WSJ With Wary Eye on Global Tumult, Fed Opted to Stay on Policy Path for Now


With Wary Eye on Global Tumult, Fed Opted to Stay on Policy Path for Now
Minutes Show Officials Conflicted Over Domestic Economic Improvement and Troubles Abroad

Federal Reserve officials were preoccupied at an October policy meeting with tumult in financial markets, weak economic conditions abroad and risks that low inflation could drift lower. But they forged ahead with a decision to end the central bank’s bond-buying program because the domestic economy and labor market appeared to be on course for further improvement.


Participants at the Oct. 28-29 meeting “pointed to a somewhat weaker economic outlook and increased downside risks in Europe, China, and Japan, as well as to the strengthening of the dollar over the period,” said minutes of the session, which were released Wednesday with the regular three-week lag.

“It was observed that if foreign economic or financial conditions deteriorated further, U.S. economic growth over the medium term might be slower than currently expected,” the minutes said. “However, many participants saw the effects of recent developments on the domestic economy as likely to be quite limited.”

All but one official at the meeting wanted to end the bond-purchase program, known as quantitative easing, that was launched in late 2012 to spur economic growth.

The Fed, led by Chairwoman Janet Yellen , has been navigating a conflicting economic backdrop of late. The job market has continued to improve faster than officials expected, but a strong dollar and weak growth abroad are combining to put downward pressure on inflation. This complicates looming Fed debates about when to start raising short-term interest rates from near zero. The improving job market calls for a move toward rate increases next year, while downward pressure on inflation calls for the Fed to hold off.

Downward pressure on inflation is a more recent development.

“Most participants anticipated that inflation was likely to edge lower in the near term, reflecting the decline in oil and other commodity prices and lower import prices. These participants continued to expect inflation to move back to the Committee’s 2 percent target over the medium term,” the minutes said.

However, officials approached the inflation question with heightened uncertainty. “Many participants observed that the Committee should remain attentive to evidence of a possible downward shift in longer-term inflation expectations; some of them noted that if such an outcome occurred, it would be even more worrisome if growth faltered.”

Against that backdrop, officials appeared to emerge from the meeting with little clear direction on how to reshape the guidance they give the public on the outlook for interest rates. The Fed has been saying since last year that rates would stay near zero for a “considerable time” after the bond program ended.

With the program now completed, many Fed officials are looking to drop the “considerable time” assurance. But the minutes left little clear indication of when and how this guidance might be changed.

Some officials wanted to drop the term at the October meeting. They didn’t want to appear locked into a specific time frame for their plans. “Considerable time” is generally interpreted in financial markets to mean at least six months, though the Fed has sought to play down that notion. Other officials thought this phrase still best described their plans, while others didn’t want to inadvertently send a signal of impending rate increase by removing the phrase.

To this discussion officials added a new twist: A debate about whether they should add new information in their official policy statement on how quickly rates will rise once increases commence.

“With regard to the pace of interest rate increases after the start of policy normalization, a number of participants thought that it could soon be helpful to clarify the Committee’s likely approach,” the minutes said. On this point, too, there was no agreement. This appears to set the Fed up for an intense debate at its December 16-17 on refining these interest rate signals.

Signs of angst about market volatility also emerged at the October policy meeting. The meeting took place a week after sharp swings in prices for U.S. stocks and bonds, in particular a surge in demand for U.S. Treasury securities on Oct. 15 which temporarily drove yields on 10-year Treasury notes below 2%.

“Some participants pointed out that, despite the market volatility, financial conditions remained highly accommodative and that further pockets of turbulence were likely to arise as the start of policy normalization approached,” the minutes said. “That said, more work to better understand the recent market dynamics was seen as desirable.

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APPENDIX

DISCLAIMER:
This communication is for informational purposes only, is not an offer to buy or sell any security, and is not investment advice because it does not take into account the differing needs of individual clients. Clients seeking investment advice specific to their financial profiles and goals should contact their Oscar Gruss & Son Incorporated sales representative. This communication is based upon information which Oscar Gruss & Son Incorporated believes to be reliable but no representation is made by this Firm as to its completeness or accuracy. This communication is not a complete analysis of every material fact concerning any company, industry or security. Oscar Gruss & Son Incorporated assumes that it will be read in conjunction with other available reports and data. Opinions expressed herein are subject to change without notice. No investor can assume that reliance on the views, opinions or recommendations contained herein will produce profitable results. Foreign-currency-denominated securities are subject to fluctuations in currency exchange rates that could have a positive or adverse effect on an investor's return upon the conversion into local currency of dividends or interest received, or proceeds from the sale of such securities. In addition, the value of U.S. dollar-denominated ADRs and the value of U.S. dollar-denominated ordinary shares, or common shares, of foreign issuers can be influenced by fluctuations in currency exchange rates.

Copyright 2014 Oscar Gruss & Son Incorporated. All rights reserved.


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WSJ : Switzerland’s Eurofin in Process of Largely Shutting Down

Switzerland’s Eurofin in Process of Largely Shutting Down
The Company Is Embroiled in the Espírito Santo Saga

A Swiss financial company embroiled in the Espírito Santo saga is in the process of largely shutting down, according to people familiar with the matter.

The Lausanne-based company, Eurofin Holding SA, is selling or spinning off businesses and winding down asset portfolios, these people said. It is possible that parts of the company will emerge in some form under a different name, one person said.

The news comes as Portuguese regulators publicly announced that they are investigating Eurofin for discreetly helping Banco Espírito Santo SA raise money as the lender headed toward collapse earlier this year.

A parliamentary committee in Lisbon has been questioning Portuguese regulators about the August bailout of Banco Espírito Santo, following allegations of fraud and accounting problems. The hearings are expected to last months, as lawmakers seek to unravel what triggered the disintegration of what was once Portugal’s biggest lender by market value.

On Monday, Bank of Portugal Governor Carlos Costa told lawmakers that regulators had uncovered “evidence that suggests acts of deceit and ruinous management regarding the issuance and placement of Banco Espírito Santo debt in special-purpose vehicles based abroad through various movements made via a Swiss intermediary.”

That intermediary is Eurofin, according to a person familiar with the matter.

In a front-page story in August, The Wall Street Journal reported that Eurofin appeared to have played a central role propping up the Espírito Santo conglomerate over the years. The Journal reported last month that regulators are looking at Eurofin having helped Banco Espírito Santo issue bonds at one price and then sell them to customers at a higher price.

Eurofin said at the time that it is wholly independent from Espírito Santo and that it didn’t sell financial products to the bank’s customers.

Eurofin, founded 15 years ago largely to handle Espírito Santo’s financial transactions, was for years partly owned by Espírito Santo. It derived a substantial portion of its revenue from the Portuguese conglomerate and its top executives frequently traveled to Lisbon to meet with Espírito Santo leaders.

Eurofin, which shares its Lausanne headquarters building with a pole-dancing school, has encountered severe financial problems as the Espírito Santo empire disintegrated. The small company has dismissed dozens of employees. It recently has sold or spun off its private-equity and medical units, according to a person familiar with the matter. Other parts of the company are slowly being shut, this person said.

Eurofin Securities SA, a key business unit, filed for bankruptcy in September, according to a company filing.

On Tuesday, Carlos Tavares, head of Portugal’s securities regulator, said the Espírito Santo bonds sold to customers were two to three times higher than the initial price.

“This price difference was kept by the counterparties that we have not fully identified,” Mr. Tavares said. According to information obtained by the auditors, “the difference was used to repay debts of other Espírito Santo Group entities,” he said.

The sale of those bonds happened mainly in the first half of this year, he added.

“We don’t think Eurofin is a counterparty to Banco Espírito Santo,” Mr. Tavares said. “We suspect that it is an entity related to Banco Espírito Santo, although not formally. We have that suspicion, but we don’t have the full information on that matter.”

Separately, Mr. Tavares said Portuguese regulators are investigating potential insider trading on July 31 and Aug. 1, days before Banco Espírito Santo was bailed out. Mr. Tavares said regulators are awaiting additional information from a “foreign entity” to further advance the investigation.

Mr. Costa, the Bank of Portugal governor, said Monday that binding offers for Novo Banco SA, the “good bank” carved out from the collapsed Banco Espírito Santo are due in the middle of the second quarter next year.

Bankers in Spain say one likely bidder is Banco Santander SA, the eurozone’s largest lender by market value. Santander’s chief executive said this month that the bank would look at buying opportunities in Portugal, where it already owns a lender.

—Margot Patrick contributed to this article.

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Compared Tesla to Apple a few years ago
Premiumisation of auto mkt
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‘Apple of the auto industry’
Efficient money raising to finance growth
Biz model akin to Porsche or Harley Davidson
Ramp much quicker for Tesla though, more like historic growth Ford
Scope $4bn ebit in a few yrs growing 25% pa

* Transocean – short idea
Growth deepwater, oil was above fundam level = last 10 yrs
Shale ‘black swan’ for energy indus
Flattening cost curve for oil price
Growth less energy intensive, gas growing, solar innovations
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Drilling 25% deepwater cost
Derating, now earnings collapse
X0.6 p/b , 30% uncontracted for ’15, 50% for ‘16
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>>> Spirit Pub/Greene King merger still on despite UK MPs’ anti pub tie vote

Spirit Pub/Greene King merger still on despite UK MPs’ anti pub tie vote

Greene King [LON:GNK] is going ahead with its plan to merge with Spirit Pubs [LON:SPRT] despite the House of Commons vote to allow pub tenants to exit rental ties to parent companies, a Greene King spokesperson and a source close to the situation said.

The House of Commons yesterday (Tuesday) passed an amendment to a bill that could mean pub owners will no longer be able to determine which beer their tenants purchase.

The vote sent pub stocks tumbling Wednesday morning. Greene King was down 4.45%, Spirit Pubs dropped 7.18%, Punch Taverns [LON:PUB] fell 10.89% and Enterprise Inns [LON:ETI] dropped 15.27%. The bill now enters a report stage before a Third Reading in the House of Commons and passage through the House of Lords, according to the UK parliamentary website.

A top 20 Greene King shareholder noted analyst reaction that the law change would have a much greater effect on tenanted pub companies like Enterprise and Punch Taverns than on Greene King and Spirit.

Announcing the deal, Greene King said that of its 1,900 pubs, just under 900 represent its leased business. Spirit has 433 leased pubs in its estate of 1,227.

Brewer and pub operator Greene King uses its pub network to promote its own beer brands through “pub tie” agreements with tenants. Pub companies in the UK have run ties for hundreds of years, allowing them to feed their own beer or preferred suppliers’ beers into a large proportion of the UK’s pub outlets.

In written evidence to Parliament on the Small Business, Enterprise and Employment Bill published on the parliamentary website on 15 October, Greene King said “any proposals which would add a free-of-tie option to the legislation should be avoided, as this would at the very least lead to significant pub closures and job losses.”

The brewer and pub owner said it has run its business “very successfully for over 200 years based on the tied pub model.” Over 75% of its tenanted and leased estate of 860 pubs is operated under a traditional short-term tenancy agreement, Greene King said.

“We were concerned about calls during Second Reading for the legislation to go further and include a mandatory free-of-tie option for tenants,” Greene King wrote. “This would have a hugely negative impact on Greene King. We have operated pubs under the Beer Tie for over 210 years and strongly believe the model is not broken and that it will continue to evolve over time as an integral part of our diversified business,” it said.

“Should the existence of an enhanced code be deemed necessary, it should address the more damaging leases – the long-term fully repairing and insuring leases, rather than the traditional short-term tied tenancy agreements which make up the vast majority of our estate, and are the tenancies operated by the family brewers. Whereas the short-term tenancy offers a low cost entry and ease of exit for tenants, the longer-term leases require a higher level of investment from the tenants, who also receive less support and are tied into longer contracts,” Greene King said.

Barclays analysts wrote they would expect pub companies to challenge the new clause on legal grounds. However, assuming it does receive royal assent, they noted it is difficult to anticipate the number of tenants that would opt for a free-of-tie arrangement.

"Some of them will no doubt be happy with the relationship where low rent is effectively subsidised by 'high' beer prices," the Barclays analysts wrote.