Markets wrap-up April 29

Markets

Markets ended the day up all around the world but Japan, on a stream of better news:

• Earnings forecasts beatten in Europe and the US, leading investors to be more optimistic for the weeks and months ahead.
  
• The stress tests of US banks is no longer in the news.
  
• Worse GDP numbers in the US at -6.1% for 2009 Q1 vs. -4.7% (Briefing.com) were dismissed by the market which seems to be firmly looking forward and focused on a 2.2% consumer spending increase.
  
• The Federal Reserve suggested today that the worst of the recession may be over and did not change their monetary policy.
• Despite the swine flu spreading around the world, there no sense of panic right now. Health organizations have been very responsive. The evolution of the flu towards a pandemic need to be monitored however, since this could stop equity markets in their actual rally.
  

Key Indexes	At close 04/29/2009	Change	% change	1 month	1 year
Nikkei 225 Japan	8,493.77	–232.57	–2.67%	–1.54%	–38.87%
Hang Seng Hong Kong	14,956.95	+401.84	+2.76%	+5.93%	–42.28%
Shanghai Composite China	2,468.19	+66.75	+2.78%	+3.95%	–29.95%
All Ordinaries Australia	3,661.90	–9.80	–0.27%	+1.28%	–35.45%

FTSE 100 Britain	4,189.59	+93.19	+2.27%	+7.46%	–31.21%
DAX Germany	4,704.56	+97.14	+2.11%	+11.92%	–32.07%
CAC 40 France	3,116.94	+65.92	+2.16%	+9.73%	–37.82%
FTSE Eurofirst 300 Europe	816.40	+15.16	+1.89%	+10.70%	–39.01%

TSX Comp. Canada	9,416.31	+68.28	+0.73%	+6.75%	–33.15%
Bovespa Brazil	47,226.79	+1,405	+3.07%	+12.69%	–28.09%
Bolsa Mexico	22,079.34	+416.81	+1.92%	+8.68%	–27.90%
IPSA 40 Chile	2,714.52	+42.90	+1.61%	+6.55%	–9.71%

Market wrap-up April 28

Today's markets

Nikkei 225 8494		-232.57	(-2.67%)
Hang Seng 14555		-285.31	(-1.92%)
All Ordinaries 3672		-18.30	(-0.50%)

FTSE 100 4096		-70.61	(-1.69%)
CAC 40 3051		-51.41	(-1.66%)
DAX 30 4607		-87.86	(-1.87%)

Dow 8017		-8.05	(-0.10%)
Nasdaq 1674		-5.60	(-0.33%)
S&P 855		-2.35	(-0.27%)

Light Crude (NYM)		49.92	(-0.22)
Natural Gas (NYM)		3.44	(+0.08)

Gold (CMX)		893.60					(-14.60)
Silver (CMX)		1,242.60					(-55.90)

Markets are unsettled by the swine flu epidemic and the renewed uncertainty about the health of the banking sector with rumors regarding the results of the stress test and the swap of TARP loans into equity for a number of US large banks (Bank of America and Citicorp are the most widely rumored).

News of the day

• Fortis shareholders approved by 73% the takeover of Fortis Bank by BNP Paribas, the French bank, in Brussels. Dutch investor have still to approve it in Utrecht tomorrow.
• Real estate decline decelerate slightly according to the S&P/Case-Shiller index
• The Conference Board’s sentiment index rose more than forecast to a five-month high of 39.2
• US to take a majority stake in GM via a debt-to-equity swap

Tax Havens, Politics and Scapegoats (3/3)

Scapegoats

On the question of transparency, which seems to be central to discussions regarding tax havens, the OECD established a Framework for a Collective Memorandum of Understanding on Eliminating Harmful Tax Practice where:

Each party will ensure that its regulatory or tax authorities have access to information regarding beneficial owners of companies, partnerships and other entities organized in its jurisdiction, including collective investment funds, and to information on the identify of the principal (as opposed to agent or nominee) of those establishing trusts (settlors) and foundations under their laws and those benefiting from trusts and foundations.

Clearly, the State of Delaware in the US does not comply.

The very interesting study conducted by Bruce Zagaris, a Partner of the Washington based law firm Berliner Corcoran & Rowe, demonstrates the double standard applied:

Some U.S. states, such as Alaska, Delaware, and Nevada, have enacted asset protection laws to attract persons, especially foreigners, seeking protection from creditors. (…) Delaware has advertised that its new trust law ensures “confidentiality of information and records.”

At least two other states, Montana and Colorado, have offshore banking laws designed to attract foreign investors by offering tax exemptions, confidentiality, and ease of establishing accounts and doing business. (…) especially the fact that Colorado's was enacted in 1999, after the release in May 1998 of the OECD's initial report on harmful tax practices.

(…)

The state of Delaware also is trying to attract business based on its laws and reputation as a domicile where corporate debtors can quickly obtain bankruptcy.Virtually no OECD country requires corporations to keep ownership information on file with a central or other governmental authority on a routine basis, except for certain types of corporations, although the OECD HTC MOU requires the targeted countries to do so.

Interesting enough, On June 23, 2008, Brazil's Congress published Law 11,727/2008, which, effective as of January 1, 2009, will amend Brazil's transfer pricing regulations and expand the legal definition of tax havens. The surprising news in all of this is that it is widely believed that these changes were made specifically so that the exotic state of Delaware could be designated as a tax haven, or at least a jurisdiction with the characteristics of one.

Paul Mason, from the BBC, analyzed what happened at the G20 meeting in London regarding the OECD list. It appears that last minute negotiations occurred between Sarkozy, Hu and Obama not to include Macau in the grey list of the OECD. But, hold on, wasn't it the OECD that was establishing the list independently...? This BBC story is worth reading!

So, all countries attending the G20 meeting escaped in one form or another to be named and shamed, whilst the usual small countries were used as scapegoats for the crisis. Making the public (read the voter) thinking that tackling tax havens and putting them under the control of large deficit countries will solve the crisis, is ludicrous.

Clearly tax havens make tax hells losing tax receipts; this is however a drop in the ocean of accumulated budget deficits over the years from lax budget spending (voting bribery?) and poor public governance, governance hailed however by the very same politicians as the new Graal of the New World Economic Order (don't misread: I very strongly support governance in general and corporate governance in particular as well as I believe its lack of it is one of the roots of the financial crisis).

In addition, imagine what would happen to tax rates, if low taxation jurisdictions did not exit. Already, The US, the UK and Ireland announced an income tax increase; this is only the beginning of the tunnel. And why blaming countries that are managing their budget in a proper way and do not need punishing taxation?

What to conclude?

First, China showed once again its power on the international stage and will become more and more assertive
Second, Continental Europe is firing a bullet in its foot as usual: the reading of the OECD list is self explaining.
Third, the US and UK continue successfully to divert attention away from their backyard: do what I say and not what I do...
Fourth, the G20 meeting and the preceding negotiations about the OECD list showed the lack of transparency and governance from countries that insist on them, and discredited the OECD.
Fifth, Large countries found their scapegoats: small, well managed countries that offer high living standards to their populations; instead of following their path, they point the finger at them as responsible for the financial crisis (one of the two causes of the crisis was outlined by President Sakorzy in October as being tax havens - a joke! -).

Tax Havens, Politics and Scapegoats (2/3)

Politics

It seems that we are going towards the legitimation of the the strongest, biggest financial centers and tax havens while smaller countries and territories are stigmatized.

Indeed, the OECD found that its definition caught certain aspects of its members' tax systems (most developed countries have low or zero taxes for certain favored groups). Its later work has therefore focused on the single aspect of information exchange. This is obviously a flawed decision. This single criteria for defining a tax haven is inadequate and goes against common sense, but is politically expedient because it includes the small tax havens (with little power in the international political arena) but exempts the powerful countries with tax haven aspects such as the USA and UK.

For example one of the most permissive location for business is the State of Delaware in the US (where Joe Biden, the current Vice-President, was a senator). Let’s review it quickly:

• 43% of companies on the NYSE are incorporated in Delaware (over 400.000 companies i.e. +/- 1 company for 2.5 inhabitants and growing)
• Significantly low income tax levels (below 6%)
• No need to disclose the beneficial owner of assets (Delaware having passed the test of transparency, no jurisdiction should be included in the OECD list)
• Partnership taxation laws which make it favorable to non-US entities, typically allowing taxation at 0% where the partners are registered in non-US jurisdictions
• Anti-hostile takeover legislation and strong protection of companies’ management
  

If you want more detailed information, go to the State of Delaware official website

To summarize and according to the State of Delware web site:

"Corporations choose Delaware for the following reasons:

1. Ease of incorporating,
2. Business-friendly climate,
3. Fast services provided by the Secretary of State's Office and
4. Delaware's Court of Chancery. (Our Court of Chancery is well known for its ability to issue timely decisions on complex corporate matters, and its wealth of case law ensures consistent answers to corporate questions.)
If you form a corporation in Delaware, you are required to pay an annual Franchise tax to the Delaware Department of State for the privilege of incorporating in Delaware. Franchise Tax is based on the number of the corporation's authorized shares and costs a couple of tens of dollars."

Funny enough (well, not so funny) the Delaware Statutory Trust has been widely used for structured finance deals such as asset securitization.

Let’s review the politics during the G20 meeting and their interaction with the OECD list.

Cartoon of the day

No comment!

Chart of the day

Interesting chart from Chart of the Day, showing that the S&P500 is testing the resistance of its newly established trend channel in October 2008 following the September meltdown and is currently testing resistance.

Don't forget that, whilst the US market leash effect on the rest of the world cannot be severed yet, it is not leading the recovery: emerging markets are, and China in particular, that display double digit growth since the start of the current rally early March vs. single digit for most developed markets.

Tax Havens, Politics and Scapegoats (1/3)

Tax Havens

The G20, hailed as a success, was nothing more than a political gathering aiming at communication (see post "G20 summit and today's markets" April 2), the most for the French President, Nicolas Sarkozy, who threatened to walk away if he did not get what he wanted: tax havens MUST be scrapped since Sarkozy, in October 2008, identified them as one of the two causes of the financial crisis...

Here we are. The OECD published on April 2 a list of non or not co-operative enough countries or supposed to be. Funny enough, Uruguay, Malaysia and Philippines were on the black list: didn’t you know that these countries were tax havens? (they were moved, together with Costa Rica from the black list to the grey list on 7 April). Didn’t you also know that Hong Kong, Mauritius, Dubaï, Saint Barthelemy in the French West Indies or Delaware in the US to name a few were not tax haven?

Funny enough, the OECD makes a distinction between tax havens and other financial centers: are they tackling tax havens or something else? We will see this later on.

In any case, the credibility of the OECD has zoomed down to zero!

Remember, the fight against tax havens took a boost after 9/11; it was aiming at fighting more efficiently Al Qaieda and money laundering from crime in general.

Let’s go back to 1998 when the criteria where laid down by the OECD to pinpoint a tax haven. There are three criteria (the absence of a requirement that the activity be substantial was abandoned by the OECD in 2001):

1. No or only nominal taxes. Tax havens offer themselves, or are perceived to offer themselves, as a place to be used by non-residents to escape high taxes in their country of residence
2. Protection of personal financial information. This prevents the transmittance of information about taxpayers who are benefiting from the low tax jurisdiction.
3. Lack of transparency where one country can make it difficult, if not impossible, for other tax authorities to apply their laws effectively

In the next article you will discover how politics melted in.

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G20 summit and today's markets

Markets reacted very positively to the G20 announcements (full press release). In essence:

• More regulation and overseeing of the finance industry, and for the first time hedge funds
• More money ($1.1 billion in all), in particular to the IMF that will treble its available resources to $750 billion and see its role strongly reinforced
• More transparency with tax havens

The rest is rhetoric and we will see how the details of today's decision develop. I however note that the reasons for the crisis (lax monetary policy, over indebtness, poor governance and incompetence) were in no way dealt with in the communiqué nor the solutions to cleanup banks balance sheets; this is left to each country to decide.

• More regulation is still vague on its form and implementation, whilst regulators should have done their job right in the first place: why should they be better in the future? I feel we need better regulation, not more regulation.

• More money? Fine, this will bring more well paid employment to Washington. At least it will leave governments not directly involved in baling-out some countries in Eastern Europe and elsewhere. After all, when one sees the disunity in Europe about the subject, it is politically easier and probably more efficient to let international organisations take care of it. Remember nevertheless that the $1.1 trillion (1) is not funded (2) will be spread over 2 years and (3) represents +/- 5% of all money committed by States individually and collectively as well by international organisations. However, this probably is the most interesting part of the summit.
  

• More transparency with tax heavens? Luckily the conference took place on the 2nd of April, but what a joke! The well-timed publication of the OECD progress report on tax heavens (dated April 2) would be quite fun if the matter was not serious. I could not find the Delaware and Nevada (US), St Barthelemy (France), Hong Kong and Macao (China), or Dubaï, and the list is far from exhaustive. Governance and equity should start with Head of States. True, politicians are back in force, and I am afraid, this is not good news for the future.

I am therefore not as enthusiastic as most commentators (where they waiting for the worse after postures played by some countries like France? - usual politician tactic to make sure they will show to their public (1) the conference is a success and (2) each of them is the victor). I however do not dismiss that the rally will continue for some time since the Conference did not end up in shamble.

Markets reacted positively to the summit, extending their early gain in Europe with Germany up +6.07% and the UK +4.28%. The Dow passed the 8,000 mark but did end up at 7,978, +2.79%.

The ECB surpised with a 25 b.p. rate cut to 1.25% vs a 50 b.p. the market was expecting. At the press conference, ECB president Jean-Claude Trichet did however say that the current level is "not the lowest limit", suggesting at least one more 25 b.p. cut.

The EUR rallied vigorously ending the day +1.7% at 1.3463.

Precious metals were under pressure with markets rallying and the G20 meeting announcing the sale of gold (limited amount however at approximately 5% of IMF holdings). Gold ended down 2.3% at 905.33/oz, off the lows of the day ($895.25/oz).

US financial rescue sheer size

An interesting article published yesterday on Bloomberg detailing the total size of the US rescue package so far: $12.8 trillion with $4.2 trillion already spent/committed! And counting... (see details at the end of this article)

No need to be a monetarist to see where the long term value of the dollar is going: south against many other fiat currencies in Asia and commodity based countries, not talking about precious metals.

Despite central banks and governments efforts to demonetize gold, reality is catching up quickly. The short term risk (and not long lasting beyond the announcement) is for Thursday G20 meeting to announce that the IMF will sell gold directly or indirectly. So far the US has been reluctant, but for a few and limited occasions since 2000, and hold a voting blocking minority. With the sheer size of the crisis and its fund rapidly dwingling, the IMF needs to raise additional funds (late last year Strauss-Kahn requested $500 billion and so far only got the Japanese committing $100 billion) with Eastern Europe requiring more funds and Mexico being the next in line with $47 billion.

IMF gold represents +/- $100 billion at today's price.

===========================================================
--- Amounts (Billions)---
Limit Current
===========================================================
Total $12,798.14 $4,169.71
-----------------------------------------------------------
Federal Reserve Total $7,765.64 $1,678.71
Primary Credit Discount $110.74 $61.31
Secondary Credit $0.19 $1.00
Primary dealer and others $147.00 $20.18
ABCP Liquidity $152.11 $6.85
AIG Credit $60.00 $43.19
Net Portfolio CP Funding $1,800.00 $241.31
Maiden Lane (Bear Stearns) $29.50 $28.82
Maiden Lane II (AIG) $22.50 $18.54
Maiden Lane III (AIG) $30.00 $24.04
Term Securities Lending $250.00 $88.55
Term Auction Facility $900.00 $468.59
Securities lending overnight $10.00 $4.41
Term Asset-Backed Loan Facility $900.00 $4.71
Currency Swaps/Other Assets $606.00 $377.87
MMIFF $540.00 $0.00
GSE Debt Purchases $600.00 $50.39
GSE Mortgage-Backed Securities $1,000.00 $236.16
Citigroup Bailout Fed Portion $220.40 $0.00
Bank of America Bailout $87.20 $0.00
Commitment to Buy Treasuries $300.00 $7.50
-----------------------------------------------------------
FDIC Total $2,038.50 $357.50
Public-Private Investment* $500.00 0.00
FDIC Liquidity Guarantees $1,400.00 $316.50
GE $126.00 $41.00
Citigroup Bailout FDIC $10.00 $0.00
Bank of America Bailout FDIC $2.50 $0.00
-----------------------------------------------------------
Treasury Total $2,694.00 $1,833.50
TARP $700.00 $599.50
Tax Break for Banks $29.00 $29.00
Stimulus Package (Bush) $168.00 $168.00
Stimulus II (Obama) $787.00 $787.00
Treasury Exchange Stabilization $50.00 $50.00
Student Loan Purchases $60.00 $0.00
Support for Fannie/Freddie $400.00 $200.00
Line of Credit for FDIC* $500.00 $0.00
-----------------------------------------------------------
HUD Total $300.00 $300.00
Hope for Homeowners FHA $300.00 $300.00
-----------------------------------------------------------

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