwich, Connecticut-based Interactive Brokers, the biggest market makers include Goldman, based in New York; Chicago's Citadel and PEAK6; and Susquehanna International Group LLP in the Philadelphia suburb of Bala Cynwyd, Pennsylvania. Spokesmen for Goldman, Citadel and Susquehanna declined to comment.

``There isn't a long list of market makers in options,'' said Andy Nybo, a senior analyst at Tabb Group, the Westborough, Massachusetts-based consultant. If some of the largest firms are sustaining losses, ``I would expect other market makers to see the same kind of activity.''

London Account

The TXU case reveals how sophisticated an options-trading scheme can be.

According to the SEC's lawsuit, Hafiz Naseem, an investment banker in New York at Credit Suisse Group, tipped off Pakistani financier Ajaz Rahim about the leveraged buyout of TXU in the weeks before the $32 billion deal was announced Feb. 26.

The agency alleges that Rahim, who was based in Karachi, made about $5 million by buying call options in advance through a London account with Switzerland's UBS AG.

Regulators claim Naseem leaked word of eight other transactions. Naseem has denied the charges. Rahim's lawyer has said he plans to contest the case against him.

'

Blink of an Eye

The 22 insider-trading cases that the SEC has initiated this year is more than the total filed during the 1990s and harkens back two decades to the days of Ivan Boesky, Martin Siegel and Dennis Levine.

The NYSE last year referred 111 incidents of suspected insider trading to the SEC for further scrutiny, exceeding the 98 it sent to the agency in 2000, at the height of the bull market. Through June 22, the exchange had referred 57 such cases to the SEC, including the one involving TXU.

Getting a complete picture of insider trading in options is impossible because the Options Regulatory Surveillance Authority, formed last year by the six U.S. options exchanges to police the market, won't provide data on its referrals.

A decade ago, brokers working on the floors of exchanges who received a suspicious order were able to warn market makers to hedge their positions against losses, said Peter Bottini, a former trader at the Chicago Board Options Exchange who's now an executive vice president at online brokerage OptionsXpress Holdings Inc.

Now, with the advent of electronic trading, thousands of contracts can change hands across the country in the blink of an eye.

Dow Jones Takeover

``Between the anonymity of electronic trading and the fact that there's such large liquidity, it's very easy to trade relatively significant quantities of options,'' said Steve Sosnick, a risk manager at Interactive's market-making unit, Timber Hill.

Hulsizer says PEAK6, which makes markets for options in more than 2,000 companies, was stuck with ``several millions of dollars'' in losses after selling calls on shares of Dow Jones & Co. before News Corp.'s $60-a-share offer for the newspaper publisher was disclosed on May 1.

Those contracts obliged PEAK6 to sell shares in Dow Jones at below-market value after the stock surged 55 percent.

The day before the bid from Rupert Murdoch's News Corp. became public, it cost 35 cents to buy calls with the right to purchase Dow Jones shares for $45 through September. That contract's price shot up 3,330 percent to $12 after the news broke.

I

Securisation

Securitization, as you might have guessed, happens when you take a pool of assets that earn interest, like car loans, mortgages, or credit card debt, and package it into securities.

For example, Wall Street might take $800 million worth of credit card debt from 80,000 different people and package that into credit card asset backed securities (ABS).

Whoever invests in this ABS gets paid dividends from the credit card borrowers as they pay their interest and principal.

Wall Street gets a fee for overseeing this whole process, and the investor gets a yield-earning asset.

Why securitization?

Standardization is one of the main advantages of securitization.

It'd be too much of a hassle to go to the supermarket and buy individual eggs. Instead, farmers package them into cartons of 12. Similarly, investors who seek a nice yield don't want to go out and make individual auto loans to Bob, Billy, and Nancy. It's much more convenient to buy a slice of a prepackaged pool of loans.

Diversification is another important advantage of securitization. By taking a huge pool of credit card debt and securitizing it, the ABS investors aren't exposed to a single credit risk, but thousands or hundreds of individual credit risks. This is much different than investing in, let's say, Home Depot bonds, where a very deep and prolonged housing downturn might expose a concentration of credit risk.

Flexibility is also key to the securitization process. Securitizers can do a lot of different things with these pools of loans to meet investors' preferences. By customizing the securitization according to customer demand, they ensure customers can get what they want -- and thus will be willing to pay more for it, which lowers funding cost and helps with asset and liability matching.

Examples
Suppose for some reason I have $1 billion worth of junk bonds. A lot of institutional investors -- like banks, insurance companies, and pension funds -- aren't allowed (or don't have the appetite) to invest in non-investment grade bonds because they are deemed too risky.

However, these institutional investors control the big money, and not being able to sell to them is a like not being able to sell alcohol to people between the ages of 21 and 31. It sharply reduces the pool of possible customers.

However, if I repackage these junk bonds into different classes, where I sell, let's say, $800 million worth of securities (thus repackaging them into a CDO), but I pledge all $1 billion, then those securities are now overcollateralized (their collateral value of $1 billion is $200 million more than the $800 million of the CDO securities sold). Because of the $200 million cushion, that $800 million in CDO securities is very safe and can earn an AAA rating from Moody's or S&P, and this lets me sell them to institutional investors.

As you can see, securitization greatly expands the market for assets that, on an individual basis, are very difficult to sell. An individual auto loan or mortgage is very illiquid; once securitized, it becomes much more marketable.

Securitization risks
There was a time when, if you originated an auto loan, you basically just kept the loan and hoped the borrower paid you on time. Nowadays, loan originators can originate loans and sell them to Wall Street securitizers for a gain on sale or securitize the loans themselves. That also means the originator often isn't the ultimate bearer of the credit risk.

If the originator knows he can get rid of the loan, this might be an incentive to push for higher volumes at less disciplined underwriting standards -- a practice that greatly contributed to the subprime meltdown.

However, securitization also allows financial companies to earn much higher returns.

For example, companies like Capital One (NYSE: COF) and Countrywide (NYSE: CFC) can take a bunch of their loans and securitize them.

Capital One takes a big pool of credit card debt, securitizes them into credit card ABS, and sells them to other people, like banks, pension funds, hedge funds, and insurance companies. The ABS investor gets the right to the yield, and Capital One often retains the rights to the excess cash flow (or any cash flow left over after the ABS investors are paid). The same process holds for mortgage loans in Countrywide's case.

The key here is that Capital One only retains a tiny portion of the ABS, so its credit risk is basically gone.

This frees up its equity so it can go out and make more credit card loans and then securitize them again.

Each time Capital One securitizes loans, it gets the rights to more residual cash flow.

Wal-Mart wants to sell its inventory as quickly as possible, because it earns a small margin on each item sold, and the more times inventory is turned over (sold), the more profit Wal-Mart makes. Similarly, financial service firms like Countrywide also want to sell their inventory of loans several times -- via the process of securitization -- to improve their returns.

Securitization is complicated, but understanding the mechanics will help you evaluate many financial companies.

Financials sector

Banks borrow at short term rates and lend at long.
So they shoulf benefit from a normalisation of the yield curve.
Overall the FTSE World Financials Index is only up 3.2%, compared to the overal index up 8.5%.
The implosion of several US subprime mortgage lenders this year scared the market.
There are fears that institutions will have to mark down the value of subprime loans on their books.
Securitsed subprime mortgages are illiquid. If subprime assets are unsellable, traders might have to sell other assets.

Melrose debt financing

Melrose plans to borrow up to 4 times EBITDA.
Many private equity firms are comfortabkle with 8 times EBITDA.

Torex asset sale

for less than half of Torex's enterprise value
Ceberus paid
225£m for the operating subsidiaries after the
holding company was put into adminstration
The price paid covered only senior debt and meant that other bondholders and shareholders received nothing.
Torex had a market cap of £520m 18 months ago and was worth 173m when the shares were suspended
The first solution was equity raising. However that would have only brought 20m
Customer were sitting on their hands after the serious fraud office started the investigation
The banks did not force Torex into the sale, but agreed to injecft a further 20m in April on condition it would support the company in the sale.

Credit Default Swaps

BA was upgraded to investment grade
after
debt reduction
a proposed pension deficity solution
capital structure
cash flow improvement
CDS fell by as much as 25bp to 55bp
Insurance against the nin payment of debt

Yield curve

Long term interest rates - the rates that matter - are set by the markets and not by bankers.

The bond and currency exchange markets are crucial balancing systems for the worlds economies.

Market

Interest rate risk

Financials

Discretionary Consumer

Cyclicals engineeruing cap goods , construction

Banks

Short US commercial banking sector due to mortgage and consumer lending risk
The slope of the yield curve is still to low
US investment banking sector is different.

European Banks look attratively valued.

Border between banks and insurance is blurring.

Microsoft new competition

The walls are coming down between the browser and the computer desktop.

Armed with Web apps that are maybe not as good as Office, but seem good enough and are free to consumers, the barbarians of the online world are at the gates of Microsoft's offline kingdom.

Microsoft is facing a Web triumvirate trying to muscle in on its domination of the desktop.

Google Gears, will enable Google applications such as Gmail, Calendar, Docs & Spreadsheets and Reader to be used without an internet connection, although only the last named will initially have this offline capability.

Google is also encouraging developers to make 1,000s of browser-based applications work offline - storing information on a computer's hard drive or local network as well as in the internet "cloud".

The ability to look at your Inbox or write a Word document without being online has been a key differentiator of Microsoft's Office suite.

At the same time, Google has tried to argue it is different from Office because it has created applications meant for sharing with other people.

But if the programs are used offline, this distinction dissolves and Google's applications become direct competitors to Microsoft's.

The other members of the triumvirate are Mozilla, creator of the Firefox browser, and Adobe, developer of the Acrobat portable document format (pdf) and Flash media player that have become standards of the web.

Mozilla is planning to support the offlining of Web applications in the next, 3.0 version of Firefox and is already experimenting with this.

Adobe will introduce Apollo later this year, a platform that enables web apps to run outside the browser on a PC, mobile phone or other device, including when they are disconnected from the net, albeit with more limited functionality.

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Shareholder adctivism

At the turn of the 20th century, large active shareholders like J.P. Morgan sat on the boards of companies to monitor their performance and to protect their investments.

The 1980s saw a revival of investor activism in the form of hostile takeovers and the rise of LBOs.

The need for active monitoring stems from an old problem: the separation of ownership from control (in large, publicly traded commercial enterprises), resulting in ineffective control of managers with, in many cases, negligible ownership stakes.

Active investors like private equity firms and some hedge funds attempt to address both the information and the control problems that confront the absentee owners of publicly traded enterprises.

Hedge fund activists buy large minority stakes in public companies, and so achieve "influence" and, in some cases, a measure of control.

Private equity investors effectively combine ownership and control by purchasing public companies, or their divisions, thereby eliminating the role of public shareholders.

The result in either case is an improvement in corporate efficiency and increasing corporate values by reducing the gap between ownership and control.

The presence of major shareholders, and oftentimes on boards, means that tough operating and financial decisions are less likely to be avoided or influenced by parties with little or no capital at risk, such as investment banks, “independent” board members, or proxy advisers.

Rising inflation expectation

Inflation expectation are closely correlated with actual inflation.

However recently in teh UK the rise in inflation exxpectation was larger than could be explained by the CPI change.

The BOE explains that givven the wide variation in rice changes, households' perception of inflation may be influenced more by the prices of certain highvisibility items such as food, gas and electricity prices.

When these prices were rising, households' perceptions of inflation might increase more than the aggregate inflation rate, which might in turn feed through into higher inflation exxpectation.

US bonds

The treasury bond yield is the cornerstone for valuing equities.

Since 87 amid repeated cycles, bond yields had oeaked at progressively lower points.

Reflecting steadily growing optimism that inflation had been squeezed out of the worlds system for good.

1994
In 1994 the Fed began raising rates from 3%
Within a year teh Fed funds rate had doubled to 6%
The 10yr yield rose to a peak above 8% in Nov 94, from 5.74 in Jan.
US stocks were flat in 94 and then went on to their rally.
While this meant severe losses for bond investors the riples brought a series of crises in the world's riskier markets, starting with Mexico.
However todays rise is not a inflation scare as in 94

Histrically 10yr rates have ben 0.8% above the Fed fubnds rate.

The latest data show that Asian central banks havestoped buying bonds but bought equities and corporate bonds instead.

Sites

Lunch 2.0 i

Justin.TV broadcast live over the internet

bub.blicio.us was also filming it for the net.

Veodia, allows bloggers to broadcast live in professional quality

PodTech, the net has wall-to-wall video coverage of anything happening in the Valley.

Widgets

Slide.com has just been accorded the status of Number 1 widget site by comScore.

There may not be that much money at stake just yet, but the advertising dollars will surely follow as distributed media consumption becomes a wider habit.

Advertisers have every reason to turn to widgets as a new way to reach a dispersed audience across the Web.

As Levchin says, "they have massive reach and a high level of engagement."

From nothing 16 months ago, Slide now reaches an audience of 117m through its widgets, according to comScore (this is based on the number of internet users who at least once a month view a Webpage with a Slide widget embedded in it.)

Many widgets are Flash-based "rich media" applications that cry out for attention.

So how will the cash be split between these rich media interlopers and the sites that play host? MySpace's none-too-subtle move to block Photobucket a couple of months ago was a clear indication that the stakes here are high. Perhaps that was one reason for Facebook's recent decision to open itself up fully to the widget-makers: it could steal an early lead in the race to attract Web developers as social networking sites evolve into broader online platforms.

Levchin predicts that two or three precedent-setting deals will eventually lay the groundrules for this new economy. His suggestion: pretty much an even split of the proceeds between widget-maker and host. As MySpace's graphic demonstration showed, though, the sites that own the eyeballs may think they deserve a bigger cut than that.

US Bond Market Outlook

The sell of in the US bond market had a cyclical trigger

The market unwounded expectations of a fed easing as economic data has been stronger than expected.

Normally when the market is pricing in a less friendly Fed this leads to a bear flattening of the yield curve with short rates going up more than long rates.

However in this case we had a bear steepening of the yield curve.

Short rates went up on the back of stronger data and less expectation of a fed cut but longer rates have gone up even more.

This reflects a secular expectation that the conundrum will be reversed.

Foreign central banks will buy less bonds. Central bank reserves will be moved be into sovereign wealth funds, including equities. The case in China where they announced to invest into a private equity fund is one example. There is a recognition that foreign central banks will not always subsidise the belly of the curve.

The US economy is going to weaken from the Q2

1. Recession and property market recession is alive and well
2. Core inflation moves south of 2%

Therefore the next move of fed will be down

1. We are bullish on the front end of the yield curve.

2. Reflecting our believe that the term premium is coming back into the slope of the curve, we do not have anything fond to say on the long end of the curve.

General

The US is a very resilient economy
In 1987 many investors shorted the US market due to worries about consumer spending
20 years the American consumer managed to still hang in.

Euroean equities long
growth and currency basis stay long on Europe
three years good run
Q1 was good in Europe
more difficult for equities to rise in a rising interest environment

Cost savings on banks
What internet and technology has done to financials is that you can squeeze a lot of cost out

will under sarkozy french market be watched more?

Utilities takeovers
UK utility consolidation
almost all sold to Euroeans
5-6left, there were 30 when electricity and water were flaoted

Defence
robust defence spending
consolidation
Babcock

Short sectors
Consumer is coming under pressure

People arer gambling that asset prices are always rising.

Inflation and interest rates

If inflation would be calculated as it was done before the Clinton administration the CPI would be up 6%.

Equities and Bonds

reduces the NPV
raises interest exenses
bonds become more attractive compared to equity

Bonds are more sensitive to inflation

Fed Model for finding fair value of stock market
earnings yield on stocks should follow the bond yield

The fed model worked very well between 1977 to 97

But over the past 20 years bond yields and PEs moved together (teh opposite)

Other opinion: there is no relationship at all between bond yields and PEs

When investors are not worried about inflation (as now) the Fed Model does not work.

When growth is strong, bonds are less attractive than equities as payments do not increase.

There are still no great worried about inflation. So when growth prospects improve as in recent weeks bond yields go u as well as equities.

Who deserves the credit for Germany's recovery?

GDP 2006 2.8% after a decade of stagnation
1 million people less on unemployment
3% rause in VAT will help to balance the budget
190bn trade surplus as germany is increasing its exports

Bundesbank
- Real wage cuts in form of longer working hours and wage cuts. Labour costs have fallen sharly in Germany in the last decade
- Corporate restructuring

Like the UK recovery of the 80s or the Dutch one od the 90sw, the german recovery has been in large part a matter of breaking labour's stranglehold on the economy.

All these changes are neoliberal

It is the changing reality of the economy that drives the changing philosophy and not vice versa.

Blinkx lc

Blinkx is a video search engine company that aggregates video data from across the web.
The company boasts an index of 12 million hours in video content.
Blinkx plc was created when the company was spun-off from Autonomy and then set a price of 45 pence per share.

With the takeover, Autonomy is spinning off its consumer division (the technology), merging it with Blinkx Inc (the video search site).

Blinkx founder and CEO Suranga Chandratillake—a former U.S. CTO of Autonomy—told Search Engine Watch in 2005 that Autonomy didn’t have any equity in the search site, but was providing the search technology behind the service. Autonomy has exercised an option to take over the consumer site Blinkx

The technology that powers the site uses formulae to recognize patterns in pictures and sounds, unlike many video search engines that rely on text

Blinkx has striking partnerships with ChaCha, Quintura, the National Geographic Channel, Portfolio.com, Break.com, VideoJug, Motion.TV, YouAreTV, QVC, NBX, the World Fashion CHannel, and several other companies

The company has headquarters in San Francisco, California and London, England. I found the financial information data on PaidContent.

As stocks were being traded, the price rose to 67.5 pence per share. This cause the video search engine to be worth £180 million ($355 million). The site had about $10-12 million invested in it since it founded in 2003.

What the company will do with this much money now is still a mystery.

Google

Core story of Google
-When people go to the internet and want to buy something, they start with Google to search, and to look for things in e commerce.
- Today, Google has 1% of the global ad market.
- Given the way consumer habits are changing, going more and more to search to start looking for things to buy, why can't this be 10% to 15% over the very long-term in terms of share.
- If you look at where we were in 1950, television was only 3% of the total ad market. Today it is about 25%.
- We think total online advertising will be 25%, and Google will be a pretty big share of that.

Google announced its $3.1 billion deal to buy DoubleClick.
DoubleClick is a key asset.
Doubleclick is the leader in display advertising as well as the top aggregator of consumer data.
Within days of the deal news breaking, Google competitors Microsoft, Yahoo and various others began beating the anti-trust drum, loudly complaining that a merger could create a company too powerful on the internet.

But since then, a lot has been been happening in the online advertising world these past few weeks.
1. Microsoft bought Aquantive for $6 billion
2. Yahoo bought Right Media for $680 million
3. 24/7 was acquired by WPP for $679 million.

The online advertising market is hot.
$40 billion, growing 20% year-over-year for the foreseeable future
and there's $600 billion in overall advertising on a worldwide basis.

Microsoft's mega-merger with aQuantive, offering an 85% premium to yesterday's closing price
1. Microsoft simply hasn't been able to come up with any effective formula in trying to take on Google, or even trying to stake any kind of meaningful claim in the online advertising market
2. That's if the company is successful in integrating the disparate aQuantive businesses into key Microsoft initiatives like "Live," "MSN" and many others.

Now the attention shifts to one of the other key players in this sector: ValueClick,
Valueclick rose 11% in sympathy of the aQuantive deal.

Over the past year, Google shares haven't done much of anything.
So you might expect a fair amount of frustration as the company continues to shell out big bucks for major, yet very controversial deals like YouTube ($1.6 billion and fraught with copyright litigation) and DoubleClick (a deal that some say could encourage a US Department of Justice anti-trust investigation.)

Google is a dual-class share company. Shareholders have to expect that the company will make decisions and they have no voice or influence in how those decisions are made.
Class A and Class B.
One matters; the other doesn't. Sergey Brin owns 28.6 million shares; Larry Page 29.1 million; and Schmidt holds 10.7 million shares. The three together control well 65% of the voting shares
With their Class B shares, the three executives control 66.2% of the vote. Shareholders have no voice.

Q1 Google continues its aggressive expansion, but isn't sacrificing profits to do it.
Earnings jumped 69%, and revenue better than 60%.
Google hired about 1,600 new workers over the past quarter -- 200 more than the Street anticipated
And still managed to beat gross operating margins, reporting 49% instead of the 48% analysts anticipated.

Youtube
Youtube was so new, and so small, but because we now know that the company only generated about $15 million in advertising revenue last year.
Sure, the company has the eyeballs; 135 million visitors, a billion video views every month, growing at a staggering 1,300% annually.
YouTube has the numbers, but not the revenue. And there's been no clear strategy vision offered up by Google as to how it plans to "monetize" the YouTube property
If major, commercial content providers start to leave Google and YouTube for online distribution projects of their own, YouTube runs the risk of becoming marginalized as a kind of Funniest Home Videos for the net
Youtube will always feature user-generated, homegrown content that will attract the eyeballs, but that's probably not the "niche" position Google envisioned when it came up with the $1.6 billion takeover offer.

Things like the $1 billion copyright suit filed by Viacom.
When Google acquired YouTube, they set aside a substantial amount of money to cover copyright liability
Google says its new "Claim Your Content" software debuting on YouTube shortly will make that lawsuit irrelevant.

Wireless
Google plans to enter the wireless business with a free, advertising-supported cell phone that the company would sell, using wi-fi AND cell technology.
Andy Rubin, a co-founder of Danger Inc. the company behind the wildly popular smartphone "Sidekick" from T-Mobile.
The fact that Google would be entering a whole new business would generate a lot of enthusiasm
The phone would be both cell and VOIP capable, meaning Google could end-run traditional cell towers where wi-fi is ubiquitous, and offer its own communications network if it so desired.
Google said at the Iphone lauch that tehy hope to be a leading representative, provides HTML, XML and other sophisticated services, that the Safari browser embedded in the iPhone, and many other of its tech devices, and future devices out of Apple, will be able to take advantage of."

Valuation
Google trades at about 25 times next year's earnings.
Its only real competitor in the sector, Yahoo, trades at 37 times next year's earnings.


Issues
1. Investors look beyond the almost daily headlines of new business ventures and partnerships and start searching for the return on those investments, which, to date, haven't materialized yet.
2. Google is arguably the biggest name in tech. oogle from becoming the Microsoft of a new generation
3. Rumour about MS buying Yahoo.

Yahoo 2

Although the management team may have missed one or two trends like social networking, it is really for execution errors.
This company has been slow to execute on what it knew were important areas, but it was too slow to go after those
Talk avout
- The compelling revenue streams;
- an update on Panama;
- the successful partnerships Semel has been able to forge with his old Hollywood buddies;
- the way Yahoo seems to have developed a better business model than Google since there seems to be so many ways Yahoo can generate revenue when Google is still essentially a one-trick pony in search advertising.

Yahoo

The past year has been brutal for Yahoo.
continuing to lose ground against Google
losing the YouTube bidding war
losing the DoubleClick bidding war
stomaching the ongoing delays of the new monetization software called "Panama," which was designed to squeeze more cash out of every click
dealing with management turmoil at the highest order

Google/Ebay

eBay has consistently been one of Google’s largest customers, accounting for perhaps 2% of Google’s gross revenue and profits in 2006.
Google has been one of eBay’s largest provider of leads, currently accounting for 5% of its traffic, but a smaller percentage of its revenue and profits
Several 'Power Users' at the eBay event said their interest and their traffic dropped dramatically after their keywords were pulled from Google, so clearly there is a greater risk to eBay

Money

Money is like a sixth sense, without them we cannot enjoy the other five.
Somerset Maugham

Corporate broking pitch

Offering capital markets expertise, research coverage and corporate broking skills.

Proven link between research and rice performance.

Capital markets advisory specialising in innovative funding structures

When plain vanilla equity issuance is not achievable

- Bonds with warrants

- Convertibles

- Structured derivatives

Actively market and promote the stock

Generate interest and liquidity from new investors

Introductions to institutions

Road shows

Market surveillance

Ability to raise new pools of capital

Google

Google Checkout rivals Ebays Paypal
Ebay is one of Google’s search engines biggest customers
Ebay’s concerns about the strategic threat led it last year to form a broad defensive partnership with Yahoo, though it has also formed a partnership with Google.

Telecommunication sector

Unlike utilities, mobile operators do not enjoy a captive audience and are subject to shifting technologies and regulations.

Given that Vodafone, ex Verizon, already distributes most of its earnings as profits, shareholders are hardly starved for payouts.

Scriabin

Sonate 2 gis-moll - klasse 1 satz -so sphärisch.
3 sonate in fis-moll - hatte ich letztes jahr - schöner 2 u 3 satz -1 u 4 satz etwas lang.

die 4 sonate mit einem kurzen einleitungssatz u dem furiosen 2 satz spiele ich jetzt u halte sie f geeignet für mich

die 5 sonate habe ich vor 3 jahren gespielt - sviatoslav richter meinte, daß dies das schwerste werk sei, daß er je gespielt hat

die 10 ist klasse - alles in einem satz - hör die die mal an - die besten aufnahmen für alle 10 sonaten ist mit ashkenazy - auch

fis-moll konzert
das ist das beste! lorin maazel dirigiert - mit ashkenazy natürlich

Spanish real estate

Spanish GDP Q1 4.1% yoy spurred by investment spending end exports.
Spanish Q1 07 house prise 7.2% yoy, slowest pace since 1998.
Supply is expected to exceed demand.
Other factors corruption and regulation.
Spanish property companies diversifying away from flats into offices, shooing malls and overseas real estate.

France: Sarkozy

Sarkozy’s economic agenda
Deficit spending
Protectionism
Mitigated by the odd labour reform

Germany: too bullish?

2006 2.6% growth
2007 3%+

Started off as export led recovery

Improvements in relative competitiveness through wage moderation.

This is not a longer term thing

Challenging by emerging market players in electrical and mechanical engineering

The growth story is simply a story of employment growth and until now not productivity growth (output per hour).

Export success to a large extend in energy price induced markets like Russia and the Middle East

Quality of education system.

When normality returns German growth should return to 1.5%

China Yuan undervalued, higher Imports

The World Bank last month raised its estimate for China's growth this year to 10.4 percent from 9.6 percent because of improved prospects for exports to Europe and developing countries. China's economy, the world's fourth largest, expanded 11.1 percent in the first quarter. The trade surplus may swell to $250 billion-$300 billion in 2007 from a record $177.5 billion last year
U.S. Treasury Secretary Henry Paulson has urged the Chinese government to move swiftly on currency reform to head off protectionist legislation in Congress.
Some U.S. lawmakers said last month that the Yuan was undervalued by 40 percent to make China's exports cheap and pledged trade sanctions as punishment
The Chinese government widened the Yuan’s trading band on May 18 to allow moves of as much as 0.5 percent each day against the U.S. dollar, although fluctuations had never reached the previous 0.3 percent limit.
The pace of the Yuan’s gains against the U.S. dollar accelerated in May.
The 0.74 percent monthly rise was the biggest since China scrapped a 10-year peg to the dollar and revalued the currency in July 2005.
It has gained 7.9 percent against the dollar since the end of the fixed exchange rate.
The Chinese government last month said it will boost imports to narrow a trade surplus with the U.S. that last year reached $232.5 billion. The Ministry of Finance raised export taxes on 142 products and cut tariffs on 209 types of imports from June

The Role of the State

The welfare state’s most important achievements are universal health insurance, state funded education and security.
Principles of classical liberalism: People should be largely free to make their own choices, mindful of their obligations to others.

US Option Accounting

US companies now have to treat stock options granted to employees as an expense.
The expense booked in the P&L reflects the notional future value of grants, not actual cash received when they exercise their options.

State Capitalism

State capitalism is set to become one of the main economic issues of our time.
Across Asia, Russia and the Middle East governments look to use their currency reserves and savings to acquire oversaeas assets.
The concept of using official savings is not new. Kuwait Investment Office and Singapore Investment Corp.

Venture Capital

Accel
Benchmark Capital
Index ventures

Internet People
Robert Loch

Inflation

Europe 1.9%
Japan 0%
US 2.6%
UK 2.8%

Europe and Japan below target, in US and UK expected to decelerate

1. The fear is that too much money is chasing too few goods.

2. Growth in money is far above nominal output.

The increasing financial complexity of rich countries creates demand for more money relative to economic output.

Carry trade

We believe it is important to stress that the term ‘carry trades’ is a misnomer of the true process that is taking place.

Japanese retail investors are raising their exposure to risky and higher-return assets and are not necessarily engaged in ‘carry trades’.

In fact, the monthly investment trust flows into foreign equities are about six to seven times larger than those heading into foreign bonds (Uridashis).

To us, it is more of a portfolio diversification, risk-seeking process than pure carry.

Interest rate differentials remain the driving force behind these moves, particularly for Japanese retail investors.

Japanese interest rates are on the rise.

The two year bond yields now 1% for the first time in a decade.

But it is the expectation of future rate changes rather than the absolute differentials that determine returns.

Most traders seem to be betting now that even if Japanese interest rates go up, rates elsewhere will rise by more.

The Australian dollar is on an 18 year high and Japan’s trade weighted exchange rate is at its lowest since 1985.

Even if the BoJ tightens once or twice more this year, it is far from clear that the JPY will rally.

Japanese retail investors are taking more risk, not just foreign currency risk. We believe that if the Nikkei starts to outperform, this trend outflow could be arrested and reversed.

Sony PS3

Nintendo Wii console outsells ps3 five times

German Property companies on AIM

Germany remains the focus of UK property investors!!!!
Speymill Deutsche
Deutsche Land
Dawnay
Day Trerveria
Corestate German Residential buy to let

Venture Capital underperforms but more money raised

Money raised by funds highest since 2000
This is being driven by a growing interest in environmentally friendly projects such as bio fuels and liquid hydrogen.
The resurgence of money into VCs has come in spite of their continued underperformance compared with generalist or big buyout firms.
The average internal rate of return over the life of all VC funds since 1980 until 2006 was 5.5% compared to 14.4% for buyout firms.

Little Change in Private Equity Financing

1. Private Equity is sustainable as long as easy credit is there.
2. Private Equity rests on an amazing arrogance which is that the stock market is completely underpriced at all times.
3. While bond yields are rising, rates on the speculative-grade loans that buyout firms also use to finance takeovers have barely budged.
4. The three-month London interbank offered rate, a benchmark for loans, has held at 5.36 percent for the past month.
5. U.S. companies rated four or five levels below investment grade pay an average spread of 2.38 percentage points on loans, according to S&P. That compares with the record low of 2.12 percentage points in February and more than 4 percentage points in 2003.
6. June 10 Yields on the high-yield, high-risk bonds that buyout firms typically use to finance their LBOs ended last week at 7.86 percent, up from the low this year of 7.58 percent in February, according to Merrill Lynch & Co. index data.

Japan long

1. The Japanese economy went through hell for 12 to 13 years. After 2003 the equity market has returned to normal.
2. The only thing that has not gone to normal is interest rates.
3. Best performing stocks Nintendo and Canon. Large caps with high export ratio
4. The Japanese economy outperformed the US and Europe in Q1, growing 3.3%.
5. This underscores the strength of the Japanese recovery and reinforces the expectation that the BOJ will raise rates.

Dollar short

On a broad, trade-weighted basis, the dollar has declined by 2.3% so far this year.

With the US economy on its gradual recovery path, the dollar is unlikely to weaken too much against the EUR or GBP in the near term

However more is likely: If Asian and Middle Eastern central banks allow their currencies to appreciate against the dollar at a faster pace, or de-peg them from the dollar, they will accumulate dollar-denominated reserves more slowly.

The gradual diversification of such reserves away from the dollar and from liquid fixed-income securities through the growth of Sovereign Wealth Funds seems likely to further weaken the dollar (as well as boosting US real rates).

US outlook

A change the composition of US growth more than it will affect the total.
1. The housing downturn has further to go, and that any meaningful recovery probably will be deferred until 2009.
2. For the first time in two decades, the strength of growth abroad will contribute to US output and job growth via improvement in US net exports.

US Government Bond Market

The yield on US government bonds move in super cycles
1900 3%
1920 5%
1945 2.5%
1980 14%

We last passed a secular yield uptrend driven by growth and inflation in the 1960s and 70s in a bond bear market that endured for some 35 years.

For the past 20 years bond yields have been falling steadily.

1. This reflects growing confidence that inflation has been squeezed out of the world economy.

2. Rapidly developing credit derivatives markets have made it easier for lenders to spread their risk. The boom in structured finance, whereby lenders are parcelling out the loans in various collateralised obligations and investors are buying small pieces they see fit. It is diffusing the risk.

U.S. Treasuries fell, extending five weeks of losses, as more investors ruled out the likelihood the Federal Reserve will lower interest rates this year.

5.25% is below the average of the past 40 years.

The inversion of the yield curve is not a preliminary sign of an economic recession, but simply a reversible anomaly.

1. Global factors are have pushed bond yields too low.
Especially the purchase of dollar bonds by foreign central banks (Chinese).
Foreign central banks are diversifying their currencies and asset classes.
The flow of saving from overseas that has so far helped to finance the US current account deficit on attractive terms will now be diverted to finance demand growth in many of our overseas trading partners — and in this context, that may contribute to somewhat higher US real interest rates.

2. Domestic forces also matter.
1. US real rates are getting a lift from an evident pickup in second-quarter US growth, which we see tracking at about 3½% annualized.
2. And “term premiums” — the compensation for moving out the risk-free yield curve —seem to have risen slightly as uncertainty about the global economic and monetary policy outlook has increased. Rising term premiums would add slightly to financial restraint.
Likewise, swap spreads — the benchmark generic risk premium for high-quality borrowers — have widened by about 10 bp over the past few weeks, adding to funding costs for intermediaries and their clients


There is therefore a disturbing possibility of a big secular yield uptrend driven by growth and inflation.

The so-called steepening yield curve indicates investors are more optimistic about the U.S. longer-term economic outlook.

Historically, the 20-year Treasury bond yield has averaged approximately two percentage points above that of three-month Treasury bills

The combination of rising real rates and stronger growth is a mixed blessing for risky assets:

Courtesy of global growth, earnings are stronger than expected, but investors may be wary of paying more for them. In my view, the correction in equities is a healthy development, since it will remind investors of their risk.

A major surge in yields could present more of a headwind to US and global growth, especially if it significantly undermined asset prices. And if global central banks go too far in tightening, growth abroad might be threatened.

The real danger for investors lies in lingering upside risks to US inflation, partly from domestic causes, but also from incipient inflation abroad and from rising protectionist sentiment in the US.