Starting to spend $1-trillion U.S. dollar

You can find the article here.

Struggling U.S. dollar triggers currency concerns Long-term threat of ‘trade chaos’ cited BARRIE MCKENNA WASHINGTON — Renewed fears that the Chinese central bank may be poised to start liquidating its $1-trillion stash of U.S. dollars briefly drove the greenback to a 20-month low against the euro and a two-year low against the British pound in trading yesterday. The euro surged to $1.3172 (U.S.) against the greenback and the pound to $1.9469, before losing ground by day’s end. The loonie and the yen have also gained on the U.S. dollar in recent days. The sudden weakness of the U.S. dollar began late last week, soon after Chinese officials suggested that holding a lot of dollars might be a losing investment strategy. Investors read that as a signal that the massive trade and financial imbalances between Asia and the U.S. may be about to unwind. The chief worry is that if China’s central bank — the largest foreign holder of U.S. dollars — begins to unload its reserves, the dollar will plunge. With China’s yuan effectively pegged to the dollar, other leading currencies would move higher after the realignment. There’s no evidence yet that’s what China is actually doing. But few investors want to be the ones left holding dollars when the plunge comes. "People are getting very nervous," said Andrew Busch, chief foreign exchange strategist at BMO Nesbitt Burns in Chicago. "It’s a wonderful behavioural science experiment and it’s being played out with billions of dollars. The first to get out tips the scales." Central banks in Russia and in some Middle Eastern countries have already announced plans to cut their U.S. dollar holdings. China’s currency rose to a new high against the greenback yesterday as the Chinese central bank set its official exchange rate at 7.8402 yuan to the U.S. dollar. That’s the highest level since July of last year when China relaxed its tight currency controls. Since then, however, the yuan is up just 3.3 per cent versus the dollar. By contrast, the greenback is down 10 per cent against the euro and roughly 2 per cent against the yen and the Canadian dollar so far this year. The loonie closed at 88.32 U.S. cents, up from 88.05 Friday, while the U.S. dollar rose to 116.13 Japanese yen from 115.55 yen. Also pushing the movement in currencies is the slowing U.S. economy, which could force the U.S. Federal Reserve Board to cut interest rates in the coming months. Meanwhile, the European Central Bank is looking at a possible interest rate increase next month. The net effect is to make euros more attractive. It has also begun to encourage Europeans to buy more imported goods, and even take trips to the United States. The British pound is rising alongside the euro, spurring a resurgence of holiday shopping junkets to New York by British tourists, according to Dee Byrne, spokeswoman for the Association of British Travel Agents. "There has been an upturn in bookings to the States, for Christmas shopping in particular," Ms. Byrne told Reuters News Agency. "People are going to New York to do their Christmas shopping, where they will get much more for their money: It couldn’t have come at a better time." But other experts see a much more ominous impact of these potentially seismic currency shifts. The surging euro could cause permanent damage to the European economy, and even spur calls for exchange rate controls. Peter Morici, a former chief economist at the U.S. International Trade Commission, said China is to blame for unleashing a potentially destabilizing period of currency realignment by stubbornly refusing to let its currency float to absorb its soaring trade surplus with the rest of the world. "The long-term consequences of this could be trade chaos," warned Mr. Morici, now a business professor at the University of Maryland. Talk of exchange rate controls in Europe is an ominous reminder of the 1930s, when protectionism and currency controls helped trigger a global recession. "It’s like water. There are too many dollars out there, looking for a place to go," Mr. Morici said. "China is pushing on a wall of competitive devaluation." Investors are betting the most likely place for all those dollars to go is the euro — often touted as a reserve currency for the world. "The Europeans wanted a reserve currency and now they’re about to find out what it’s like," Mr. Morici said.

The Chinese government holds a lot of U.S. dollars because it must keep supplying the Yuan to keep the exchange rate at $7.8 yuan/US$. Now it finds that it does not need to keep as much as $1-trillian, so it’s starting to actually spend the money.           It is because when the Chinese government starts to use the U.S. dollars, that means increase U.S. supply, and excess money supply means the U.S. dollar will get cheap.         It’s because these countries want to make sure the money they are holding will not depreciate quickly — if U.S. dollar is going to depreciate, they want to sell them now.             Cutting interest rate is an action the U.S. government to encourage economic growth.   More people going to the U.S. –> I wonder if that also means more tourists to Canada.                   The losers always blame the winners.

India vs China

Studying economics is like making friends: it is not about what/who is right or wrong, it is about what position you take and how you support it. In this article, it talks about why India’s economy is not as sustainable as China. Of course, Monday is the day when the Economist arrives, so this is an article from today’s fresh Economist.

Too hot to handle – India’s economy 25 November 2006 The Economist India’s economy runs the risk of overheating Why the sizzling Indian economy is more at risk than China’s INDIA’S curries can be even hotter than the fieriest of Chinese hotpots; likewise the temperature of the two economies. Despite widespread claims that China’s economy is overheating, actually India’s shows more signs of boiling over. In the year to the second quarter, India’s GDP grew by an impressive 8.9%, while China’s more up-to-date figures show even more breathtaking growth of 10.4% in the year to the third quarter. But to judge whether an economy is too hot, one needs to compare this expansion in actual demand with potential supply, ie, the sustainable rate of growth. Despite India’s growth spurt in recent years, its sustainable pace is still much lower than China’s, which puts its economy more at risk of overheating and rising inflation. China’s double-digit growth may look like a danger sign but there are few of the usual troubles. Inflation is only 1.4% and China has a widening current-account surplus, which implies excess supply rather than excess demand. Nor do asset price gains look particularly excessive. Average house prices have risen by less than 6% in the past 12 months. And share prices have gained only 42% in the past four years. Even the expansion of bank credit has slowed to an annual pace of 15%, not much faster than nominal GDP growth. In contrast, India’s economy displays an alarming number of signs that things have gone too far. Consumer-price inflation has risen to almost 7% (see chart), well above Asia’s average rate of 2.5%. A recent report by Robert Prior-Wandesforde at HSBC finds many other signs of excess. For example, in a survey of 600 firms by the National Council of Applied Economics Research, an astonishing 96% of firms reported that they were operating close to or above their optimal levels of capacity utilisation—the highest number ever recorded. Firms are also experiencing a serious shortage of skilled labour and wages are rocketing. Companies’ total wage costs in the six months to September were 22% higher than a year earlier, compared with an average increase of around 12% in the previous four years. India’s current account has shifted to a forecast deficit of 3% of GDP this year from a surplus of 1.5% in 2003—a classic sign of excess demand. Total bank lending has expanded by 30% over the past year, close to the fastest growth on record. India’s share and housing markets also look bubbly. Draft proposals by the central bank on November 17th to cap banks’ exposure to stockmarkets and curb reckless lending only mildly dampened the optimism. Share prices are almost four times their level in early 2003. India’s price/earnings ratio of 20 is well above the average of 14 for all Asian emerging markets. House prices have also gone through the roof: Chetan Ahya of Morgan Stanley reckons that prices in big cities have more than doubled in the past two years. Housing loans jumped by 54% in the year to June (the latest figures available) and loans for commercial property were up by 102%. Indian policymakers seem reluctant to admit that economic growth has exceeded its speed limit over the past three years, let alone slow it. They prefer to bask in the belief that India has become another China, able to keep growing ever faster without inflation rising. Palaniappan Chidambaram, the finance minister, has said the Indian economy will continue to grow by more than 8% in the next few years. India’s trend growth rate has almost certainly increased but it is still nowhere near as high as China’s. Mr Prior-Wandesforde estimates that it is now around 6.5%, up from 5% in the late 1980s. But India’s recent acceleration largely reflects a cyclical boom, thanks to loose monetary and fiscal policy. The Reserve Bank of India has raised one of its key interest rates by one and a half percentage points to 6% over the past two years, but inflation has risen by more, so real interest rates have fallen and are historically low. This makes the economy more vulnerable to a hard landing. India cannot grow as fast as China without igniting inflation because of its lower investment rate, particularly in infrastructure, and labour bottlenecks. The latest government figures, for the year ending in March 2005, put total investment at 30% of GDP, compared with over 45% officially reported in China. Some, however, believe that an investment boom is under way. A recent report by Surjit Bhalla of Oxus Investments, an economic research firm and hedge fund, has caused a stir by estimating that investment in the year ending in March 2007 will reach between 38% and 42% of GDP. Such investment, he says, would allow India to sustain 10% annual GDP growth. Sadly, Mr Bhalla’s estimate for investment is almost certainly too high. Unless saving (29% of GDP in 2004-05) has also surged over the past two years, an investment rate of 40% would imply a current-account deficit (which must equal the gap between saving and investment) of close to 10% of GDP. This does not square with trade figures and, in any case, it would hardly be a sign of economic health. Nor does a significant increase in saving look likely given strong consumer spending this year and only a modest fall in the government’s budget deficit. When China’s President Hu Jintao held meetings with the Indian prime minister, Manmohan Singh, in Delhi this week, they agreed there was room for both countries to prosper in their overcrowded corner of the world. It is, however, wishful thinking to believe that India can now run as fast as China without a higher investment rate and a more flexible labour market. The danger of red-hot curries is that they can leave one gasping and in tears.

Current-account is (Export – Import). In China, export is well more than import, so having a "widening surplus" It’s funny when the author says "only 42%", what’s the share prices of Canada? 5%? Of course, the following says that of India is even more than 42% — at 400%.       I talked to my favorite professor and he said this: China requires low-skilled worker, while India is high-tech.  While China has plenty of workers, India runs out workers quickly!   India imports more than export, maybe they need to buy a lot of M$ Windows licenses — People in China said: what are M$ Windows?   bubble –> bubbly India share prices are at 400%!                   Real interest rate = nominal interest rate – inflation. When a big bubble bursts, it is "hard landing".  Canada always has monetary policies in place to ensure a "soft landing".               (S-I) + (T-G) = (X-M) (29%-40%) + (T-G) = (X-M) Here explains why the investment estimate is too high. Assume (T-G) is unchanged, then (X-M) is about -10%. The article says there wasn’t 10% current deficit. Also, since S (saving) is not likely to increase much, and (T-G) is not likely to change.

Air Canada

This article talks about the recent Air Canada IPO, and about the underwriters — those people who helped to take the company to IPO. Good stuffs.

Air Canada IPO’s hard landing a lesson for Milton Headshot of Eric Reguly ERIC REGULY Robert Milton’s remarkably long run of good fortune ended last week when the initial public offering of Air Canada went into a nosedive. The airline’s shares, which had been entirely owned by parent company ACE Aviation, where Mr. Milton is CEO, came out at $21 and dropped like a lead parachute to $17.50. By yesterday, the Air Canada "A" shares were still $1.75 below their issue price. When IPOs go wrong, everyone looks around the room for someone to blame. Not my fault, say the underwriters. Nor mine, say the bosses of the issuing companies. Nor mine, say the hedge funds and the short sellers. Inevitably, some external and amorphous force — let’s call it "market conditions" for lack of a better description — takes the hit. Forget it. The market in general and the airline market in particular were in lovely shape when the Air Canada IPO shares hit the market with a thud on Friday, Nov. 17. Airline and aviation businesses were, and are, hot commodities. Values had soared and deal making had returned. US Airways made an $8-billion (U.S.) bid for Delta. Canada’s Onex, fresh from floating commercial plane component maker Spirit AeroSystems on the stock market, joined an investor group to bid for Qantas Airways. Airline maintenance units were being sold at gorgeously high valuations. And ACE Aviation was about to make a splash with the Air Canada IPO. The Air Canada offering looked like a no-lose investment. ACE emerged from the bankruptcy protection wreckage of Air Canada in 2004. The holding company, like the old Canadian Pacific, became the owner of an array of operating businesses. The four biggies were: the main airline, Air Canada; regional carrier Jazz; the Aeroplan loyalty program; and the aircraft maintenance, repair and overhaul division. Early in the game, ACE became a victim of the classic holding company discount, that is, ACE’s value did not reflect the worth of the parts. Mr. Milton tried to unlock value through tax-free distributions. The Aeroplan and Jazz IPOs were wildly oversubscribed. Next up were promises to distribute $2-billion of ACE capital to investors, sell the maintenance division and give Air Canada the IPO treatment. Buried inside ACE, Air Canada was afforded little or no value. ACE shareholders, many of them hedge funds, urged their fearless leader on. The hedgies did what hedgies were born to do, which is hedge. They bought ACE and shorted Aeroplan and Jazz. The effect, as one fund manager says, was to "isolate" a long position in Air Canada and the maintenance unit at little cost. In other words, the hedgies believed in, and bought into, Mr. Milton’s strategy. Along came the Air Canada underwriters, led by RBC Dominion Securities. They were happy. They knew that previous ACE spinoffs flew off the shelves. They said the IPO was many times oversubscribed, that is, the demand for the new Air Canada shares hugely outweighed the available supply. So they increased the size of the ACE and Air Canada primary and secondary offerings. The expected price range per share was $19 to $22. The sale came it at $21 and the total proceeds of $525-million rolled in against the original estimate of $400-million. The underwriters must have known ACE was stuffed with hedge fund investors — they were paid a fat 5-per-cent commission to learn this stuff. Incredibly, they did not realize what many of the hedgies would do as soon as Air Canada hit the market. They sold the shares to monetize the value of Air Canada, the main operating unit whose value had been hidden. Remember, that’s why they piled into ACE shares in the first place. Air Canada shares immediately sank. Then the herd mentality took over. The stock flippers stormed the exit doors too, followed by the regular investors. The shares kept sinking. Mr. Milton and the investors who rode the shares down have been in exceedingly bad moods since then. There are rumours that Mr. Milton is screaming mad at the hedge funds and will seek revenge, possibly by cutting short his plans to distribute the $2-billion of ACE capital to shareholders. Other rumours say he’s mad at the underwriters for having persuaded him to boost the size of the IPO. The latter seems more credible. If the underwriters had ignored their lust for bigger fees from a bigger offering, the supply constraint probably would have mitigated the damage. It may have even prevented it. This story may have a happy outcome. Fuel prices are coming down, which will lift Air Canada’s profits. The airline seems undervalued compared with its peer group. ACE still suffers from a holding company discount and Mr. Milton is as motivated as ever to eliminate it through more distributions and sales. The sale of the maintenance business, worth perhaps $700-million-plus, is in the works. But the happy ending should have come last week. Mr. Milton has learned a lesson — don’t believe everything the underwriters tell you. ereguly@globeandmail.com

Meaning "A very steep dive of an aircraft." [Answers.com] ACE Aviation bought the Air Canada company and reorganized it in 2004. The underwriters are the people (the bankers) who helps to take the company public.  They set a IPO offer price. Hedge funds are "mutual funds for the super-rich.". They are really smart people. These people made money and left, and tell the other losers "you suckers".                                       The big 5 banks are among the top IPO underwriters. Of course, these underwriters told Air Canada that they are able to sell at a higher price than other underwriters.                   The underwriters are paid by commission — if they can take a company to IPO with more cash in return (called the "proceed"), they earn a bigger commission.     The bottom line: Air Canada has such as bad reputation — bad services, charge your lunch, and won’t give you a blanket if you are cold and run out of cash. If I invest in Air Canada, I dare not to tell my friends.

2%

Our Finance Minister Jim Flaherty said many things yesterday… including cutting tax and reducing national debt — two things that cannot be achieved at the same time. And he talkd about inflation rate here too.

Inflation target to remain at 2% for five years Finance Minister, Bank of Canada agree not to alter what has worked in the past HEATHER SCOFFIELD ECONOMICS REPORTER The central bank and the federal government have agreed to renew their 2-per-cent inflation target for another five years. Finance Minister Jim Flaherty and the Bank of Canada announced yesterday that monetary policy will continue to target an annual inflation rate of between 1 and 3 per cent, with a focus on hitting the centre of that range. "Maintaining low, stable and predictable inflation goes right to the bottom line of every household budget," Mr. Flaherty said yesterday, announcing the renewal as part of his economic and fiscal update. Details behind the central bank’s rationale will be released in documents on Monday. But the decision to stick with a target that has worked well for Canada in the past was not a surprise. Bank of Canada Governor David Dodge had signalled that there was no overwhelming evidence to convince him that the target should be any different. Since the early 1990s, the central bank has aimed to use interest rates to keep inflation anchored between 1 and 3 per cent a year. On a monthly basis, the bank looks at both total inflation and core inflation, which excludes the most volatile items, such as energy, food and taxes. In recent years, the bank has preferred to speak about the inflation target as being 2 per cent, rather than a 1- to 3-per-cent range. Plus, it has focused much of its attention on the core rate, rather than the total number, arguing that total inflation is volatile and over the long run will converge with core inflation. And, in the past decade, the Bank of Canada has been remarkably successful at keeping inflation — both total inflation and the core measure — close to its target. Core inflation has averaged 1.8 per cent a year over the past 10 years, while total inflation has averaged 2 per cent. While there is some merit in arguments that the target band should be a little lower, or that the bank should be aiming at the actual level of the consumer price index, rather than the percentage change, "at the end of the day, I think we’ve been very well served by the target," said Craig Alexander, deputy chief economist of Toronto-Dominion Bank. The 2-per-cent target has become part of Canada’s culture now, and to change it would require a lot of groundwork, said Rick Egelton, chief economist for Bank of Montreal. "It’s been a good anchor for the economy. It’s kept wage settlements pretty much in line. I think most people, when they think about wage contracts, probably think about inflation in or around the 2-per-cent range," he said. "They’ve communicated that number and it’s ingrained in most economic agents’ minds and brains, and I don’t see much point in deviating from it," Mr. Egelton added. "If you deviate from it, you need to tell people why the new number is different than the one you have."

There are two kinds of policies: monytary policy: government can increase or reduce interest rate; fiscal policy: government can increase or reduce tax and spending Not many countries set this kind of goal, and Canada’s target to have a stable inflation rate has been very successful in the global economy. If inflation is too high, the government will hike interest rate.         Here it defines two kinds of inflations.  You can find this identical sentence in almost every article talking about the government policies.   According to my professor — the long run only happens after you die.             Agree… changing it will include changing all economics textbooks!     The bottom line: stable inflation is good.  Think about China having inflation rate as high as 5.3%, people will not save money, and will buy like crazy when receiving their paid checks.

Wireless Electricity

I seldom actually talk about science and high-tech these days — and this one is particularly cool! We are talking about wireless power, not wireless internet. Do we get shocked? Do we get the radiation? This post answers the questions in business terms.  You can also get this article from the Economist website. 

Wireless power Cut the cables Nov 16th 2006 From The Economist print edition A practical way to recharge gadgets without plugging them in ALTHOUGH the laws of physics cannot be altered at whim, scientists are adept at manipulating the world to sidestep this inconvenience. One such deft manoeuvre has just been proposed by physicists who have worked out how to recharge the batteries in mobile phones and laptop computers without using power cables. Physicists have known how to transmit power wirelessly for almost two centuries. Michael Faraday discovered in 1831 that an electric current flowing in a wire induces a secondary current in a neighbouring wire. The principle is exploited in devices from electric motors to power transformers. The problem is that the energy is transmitted in all directions, which means that power is lost rapidly with distance. To exploit the effect, the wires have to be so close as to be almost touching. The alternative—pumping up the power—would zap people with rather too much electromagnetic radiation to be entirely safe. Marin Soljacic and his colleagues at the Massachusetts Institute of Technology have devised a solution to this problem. They propose to transmit power using what are known as “non-radiative” fields and to distribute the electromagnetic energy so that it is carried by the magnetic rather than the electric part of the field. Because magnetic fields interact much less strongly than electric fields with most types of matter—including, most importantly, people—the transmission of power would be both more efficient and considerably safer. They reported their work to the industrial physics forum held by the American Institute of Physics in San Francisco this week. One of the most promising layouts, according to the researchers, is to have a simple loop of wire connected to the mains and stuck to the ceiling. They showed that the electric field is confined near the ceiling, leaving only the magnetic field to transfer the energy to a smaller receiving loop a few metres away. This could be placed on, say, a laptop or mobile phone. Non-radiative fields also have a second advantage. The energy can be gathered only by gadgets specially designed to “resonate” with the field. Most of the energy not picked up by a receiver can be reabsorbed by the emitter. The proposed system has an overall efficiency of 40% and Dr Soljacic hopes to boost this by tinkering with the materials and layout. The idea would be to install a source in each room of an office building, factory or home, giving wireless power throughout

Productivity

Article can be found here.

Productivity gap called ‘tragedy’ Canada’s slipping prosperity should be election issue, Rotman dean says HEATHER SCOFFIELD ECONOMICS REPORTER Canada is making essentially no progress on the productivity front, and University of Toronto’s Roger Martin is fed up. After issuing report after report detailing how business and government can improve productivity, the dean of the Rotman School of Management is now calling on voters and politicians to turn Canada’s prosperity gap (compared with the United States) into an election issue so that leaders are forced to act. "We call for a shifting of our overall attitude from collective complacency to a shared determination to close the gap," Mr. Martin writes in his fifth annual report on how to make Ontario more prosperous. "We just have to take this agenda seriously." Year after year, Mr. Martin’s Institute on Competitiveness and Prosperity has tracked the province’s performance compared with similar jurisdictions in North America. Ontario has slid from the middle of the pack two decades ago, to the bottom of the pack, along with Quebec. "I’m frustrated," Mr. Martin said in an interview. "It feels to me a tragedy, that 17 years ago we were at the median. We’re now about $6,000 in GDP per capita . . . behind, and it’s robbing us of massive fiscal capacity. And we’re just sort of like, ‘well, that’s okay.’ " Because Canada is prosperous by international standards, the public is not very concerned about a deterioration in Canada’s relative standard of living, he worries. "The stealthily slow drift of underachievement could erode our economic strength before we know it." In 2001, Mr. Martin designed a strategy for Ontario to edge its way back to the middle of the North American pack by 2012. But since the province has made no progress, he has extended the timeline to a more realistic 2020. While Canadians may feel comfortable right now, and are just as prosperous as many European countries, closing the gap with the United States is crucial, Mr. Martin argues. That’s because the country is not living up to its potential, and it means that Canadians are accepting a lower standard of living than they have to — meaning lower wages, lower-quality jobs, more dependence on government support, and forgone income. He figures closing the prosperity gap with the United States would increase disposable income for each Ontario household by about $8,400 a year. To close the gap, public support and pressure on politicians is a prerequisite, if policy makers are to find the political will to implement productivity-enhancing measures, he says. And with provincial elections pending in Ontario and Quebec, and a federal election on the horizon, "this is a particularly timely opportunity to set out an agenda for our prosperity." He’s hopeful that Ottawa will jump on his bandwagon tomorrow when Finance Minister Jim Flaherty presents a long-term economic plan for the country. But neither Mr. Martin nor Mr. Flaherty should expect any of their productivity rhetoric to resonate loudly with the public, said pollster Allan Gregg, chairman of Strategic Counsel. "It’s a classic politicians’ dilemma. How do you take what you believe to be good public policy, and make good politics out of it," Mr. Gregg said. No matter what type of language is used, discussions about productivity tell the public that business needs lower taxes while individuals need to work longer and harder, Mr. Gregg said. "The problem is that productivity is a concept whose liabilities are very real: I must work harder. And its benefits are entirely ethereal. Something happens, our economy grows."

Roger Martin is dean of the Rotman School of Management   Here he is saying: Politicians should say "Let’s vote for me, and I promise to make you work harder!"             This is the amount of "value-add" of your work: if you buy a $1 water, take it to a town and sell it as $1.5, then you have $1.5-$1=$0.5 of GDP. This is a yearly amount.               True, and who’s fault is this? If the government does not provide such a high minimum wage and good employment insurance (also called "Safety net", maybe Canadians will work harder. I’m thinking: If you increase my income by $8,400 then I will work harder — not the other way around.                   Wrong Mr. Gregg! If you are right, why don’t we all become slaves — productivity is about technology and innovation. Also it’s about work smart, not work hard.

Sarbanes-Oxley

Article from here. If you learn about enterprise risk management, you must know about Sarbanes-Oxley rules in the U.S.

Paulson calls for softer Sarbanes-Oxley Treasurer says some corporate rules are too costly for small businesses Reuters News Agency NEW YORK — U.S. Treasury Secretary Henry Paulson said yesterday some aspects of Sarbanes-Oxley rules governing corporate behaviour are positive but may need to be applied more lightly to protect U.S. competitiveness. In remarks to the Economic Club of New York, Mr. Paulson said it was vital to balance the costs of regulation against benefits, or risk hurting the U.S. economy. "Excessive regulation slows innovation, imposes needless costs on investors, and stifles competition and job creation," Mr. Paulson said. Mr. Paulson, speaking for the first time since Democrats captured majorities in both houses of the U.S. Congress in the November election, said Treasury plans to sponsor a conference early next year, with a wide variety of participants, to consider how to protect U.S. economic competitiveness. He singled out the Sarbanes-Oxley rules, imposed in the wake of corporate scandals including the collapse of Enron Corp., for special comment. While new laws to amend Sarbanes-Oxley were not needed, Mr. Paulson said, its provisions should be applied flexibly to reduce the costs for compliance, especially for small businesses. The U.S. Treasury chief, a former chairman of Wall Street giant Goldman Sachs, said U.S. capital markets remained "the deepest, most efficient and most transparent in the world" but cited some reasons for concern. "Recently, in the wake of new, heightened regulatory and listing requirements for all public companies in the U.S., we have witnessed changes in IPO (initial public offering) activity," Mr. Paulson said. He said IPO dollar volume "is well below the historical trend" and more public companies are going private instead of remaining as publicly listed, shareholder-owned companies. "This is occurring in record numbers, at record volumes and, as a percentage of overall public company M&A [mergers and acquisition] activity, is approaching levels we have not seen in almost 20 years," Mr. Paulson said. He said layers of regulation can create a situation that not only makes enforcement inefficient but also "can appear confusing and threatening" to companies. Mr. Paulson urged special scrutiny for provisions of the Sarbanes-Oxley Act, in section 404, that require managers to assess the effectiveness of a company’s internal controls and have an auditor attest that they are sufficient. "It seems clear that a significant portion of the time, energy and expense associated with implementing section 404 might have been better focused on direct business matters that create jobs and reward shareholders," Mr. Paulson said. The U.S. Treasury chief said "we cannot legislate or rule-make our way to ethical behaviour," but instead must count upon rules and corporate behaviour being based upon strong principles.

Sarbanes-Oxley rules are created by the U.S. government after the many corporate scandals recently, such as the collapse of Enron. All U.S. public companies must be compatible of the Sarbanes-Oxley rules, and it’s expensive to implement.           In my opinion, I don’t know if it’s needed for a "good" business environment, the Sarbanes-Oxley act is certainly good for the government — rather symbolic — to ragain the investment confidence.         Companies don’t go public anymore because of the high cost associated with the Sarbanes-Oxley Act.  Of course, public companies even go private to avoid the cost sometimes.               The bottom line: At the time, Enron’s previous executives are either jailed or dead — The U.S. government starts to think about ways to work around restrictions… In my opinion, it’s so symbolic.

Chinese Yuan HK Dollar

The Economist this week talks about Hong Kong dollar with Chinese Yuan — will they become one currency?  This article says no in a short term, yes in the long term.  Original article is here.

Yuan for all, all for yuan Nov 16th 2006 | HONG KONG From The Economist print edition Is it time for China’s currencies to get hitched? THE Chinese yuan has picked up the pace over the past couple of months, rising at an annual rate of almost 7% against the American dollar since September—four times as fast as over the previous 14 months since it broke its link with the dollar. If this continues, the yuan could soon be worth more than China’s second currency, the Hong Kong dollar, which is still firmly pegged to the greenback. On November 13th the yuan hit a new high of 7.864 to the dollar, putting it within a whisker of the Hong Kong dollar’s trading band of HK$7.75-7.85 against its American counterpart. This has prompted some market speculation that as the yuan approaches parity with its traditionally stronger neighbour, which looks possible by the end of the year, Hong Kong will abandon its dollar peg and instead tie itself to the yuan. But not only is the dollar divorce unlikely in the near future, such a marriage would be one made in hell. Hong Kong’s peg to the dollar has survived 23 years of political and economic turmoil, more than twice as long as China’s dollar peg lasted. During the 1997-98 Asian crisis the Hong Kong Monetary Authority (HKMA) fiercely defended the peg against massive speculative attacks at the cost of sky-high interest rates, a property-market collapse and severe deflation. Today the Hong Kong dollar is under upward, not downward pressure, but Joseph Yam, head of the HKMA, has repeatedly said that the rising yuan will not lead to a change in the Hong Kong dollar’s peg. Currency traders hope otherwise. In theory the dollar peg means that interest rates in Hong Kong should be the same as in America. Yet three-month rates are 120 basis points lower than those in America, which partly reflects the suspicion that the currency could break ranks with the dollar and rise in line with the yuan. However, there is no economic reason for the Hong Kong dollar and the yuan to be fixed at a one-for-one rate. For one thing the yuan is not fully convertible, so it cannot be an anchor currency. China is gradually relaxing capital controls but it still has a long way to go. Hong Kong would lose its own fully convertible international currency by being tied to it. Second, the two economies differ hugely in their economic structure and stage of development and thus are hardly an optimal currency area. China is heavily dependent on manufacturing whereas Hong Kong concentrates on financial services. It is true that Hong Kong’s economy has become more closely integrated with the mainland through trade, investment and tourism: its trade with mainland China is much bigger than that with America. A recent study by the HKMA finds that Hong Kong’s business cycle also moves more closely with China’s than it used to, but it is still more closely correlated with America’s economy. Third, China needs a more independent monetary policy to control its red-hot economy, which means it must let the yuan rise. Hong Kong, in contrast, has not long emerged from a period of prolonged deflation. And most local economists reckon that currency stability is more important than monetary-policy flexibility. The anchor has helped Hong Kong to weather international financial storms and underpinned the city’s competitiveness as a financial centre. Last but not least, Hong Kong, unlike China, is not under foreign pressure to allow its currency to appreciate. If the yuan climbs further, Hong Kong would be happy to gain competitiveness in the region, boosting exports as well as inward investment and tourism from the mainland. Looking ahead, as Hong Kong and mainland China become more economically and financially integrated, it seems inevitable that the Hong Kong dollar will eventually be replaced by the yuan. However, a merger will not make sense until the yuan becomes fully convertible. Gunshot marriages rarely work out well.

The exchange rate of HK$ and US$ is always at $7.8 — as set by the HK government. While the Chinese Yuan is not fixed.       This is interesting — is Hong Kong seeing the Chinese Yuan more reliable than the US$?                   The currency is fully convertible if you can easily buy and sell it with your currency. Say, you may only convert US$10,000 to Chinese Yuan in a given day, but no more.     Really? Should a currency peg with some country with similar economy?       This is true — when you are pegging your currency with another country, basically you are giving up your control over your own currency.         The bottom line: Hong Kong is small — giving up its currency and use Chinese Yuan is just a question of time.

Dividend Stocks

This article talks about dividend stocks — which I just learned recently in the Finance course.  You may find this in today’s Globe and Mail frontpage.

Buy and hold boring old stocks that raise their dividends. That’s it, Tom says JOHN HEINZL Tom Connolly was never seduced by income trusts. He hates bonds and mutual funds. And he has no time for Google, Research In Motion and other "stupid stocks" that trade at exorbitant price-earnings multiples. At 66, the retired teacher and editor of the Connolly Report — sorry, he’s not taking on any new subscribers — dismisses pretty much every type of investment product churned out by the wealth management industry. Except one: Dividend stocks. Not all dividend stocks, mind you. He only considers companies that raise their dividends regularly, a group that consists largely of boring old banks, insurers, pipelines and electric utilities. In an era dominated by hedge funds and commodity speculators, his approach to investing couldn’t be simpler. And yet most people are too distracted by the daily vicissitudes of the market to appreciate the elegance — not to mention fabulous returns — of his dividend growth strategy. "First you’ve got to know about it. Then you have to believe that it works. And then you’ve got to have the patience to work it," says the Kingston-based Mr. Connolly, who has published his newsletter since 1981 and still has dozens of his original subscribers. How well does dividend-growth investing work? Consider Manulife Financial, a stock Mr. Connolly doesn’t own, but which demonstrates the power of his approach. When Manulife declared its first quarterly dividend of 5 cents a share — or 20 cents annually — back in February, 2000, the stock was trading at $8.47. So the yield was 2.4 per cent, or 20 cents divided by $8.47. (Figures have been adjusted to reflect a two-for-one stock split earlier this year.) At the time, 2.4 per cent might not have seemed like much, but consider what’s happened since: Manulife has raised its dividend eight times and is now paying 80 centsannually — four times its original payout. As the dividend has risen, so has the stock. It closed yesterday at $38.25. Here’s the best part: Since that first dividend was declared, Manulife’s total return — including reinvested dividends — has been more than 400 per cent. Try that with a bond or a fee-laden mutual fund. While it’s true that many investors lack the patience to buy and hold dividend stocks, the collapse of income trusts has put the spotlight back on this sector. The resurgence of dividend stocks is one reason Canada’s benchmark index has clawed its way back to near-record levels, even as the bottom has fallen out of the oil market. Since oil peaked at more than $77 (U.S.) a barrel in July, the price has plunged 28 per cent, closing yesterday at $55.81. In that same period, the S&P/TSX composite index has risen more than 6 per cent. It’s now just 115 points shy of its April record, a remarkable feat given that energy shares account for more than one-quarter of the index’s weight. Why the resilience? A lot of the money that flowed out of income trusts and energy shares has flowed back into dividend stocks. Since the oil slide started, Sun Life Financial, for example, has surged 10.9 per cent, Power Corp. 16.9 per cent and TransCanada 18.7 per cent. Mr. Connolly owns all three, which helps explain why he drives a BMW, has two cottages and is planning to take his wife to France for three weeks in December. His investing strategy — summarized on his website dividendgrowth.ca — also allows him to support charities that are close to his heart. Lest you think dividend investing is without risk, he also owns troubled Loblaw Cos. Ltd., whose stock has tumbled about 18 per cent in the past year. "There will be rough spots and the prices will go down," he admits. When’s a good time to buy dividend stocks? Not right now, he says. After the trust bust, dividend stocks have gotten too rich, he reckons. Better to wait for a pullback. When choosing stocks, he looks for a recent dividend hike and a yield that’s slightly higher than others in the same sector. The yield shouldn’t be too high, however, because that often indicates weak dividend growth. In some cases, it can also signal serious financial trouble. When he finds a stock he likes, he holds it for the rising income. His advice to investors: "Have faith and believe and don’t waver. That’s the key to the whole thing." jheinzl@globeandmail.com

Dividend stocks are stocks that focus on paying shareholders consistent and growing dividends.                   More important, as this article did not mention, is that Manulife is able to meet expectation of dividend growth.  If a company claims they can but cannot, that’s a bad sign because the company seems to be losing financial control.                     Why? Because the Canadian government said they will start to tax income trust dividends recently, so investors do not want to invest in income trusts anymore, and take out their money and invest somewhere else.   It’s interesting to see how we consider to be a rich/successful person.           The bottom line: Remember this — dividend matters and dividend policy does not. In other words, it’s important that the firm I invest in will give me good money.  However, when to give me is not relevant — it does not make me or the firm richer.

US President + US Vice President + Ford + GM + DaimlerChrysler

This is an article from Globe and Mail yesterday, but I found it interesting because I applied the Porter’s Diamond Model…

Bush feels for car czars’ ‘tough choices’ Auto makers press U.S. leadership on heath care costs, Asian trade issues KEN THOMAS Associated Press WASHINGTON — President George W. Bush told U.S. auto industry leaders yesterday he recognized they had "tough choices" to make their companies competitive in a difficult global environment and promised a continuing dialogue between government and industry. Mr. Bush, Vice-President Dick Cheney and other administration officials met in the Oval Office for just over an hour with top executives of Ford Motor Co., General Motors Corp. and DaimlerChrysler AG’s Chrysler Group. The auto makers later told reporters they’d had a good meeting. "The president clearly understands the importance of the business to the United States and the global economy," said Ford chief executive officer Alan Mulally. The auto executives said they pressed their concerns about health care and trade issues, while making clear that the troubled industry does not want a federal bailout. "We found a lot in common," said Mr. Bush, who met with the leaders just hours before he was to leave on a trip to Asia and a meeting in Vietnam with Asia-Pacific economic partners. The message he will give those partners, Mr. Bush said, is "just treat us like we treat you . . . Our markets are open for your products and we expect your markets to be open for ours, including our automobiles." "These leaders are making difficult decisions, tough choices to make sure that their companies are competitive in a global economy. And I’m confident that they’re making the right decisions," Mr. Bush said of the U.S. executives. The auto makers made the case that Japan’s weakened yen makes imported goods from Japan cheaper and enhances profits Japanese auto makers make in the U.S. On exchange rate policy, GM chairman and CEO Richard Wagoner said they discussed the auto makers’ "strong conviction that the Japanese yen is systematically undervalued, which helps them to maintain significant trade balance surpluses in our industry." "I can’t honestly say it appears the President 100 per cent saw it that way, but we had a good dialogue," Mr. Wagoner said. Tom LaSorda, president and chief executive officer of DaimlerChrysler AG’s Chrysler Group, said the auto makers stressed that "specific issues like health care" aren’t limited to the automobile industry. Mr. Wagoner said, "It was a very good dialogue, very open back and forth." The GM CEO said the auto makers told the President that by 2012, up to half of their vehicles could be capable of running on ethanol blends of up to 85 per cent, known as E85. He said auto makers would need assurances that the alternative fuel would be adequately available. Currently, only about 700 of the 170,000 gasoline stations nationally offer E85; most are in the Midwest. The three auto makers said earlier this year they would double their production of flexible-fuel vehicles by 2010. On health care, Mr. Wagoner said they discussed the role of information technology in improving quality and reducing costs and said they would study high-cost, catastrophic cases that frequently drive up the cost of health care. Mr. Bush cited a "mutual desire to reduce our dependence on imported oil." "And so we found a lot in common," Mr. Bush said. "We’ll have a continuing dialogue that’s in our interest." The executives said they were not interested in a bailout similar to the 1979 measure approved by the U.S. Congress that helped preserve Chrysler Corp. Instead, they said the focus should be on the spiralling costs manufacturers face on health care, the advantages Japanese auto makers have because of a weak yen and their work to develop alternative fuel vehicles. All three auto makers spend more on health care per vehicle than steel, which adds about $1,000 to the cost of a car built by the Big Three. GM, the U.S.’s largest private provider of health care, spent $5.3 billion on health care last year for 1.1 million employees, retirees and their dependents.

Big names here!   Both Canada and the U.S. are cutting manufacturing facilities, because of the very cheap labours in the developing countries. Bailout means only solve temporary problem without seeking root cause. One example of a federal bailout request is that the Canadian manufacturers are asking Stephen Harper to solve this same problem by lower the industry corporate tax rate.           Means undervalued because of government/environment, but not the companies themselves. Here the Japanese Yen is cheap, so their cars are cheaper.               Here, you can apply Porter’s Diamond Model: Improving supporting industries (gas) can improve the car industry.               "Since the summer of 1979, Chrysler executives have sought a federal subsidy to save their company from possible bankruptcy" (Cato.org)