Superfund... impulsive idea?

By Julian Sudre


When three major US investment banks teamed up to create a superfund of $75bn so as to dampen further catastrophy in the markets, instantly we knew that Armaggeddon will be kept in check -- er, maybe not quite.

As the passengers realised that the ship they were on was scuppered, they compulsively jumped off into cold waters; perhaps the knee-jerk reaction of Bank of America, Citigroup and JP Morgan could do with some restructuring.
The purpose of the fund is to buy assets of ailing so called " Structured Investment Vehicles" in order to prevent a firesale of billion of dollars, thus the prevention of dumping securities or putting them back on to the banks' balance sheets. The problem with SIV is they are unable to sell commercial paper pushing up bonds price and borrowing costs up hence the slowing down of the US and European economy growth.

Recently former Fed Reserves chairman, Alan Greenspan voiced concern about the fund as it may actually hurt jittery financial markets.
In effect, the lower dollar means a reduced trade deficit because the US is exporting more and importing less and more foreign investments are good for the american economy but the flip side of it is that the oil is priced in dollars -- that is, if the dollar keeps falling, the oil will go up.

Not to be oudone, the latest figure to pour scorn on the superfund encouraged by the US Treasury, the renowned investor Warren Buffet, believes those banks should sell 10 per cent of the fund into the open market to ensure it is properly priced.
Paulson, a former CEO of Goldman's Sachs and today US Treasury Secretary, is trying to get european banks into the fund. Deutsche Bank's chief, Josef Ackermann is nonetheless reluctant in joining the fund. Mr Ackermann said it was premature to make a firm judgement about the fund.
Obviously Paulson has been fighting off critics of the master liquidity enhancement conduit or M-LEC but he insists that such fund could accelerate the return of liquidity to parts of the markets; and therefore it should be seen as a complementary to other initiatives. The US Treasury Secretary stresses that the concept for investors working with banks to buy assets that are not credit impaired. Still, it is noteworthy to add that the superfund is a very complex initiative and some investment banks said they did not understand it.

Basically, the superfund is a super conduit or in other words a restructured SIV. Structured Investment Vehicles issue short-term debts to invest in longer-term securities. The fund is designed to hold these assets until investors can better evaluate the difficult rates for the mortgages backing these bonds and other securities. Although, in all fairness, this process could take a year or two to get off the ground.
Today, investors have become sceptical about it as they believe it's primarily another SIV and amounts to a bailout for banks. Would it amount to say that it is a restructuring of previously financed transactions? Well yes, and let us take into account that one bank -- Citi -- has its exposure to SIV's estimated at a stonking $80bn.

The superfund is slated to be launched at the end if the year but its lack of details and the way it will operate seem to be indeed opaque to investors, the reason why one gets to wonder if it is that super a fund.

MARKET REPORT

By Julian Sudre

There was a certain form of optimism in the air that investors have been breathing in lately even though the miasma of turbulence impaired healthy speculations; it has seemed that everyone was oblivious to the long-term repercussions in the markets. A string of banks issued profits warnings while shares were going north.
The latest investment bank Merrill Lynch announced yesterday that its US mortgage-related losses were not $4.5bn but $7.9bn which resulted in an indeed very volatile session for Wall Street stocks.
Now the procrustean bed has to be un-made as it is time people in the financial sector ate humble pie because on the strengh of another set of weak US housing data and a surge in oil prices added fuel to the fire once again.
Meanwhile Industrial and Commercial Bank of China - ICBC - is to aquire a stake of about 20 per cent in Standard Bank, the largest African bank by assets.
The chinese bank is coughing up £2.6bn according to a banker close to the deal.
It will be the largest banking deal in South Africa since Barclays bought Absa Group.
GSK, the second-largest pharmaceuticals company reported third-quarter profits 7 per cent lower at £1.9b is to take a significant charge this year that will depress earnings per share growth below the 2007 guidance it gave in February of 8-10 per cent at constant exchange rates. The £1.5bn "operational excellence" programme will see the closure of factories and several thousand job cuts in the coming months.
RV Capital, a london-based market-maker that trades in futures was the latest casualty of the credit market turmoil after putting itself into administration yesterday facing losses of £10.4m -£14m so far.
Another grim news for BP which reported it will cut about 17 per cent of its onshore workforce for the North Sea with an average of 350 jobs to be slashed as part of plans to downsize from the North Sea, where its production has dropped by more than a third in three years.
In the mining sector, production problems cut Kazakhmys' output in its third quarter, with copper ore extraction down 19 per cent year-on-year. The shares in the Kazakhsran-based company were pushed down 108p or 7.2 per cent to £13.77 yesterday.
The production of cathode, a refined copper, was almost 19 per cent lower in the third quarter.
The reduced output of the company has had a knock-on effect on production of other minerals.
Zinc in concentrate slipped 18 per cent and zinc metal was more than halved.
On the upside, Home Retail showed a 40 per cent rise in first-half profits as it benefited from stronger-than-expected earnings at Argos, its catalogue business. Underlying profits at Argos increased 50 per cent to £99.5m and sales were up 1.4 per cent like-for-like but down 2.5 per cent at Homebase. Overall group sales rose 3 per cent to £2.74bn. Pre-tax profits were £169.3m compared with £59.7m last time.
In the banking sector, JP Morgan is considering acquiring a stake in a chinese brokerage as part of its expansion strategy in the country. But other banks, including Merrill Lynch, Citigroup, Deutshe Bank and Credit Suisse, are believed to be preparing to negotiate deals to set up Chinese brokerage joint ventures.
Mounting concerns about the 787 programme has triggered Boeing to cut its sales forecasts for next year by $3.5bn or 5 per cent as a result of the announced delays to deliveries of the new 787 Dreamliner.

Where are the markets headed?

By julian Sudre

While major investment banks started licking their wounds and faced the rude awakening of issuing profits warnings with a write-down of altogether more than $10bn, caused by the sub-prime and credit woes. The turbulence in the money markets with the aggressive fed rates cut by half a point and a three-month Libor rate hovering at some vertiginous 6 per cent – those were decidedly the anaphylactic shock that has sent the American currency packing.

But to add insult to injury, the Australian dollar could be taking a leaf out of his Canadian counterpart when the “Aussie” yesterday reached its strongest level against the US dollar in nearly a quarter of a century. Worryingly enough, if the Fed would further step in for a cut, the dollar would be once again the one that would carry the can and European economists would be the ones who would try staunchly to dampen the rise of the Euro as a result. The effects could be dramatic, but all things considered that would explain the surge of funds into emerging markets and the outperformance of companies with profits outside the US.

The gymnastics of stocks fluctuations alongside fears of dipping into recession and flying speculations over the malaise in the credit markets have made themselves felt on the European markets – which remain below their highs.

Whereas in the US, The S&P 500 and the Dow Jones Industrial Average have retouched all-time highs perhaps thanks to last week’s US job report that was better than expected. So the American dollar could actually not be headed for the dungeon?

Some insiders have it that the dollar is cyclical not structural and a rally in 2008 could be a possibility. Well, it's noteworthy to take a long-view of factors that could destabilise the dollar. Thus, the real-estate bubble starts collapsing, the continued trade deficit, oil trading in Euro and the Iran oil Bourse; and the Bank of China's decision to to allow investors to buy and sell gold using their USD, and the increasing risk of conflict with China. Syria indeed, rattled the US's cage on February 14 2006 when it switched of all the state's foreign currency transactions to Euro from Dollar and Venezuela's president Hugo Chavez is also trying to get away from the fiat Dollar.

Over, at the other end of the financial spectrum, the steel industry has been on a roll. Over the last five years, demands and profits booms have proven that countries such as China are the main driver of the prosperity of the commodity. The reason behind this has been an increase in car production but also the 2008 Olympic Games. Ergo, prices of raw materials show no sign of easing; iron ore prices are on the increase with a 9.5 per cent rise this year after soaring 19 per cent in 2006 and jumping 71.5 per cent in 2005. It certainly is good news for the mining industry. But also, these are good time to be in aluminium with perhaps not such a dramatic boom as that of copper but it has triggered some of its biggest takeove deals.

Rusal of Russia in April completed a takeover of its smaller compatriot, Sual, and the aluminium assets of Glencore, the Swiss commodities trader, creating a company estimating to be worth in the region of $30bn. Today United Company Rusal has overtaken Alcoa of the US as the world's biggest aluminium producer. So now, where do we get from here?