>>> What to look at this Week End - 27-28/09/2014


Macro
- German Econ Min Gabriel: German 2014 GDP could be below 1.8% official forecast, but still better than other European countries - German press 
- ECB is not expected to announce any new policy moves at this week's meeting; Some expect ECB to reveal more details of plans to buy ABS
- Austria to put together tax relief package of about €5B for 2015 to help promote economy - financial press


Keep an eye on :
- AGN US : Major Allergan Investor Joins Chorus Against Salix Deal
- ALV GY : Allianz Won't Sell Pimco After Gross Departure: Financial Times
- AZN LN : AstraZeneca’s Iressa Ineffective If Resistance Develops: Study
- BSY LN : Former BSkyB Exec to Lead Merged TV Production Group: FT
- CBK GY : Said to be investigated by the Manhattan US attorney for alleged violations of money-laundering laws
- DTE GY : Deutsche Telekom warms to idea of longer stay in U.S.: sources
- EDF FP : Royal Says EDF CEO to Be Named After Energy Law Debate: Europe 1
- RNO FP : Renault Looking at Sedan Based on Nissan Altima Platform: Focus
- RNO FP : Renault CEO Sees 2015 European Car Sales Rising 3%-4%: Corriere
- TAP US : Gains Are on Tap at Molson Coors, stock could $100 in a deal (+35%) - Barrons
- TSCO LN : Tesco CEO Lewis Says Co.’s Culture Must Change, Guardian Reports
- TSCO LN : Tesco Pulled GBP3b Credit Facility Before Warning: FT
- TIT IM : Tim hires bank to seek acquisitions in Brazil, targeting Oi - Valor Economico
- FR FP : Valeo CEO Sees No Significant Recovery in EU Car Mkt: Investir

FT : Political reticence blunts ECB’s asset purchase plan

Political reticence blunts ECB’s asset purchase plan

The Euro logo is pictured outside European Central Bank ahead of the the meeting of the Governing Council in Frankfurt am Main, central Germany, on August 1, 2013. Mario Draghi, President of the European Central Bank, ECB repeated a pledge that eurozone interest rates would remain low or could even fall further amid risks for the euro area. AFP PHOTO / DPA / BORIS ROESSLER GERMANY OUT (Photo credit should read BORIS ROESSLER/AFP/Getty Images)©AFP
The European Central Bank will this week unveil details of its plan to save the eurozone from economic stagnation by buying hundreds of billions of euros-worth of private-sector assets. But one of the most crucial questions surrounding the purchases of bundles of loans, known as asset-backed securities, looks set to remain unanswered for some time.
The governing council will meet in Naples, where it is expected on Thursday to reveal which asset-backed securities and covered bonds the central bank plans to buy to revive growth and boost inflation. Analysts say inflation is likely to have fallen to a five-year low this month.

The purchases will work in tandem with the central bank’s offers of cheap four-year loans, under what it dubs its targeted longer term refinancing operations, to bloat its balance sheet by as much as €1tn between now and the end of 2016.
But one of the most vital pieces of information about the programme will almost certainly be missing.
Whether the ECB can buy the riskier parts of securitisations, the so-called mezzanine tranches, is up to governments. With the new European Commission not yet in place, eurozone finance ministers are unlikely to discuss the issue until the end of October, with a decision weeks later. The early indications are that Germany and France will not support the plan.
The ECB’s president, Mario Draghi, said earlier this month that the central bank would buy the safest slices of securitisations, known as senior tranches. But the ECB is cautious of taking too much risk on to the central bank’s balance sheet. To avoid that, Mr Draghi said the ECB would buy the mezzanine tranches only if governments would guarantee any losses.
Even before the details have been announced, there are already signs that the ECB’s buying spree is breathing life into a market that has been moribund since the financial crisis left its reputation in tatters. Spreads have tightened on new deals and investors who have until now avoided Europe’s securitisation market, such as sovereign wealth funds and other central banks, have had their interest piqued.

David Covey, head of European ABS strategy at Nomura, said: “The ECB’s backing is bringing a legitimacy to the [European] ABS market.”
Mr Draghi has stressed European securitisations have proven much safer investments than their US equivalents, which spread problems in one corner of the US mortgage market to the rest of the global financial system, earning the industry the moniker of “toxic sludge”.
Yet, while default rates has been much lower here, activity in the European market has remained subdued since the peak of the crisis in 2008. That means ECB could struggle to buy enough ABS to expand its total balance sheet towards the €3tn target indicated by Mr Draghi from its current level of around €2tn.
Ebrahim Rahbari, a European economist at Citi, said: “There is a pretty big drag on the balance sheet from repayments of earlier offers of three-year loans from the central bank and the maturing of its earlier asset purchases. Whatever you do to make up that decline needs to be north of a trillion. Doing that with the TLTROs and the asset purchases is a tall order.”
The Association for Financial Markets in Europe, a trade body, puts the total size of the European market at €662.4bn. Banks have also retained another €726.8bn of securitisations on their own balance sheets, often using the bonds as collateral for the ECB’s cheap loans. An important question is how willing the central bank is to buy these retained ABS directly from lenders.
Mr Draghi believes the ECB’s entry into the market will trigger a wave of issuance. But analysts argue that unless the ECB has the support to buy the riskier slices of securitisations, a leap in activity is unlikely.
“If the ECB only buys senior tranches, it only really helps banks on the funding side and not the capital side. Most of the capital relief would only come from the sales of the mezzanine tranches,” Mr Covey said. But banks already have options for cheap funding: the TLTROs allow them to borrow for four years for little more than the ECB’s main refinancing rate.

FT : Hedge funds move from the margins into the mainstream

Hedge funds move from the margins into the mainstream

As hedge funds have evolved from tiny pools of private capital to hulking investment houses, so too have their clients.
Some hedge funds are now larger than those of conventional “long-only” asset managers – and much more complex.

Hedge fund investors used to be rich individuals seeking higher returns. But today, according to Towers Watson, the consultancy, more than a third of hedge fund assets come from pension funds seeking to diversify by placing money in “alternative” assets.
As many large hedge funds run several investment strategies simultaneously, determining their risk profiles has become more difficult. “The number of sub-strategies is huge,” says David Barenborg of BlackRock, one of the world’s largest allocators to hedge funds.
Calpers, the largest US public pension fund, recently decided hedge funds had become too complex and costly and withdrew its $4bn investment.
For Max von Bismarck, partner at SkyBridge, which has $10bn in hedge funds, alternative investment vehicles help manage risks, as they are not correlated with the rest of its portfolio.
Yet this argument has been tested, as hedge funds pursue similar strategies, potentially amplifying losses even within a diversified portfolio. Several funds lost money when highly valued technology shares they held fell.
Coatue Management, run by Philippe Laffont, saw its flagship fund fall 8.7 per in March after being burned by a reversal in technology shares, but later managed to recover some of its losses later in the year.
A number of hedge funds were hit by betting on the outcome of several large takeovers during the summer, such as 21st Century Fox’s offer for Time Warner, and Sprint’s attempt to buy T-Mobile US. The collapse of these deals wrongfooted several funds that specialise in trading on takeover situations, known as risk arbitrageurs, or “arbs”. The resulting “Arbageddon” was a further reminder to investors of the dangers of investing in hedge funds that are all chasing the same trades.
More recently, a number of large hedge funds made bets on so-called “inversion” mergers, where US companies buy a rival domiciled in a country with a lower tax base.
As the Obama administration has become more vocal about stopping this practice, arguing that it is an abuse of the US tax system, the shares in companies involved in inversions have gyrated, leading to a choppy time for the many hedge funds that own them.

>>> ECB is not expected to announce any new policy moves at this

ECB is not expected to announce any new policy moves at this week's meeting; Some expect ECB to reveal more details of plans to buy ABS - financial press 

- Commerzbank economist: "The volume of the TLTROs and the ABS/Covered Bond programme will not meet the ECB's expectations."
- Deutsche Bank economist: "More likely than not that the ECB will announce 'broad-based asset purchases', including public QE within the next six months."

WSJ : Starz May Not Find Merger in Its Future

Starz May Not Find Merger in Its Future

For a glimpse of challenges facing stand-alone media companies, investors should gaze at the Starz.
News that the premium cable network is seeking a buyer should come as no surprise. From the beginning, many investors saw Liberty Media's August 2012 announcement that it would spin off Starz as a way to spur an acquisition by another player. The rationale behind a sale has only gotten stronger since then.
Starz and other stand-alone networks such as AMC Networks and Scripps Networks Interactive lack the heft of their larger peers when it comes to negotiating affiliate deals with pay-TV providers. And they look increasingly vulnerable now that distributors like Comcast, Time Warner Cable, AT&T and DirecTV are combining forces.
As those deals work their way through the government-approval process, Starz has more incentive than ever to sell itself. But when it comes to bulking up, big media companies have more incentive to combine with even bigger media companies than they do to pick up stragglers.
Having a full array of assets, including valuable sports rights, a broadcast network and cable channels makes a media firm harder to ignore when it sits down across the negotiating table from a pay-TV provider. That principle was on display in 21st Century Fox's $80 billion bid for Time Warner in June. Fox later abandoned this after being rebuffed. But the idea behind that deal was to create a mega company with the full arsenal of assets at its disposal.
A premium channel might also be considered a must-have asset; HBO undoubtedly made Time Warner a more attractive target. But HBO's deep library of original content makes it a more powerful negotiating tool than Starz, which is still in the relatively early stages of its original-programming strategy.
In a recent survey of 18-to-24-year-olds conducted by Janney Capital Markets, HBO was by far the most popular among premium networks and streaming services. The firm, which surveyed a thousand people in that demographic, found HBO was the fifth most popular source of content, putting it above broadcast networks like Fox and CBS.
That suggests HBO is well positioned for the possibility of new distribution models as more people watch video online, Janney says. That could mean offering its HBO Go service directly to consumers or becoming part of a smaller cable bundle.
And being inside a larger company undoubtedly helps. The advantage is reflected in the multiples of stand-alone companies versus those of their larger peers. Starz trades at nine times 2015 earnings before interest, taxes, depreciation and amortization, compared with 11 times for Time Warner and 13 times for Fox.
As media companies look to get bigger, stand-alone networks may not be their first port of call.

NYT : Made in the U.S.A., but Banked Overseas

Made in the U.S.A., but Banked Overseas

“U.S. multinational firms have established themselves as world leaders in global tax avoidance strategies,” says Prof. Edward Kleinbard.

Imagine how frustrating it would be to have billions of dollars in cash but be unable to spend it as you wish unless you paid a large part to the Internal Revenue Service.

That could be your problem if you were running a large multinational corporation based in the United States.

Profitable companies that operate only in this country have some tax breaks available and so often pay considerably less than the statutory corporate tax rate of 35 percent. But they still face a significant tax bill.

It is a different story for United States companies that operate internationally.


Senators Carl Levin, left, and John McCain in April before a hearing on corporate tax avoidance.
JONATHAN ERNST / REUTERS
“U.S. multinational firms have established themselves as world leaders in global tax avoidance strategies,” said Edward D. Kleinbard, a former chief of staff of Congress’s Joint Committee on Taxation who now teaches tax law at the Gould School of Law at the University of Southern California.

In a recent article, he sarcastically added that those companies “are burdened by tax rates that are the envy of their international peers.”

The companies avoid United States taxes largely by claiming that much of their income is earned in countries where taxes are low — or even nonexistent. Apple books profits from patents developed in the United States in an Irish subsidiary that is not taxed there or anywhere else. Caterpillar earns money by producing tractor parts in the United States and selling them to Canadian farmers. It books the profits in a Swiss subsidiary.

Companies are supposed to pay United States taxes at a 35 percent rate — minus any foreign taxes already paid — when the profits are brought back to this country. And that is where the frustration comes in.

In practice, the rules on bringing cash home are not exactly ironclad. Companies can put the money in banks. They can use the cash to buy bonds, or even stock, in other American companies. They can reinvest it in foreign operations or buy a foreign company.

But they can’t legally use it to take over another American company or to pay dividends.

As the multinationals have become better at avoiding American taxes — and it is much easier for a company with intellectual property like patents or copyrights than it is for companies that simply make and sell things — those untaxed profits have climbed into the billions.

In 2004, intense corporate lobbying persuaded Congress to pass what was called the American Jobs Creation Act. A section of that bill, called the Homeland Investment Act, said that, for one time only, companies could bring the money home and pay only a 5.25 percent tax rate. Companies promised they would use the cash to invest in research and development, build plants and hire Americans. There were safeguards that were supposed to keep the money from being used to pay dividends.

The safeguards did not work. On average, one study reported, companies that brought back money used 60 percent or more of the cash to increase dividends or buy back stock. What they did not do was use the money to hire people or invest in the United States.

But a precedent was established. Companies concluded that it was foolish to bring money home and pay the normal tax rate. Lobbying had produced a tax break once, and perhaps it could do so again.
A lobbying campaign for a similar break failed last year.

“Congress did not enjoy the sensation of being misled and abused,” Mr. Kleinbard said.

As the cash built up on balance sheets, earning low returns under current interest rates, shareholders looked at it enviously. They wanted to gain access to it without the company having to pay taxes.

One way to do that is called an inversion, in which an American company buys a foreign one but structures the deal so that the headquarters of the new company is overseas in a country with a lower tax rate.

The company may still be owned by the same investors and run by the same managers working in the United States. But there are ways to transfer the money to the “new” parent without paying taxes.

Inversions have been around for years, and in fact were restricted by that 2004 tax act, which required that the foreign company being acquired be at least a quarter as large as the American one. That limitation meant United States companies had to at least merge with a real company rather than set up a foreign shell company, as some had been doing.

This week, the Obama administration announced new regulations to toughen the way that computation is made and to make it harder for an inverted company to gain tax-free access to its overseas cash. It said it was also working on regulations to limit what is called “domestic earnings stripping,” a way to move taxable profits from the United States company to a foreign affiliate.

The regulations will most likely have some effect, but it would take legislation to really reduce the abuse. A senior Treasury Department official said he hoped Congress might act in the lame-duck session after the November election, but don’t hold your breath.

As it is, the system is absurd. A company can exploit the fiction that its overseas subsidiary is a different company and sign contracts to move profits wherever it wishes.

A company that has done that, and has built up overseas profits, has a tax incentive to build a new plant overseas rather than in the United States.

A company that really needs the money built up in purported overseas profits may have to pay taxes to get at it. But if the company is rich enough, its credit will be good enough to allow it to borrow money to pay shareholders, and thus face no tax. That is what Apple did. Call it the Reverse Robin Hood effect.

One way to deal with the absurdities would be to simply drop the idea that the United States taxes profits globally. But if companies could continue to claim that profits really made in this country were made abroad, that would be equivalent to simply abolishing taxes for American multinationals. To make sense, any such move would require the closing of many loopholes that allow companies to move income around.

A simpler solution would be to impose a tax on the consolidated profits of a multinational company — as companies report consolidated earnings to shareholders — and then allow the company to take a credit for taxes actually paid to foreign countries.

The statutory tax rate would have to come down substantially from the current 35 percent, but it could then have some relation to what was actually paid. Mr. Kleinbard advocates such a move in his book “We Are Better Than This: How Government Should Spend Our Money,” which is to be published next week by Oxford University Press.

What happens, and whether anything happens, may depend on whether the administration is successful in persuading people that the government must raise enough money to pay for needed services and that allowing wealthy multinationals to largely avoid taxation simply shifts the tax burden to others.

Unfortunately, that competes with another attitude that has gained popularity in recent years — that taxes are by definition bad and anyone who manages to avoid paying them legally is to be congratulated and emulated.

When the Senate Permanent Subcommittee on Investigations held a hearing in April that exposed the tactics Caterpillar had used to avoid United States taxes, the condemnation from some Republican senators was directed not at the company but at the panel’s chairman, Senator Carl Levin, Democrat from Michigan.

Senator Rand Paul, Republican of Kentucky, offered apologies to Caterpillar and to its auditor, PricewaterhouseCoopers, which had advised the company on its tax strategy. Senator Rob Portman, Republican of Ohio, seemed to think that any company not following the Caterpillar example would be acting wrongly. “It is a fiduciary responsibility if you are a public company,” he said, “to look where you can maximize profits.”

FT : Geneva Report warns record debt and slow growth point to crisis

Geneva Report warns record debt and slow growth point to crisis
A “poisonous combination” of record debt and slowing growth suggest the global economy could be heading for another crisis, a hard-hitting report will warn on Monday.
The 16th annual Geneva Report, commissioned by the International Centre for Monetary and Banking Studies and written by a panel of senior economists including three former senior central bankers, predicts interest rates across the world will have to stay low for a “very, very long” time to enable households, companies and governments to service their debts and avoid another crash.
The warning, before the International Monetary Fund’s annual meeting in Washington next week, comes amid growing concern that a weakening global recovery is coinciding with the possibility that the US Federal Reserve will begin to raise interest rates within a year.

One of the Geneva Report’s main contributions is to document the continued rise of debt at a time when most talk is about how the global economy is deleveraging, reducing the burden of debts.
Although the burden of financial sector debt has fallen, particularly in the US, and household debts have stopped rising as a share of income in advanced economies, the report documents the continued rapid rise of public sector debt in rich countries and private debt in emerging markets, especially China.
It warns of a “poisonous combination of high and rising global debt and slowing nominal GDP [gross domestic product], driven by both slowing real growth and falling inflation”.
The total burden of world debt, private and public, has risen from 160 per cent of national income in 2001 to almost 200 per cent after the crisis struck in 2009 and 215 per cent in 2013.
“Contrary to widely held beliefs, the world has not yet begun to delever and the global debt to GDP ratio is still growing, breaking new highs,” the report said.
Luigi Buttiglione, one of the report’s authors and head of global strategy at hedge fund Brevan Howard, said: “Over my career I have seen many so-called miracle economies – Italy in the 1960s, Japan, the Asian tigers, Ireland, Spain and now perhaps China – and they all ended after a build-up of debt.”
Mr Buttiglione explained how, initially, solid reasoning for faster growth encourages borrowing, which helps maintain growth even after the underlying story sours.
The report’s authors expect interest rates to stay lower than market expectations because the rise in debt means that borrowers would be unable to withstand faster rate rises. To prevent an even more rapid build-up in debt if borrowing costs are low, the authors further expect authorities around the world to use more direct measures to curb borrowing.
The report expresses most concern about economies where debts are high and growth has slowed persistently – such as the eurozone periphery in southern Europe and China, where growth rates have fallen from double digits to 7.5 per cent.
Although the authors note that the value of assets has tended to rise alongside the growth of debt, so balance sheets do not look particularly stretched, they worry that asset prices might be subject to a vicious circle in “the next leg of the global leverage crisis” where a reversal of asset prices forces a credit squeeze, putting downward pressure on asset prices.

>>> Barron’s summary: Positive on JBLU, TAP, BECN; Cautious on VMW, GPRO, STZ

Barron’s summary: Positive on JBLU, TAP, BECN; Cautious on VMW, GPRO, STZ 

Cover story: Barrons Penta special section reports private bankers say their Silicon Valley clients invest very differently from the rest of the country, seeking stakes in venture capital, timberland, farmland, and municipal bonds; Pentas ranking of the top 40 wealth management firms is led by Bank of America Global Wealth & Investment Management, Morgan Stanley Wealth Management, and JPMorgan. 

Tech Trader: Cautious on VMW: Former tech-sector darling now faces disruption of its own, with the latest threat being bare-metal computing in which a technology known as a container is used to fool each individual software application, rather than the operating system itself, into thinking it has full control of the server. 

Trader: Investors are concerned about how much more economic pain is to come in Europe and Japan; Cautious on GPRO: Close reading of regulatory filings suggests plenty of vulnerabilities for such a highly valued stock, and with costs rising faster than revenue and a number of governance issues, investors should be wary; Cautious on STZ: Companys track record shows little to justify its lofty valuation, and recent jump in revenue stems from a change in accounting methods. 

Features: Positive on JBLU: A few changes to the carriers business model, which has been better at creating passenger comforts than meeting earnings forecasts, could give shares a boost of as much as 50%; Positive on TAP: Ongoing consolidation of the beer industry could lift shares 30% or more if brewer is acquired, though with steady earnings growth and cost reductions it still looks good on its own; Cautious on DE, POT, MON: With farmers likely to lose money on corn, soybeans, and wheat for the first time in almost a decade, the companies that serve the industry could take a hit. 

Small Caps: Positive on BECN: Second-largest roofing-products distributor in the country is seeing strength in demand for nonresidential roofing, and shares could rise if company rides the industrys consolidation wave and makes an acquisition. 

Hedge Funds: Interview with David Ford and David Sabath, Founders, Latigo Ultra Fund, who target compelling event-driven opportunities largely in the U.S. with a bit in Europe; Interview with Joe McNay, Founder and Chief Investment Officer, Essex Investment Management (picks: ACT, AERI, TWOU, PANW, IDTI, FSLR, CSIQ, SUNE, SPWR). 

Follow-Up: Positive on COF: Nations fourth-largest issuer of credit cards has benefited from improving credit quality, greater efficiencies, and strong growth in auto loans and commercial lending; Cautious on THRX: Shares of firm that manages royalties from sales of prescription respiratory drugs Breo and Anoro, distributed by GSK, still arent a bargain amid slowing prescription trend. 

European Trader: Cautious on Rocket Internet, Zalando: German tech companies could see a pop when they go public, but the new stocks may struggle to live up to the hype. 

Asian Trader: Japan is at an interesting crossroads in its macroeconomic policies that should prompt investors to rethink some of their holdings there"; Christopher Wood of CLSA in Hong Kong suggests microeconomic plays, and likes five real estate companies (Positive on Mitsubishi Estate, Mitsui Fudosan, Sumitomo Realty, Sekisui House, Daiwa House).

>>> Tim hires bank to seek acquisitions in Brazil, targeting Oi

Tim hires bank to seek acquisitions in Brazil, targeting Oi 

Tim Participacoes (Bovespa: TIMP3), the Brazilian mobile telephone company, has hired a bank to seek acquisitions in Brazil and has targeted Oi (Bovespa: OIBR4), a Rio de Janeiro-based company, Veja reported, without citing sources.

The item did not identify the bank that has been supposedly hired by Tim to make acquisitions in Brazil.

Oi has BRL 46bn (USD 19bn) of debt, a factor causing it to not participate in an auction for 4G frequencies in Brazil set for 30 September, as reported.

Oi's aim is to reduce its leverage to participate as a leading actor in the industry consolidation underway, Valor reported, citing an unidentified representative of the controlling shareholders of the listed company.

Tim plans to seek acquisitions despite Banco BTG Pactual (Bovespa: BBTG11), the Brazilian investment bank, preparing to buy the Brazil-based company controlled by Italia Telecom, Veja reported.

Banco BTG Pactual soon will try to buy Tim, divide it and resell it to Oi, Claro and Vivo, Veja previously.

Vivo, the Brazilian mobile telephone company, is owned by the listed, Spanish company Telefonica. Claro, controlled by Mexico’s America Movil, is the third-largest cell-phone operator in Brazil. America Movil, the largest mobile telephone company in Latin America, is controlled by Mexican billionaire Carlos Slim Helu. Oi, the fixed-line operator, is partly owned by Portugal Telecom.

Italia Telecom seeks about USD 12bn for its two-thirds stake in Tim, according to an unsourced report in Rio de Janeiro-based daily newspaper O Globo this past February.


Source Veja, Valor Economico