TheChek News Flow

Brazil’s ‘first ethanol billionaire’ hits at petrol price curbs

Rubens Ometto, the sugar cane tycoon, has described government petrol price controls as a “disaster”, in a rare outburst for Brazil’s normally reserved business community.

The chief executive of Cosan, the sugar and logistics company, ratcheted up the pressure on President Dilma Rousseff’s government, which is already unpopular with markets, by telling a gathering of Brazil’s business elite that the government needed to “get off the backs of entrepreneurs”.

Mr Ometto, described by Forbes magazine as the first ethanol billionaire, said the government’s price controls for state-owned oil company Petrobras were destroying the country’s prized ethanol industry. Petrobras is being forced to import petrol at international prices and sell it domestically at a discount to help control inflation, meaning ethanol producers have to compete with subsidised gasoline.

“If this policy has for us [ethanol producers] been ruinous, it has been fatal for Petrobras,” Mr Ometto said at a Brazilian American Chamber of Commerce awards dinner in New York late last week, at which he was honoured for his contribution to Brazilian business.

Ms Rousseff’s government holds a strong lead heading into elections scheduled for October, but she has been falling in opinion polls. Each dip in her popularity has helped drive a rally in the country’s stock market as investors bet that a victory for the opposition or a weakening of the president in her second term could lead to more business-friendly policies.

Aside from the petrol price controls, investors point to the government’s intervention in electrical energy prices, its maintenance of a minimum wage policy not linked to productivity and its previous meddling in currency markets as destructive for the investment climate.

“This [petrol price policy] is a disaster because businessmen cannot plan,” Mr Ometto told the FT. “It is one thing if you plan a business and you commit an error in your projections and diagnoses; it’s another thing if you are penalised because the rules change in the middle of it.”

Mr Ometto’s outspoken comments were unusual in a business community that generally keeps very close ties with government. While big Brazilian companies tend to be well managed, the government’s central place in the economy, given its sheer size, means most rely on it for some business.

BNDES, Brazil’s development bank, is also the main source of long-term lending in the economy, with big business dependent on its allocations of loans at cheaper rates than those available from private-sector banks.

In his speech to the awards dinner – whose attendees included Luciano Coutinho, the head of the BNDES – Mr Ometto called on the government to lift burdens such as a convoluted taxation system and difficult labour laws.

If the government could not help, it could “at least not get in the way”, Mr Ometto said.

His company, Cosan, is also a partner of Anglo-Dutch group Shell.

- The company is considering the purchasing the 55% in Alliance Boots (WAG purchased 45% of Boots in 2012 in a deal valued at $6.7B with a #-year option to acquire the rest).

- The countries were said to have sold steel products at unreasonably low prices in the US. 

Market Likely to Be Tapped in July

China will allow 10 provinces and cities to sell bonds on their own credit later this year, introducing the country's first Western-style municipal bonds as it broadens the financial choices for local governments.

The list will cover six provinces, including the wealthy eastern Zhejiang, Jiangsu and Shandong, southern Guangdong and two less-developed provinces in central and western China. The four cities are Beijing, Shanghai, Shenzhen and another city on the country's eastern coast, said a person familiar with the situation.

The central government will announce the plan later this month and bonds will likely be issued in early July, the person said.

Local governments are generally barred from directly issuing debt because of concerns over rising debt and fears that some local administrations don't have the ability to manage their own funds.

China began issuing local-government bonds in 2009 to offer local authorities more financing channels. The finance ministry sold all such bonds on behalf of the local authorities in 2009 and 2010.

Beijing started a trial program in late 2011 to allow a few provinces and cities to sell bonds directly, a potential first step toward putting local-government finances in order. But the bonds were still supported by the central government, because the finance ministry continued to repay the principal and interest on the local authorities' behalf.

The new municipal bonds will be rated and investors will probably ask for higher yields because the local authorities will repay the debt themselves.

China is revising its budget law to give such bond offers formal permission. The most-recent draft of the law, which still needs legislative approval, includes a provision for local governments to issue bonds directly to fund essential projects.

It is unclear how much debt the 10 provinces and cities will offer this year, but Beijing has raised the total local-government bond quota to 400 billion yuan ($64.2 billion) this year, up from 350 billion yuan in 2013, according to the country's deficit plan for 2014. China announced a larger budget deficit this year as it tries to overhaul the economy and respond to the effects of slower growth.

The finance ministry has asked local governments to make proper use of the bond proceeds, with increased support for social welfare and economic restructuring, the Xinhua news agency said earlier.

China's National Audit Office said in late 2013 that debt and guarantees issued by local governments had surged 67% to 17.9 trillion yuan by the end of June 2013, compared with the last tally of local debt at the end of 2010 of 10.7 trillion yuan.

In response to the 2008 financial crisis, many local governments in China undertook major spending projects to stimulate economic growth. Much of this was financed through special investment platforms set up specifically to skirt rules barring local governments from borrowing directly from financial institutions.

That has led to greater scrutiny from Beijing of local-government financing policies, although it has tried to balance that by opening the doors to governments that prove they can manage their finances successfully.

No, according to the traditional definition of two negative quarters of gross domestic product.

But to a middle-class family and those less fortunate, a couple of GDP ticks up or down are utterly meaningless.

In Washington — where the learned economists who came up with the definition toil — not a single pencil-pusher saw the massive 2007-2009 financial crisis coming or the fact that the economy would not grow in the first quarter of this year.

In fact, at the Fed they forecast 2 percent growth for the quarter.

Let’s move to the kitchen table, where the real-life economic decisions get made. What bills will be paid and what purchases can be made?

This is where economic growth begins — and where barely any of the $4 trillion of the Fed’s ballooning balance sheet has reached.

Walmart reported earnings Thursday, and they are a meaningful measure of what’s going on in the consumer’s kitchen.

With its vast array of products, Walmart is America’s general store. It provides a window on not only how much consumers spend, but also what they’re spending it on every day.

So when Walmart guided down estimates for next quarter, stocks and bonds became even more fearful of growing economic weakness.

When in doubt, look to the bond market — the adult in the room — for guidance in these important matters.

The 10-year Treasury bond yield is trading at recessionary levels. The benchmark note broke below the psychologically important level of 2.5 percent, and the 30-year is at 3.33 percent.

Besides being a gauge for mortgage rates, these yields say that Treasury market traders don’t see much growth — if any — for the near future.

Speaking of kitchens, for most Americans, President Harry S. Truman’s famous quote works quite well for defining an economic slowdown: “It’s a recession when your neighbor loses his job; it’s a depression when you lose yours.”

Today everybody has a friend or family member out of work. No matter how the Beltway economists slice it or how they spin it, this zero of an economy is still at zero.

Telecoms watchdog warns on EU rules

The British telecoms regulator has warned that proposed European rules safeguarding “net neutrality” could be damaging if they fail to recognise the need for internet management.

Last month, the European Commission agreed proposals to ensure “net neutrality”, the concept of unrestricted access to the internet. The plans would, for example, ban “business class” internet access for companies willing to pay more.

But support for a more flexible approach to internet management has emerged from the UK, where the regulator Ofcom has said that “well-intentioned but overprescriptive and detailed legislation may deliver the opposite of the intended effect”.

In a speech, Ed Richards, chief executive of Ofcom, expressed concern that such legislation would mean “not more certainty but less. Not the timely exercise of reasonable objective judgment, but the pursuit of time-consuming and self-interested litigation”.

Mr Richards has, as an alternative, outlined a view on legislation that allows both sustaining the quality and performance of the internet and the provision of managed services.

He said that blocking of any kind by internet access providers was “highly undesirable” but that companies should be allowed to apply traffic management to optimise the consumer experience.

He said: “This should not extend to outright blocking, throttling or practices such as the anti-competitive prioritisation of a network’s own content and services. However, it is important that framework of regulation should be fully capable of addressing areas of serious concern such as child safety.”

Mr Richards also supported the provision of managed services by network operators to help them make “a return for investment they have made in their networks” – adding that this should ultimately be beneficial for consumer.

His words are likely to be welcomed by companies in the telecoms industry, which want to develop specialised services and charge different prices.

Telecoms executives have also said that the rules failed to recognise the need to manage internet traffic in order to ensure that services are not degraded. However, the sector has less benevolent reasons to complain given internet services such as WhatsApp and Skype have seen their revenues hit by rival free services.

EU member states will be able to tweak the net neutrality law, although most are expected broadly to support the package that also includes proposals on cutting roaming charges.

The Department for Culture, Media and Sports said that the UK government supported a flexible approach.

“We are committed to an open, safe and secure internet that allows growth and innovation, delivering services and products that consumers want,” it said. “However, we believe that self-regulation and greater transparency of traffic management measures would be more effective ... Regulation risks being too prescriptive, inflexible and may have unintended consequences.”

Cover story: Profile of Jana Partners Barry Rosenstein, whose Jana Nirvana fund has had a three-year annualized gain of 19.1%, topping the 16% return of the S&P 500 since the end of 2013 (+ WAG, OIS, EQIX); Barrons list of the Top 100 Hedge Funds, led by Glenview Offshore Opportunity, Hildene Opportunities LP, Chenavari-Toro Capital IA Class A, Childrens Investment Ltd., and Tiger Global. 

Features: Cautious on AVP: Company is doing well under turnaround led by CEO Sheri McCoy, and bulls argue shares could return to the low $20s in a couple of years, but key to success hinges on fixing North American operations; Positive on AMTD: Improving trading volumes could help shares appreciate by 35%, while rising interest rates could give entire sector a boost; Positive on PBI: Under CEO Marc Lautenbach the companys postage-meter business has stabilized and become profitable, while new digital businesses will continue to drive growth that could boost shares 60% in the next three years. 

Tech Trader: Cautious on CSCO: Despite beating expectations for fiscal third quarter, company still faces a major threat from software-defined networking, in which its equipment can be replaced by something like a general-purpose computer running switching software; Cautious on FB, AMZN: Tiernan Ray continues to question the metrics being used by analysts to trumpet shares of tech giants. 

Trader: Despite index highs, says Michael Marrale of ITC, theres an incredible amount of pessimism and negativity in equity markets; Cautious on TGI: Aerospace structure business is companys problem child, but if it can fix that, slowing growth may stabilize and it may win more contracts such as a recent one from Airbus; Negative on WWE: Stock price contains a lot, but not all, of the recent bad news for company that has overestimated its ability to attract new viewers. 

Follow-Up: Cautious on PFE: Pharma giant should stop pursuit of AZN, since deal doesnt make sense strategically and would shackle company to what is probably the worst-positioned major global drug company based on projected revenues and profits in the coming years; Cautious on R: Shares have outperformed the broader market, but at their current price the stocks valuation has caught up with its growth prospects. 

Mutual Funds: Interview with Andy Acker, Manager, Janus Global Life Sciences (top ten holdings: GILD, AET, ESRX, JNJ, CELG, BIIB, Roche Holding, VRX, AZN, NPSP). 

European Trader: Positive on Bankia: Spains so-called bad bank could be about to come good for investors, with shares climbing 20% in the next 12 months as management overhaul provides a solid foundation for future growth. 

Asian Trader: Positive on Softbank: Investors looking for a way to play Alibaba are better off with telecommunications giant than with YHOO, and its $57 possible profit on Alibaba IPO could set a record. 

Emerging Markets: Li Ka-shing, Asias richest man, has been selling Chinese real estate stocks, including large holdings in tier-one cities such as Shanghai and Guangzhou; for small investors, only those willing to wait for a correction should venture into the sector. 

Commodities: After two years of decline, titanium prices appear to have reached rock bottom. CEO Spotlight: Profile of KKRs Henry Kravis and George Roberts, who say if they were starting their firm today they would focus on smaller real-estate deals, not private equity. 

Streetwise: GS strategist David Kostin screened for companies that have spent less on capex relative to sales during they past five years than they did during the previous five (Positive on COP, SHW, ORCL); Some sectors are seeing capital spending opportunities that are simply too good to pass up.