FT : Dutch pension fund defends Israel stance

Dutch pension fund defends Israel stance

The second-biggest pension fund in the Netherlands has defended its asset management arm’s decision to dump its holdings in five Israeli banks in January.
PFZW, the €137bn pension fund, said it has completed a “review” into the decision made by PGGM to pull out of Bank Hapoalim, Bank Leumi, First International Bank of Israel, Israel Discount Bank and Mizrahi Tefahot Bank.

Ellen Habermehl, a spokesperson for PFZW, said in a statement emailed to FTfm: “The commotion caused by our decision has led us to carefully evaluate our decision-making process on this matter. We have concluded that there is no reason to reconsider this decision.”
Ms Habermehl added that the pension fund has close to €100m invested in 100 Israeli companies, and “plans to continue to invest in Israel as long as it is in line with our policy of responsible investment”.
PGGM’s decision, which was based on concerns that the banks finance illegal Israeli settlements in the occupied territories, prompted ABP, the largest Dutch pension fund, to issue a public statement saying that it would remain invested in three of the banks.
ABP, the world’s third-largest pension fund with €300bn of assets, concluded that the banks “do not act in breach of international laws and regulations, and that there are no judicial rulings that should lead to their exclusion”.
Ms Habermehl confirmed that PFZW’s management team met executives from Israeli and Palestinian companies as well as non-government organisations and government officials in April 2013 before deciding to divest from the five banks.
She said: “Yes, we did talk to [several pro-Palestine lobby groups], but we did much more during the five years of engagement on this issue.”

WSJ : Where to Find the Best Croissants in Paris, France

Where to Find the Best Croissants in Paris, France {http://on.wsj.com/1dGqSyR}
Taste the most perfect pastries in the capital of France, made by a new generation of artisanal bakers

THOUGH I HAVE zero medical training, I feel qualified to tinker with one of the most timeworn adages about health. Having lived in Paris for 27 years, I've concluded that a croissant a day keeps the doctor away. At the very least, it's the best way to start the day.

A croissant safari is also a delicious way to explore Paris—especially now. In a welcome rebuff to the many bakeries that use industrially made dough, a new generation of pastry chefs committed to top-quality ingredients and traditional methods is leading a renaissance of the emblematic indulgence. Sampling their wares will also not only get you out of bed early (croissants tend to be best in the morning, when they're freshly baked), but take you to parts of the French capital you probably wouldn't see otherwise. Some of today's best croissants are made in lovely neighborhoods where Parisians actually live, as opposed to the well-trod precincts around major museums and monuments.

The first thing I learned about one of the most quintessentially French of foods, by the way, was that they weren't originally French at all. Austrian-born Marie Antoinette is said to have introduced the kipferl, a crescent-shaped Viennese pastry, in the 18th century after she arrived to marry King Louis XVI. Another story attributes the croissant's French debut to Austrian baker August Zang, who opened a shop in Paris in the 1830s. What is certain is that local bakers refined the pastry by making it with a yeast-leavened dough that's layered and folded several times with chilled butter, a process known as laminating. This labor-intensive routine is what gives the croissant its flaky quality, and part of what made the pastry so popular.

My own croissant connoisseurship began under the tutelage of Maria, the Spanish concierge in the elegant Seventh Arrondissement building where I lived when I moved to Paris in 1986. I was an unlikely tenant; everyone else in the building was in bed by 9 p.m., and many of my genteel neighbors walked with canes. Every morning, Maria tied a black scarf over her head, went to early mass, then bought a morning baguette and croissants for my landlord, a retired British diplomat, and his French wife.

“ 'It takes 48 hours to make good croissant dough,' he said. ”
One morning Maria surprised me in my pajamas when she knocked on the door with my mail (she usually slid it under the doormat). When I peered around the heavy oak door, she handed me the post and a white paper bag. "Feliz cumpleaños, Señor," she said with a slight bow. Since she knew it was my birthday, I guessed she'd been paying keen attention to my mail, but any uneasiness vanished when I tucked into the best croissant I'd eaten in my life, a lightly buttery pastry turban with a crust that flaked apart in golden, rectangular crumbs and hid a delicate, cottony interior. That afternoon, when I stopped by to thank her with a bunch of rust-colored chrysanthemums, she crossed herself before taking the bouquet—unbeknownst to me, in France the flowers are seen as appropriate only for cemeteries—but we became friendly. I asked her where to find the best pastries in the neighborhood; that night I found a tidy hand-written treatise pushed under my door.

Maria bought her croissants at La Maison Pradier during the winter and Gosselin in summer, because, she explained, the latter's fours (ovens) were newer and therefore hotter when it was humid, which meant better crusting. Her favorite shop, though, was Gérard Mulot in Saint-Germain-des-Prés, often the destination of her midday walk.

"You should know from the smell that a croissant was made with good unsalted butter, but it should not be the dominant taste," she wrote. "They should be a nice golden color, but not too dark, which means they've cooked too long and could be dry."

I became an eager student of croissants. The key to spectacular examples is the dough, bien sur. "It takes 48 hours to make good croissant dough," said Fabrice Le Bourdat of Blé Sucré bakery in the 12th Arrondisement. "First you make the dough and let it rest for a day chilled. The following day you add the butter and do the feuilletage [laminating]. Then you spread and stretch it, roll it again, and let it rest so that it rises slowly. It's a very time-consuming process involving a lot of manual labor, and this is why so many Paris bakeries now buy their croissant dough ready-made."

Many, but not all. I recently embarked on a week-long tour des fours with a baker friend who was visiting from abroad. On our expedition, I learned how important the raw ingredients—butter, flour, milk, sugar and yeast—are to a great croissant. The new generation of bakers painstakingly sources minimally processed, often organic, components for dough. (Mr. Le Bourdat, for example, said he uses organic yeast, because "it contains no extraneous chemical agents and produces a slower fermentation, which allows the flavors to develop more fully.") I was also reminded of why Paris is the only city where I don't mind hearing the alarm clock go off.

Top Spots for Croissants in Paris
A fresh crop of bakeries serves up flaky delights—and other very tasty baked goods

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THE BOHEMIAN | GONTRAN CHERRIER

Tousled 30-something baker Gontran Cherrier came to Montmartre, the storied quartier the locals often call "Le Village," in 2010, and it's easy to see why he quickly found a following. Mr. Cherrier's croissant is a soft scroll of pale-yellow, butter-scented pastry tissues that are a pleasure to pluck apart. Another delectable choice at this simple, white-tiled bakery is his miso-seasoned rye bread, which makes flavorful bookends for sandwiches when lightly toasted. 22 rue Caulaincourt and other locations, gontrancherrierboulanger.com

THE CLASSICIST | SÉBASTIEN GAUDARD PÂTISSERIE DES MARTYRS

A sure sign of the new affluence of the Ninth Arrondissement, the central Paris district also known as "La Nouvelle Athènes" for its neoclassical early 19th-century architecture, is that it's attracting craftsmen like Sébastien Gaudard. He opened La Pâtisserie des Martyrs, which has a handsome Belle Époque-style décor with marble counters, glass lanterns and a check tiled floor, on its main market street at the end of 2011. It's since become a neighborhood institution. Mr. Gaudard's croissants have a gossamer glaze of sugar that brightens the taste of the butter in the pastry. When pieces are torn off, the fluffy interior remains fused to the crunchy outer layers, a sign of a transcendently good croissant. Mr. Gaudard's are the ones that end up on my own breakfast table most often. 22 rue des Martyrs, sebastiengaudard.fr

THE ARTIST | DU PAIN ET DES IDÉES

Not far from Canal St. Martin, the old industrial waterway that's become the aquatic spine of one of the hippest neighborhoods in eastern Paris, is baker Christophe Vasseur's Du Pain et des Idées. (Its magnificent painted glass ceiling from 1875, cast iron bread racks and gilded details bespeak his former career as fashion executive.) Since Mr. Vasseur relaunched the bakery in 2002, it's acquired a cult following for its bread—try the thick-crusted pain des amis—and fluffy, crispy-tailed croissants. For a perfect breakfast, pick up a couple and head over to Ten Belles, the coffee shop on the other side of the canal. And don't leave without one of Mr. Vasseur's apple tartlettes—a fine fan of sliced apple spread atop a smear of deeply reduced apple compote on a disk of crunchy pastry. They're what the French would call une tuerie (absolutely fantastic). 34 rue Yves Toudic, dupainetdesidees.com

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La Pâtisserie Cyril Lignac Beatriz da Costa for The Wall Street Journal
THE CELEBRITY | LA PÂTISSERIE CYRIL LIGNAC

As a main host of culinary programming for France's M6 television channel, Cyril Lignac is one of the country's best-known food television personalities. He also runs a cooking school and several restaurants in Paris. In 2011, he and former Fauchon pastry chef Benoît Couvrand opened the pretty but edgy La Pâtisserie. Its facade is painted oxblood red and the marble-faced counters are lighted by a forest of spotlights. Stopping by on a recent winter morning, I wondered if the croissants would live up to Mr. Lignac's somewhat hyped reputation, but the downy golden crescent I tucked into did him and Mr. Couvrand proud indeed; it just might be the lightest croissant in town. There are also seasonal offerings, like the éclair à la figue de Solliès, or fig-filled éclair, a riff on another great French classic. 24 rue Paul Bert (and 2 rue de Chaillot), lapatisseriecyrillignac.com

THE BAKER'S BAKER | BLÉ SUCRÉ

It was vexing to find a line at Fabrice Le Bourdat's Blé Sucré for its 7 a.m. opening, but once we withdrew to the adjacent Square Trousseau for our tasting, I realized that the wait had been worthwhile. My still-warm croissant had an alluringly brittle, shell-like crust, but it was the interior that was so good—fluffy but elastic, it tore apart in fine layers and was redolent of high-quality butter. My pal insisted I try one of her madeleines, which had delivered what she described as a "perfect Proustian moment." But I was still trying to figure out why Mr. Le Bourdat's croissant was so good, and then I got it: What the waking palate needs is a little salt, and that's exactly what this pastry almost imperceptibly delivered. Mr. Le Bourdat's shop is rightly vaunted as one of the best—maybe even the best—of the new breed of Paris bakeries. 7 rue Antoine Vollon, blesucre.fr

FT : Save capitalism from the capitalists by taxing wealth

Save capitalism from the capitalists by taxing wealth

Rising levels of inequality need to be addressed on a global scale, writes Thomas Piketty

The distribution of income and wealth is one of the most controversial issues of the day. History tells us that there are powerful economic forces pushing in every direction – towards greater equality, and away from it. Which prevail will depend on the policies we choose.
America is a case in point. Here is a country that was conceived as the antithesis of the patrimonial societies of old Europe. Alexis de Tocqueville, the 19th century historian, saw America as the place where land was so plentiful that everyone could afford property and a democracy of equal citizens could flourish. Until the first world war, the concentration of wealth in the hands of the rich was far less extreme in the US than Europe. In the 20th century, however, the situation was reversed.

Between 1914 and 1945 European wealth inequalities were whipped out by war, inflation, nationalisation and taxation. After that, European countries set up institutions which – for all their faults – are structurally more egalitarian and inclusive than those of the US.
Ironically, many of these institutions drew inspiration from America. From the 1930s to the early 1980s, for example, Britain maintained a balanced distribution of income by hitting what were deemed to be indecently high incomes with very high tax rates. But confiscatory income tax was in fact an American invention – pioneered in the interwar years at a time when that country was determined to avoid the disfiguring inequalities of class-ridden Europe. The American experiment with high tax did not hurt growth, which was higher at the time than it has been since 1980s. It is an idea that deserves to be revived, especially in the country that first thought of it.
The US was also first to develop mass schooling, with nearly universal literacy – among white men, at any rate – in the early 19th century, an accomplishment that took Europe almost another 100 years. But again, it is Europe that is now more inclusive. True, the US has produced many of the world’s outstanding universities. But Europe has done better at producing solid middle-ranking ones. According to the Shanghai ranking, 53 of the 100 best universities in the world are in the US, and 31 in Europe. Look instead at the top 500 universities, however, and the order is reversed: 202 in Europe against 150 in the US.
People often talk up the virtues of their national meritocracies, but – whether in France, America or elsewhere – such rhetoric seldom fits the facts. Often the purpose is to justify existing inequalities. Access to American universities – once among the most open in the world – is highly unequal. Building higher education systems that combine efficiency and equal opportunity is a major challenge facing all countries.
Mass education is important, but it does not guarantee a fair distribution of income and wealth. US income inequality has sharpened since the 1980s, largely reflecting the huge incomes of people at the top. Why? Have the skills of the managerial cadre advanced further than everyone else’s? In a large organisation, it is hard to know how much each person’s work is worth. But another hypothesis – that top managers by and large have the power to set their pay themselves – is better supported by the evidence.
Even if wage inequality could be brought under control, history tells us of another malign force, which tends to amplify modest inequalities in wealth until they reach extreme levels. This tends to happen when returns accrue to the owners of capital faster than the economy grows, handing capitalists an ever larger share of the spoils, at the expense of the middle and lower classes. It was because the return on capital exceeded economic growth that inequality worsened in the 19th century – and these conditions are likely to be repeated in the 21st. The Forbes global billionaire rankings show that the wealth of the very richest has grown more than three times as fast as the size of the world economy between 1987 and 2013.
US inequality may now be so sharp, and the political process so tightly captured by top earners, that necessary reforms will not happen – much like in Europe before the first world war. But that should not stop us from aspiring to improve. The ideal solution would be a global progressive tax on individual net worth. Those who are just getting started would pay little, while those who have billions would pay a lot. This would keep inequality under control and make it easier to climb the ladder. And it would put global wealth dynamics under public scrutiny. The lack of financial transparency and reliable wealth statistics is one of the main challenges for modern democracies.
Of course there are alternatives. China and Russia, too, must deal with wealthy oligarchies, and they do it with their own tools – capital controls, and jails whose bleak walls can contain the most ambitious oligarchs. For countries that prefer the rule of law and an international economic order, a global wealth tax is a better bet. Maybe China will come round to it before we do.
Inflation is another potential solution. In the past it has helped lighten the burden of public debt. But it also erodes the savings of the less well off. A tax on vast fortunes seems preferable.
A global wealth tax would require international co-operation. This is difficult but feasible. The US and the EU each account for a quarter of world output. If they could speak with one voice, a global registry of financial assets would be within reach. Sanctions could be imposed on tax havens that refused co-operation.
Short of that, many may turn against globalisation. If, one day, they found a common voice, it would speak the disremembered mantras of nationalism and economic isolation.

>>> Sanpower in advanced discussions regarding takeover bid for House of Fraser

Sanpower in advanced discussions regarding takeover bid for House of Fraser (HOF LN)

Sanpower, a Chinese conglomerate founded by Yuan Yafei, has submitted a takeover bid for the UK-based department store chain House of Fraser, The Sunday Times reported. Sanpower is in advanced talks with House of Fraser about a bid of more than GBP 450m (EUR 544m) for the retailer, the report said, without citing a source for the claim.

House of Fraser chairman Don McCarthy is believed to have accepted Sanpower’s bid last week, the item said. McCarthy and his family own about 20% of House of Fraser. The company’s other leading shareholders have also received details of the offer, according to the newspaper.

Sanpower and House of Fraser have been holding secret talks for months, the item said.

House of Fraser has held unsuccessful talks with potential buyers, the article added, naming French counterpart Galeries Lafayette and the retail entrepreneur Mike Ashley as two of those suitors.

The department store chain had been considering a flotation, and had hired the investment banks Rothschild and HSBC and the stockbroker Numis Securities to advise on the listing plans, according to the report.

A takeover would need to secure approval from the majority of House of Fraser’s owners, the item added, noting that representatives of collapsed Icelandic banks effectively control a 49% stake in the company.

Tom Hunter, a private investor, holds an 11% stake in House of Fraser, while Kevin Stanford controls a 10% shareholding, the item added.

House of Fraser refused to comment, the report said.

Separately, The Mail on Sunday reported that House of Fraser’s board members have been instructed to focus their efforts over the coming six weeks on preparations for a GBP 450m listing. The newspaper cited unspecified sources who said early meetings between House of Fraser directors, potential investors and advisers were “positive.”

It is thought that House of Fraser’s flotation prospectus will not be completed for several weeks, The Mail on Sunday item said.


Source Sunday Times, Mail on Sunday

>>> ECB's Weidmann: ECB should only react to low inflation in the event of 2nd r

ECB's Weidmann: ECB should only react to low inflation in the event of 2nd round effects; ECB should not overreact to a fall off in inflation which is largely due to cyclical factors 

- German press- Sees much of the falloff in euro zone inflation attributed to energy and food prices. 
- Does not see euro zone in a cycle of deflation. 

**NOTE Mar 25th: (EU) ECB's Weidmann (Germany): ECB would be in uncharted territory if it were to adopt QE, ECB needs to respect the limits of its mandate 
- Markets are rewarding the eurozone for reform progress, and all indications are that the eurozone recovery will continue. 
- Still too early to say eurozone debt crisis is over. 
- Broad deflation risks are very limited. 
- Current EUR FX level does not warrant monetary policy action. Current ECB monetary policy remains expansive.

>>> Amgen Studies Show Amgen's Novel Investigational Cholesterol-Lowering Medici

Amgen Studies Show Amgen's Novel Investigational Cholesterol-Lowering Medicine Evolocumab Significantly Reduced LDL Cholesterol By 55-66% Compared To Placebo

- Evolocumab is an investigational fully human monoclonal antibody that inhibits proprotein convertase subtilisin/kexin type 9 (PCSK9), a protein that reduces the liver's ability to remove LDL-C from the blood.1 
- The three Phase 3 studies evaluated evolocumab in different patient populations: as monotherapy in patients with high cholesterol (MENDEL-2); as a long-term 52-week therapy in patients with high cholesterol on risk-based lipid-lowering therapy (DESCARTES); and in combination with statins and other lipid-lowering therapies in patients with heterozygous familial hypercholesterolemia (HeFH), a genetic disorder characterized by elevated LDL-C levels (RUTHERFORD-2). 
- In MENDEL-2, the most common adverse events (AEs) (=2 percent in evolocumab combined group) were headache, diarrhea, nausea and urinary tract infection. The most common AEs (>5 percent in evolocumab) in the DESCARTES study were nasopharyngitis, upper respiratory tract infection, influenza and back pain. In RUTHERFORD-2, the most common AEs (=2 percent in the combined evolocumab group) were nasopharyngitis, headache, contusion (i.e., bruise), back pain, nausea, arthralgia, upper respiratory tract infection, influenza, myalgia and pain in extremity.

>>> Barron's Summary: Positive on ALU, CIEN, JDSU, DDR, EXAS; Cautious on KO, T

Barron's Summary: Positive on ALU, CIEN, JDSU, DDR, EXAS; Cautious on KO, TSLA, FB, KATE

- Cover story: Lower energy costs will have a salutary effect on the U.S. economy, while vast new discoveries of oil and natural gas in the U.S. and around the globe could drive oil prices to as low as $75 a barrel over the next five years from a current $100; as fuel choices are gradually introduced to the market, global oil consumption will slow. 

- Tech Trader: Cautious on FB: Social site hasnt offered an explanation of whether it first tried to build the technology behind Oculus itself before buying the virtual reality hardware maker, nor has it made a valuation case, a troubling situation because there is no way to know whether it paid a fair price; Positive on ALU, ERIC, CIEN, NOK, FNSR, JDSU, AVGO: Wireless and wired equipment makers have increasing utility and value as FB, GOOG, VZ, and CHL build out networks to bring more users online. 

- Trader: More volatility could come from lower-than-expected first quarter earnings reports, out in April and May; Cautious on KATE: Shares are up, but improved annual results are less stellar than they look at first glance, and company would have to significantly boost sales to justify current stock price; Negative on KO: Weak stock rise over the past 24 months suggests investors believe management is underperforming. Yet a richer compensation plan is being introduced when the previous one still had a year to run, prompting shareholder Wintergreen Advisors to call for its withdrawal. 

Features: 
1) Cautious on TSLA: Chief Elon Musks plan to build a huge factory in bid to trim cost of lithium-ion batteries could work, but cost reductions would only materialize if 500K batteries a year are produced, while automaker sells only 35K cars per year; 
2) Cautious on GOOG, FB, Tencent, BIDU, YHOO, TWTR, LNKD, YELP, ZNGA, AOL, SOHU, RENN: Companies control about 81% of the online advertising market, but given its size and potential growth, it will be nearly impossible for firms to grow into their current market values; 
3) Positive on DDR: Shares of shopping-center REIT have fallen, but with rents rising and debt going down, stock could climb to $20 from $16 as fundamentals improve; 
4) Corporate Americas switch to private healthcare exchanges could give private exchange providers, ancillary benefit suppliers, pharmacy benefit managers, and managed-care providers a boost (Positive on AON, MMC, TW, XRX, MET, UNM, CVS, ESRX, AET, UNH, CI); 
5) Positive on EXAS: Shares could rise 50% if pharma companys colon-cancer test ramps up quickly, a situation short sellers are betting wont happen. 

- Follow-Up: Cautious on C: Despite banks stress-test failure, the great strength of its global franchise sets it apart from peers, but worldwide operations arent generating enough returns and developing market exposure has some investors worried; Positive on ANN: Shares, already on the rise, could see another 15% gain if retailers earnings continue to meet expectations; Positive on PAY: Data breaches at companies such as TGT are good news for company, which is seeing ramped-up demand in U.S. for terminals that can read chips embedded in credit and debit cards. 

- Hedge Funds: Interview with Lawrence Speidell, Founder, Frontier Market Asset Management, who picks small, well-run companies that arent affected by the global macroeconomic din that usually drives big bourses like Sao Paulo and Shanghai; Interview with Robert Willens, Tax Consultant, Robert Willens LLC, who says draft legislation for the Tax Reform Act of 2014 is of concern because of the way it could affect investors who own REITs. 

- European Trader: European consumer stocks could have their moment in the sun as the regions fully valued equities markets prompt investors to scout for undervalued companies (Positive on Heineken, British American Tobacco, Imperial Tobacco Group). 

- Asian Trader: Japanese bank stocks have fallen to levels that make them attractive again, and some are making acquisitions in U.S. and Asian markets (Positive on Sumitomo Mitsui Financial Group, Mitsubishi UFJ). 

- Emerging Markets: Whats good for Mexicos economy, including landmark reforms that open up energy and telecom sectors to encourage competition and foreign investors, isnt necessarily good for stocks (Negative on EWW, EWZ, MX, Fomento Economico Mexicano, Wal-Mart de Mexico). 

- Streetwise: Brian Sanborn of Ned Davis Research says investors should seek stocks that analysts are revising upward without getting carried away, such as HUM, which generally isnt considered a momentum name.

(Barron's) Danger Ahead for Tax Loopholes (VOD / AT&T mentionned)

Danger Ahead for Tax Loopholes

An interview with tax guru Robert Willens. Sizing up proposals that could affect REITs, AT&T and others.

When it comes to analyzing companies, taxes don't always command the same amount of attention from investors as, say, earnings growth or profit-margin trends. But taxes and tax policy, however dry and arcane, can have a profound impact on a company's financial outlook. How quickly a company can depreciate equipment it buys, whether it can repatriate cash cheaply, or even whether it's able to convert to a REIT (real-estate investment trust)—along with, of course, shutting down corporate-tax loopholes—are all hot topics in Congress right now.

For some perspective on those issues and others, Barron's spoke recently to Robert Willens, a well-regarded and very seasoned tax and accounting expert. Willens, 67, began his career in 1972 and eventually became a tax partner in the New York office of Peat, Marwick, Mitchell & Co., now KPMG. He then went on to spend 20 years at Lehman Brothers, which he left in January 2008 to start his own consultancy, Robert Willens LLC. Willens, whose consultancy caters primarily to hedge funds, focusing more on corporate tax than individual, also pens a daily newsletter called, what else, The Willens Report.


"The fear is that the IRS is attempting to make policy here, even though they don't usually do that." -- Bob Willens
Barron's: What's the latest as far as any tax reform coming out of Washington?

Willens: We are keeping an eye on the draft legislation, called the Tax Reform Act of 2014, which was put out in February by Dave Camp, chairman of the Committee on Ways and Means. He's a Republican congressman from Michigan. His proposal, which was several years in the making, would radically overhaul the tax code, even more so than the tax legislation we had in 1986. Camp's approach is to reduce tax rates, but broaden the tax base by eliminating many of the loopholes, to ensure the same level of revenue.

What in particular caught your eye?

The proposal has really caused a lot of anxiety in the investment community, particularly for people who invest in REITs. It doesn't seem these proposals will be enacted any time soon, but nevertheless they are a concern.

REITs pay out most of their taxable income to shareholders and therefore avoid corporate taxes. What does the proposal call for?

It would essentially terminate the ability of any company to convert to a REIT. There have been concerns that non-traditional companies have been qualifying for REIT status, perhaps inappropriately. But this proposal goes way beyond what is necessary to police the space. It would impose a "toll charge" on any C corporation that wanted to convert to a REIT—basically, the charge will be equivalent to the fair market value of all the company's assets, as if they had been sold. That would be a very large amount, and particularly onerous because it would be a gain realized without any cash to pay the tax on the gain.

What are a few examples of companies attempting to convert to REITs?

There are lot of companies, including Lamar Advertising [ticker: LAMR], Iron Mountain [IRM], Equinix [EQIX], and CBS Outdoor Americas [CBSO] [which just split from CBS on Friday], that have all requested rulings from the IRS to become REITs. Ordinarily, the IRS will issue a ruling within six to seven months after the request is made. But they have had their ruling requests at the IRS for more than a year. No doubt these companies are having dialogues with the IRS, but they haven't gotten rulings.

What are some of the key issues for these companies as they try to become REITs?

In the case of Iron Mountain, which handles record management and storage, one of the problems is that in order to be a REIT, you have to have real-estate assets, and you have to earn rents from real property. In Iron Mountain's case, in their warehouse they have these shelves they call racking, where they house documents. But there is some question as to whether that racking is a structural component of the building. If it is, then it is real estate. If it is not, then it is personal property.

For Lamar Advertising and Equinix, which operates data centers, it's hard to say what the issues are. It is clear, though, that Lamar has outdoor advertising displays, as does CBS Outdoor, which is attempting to convert its North and South American outdoor advertising business as a REIT. Those billboards are inherently permanent structures and, therefore, considered real estate. The fear is that the IRS is attempting to make policy here, even though they don't usually do that.

Another vehicle that investors looking for tax benefits have been turning to more often is master limited partnerships (MLPs), which, like REITs, pay out the bulk of their earnings to investors and forgo corporate taxes. Despite their similarities, does it look like we may see an increase in the number of companies becoming MLPs?

While the IRS is getting more restrictive on REITs and inversions, they are getting more expansive on MLPs, for some unknown reason. They are allowing a broader class of entity to convert to MLP status. Most MLPs are involved in the mineral and natural resource field, usually in exploration, development, processing, refining, marketing, and transportation of minerals or natural resources, including oil and gas. But over the last year, the IRS has been allowing companies that aren't directly engaged in those activities to become MLPs—companies that simply service companies that are engaged in those activities. We've seen an expansion in the number of companies eligible to be MLPs because the IRS has allowed companies whose activities are kind of peripheral to the main activities that MLPs were traditionally known for.

There's been a lot of talk about so-called inversions, in which a U.S. company changes its domicile to that of a country with lower taxes. First off, could you summarize how these transactions work?

It is simply a transaction in which a foreign company—sometimes newly created, sometimes an existing company—acquires the stock of a U.S. company. Typically, the foreign company pays for the stock, primarily with its own stock. Since the foreign company is inevitably smaller than the U.S. company it is acquiring, the result is that the U.S. shareholders acquire a majority ownership in the foreign company. Shares still typically trade on a U.S. exchange. The principal purpose of that—even though they will frequently tell you that there are many business goals that are achieved—is to reduce the tax burden. Income is shifted from the U.S. to the more benign foreign tax environments, typically Ireland, the Netherlands, Switzerland or the U.K.

What are a few examples?

Actavis [ACT] recently completed one inversion, and they are on the verge of doing a second one with the acquisition of Forest Laboratories [FRX]. Other examples of companies doing inversions include Eaton [ETN] and Perrigo [PRGO]. Chiquita Brands International [CQB] just announced one.

Will there be more of these transactions?

Absolutely. But I'm often asked why everybody doesn't do this, because you are guaranteed to reduce your tax rate dramatically and help the bottom line. There is some reluctance because the transactions tend to get covered in the press not very charitably, and there is fear of some reputational risk.

How do inversions affect investors?

Inversions complicate things for investors. First and foremost, the exchange of their stock in the U.S. company for stock in the foreign acquirer is taxable. And going forward, any dividends are from a foreign corporation, which complicates matters.

Do you expect the U.S. government to crack down on companies performing these inversions, which has cost billions in lost federal tax revenue?

You would think so. There have been periods of inactivity in this area and periods of great activity. The first inversion was in 1994 for a company called Helen of Troy, now domiciled in Bermuda. Since then there have been three waves of inversion transactions; we are now in the third wave. The last time Congress got involved was in 2003, and while they did create some impediments, they weren't sufficient in deterring companies from doing these transactions.

What's happening now?

A few weeks ago, when President Obama laid out his budget, it included proposals dealing specifically with inversions. In the budget, the president refers disparagingly to inversions—how they have very little, if any, business purpose and that they are done almost exclusively for tax-avoidance reasons. It also says there is no reason why these companies should be able to reduce their tax rate so easily by shifting income to more friendly foreign tax environments. Those proposals, if enacted, would almost certainly stop inversions.

What's the chance of that happening?

There is little chance of the proposals passing in their current form. But by becoming part of the conversation, it increases the possibility of their being enacted down the road, perhaps in a different, though no less punitive, form.

There are many U.S. companies with a lot of cash parked abroad, thanks to their overseas operations. But they're reluctant to spend that cash in the U.S. because of the tax bill it will incur. What do you expect on this front?

It's hard to say. U.S. companies had a one-year option in 2004 or 2005 that allowed them to repatriate earnings at a very low tax rate. The problem was that the companies, for the privilege of repatriating those earnings, were supposed to use repatriated cash to build plants, hire workers, and invest in research and development, and advertising. The only things they weren't allowed to do were to repurchase stock, pay special dividends, or pay executive compensation.

How did that turn out?

Studies showed there wasn't any incremental R&D spending, and there weren't a lot of incremental advertising or marketing expenditures. But there was a huge ramp-up in stock repurchases and dividends. So the program got a very bad name, and it clearly didn't accomplish what it was supposed to.

So companies spent the cash on exactly what they were explicitly told not to.

The problem was that money is fungible, or interchangeable. The funds that were repatriated were used for things like R&D, but the repatriated funds freed up money that was used to pay dividends and buy back stock.

There have been a lot of attempts to have another tax holiday for repatriated cash, and the proposals have been accompanied by very strong enforcement mechanisms to ensure that if a company didn't have an increase in its plant and equipment investment or R&D expenditures, it would have to pay taxes on the repatriated cash at the higher rate. But I don't expect we are going to see that, at least not anytime soon. So companies are left to their own devices, and they have to try to come up with their own techniques to repatriate the earnings tax efficiently. But that's very difficult to do nowadays.

What other tax matters are you keeping an eye on, particularly pertaining to investing?

The tax extenders bill has a better chance of passing this year. This bill extends the provisions in the tax law that have to be re-enacted continuously, usually every two years. The reason these provisions aren't a permanent part of the tax law is because of budget accounting—if they were permanent, the budget deficit would look worse than it is.

Which extenders are you most interested in?

Bonus depreciation, which was enacted in 2008 and has been extended several times. It allows companies that invest in capital goods to deduct, in the year they purchased the equipment, 50% of the cost of the equipment. For a company like AT&T [T], it is incredibly important and has reduced their cash tax rate dramatically.

So it accelerates depreciation on capital goods?

It goes beyond that. We already have accelerated depreciation. This is bonus depreciation, on top of the accelerated depreciation. When you combine bonus and accelerated depreciation, you wind up allowing a company to deduct about 70% or 75% of the cost of plant and equipment in the year of purchase. So they get to recover almost the entire outlay through tax deductions. AT&T has been a big beneficiary, and the expiration of bonus depreciation would clearly increase AT&T's cash tax payments this year, relative to prior years, and contribute towards a decline in cash from operations. But with this extenders bill in limbo, analysts that follow AT&T are getting quite concerned that their cash taxes will be higher this year. There have been some rumors about AT&T perhaps doing an inversion transaction with Vodafone [VOD]. But as a practical matter, I don't think they can. For such an iconic company to do an inversion would not be looked upon very favorably.

Do you expect that there will be meaningful federal tax reform anytime soon?

It is hard to imagine that, given how hard it is for the various factions in Congress to ever agree on anything. Tax reform is a fairly major undertaking, and presumably a lot of people's oxes would be gored if there were a comprehensive tax-reform effort. So I have a hard time believing that Congress could arrive at the kind of compromises they would have to reach to come up with anything meaningful.

(Barron's) - Cover : Here Comes $75 Oil

Here Comes $75 Oil

Lower energy costs will have a salutary effect on the U.S. economy. Not so Russia, where oil provides 50% of government income.

The long-term outlook for global oil prices is lower, perhaps much lower, giving a strong boost to the U.S. economy while potentially crippling the economy of Vladimir Putin's Russia. Vast new discoveries of oil and natural gas in the U.S. and around the globe could drive the oil price to as low as $75 a barrel over the next five years from a current $100.

The demand side, too, will put pressure on the supremacy of petroleum. For the first time in its 150-year history, the internal combustion engine can be run efficiently on alternative fuels from a number of sources, including natural gas. As these alternatives are increasingly introduced, global consumption of oil will slow its growth and flatten out.

Citigroup's head of global commodity research, Edward Morse, believes the combination of flattening consumption and rising production should mean that "the $90-a-barrel floor on the world oil price over the past few years will become a $90 ceiling." Within a new trading range with a $90 ceiling, Morse sees an average of $75 as plausible.

That's a far cry from the old paradigm, promoted in the past 40 years, which posited ever-greater demand for petroleum as developing economies grew, and a slowdown on the supply side -- the looming prospect of "peak oil," whereby global production maxes out and falls into decline. To the contrary, unconventional sources of crude oil totaling more than a trillion barrels -- the equivalent of more than 30 years of extra supply -- have been discovered in the past five years. The majority is recoverable at $75 or less, and much is now being tapped.

Within the next five years, growth in U.S. production of oil should make this country a net exporter, ending a pattern that has persisted since World War II. "While this country will still be importing plenty of medium and heavy crudes, most of the imports will come from Canada and Mexico," says Morse. "So the U.S. will no longer have to worry about disruptions in supply that might disrupt economic activity. That's why we call it the era of North American energy independence."

British economist Alfred Marshall famously likened supply and demand to the blades of scissors, and the blades are also poised to cut oil prices in the rest of the world. On the supply side, unconventional sources of oil are being tapped in countries that include India, Bahrain, and Uganda. On the demand side, a third of the auto fleet in Brazil can already run on fuel other than petroleum.

THE RECENT AGGRESSION by the oil-and-gas exporting nation of Russia reminds us of the fragility of global energy supplies. At the same time, the oil-and-gas abundance in this country has influenced concrete proposals for dealing with Russia. Energy consultant Philip Verleger has publicly proposed as a "meaningful response to Russian aggression" that the U.S. sell the nearly 700 million barrels in its Strategic Petroleum Reserve as a way to "drive oil prices down and impose significant harm on Russia," since the SPR is "no longer needed for national security." And an editorial in The Wall Street Journal recently proposed that the Department of Energy "approve immediately the 25 applications for liquefied natural gas…export terminals," since "every dollar of U.S. gas is one less dollar flowing to Mr. Putin's economy."

Such proposals would have been unthinkable as recently as five years ago, when the old paradigm was still dominant and domestic supplies of oil and gas were a source of worry.

Over the next five years, the effects of the global oil-and-gas boom should prove a grim object lesson for the Russian economy on the downside of the "resource curse." Russia's economy "largely depends on energy exports," according to a study from the U.S. Energy Information Administration. That works well when prices are high, but quite badly when prices fall.

Oil-and-gas revenues account for 70% of Russia's total exports and more than half the income of its federal government. Russia exports more than seven million barrels of oil a day, second only to Saudi Arabia. One key difference between Russia and the No. 1 exporter is that more than 60% of Russian oil is produced in Siberia, where costs are much higher. A fall in the world price to $75 from $100 would therefore have a much greater impact on the net revenues that Russia earns from oil than is earned by the Saudis.

The downside of the resource curse could also be felt in Russia's reliance on sales of natural gas. About 75% of Russia's natural gas exports go to Western Europe, providing 30% of its requirements, at prices that are two and three times the price in the U.S. That enormous premium stems from the fact that there is no world market for natural gas, given the prohibitive cost of shipping it in its unaltered state. Hence, the argument for accelerated approval of liquefied-natural-gas export terminals. With abundant natural gas now available in so much of the world -- including Australia, South Africa, Brazil, and Argentina -- within the next five years, something resembling a global market in liquefied natural gas will likely develop. That would break the local monopoly of the Russians in their market, enabling Europeans to buy from other sources, and weighing on the premium Russian gas now commands.

AMY JAFFE, EXECUTIVE DIRECTOR for energy and sustainability at the University of California, Davis, co-authored a recent study with Rice University economics professor Mahmoud El-Gamal predicting that barring a "war that destroys physical installations for the production and/or transport of oil," the oil price will "fall precipitously over the medium term of three to five years."

Jaffe believes the average price could fall below $75, based in part on her view that oil-production costs are not fixed. "Research shows that costs track oil prices and not the other way around," she observes. As oil prices move lower, demand for drilling rigs and related equipment falls, lowering the cost of drilling. And that's bad news for Putin.

"The Russian government's budget is expected to need an oil price of over $100 to stay balanced between now and 2020," Jaffe says. "A $75 average could make the ruble's recent tailspin look trivial by comparison."

Steve Briese, publisher and writer of the Bullish Review of Commodity Insiders newsletter, is currently projecting an imminent plunge in the oil price to the $70 region. His bearish outlook is based on the recent peak in the net short position of businesses involved with oil. These businesses, also called "commercials," use futures and options on West Texas Intermediate crude traded on the New York Mercantile Exchange as part of their business strategy.

The futures and options market in WTI crude is actively used by refiners that would naturally take long positions in these derivative contracts to hedge against a price rise, and producers who would naturally take short positions in order to hedge against a price decline. The fact that the net short position of these commercials recently set a record indicates that refineries are lightening up on their long positions. While this leaves them exposed to a price rise, it also means they will benefit if the price declines.

Briese uses published data from the Commodity Futures Trading Commission to track the bets of these bona fide hedgers with an eye to betting accordingly. In his view, since they are in the oil business and therefore close to the scene, they are the true insiders, whose consensus outlook is better than anyone else's. Perhaps these insiders recognize that the new paradigm is here to stay.

THE GAME CHANGERS on the supply side are the three new types of oil production that have not been counted as part of the oil supply until recently: deepwater oil, shale oil, and oil sands. Each of these sources of oil has been estimated at more than 300 billion barrels, totaling more than one trillion barrels in all. That's a huge addition to previously estimated reserves of some 1.5 trillion barrels. According to Citigroup energy analyst Eric Lee, a good proportion of the extra trillion barrels could be recoverable at $75 a barrel or less. In fact, he notes that a $75 cost estimate could even be on the high side, as production costs for shale and even deepwater can continue to fall over time.

Deepwater oil has been tallied at 317 billion barrels by the Norway-based oil-and-gas source Rystad Energy. Of that total, Rystad estimates that 53 billion barrels are recoverable off the shores of North America.

What slowed development of deepwater drilling was the 2010 disaster in the Gulf of Mexico involving BP (ticker: BP), which killed 11 people and spilled millions of barrels of oil. But two weeks ago, the Environmental Protection Agency lifted the ban on BP's right to bid on oil leases in the Gulf of Mexico. A few days later, BP bid successfully on 24 leases in the Gulf in an auction held in New Orleans. Elsewhere, activity had already picked up in regions that include East Africa (63 billion barrels) and the Asia-Pacific region (32 billion barrels).

Shale oil, recoverable mainly through hydraulic fracturing, or fracking, has been estimated by the U.S. Energy Information Administration at 345 billion barrels, of which 58 billion barrels are recoverable in the U.S. The EIA report of June 2013 estimates that the 310-million-barrel increase in U.S. oil production in 2012 over 2011 was "largely attributable to increased production from shales and other tight sources."

Oil sands, according to the BP Statistical Review, are found in just two countries: Canada, at 167.8 billion barrels, and Venezuela, at 220 billion. In the oil-sands case, it is not clear whether production would continue with $75 oil. But as Citigroup's Morse points out, "While current investors might be discouraged by $75, other companies would be open to investing, including state-owned companies in the Far East, since the cash flow would be robust for 40 years or so." Investors with a 40-year outlook might not be deterred by a $75 average price if they are bullish on a long-term basis.

Meanwhile, at current prices, the BP Statistical Review reveals 25.9 billion barrels of Canadian oil sands as "under active development."

On the demand side, petroleum's monopoly of the transportation market is being challenged by abundant natural gas recoverable from shale. According to estimates by Advanced Resources International, an energy consulting firm that compiles data in conjunction with the EIA, shale-gas resources in the U.S. amount to a staggering 1,161 trillion cubic feet, compared with 285 trillion cubic feet in Russia, and a world total of 7,795 trillion cubic feet. On a British-thermal-units basis, 7,795 trillion cubic feet of natural gas is the equivalent of 1.4 trillion barrels of crude oil.

AS THE NEARBY CHART SHOWS, domestic oil and natural-gas prices used to track each other fairly closely. The reason for the correlation: Oil drilling invariably produces natural gas as a byproduct. By 2009, however, the correlation began to break down, with natural-gas prices moving to a steep discount to oil prices, as gas production soared. A barrel of oil contains the energy-equivalent of some 5.55 million BTUs. At the current natural-gas spot price of $4.30 per million BTUs, a barrel at $75 buys nearly 17.5 million BTUs-worth of natural gas -- more than three times as much.

This multiple is already being exploited. In a major study, Citigroup's Morse, together with a team of other analysts, has calculated that there is huge potential for savings if trucks, buses, ships, and ultimately passenger vehicles are run with natural gas rather than petroleum fuels. The study also notes that the conversion is well under way. Waste Management (WM) has made it known that 80% of the trucks it buys are fueled by cheaper natural gas. Cummins (CMI) and joint-venture partner Westport Innovations (WPRT) sell an engine that runs on both liquid natural gas and compressed natural gas. Westport Innovations specializes in retrofitting engines with natural-gas components.

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According to the Citigroup study, the low-hanging fruit lies in commercial fleets setting up refueling stations along routes of 400 miles or less. In the U.S., that includes heavily trafficked routes in the Northeast and in Southern California. Intracity traffic that includes passenger buses and other short-haul vehicles can also shift to natural gas.

Transportation accounts for nearly half of the oil the world consumes each year, and trucks alone use nearly one of every nine barrels consumed. Also ripe for natural-gas substitution is the consumption of oil for industrial uses -- accounting for more than one in five barrels consumed -- and for electricity generation, which still accounts for one in 18 barrels consumed worldwide. Moreover, when mixed with petroleum, fuels that can be made from natural gas, like ethanol and methanol, can help meet ever-more-stringent Corporate Average Fuel Economy, or CAFE standards, being mandated over the next several years.

Taken together, these trends should be more than enough to cause global consumption of oil to slow its growth over the next several years and then flatten out. There is even the potential for global oil demand to begin declining. Yossie Hollander, co-founder of the Fuel Freedom Foundation, a nonprofit dedicated to breaking the world's oil addiction, argues that passenger vehicles can run economically on methanol and ethanol made from various sources, including natural gas.

"Methanol can be made today competitively with existing technology, from energy resources with which the United States is well endowed -- natural gas, coal, biomass, garbage, or any other organic material," Gal Luft, an advisor to the Fuel Freedom Foundation, argues in Petropoly, co-authored by Anne Korin. "In the future, perhaps even recycled carbon dioxide could be commercially converted into methanol, providing an elegant solution to the otherwise seemingly economically irresolvable issue of fossil-fuels-derived greenhouse-gas emissions."

THE OIL AND GAS BOOM is not welcome to environmentalists, although it should be. The replacement of coal with natural gas for electricity generation has reduced carbon-dioxide emissions, and emissions of sulfur dioxide and nitrogen oxides fall as natural gas replaces petroleum. Also, lower energy prices confer disproportionate benefits on people of modest means, who spend a larger share of their income on energy than do richer folk.

But the dangers of deepwater drilling and of fracking, and the use of fossil fuels for decades to come, are already provoking pushback from the greens. In the end, however, as Trevor Houser of the Peterson Institute remarks, "Provided that industry accepts reasonable levels of regulatory oversight, the oil-and-gas boom is unlikely to be stopped by environmentalists."

"The history of mankind," observes Morse, "at least since the invention of the wheel, is a history of cheaper and cheaper energy. Modern civilization would be impossible without cheap energy. I believe we are entering another period of cheaper energy that should last 50 years or more."