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In his opening address at the World Economic Forum Annual Meeting in Davos, Switzerland on Wednesday, President Nicolas Sarkozy of France said that it will not be possible to emerge from the global economic crisis and protect against future crises if the economic imbalances that are at the root of the problem are not addressed. “Countries with trade surpluses must consume more and improve the living standards and social protection of their citizens,” he remarked. “Countries with deficits must make an effort to consume a little less and repay their debts.” The world’s currency regime is central to the issue, Sarkozy argued. Exchange rate instability and the under-valuation of certain currencies lead to unfair trade and competition, he said. “The prosperity of the post-war era owed a great deal to Bretton Woods, to its rules and its institutions. That is exactly what we need today; we need a new Bretton Woods.” Sarkozy said that France would place the reform of the international monetary system on the agenda when it chairs the G8 and G20 next year.
In his address, Sarkozy also called for an examination of the nature of globalization and capitalism. “This is not a crisis in globalization; this is a crisis of globalization,” he said. “Finance, free trade and competition are only means and not ends in themselves.” Sarkozy added that banks should stick to analysing credit risk, assessing the capacity of borrowers to repay loans and finance economic growth. “The role of the bank is not to speculate.” He also questioned the rewarding of high compensation and bonuses for CEOs whose companies lose money. Capitalism should not be replaced but it has to be changed, the French president declared. “We will only save capitalism by reforming it, by making it more moral.”
Sarkozy endorsed Obama's proposed curbs on Wall Street but stressed the need for a global consensus on financial regulation in the Group of 20 major economies.
Key Pointson panel discussion on systemic risk:
The worst phase of the most severe financial crisis since the Great Depression is coming to an end, but there will be no return to “business as usual”
New regulation of financial institutions is inevitable; but politically motivated regulation driven by public anger is unlikely to be effective and may be damaging
It is not just about banks; addressing systemic financial risk means looking at the non-bank sector, government policy, accounting rules and rating agencies
Future crises are inevitable, although their trigger points, scope and severity will differ
Regulation alone can never be fully effective, and overregulation could threaten the economic role of the financial system; crises are macro, regulation is micro
International coordination is vital; full harmonization of national regulation may be hard to achieve, but greater consistency between national approaches is essential
The panel agreed that system-wide risk was severely underestimated before the last financial crisis. More intrusive regulation of the financial system is now inevitable, and some of it is helpful. But there are questions about where that regulation should be focused and the extent to which regulation itself is the answer.
There are currently two sets of regulatory policy proposals - - the Volcker proposal to curtail bank proprietary trading and the use of revised capital requirements to reduce systemic risk. But other factors need to be considered: global imbalances, macroeconomic policies, enhanced supervision of the financial system and global resolution frameworks to allow cross-border financial institutions to be wound up without causing wider problems.
Too Big to Fail?
Addressing systemic financial risk is a problem that is too great to get wrong. But there are questions over whether breaking up banks or prohibiting banks from engaging in certain activities is the right approach. The increase in the size of banks in recent years is essentially a response to increased demand for cross-border services to help risk transfer from corporate and other clients. Narrowing the scope of activities of integrated banks would have major impacts on the ability of the financial sector to service global trade and business. A better question than “too big to fail?” is perhaps “too interconnected to fail?”
The debt overhang is threatening the global economy, Niall Ferguson, professor of history at Harvard University, told CNBC. "I think we gave a situation where Greece is leading the pack but other countries will follow," he said:
There were concerns that distinguishing between the market-making activities of banks and proprietary trading would be practically difficult. There is a need, for example, for banks to be active players in placing and marketing government bonds to ensure liquidity. Having banks that are willing to take cross-border risk is essential. Others, however, suggested that capital requirement measures and measures to better align management incentives is about risk mitigation, whereas the Volcker proposal is an attempt at a more substantial structural shift.
Politics
Political pressures could lead to ill-judged policy responses, with unintended consequences. But the concern of the public with the socialization of financial losses is accepted as legitimate. Regulation of the financial system is a necessity to ensure the interests of tax-payers and citizens, given the implicit subsidy of bank capital through the existence of depositors’ insurance and the possibility of the state’s safety net being extended with public money, as happened during the financial crisis to prevent a wider systemic meltdown. One participant asked whether the problem that regulators and others are trying to solve is genuinely one of managing systemic financial risk or responding to public concerns. The key question should be whether a measure will reduce the probability of the next crisis, while recognizing that that probability will never be zero.
Global Perspective
While the need for global coordination is widely recognized – particularly on resolution mechanisms – the absence of a global regulator, lender of last resort or taxpayer was cited as being one reason why a fully global system might not emerge quickly. Better consistency of national approaches seems more likely to work, with local regulation of subsidiaries of financial institutions.
The role of poor management in the current financial crisis was raised, asking whether overregulation might lead to yet poorer management in the future (as options would be constrained by regulation), thus sowing the seeds of a future crisis. Board members, particularly non-executive board members, need to play a much stronger oversight role.
Session Panellists Jaime Caruana, General Manager, Bank for International Settlements (BIS), Basel Ibrahim S. Dabdoub, Group Chief Executive Officer, National Bank of Kuwait, Kuwait; Global Agenda Council on Global Investment Flows Robert E. Diamond Jr, President, Barclays, United Kingdom Stefan Lippe, Chief Executive Officer, Swiss Re, Switzerland Jonathan M. Nelson, Chief Executive Officer, Providence Equity Partners, USA Guillermo Ortiz, Professor, ITAM (Instituto Tecnologico Autonomo de Mexico), Mexico
Fed statement may lift risky assets
Davy chief economist, Rossa White, comments:"The Federal Reserve meeting was well-timed, given the recent sell-off in risky assets. The Fed statement may well shore up the equity market by maintaining the commitment to exceptionally low short-term interest rates for the next number of months. There was one dissenter, but his views had been well flagged in advance. Elsewhere, Obama's State of the Union address suggested that easy fiscal policy will remain in place for a time.
The Fed did not dare change the key wording to maintaining 'exceptionally low levels of the federal funds rate for an extended period': it would have been especially ill-timed in the context of recent weakness in equities. But there were two small alterations. First, it was somewhat more upbeat on the economic outlook (in its nuanced fashion) compared with the previous meeting six weeks previously. 'Activity has continued to strengthen' rather than just 'pick up'. Second, Thomas Hoenig, one of the rotating members who did not vote in December, voted against the policy action this time. He preferred to alter the wording, but his views had been flagged in recent speeches.
European stock markets have clearly underperformed the US year-to-date for one reason: Greece. Yesterday saw carnage in Greek bonds, as 10-year yields jumped 51bps. But there was a positive message for Ireland buried beneath the rubble. Irish government bonds did better than Italy, Portugal and Spain on the day. In fact, Irish cash spreads widened by only one basis point vis-a-vis Germany. Those market moves provide compelling evidence that the market has been reassured by Ireland's strenuous efforts to reduce its structural deficit."
CNBC's Geoff Cutmore spoke to Daniel Yergin, president of Cambridge Energy Research Associates and Sir Howard Davies, director of the LSE, at the World Economic Forum in Davos Wednesday:
Economic View; One dissenter, but Fed still in no rush to the exit
Goodbody chief economist, Dermot O’Leary, comments:"Reflecting the subtle nature of the changes in the FOMC statement last night, the reaction in bond, equity and currency markets was fairly muted. The key commitment of keeping rates at “exceptionally low levels…for an extended period” remained in the statement, and likely explains why equities went a little better after the statement, but this view was not unanimous this time around; one FOMC member now believes that the time is right to let the market know that rates will eventually have to be moved off these emergency rate settings.
This indicates that there was probably a robust discussion at the meeting around the method by which the Fed will employ its “exit strategy” and when it should be implemented. We will learn more on this when the minutes are released on 17th February. There were only nuanced changes in the Fed’s views on the economy. While the Fed believes that the recovery “is likely to be moderate”, the most recent information suggests that activity has “continued to strengthen”. One sector that this does not apply to anymore though, according to the Fed, is the housing market, with “the signs of improvement” referred to in the December statement left out this time around. In line with expectations, the purchase of mortgage securities will be completed by the end of the first quarter. Taking all of these points together, it appears that little has changed for the vast majority of the FOMC members. Our view is that the Fed funds rate will not increase at all this year."
US markets
The Dow Jones rose 42 points or 0.41% to 10,236.
The S&P 500 rose 0.49% and the Nasdaq added 0.80%.
Asia
The MSCI Asia Pacific Index rose 0.7% Thursday, the first gain in nine days.
The Nikkei 225 gained 1.58% and the Shanghai Composite added 0.25%.
In Europe, the Dow Jones Stoxx 600 is up 1.16% Thursday.
In Dublin, the ISEQ has gained 1.61%.
AIB is up 4.18% and BoI has added 4.58%.
Market cap leader is up 1.92%.
Goodbody analyst, Gerry Hennigan, commented on Tullow Oil; Placing & call details - - "Post the release of the Trading Statement and Placing document yesterday Tullow successfully completed the Placing of just under 10% of its share capital (80.4m shares) at £11.50 per share raising gross proceeds of £925m. According to management, the rationale for the Placing was not just to provide additional capital for Uganda, but also to fund an exploration programme that sought to drill as many as 35 wells in the current year. Indeed, in the scheduled conference call, management indicated that, notwithstanding events in Uganda, additional funds would likely have been sought from the market to enable Tullow to step-up its exploration campaign.
Most of the discussion within the call not surprisingly focussed on events in Uganda. Acknowledging that its stance regarding Uganda contrasts with that outlined in Q4, when Tullow sought to farm-down 50% of its current interests, the rationale now for pre-emption is that new partner addition in the shape of CNOOC and / or Total will shorten the timeframe to full production and enable greater volumes to be produced. While understandably reticent about providing specific detail, given the sensitivities surrounding negotiations with the government, it was clear that the timeframe for full production had been set at an aggressive 3 years from approval and that an additional £600m would be spent by Tullow in Uganda over that period. Acknowledging the limitations of its current production base (c.58 kbopd), management has set a target of producing 200 kbopd within a five-year timeframe, as it seeks to fund an annual exploration programme of $500m. While Jubilee will help to move the needle next year in that direction (we are currently forecasting production of 64 kbopd in 2011), capex commitments amounting to an annual spend of c.£1bn over the next three years will clearly require funding beyond that generated organically. Yesterday’s placing essentially addresses capex for the current year (guided at £990m). Divestment of a 50% stake in Block 2 may well part fund capex beyond 2010, and while management outlined the potential to further tap the debt markets, as the need requires, future approaches to the market pre commercial production in Uganda cannot be ruled out, in our view.
Cost commitments, allied to the declining trend in the organic production base, a concern of ours for some time, led to yesterday’s equity issue. Addressing the production deficit, despite contribution from Jubilee by year-end would, at face value, appear to be a driver of the pre-emption process. That said, in light of the commitments in Uganda, while management insists that it remains committed to its exploration roots, Tullow, in our view, is as much a development story over the next three years as it is an exploration story."
CPL
Recruitment firm CPL today reported pre-tax profits of €2.4m for the six months to December, up from €1.5m at the same time the previous year.
The group's gross profit fell by 37% to €12.9m,.
Revenues fell in the period from €118.9m to €91.4m.
The BDI closed at 3,005 on Thursday, Dec 31st - - a rise of 289% in 2009.
On Friday, the index rose 34 points or 1.1% to 3,204 - - and closed down 2.8% in the week.
On Monday this week, the BDI rose 19 points or 0.6% to 3,223; the index fell 18 points or 0.6% to 3,205; on Wednesday, the index fell 87 points or 2.7% to 3,118.
Davy's Barry Dixon comments on CRH and a forecast of 8% growth in US highway construction in 2010 - - "ARTBA has released its outlook for US highway construction markets for 2010 and beyond. It is forecasting growth of 8% in highway spending in 2010, driven largely by the release of ARRA funds. The longer-term outlook remains positive with the renegotiation of the federal highway programme central to this.
ARTBA's assumptions are broadly in line with our own assumption of unchanged federal funds ($41.2bn), a deterioration in the level of state funds (we are assuming a decline of 10% to c.$32-33bn) and a significant year-on-year increase in the funds coming from ARRA (we are forecasting $12-15bn). In 2009, approximately $5bn of the $27bn allocation was actually spent although over $20bn was obligated and over $15bn was contracted. This provides a very strong pipeline of work for the 2010 season.
Combining these factors yields a total US highway budget for 2009 of over $88bn, 9% ahead of last year's total. ARTBA is assuming $90bn on the basis of a higher level of state spending.
In any event, the numbers are broadly similar and point to another strong year for infrastructure spending in 2010. CRH is the largest provider of raw materials into this market while Heidelberg is also a significant player.
As the year progresses, the renegotiation of the federal highway programme (previously SAFETEA-LU) will gain momentum. Some commentators are suggesting that it may be linked to the 'Jobs for Main Street' Act. We believe this is unlikely as the latter will be much more focused on creating jobs in the short term. The real issue is the level of funding provided for under the new bill and how this will be funded."
There is growing agreement that the level of federal funding will have to rise in order to restore infrastructure standards in the US. Any indication of an increase would obviously be positive for the longer-term prospects of the players in this market.
Goodbody's Robert Eason comments on CRH an related industry results - - "There were four sets of results released yesterday which were taken negatively by the market, Cemex (-8%), Caterpillar (-4%), USG (-7%) and Eagle Materials (-4%). While Caterpillar left sales guidance unchanged at +10-25% for FY10, management’s expectations for earnings of $2.50 was behind consensus of $2.70, thus implying no operating leverage.
The key takeaways from the Caterpillar statement for a CRH were: (i) US non-residential construction activity deteriorated in Q4 with orders down 38% versus -31% in Q3 and the decline is expected to continue in 2010; (ii) While Caterpillar notes the positive impact of stimulus funds on infrastructure in the second half of 2009, it is cautious on 2010 due to uncertainty created by not having a multi-year highway programme in place; and (iii) The US residential market had one of its worst year in 2009, however, it is expected to recover from these depressed levels in 2010. These views are very much consistent with our view on CRH’s US operations, in that non-residential activity is set for another year of double-digit declines, which will be partly offset by a modest recovery in residential and a robust performance from infrastructure.
Both Eagle Materials (EPS of $0.11 versus consensus of $0.15) and USG (losses of $1.17 versus consensus of -$0.55) both missed consensus forecasts, through a combination of lower sales and higher costs. The top line progression highlights how difficult market conditions continue to be in the US construction market. USG’s sales were down 27% in Q4 (versus -32% in Q3), while the division (L&W Supply) of most relevance to CRH’s US distribution business (7% of group sales) had revenues down 38% in the quarter (unchanged on Q3). In the case of Eagle materials, volumes were weak (cement -17%, aggregate -36% and rmc -34%) and similar to Cemex it is seeing pricing pressures (cement -12%, aggregate -2% and rmc -9%). Clearly these results are weak, however, there is limited read through for CRH as we have already had a trading update for FY09."
