Agenda-Setting Financial Insight.

Jan. 7 2013 10:34 AM

Google Won't Evade Rivals as Easily as Feds

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Google will pursue arbitration before seeking injunctions against those it believes are violating mobile patents it bought from Motorola

Photo by ERIC PIERMONT/AFP/Getty Images

Google evaded the feds but won’t so easily do the same with rivals. The U.S. Federal Trade Commission’s extensive antitrust probe into the dominant search engine ended with a whimper: the company promises to behave. The government’s case always looked shaky. If it couldn’t nail Microsoft, Google was a pipe dream. Just as well. For now, it’s still a problem for the market to sort out.

The settlement announced on Jan. 2 contains a few tiny bones for the watchdog. Google will pursue arbitration before seeking injunctions against those it believes are violating mobile patents it bought from Motorola. Companies that don’t want their data scraped and displayed on specialized Google pages can opt out and rest assured they won’t be punished by Google with lower rankings in general searches. Finally, advertisers will be allowed to export their data from Google, making it easier to run simultaneous campaigns on rival sites.

These concessions aren’t significant. Google walks away able to display search results the way it wants. That means, for example, if a user queries “Thai restaurant,” a Google map with reviews from Google-owned Zagat can turn up – and first. That gives it a serious edge. It also means advertisers must deal with Google if they want to reach these searchers. 

While this Google advantage is powerful, regulators and rivals face an uphill climb in court. They’d have to prove consumers were harmed. In reality, web surfers can always bypass Google by using another search engine or entering a site address directly.  

Small wonder the government emerged nearly empty-handed. After all, when it doggedly pursued Microsoft more than a decade ago, the computer giant claimed a larger share of its market than even Google, more clearly abused its leading position and locked in consumers to its services. And that case essentially ended similarly, with Microsoft pledging to act more responsibly.

The case also showed how rivals in the technology industry can be more effective than the government at demolishing powerhouses. Microsoft has been unable to make much of a mark in search, smartphones or tablets. Eventually, Google is destined to the same fate.

In the meantime, the likes of Facebook, Yelp and Microsoft will be forced to make their case directly and prove their information is more timely and their services better than Google’s. Given the current state of affairs, it’s a better outcome for consumers than heavy-handed government interference. 

Read more at Reuters Breakingviews.

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Jan. 3 2013 2:43 PM

SeaWorld IPO May Not Make Second Investment Splash

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SeaWorld’s next investment splash might be smaller than its last

Photo by Mike Aguilera/SeaWorld San Diego Via Getty Images

SeaWorld’s next investment splash might be smaller than its last. Blackstone Group is ready to take public the amusement parks it bought in 2009 from Anheuser-Busch InBev. Dividends have helped the buyout firm recoup a big part of its original cash outlay already and it may end up trebling its money. But new buyers hoping for a similar performance after the initial public offering should beware getting soaked.

Blackstone put in about $1 billion of equity to acquire SeaWorld for a headline price of $2.3 billion, according to the IPO prospectus. Since then, the firm led by Stephen Schwarzman has collected some $610 million in special payouts. Now it looks to be in line for even more.

Six Flags potentially shows how. The rival owner of 19 parks full of roller coasters and log flumes trades at an enterprise value of just over 11 times estimated EBITDA for 2013, according to Thomson Reuters data. Using the same multiple and assuming SeaWorld’s EBITDA hits $400 million this year, the company’s total value would be $4.4 billion.

Shamu the whale’s home is, however, weighed down by $1.7 billion of debt. That would leave SeaWorld with an equity value of $2.7 billion. When combined with the earlier dividends, the figures imply Blackstone’s investment - at least on paper - is now worth about $3.3 billion. Even after allowing for up to $400 million in performance bonuses Blackstone may have to hand over to the original seller, SeaWorld should deliver a handsome rate of return.

New investors may be hard-pressed to manage the same feat. Though IPO proceeds would help reduce the ratio a bit, SeaWorld’s debt is more than four times expected 2013 EBITDA, compared with less than three at Six Flags. Also, Blackstone’s acquisition timing, amid a consumer spending slump, was shrewd. As the company and its banking advisers start pitching and pricing the shares, investors should be careful not to buy into any fish tale.

Read more at Reuters Breakingviews.

Jan. 2 2013 7:02 PM

Global Relief on Fiscal Cliff Misses the Point

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House Speaker John Boehner walks out after a second meeting with House Republicans at the US Capitol on January 1, 2013 in Washington, DC

Photo by MOLLY RILEY/AFP/Getty Images

The fiscal cliff has been averted. Asian and European stock markets rose 1-3 percent after the U.S. Congress managed to avoid the previously mandated spending cuts and tax increases. The rally is unlikely to last long.

The initial response was rational. Inaction on the measures otherwise due to start immediately would probably have led to an American recession, almost inevitably bringing a global slowdown. Still, the whole crisis is basically discouraging.

There was no need for a deadline, if only Congress and the president had been able to agree on a long-term deficit reduction plan any time over the last four years. The temporary resolution was entirely predictable - a messy and inadequate compromise with tax increases and vague commitments to reduce spending. It could have been found days, weeks or months ago.

Equally silly battles loom. The mandated cuts were merely deferred for two months, to around the time that Washington will have to raise the limit on U.S. government borrowing. Get ready for more bitter rhetoric and nail-biting - and another narrow escape.

The United States suffers from the nearly universal problems of developed economies: years of high fiscal deficits, much higher since the 2008 financial crisis and subsequent recession. America is exceptional, though. Its politicians seem uniquely unable either to live with the resulting deficits or to agree how to reduce them.

The result is a structural deadlock and a stream of crises. The 2012 election was not decisive enough to change the pattern. The world’s financial system will remain hostage to a debate between a large and vocal minority of the U.S. population that desperately wants lower taxes and a less committed majority which does not want big cuts in government services.

It would be better if dysfunctional American politics were not so crucial to the global economy, and if the dollar were not so crucial to the financial system. But it is too early for the first to change, and too late for the second. The crises will roll on until investors make U.S. borrowing prohibitively expensive. For now, though, markets are enthusiastic about more of the same.

Read more at Reuters Breakingviews.

Dec. 31 2012 3:55 PM

Latin America Can Count on Masses for Next Phase of Growth

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Consumers are wielding newfound clout from Mexico City to Tierra del Fuego

Photo by Jemal Countess/Getty Images

Latin America can count on the masses for the next phase of growth. Though epitomized by a handful of people like the world’s richest man, Carlos Slim, and showy political leaders spearheading the region’s commodity-led export economies, a burgeoning middle class will make its mark in 2013 powering Latin America’s future.

Consumers are wielding newfound clout from Mexico City to Tierra del Fuego. The World Bank reckons some 50 million people have been lifted out of poverty in the region over the last decade, swelling the middle class ranks. That, in turn, has created millions of new borrowers. Unemployment is very low in some places while wages are rising in others.

Take Brazil’s $2.5 trillion economy. Despite modest GDP growth, consumers have been resilient. Sales at shopping centers may top $58 billion in 2012, the seventh consecutive annual increase, according to trade group Abrasce. A record 48 malls are expected to open in 2013. A $12 billion e-commerce business lured Amazon and Google.

Meanwhile, Mexicans are emulating their northern neighbors. The region’s second largest economy, at $1.2 trillion, is now the world’s biggest soft-drink consumer. Wal-Mart is growing twice as fast there as in the United States. The country’s new “Buen Fin” shopping campaign, modeled after America’s Black Friday, saw November sales jump 30 percent from a year ago.

That lays the groundwork for a surge. As Chile keeps inflation at bay and Colombia pursues potentially landmark peace talks with rebels, Brazil, in particular, should lead the way. It’s gearing up to host soccer’s World Cup in 2014 and the summer Olympics in 2016. The associated infrastructure spending will create jobs and enhance spending power. Combined with benchmark interest rates that recently hit an all-time low of 7.25 percent, the pieces are in place for a consumer-led boom.

The fiesta will need to be monitored. Left unchecked, households could borrow too much. Inflation is always a bubbling worry in Latin America. And the region isn’t immune from slower growth in other parts of the world. But the underlying trends suggest a coming spark for foreign investment and local markets.

Read more at Reuters Breakingviews.

Dec. 28 2012 11:01 AM

Coal's Ascendancy May Leave Ailing U.S. Miners in Pit

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Coal’s ascendancy looks set to leave already ailing U.S. miners stuck in a pit

Photo by YURI CORTEZ/AFP/Getty Images

Coal’s ascendancy looks set to leave already ailing U.S. miners stuck in a pit. Within five years, the black rock is likely to replace oil as the world’s top energy source, according to the International Energy Agency. That should be good news for America’s miners, which are sitting on 28 percent of the planet’s coal. But they’re ill placed to do well from the boom.

America’s reserves equate to several hundred years of the nation’s current coal consumption. They’re also about 50 percent larger than Russia’s, which has the second-largest set of seams. Combined, the two countries burn about 1.2 billion tonnes of King Coal a year, equivalent to the 16 percent increase in global consumption the IEA expects by 2017.

America’s coal industry is being left out of the party, however. It’s already hurting. Alpha Natural Resources and Arch Coal lost close to half their market value in 2012. The Obama administration’s tighter air control rules are only a small part of the problem. Natural gas remains cheap and is expected to further cut demand for coal in generating electricity by another 14 percent by 2017.

Worse, most U.S. mines are poorly placed to exploit demand outside its borders. Most, especially in the Appalachian states, are old and have already tapped the cheapest seams. Add in pricey rail transport to East Coast ports and exports only make money when coal is over $100 per tonne, according to Brean Murray Carret & Co. That puts them at least $5 out the money at current international prices. Costs for producers in Wyoming and Montana are lower, but these have poor access to ports.

Instead the spoils from rising global demand will go to those operating in Indonesia and Australia, the top two exporters. Flooding and weak global prices hurt Australian miners in 2012, knocking a third off the market value of top producer Whitehaven Coal. But the future looks brighter. Costs there and in Indonesia are lower. And China, the main growth market, is relatively close.

Miners down under should have a better 2013. But for America’s producers, a happy new year looks a tough call.

Read more at Reuters Breakingviews.

Dec. 27 2012 1:07 PM

U.S. Doesn't Need Washington for Economic Stimulus

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Fracking is boosting state and local government revenue by around $30 billion a year

Photo by Matthew Lloyd/Getty Images

America doesn’t need Washington for an economic stimulus. President Barack Obama lobbied Congress for a $50 billion investment in infrastructure as part of the fiscal cliff battle, but it’s been stymied by gridlock. A contentious corner of the energy industry is having much more success, though. Shale gas and oil production pumped three times that amount into the economy in 2012, with more to come. It won’t cure America’s ills, but it should ease the pain.

Fracking, the drilling technique used to extract oil and gas from shale rock, is still controversial due to fears about its potential damage to the environment. There’s much less uncertainty about its impact on the economy. Like a chunky federal stimulus, it’s shoveling money into the pockets of consumers, boosting job creation and bolstering the fiscal fortunes of the states.

For a start, consumers saved some $107 billion in 2012 thanks to gas prices that are significantly cheaper than in Europe and Asia, according to IHS. That works out to about $926 per household, or about the same amount as the estimated average savings Americans received from the temporary payroll tax cut in 2012.

The 16 producing states are also benefiting. Fracking is boosting state and local government revenue by around $30 billion a year, IHS estimates. North Dakota is running a $1.5 billion budget surplus - equivalent to about a third of the state’s general fund spending. And the unconventional boom has created about 1.7 million jobs - only the largest public infrastructure investments can top that. And it should create another 1.3 million by the end of the decade.

There’s another bonus, too. The surge in oil production saved America about $185 billion in oil imports in 2012. Bargain-price energy is boosting exports, too, as petrochemical makers and other manufacturers flock back to America. Citi believes the fracking bonanza could cut the trade deficit by as much as 80 percent over the coming decade. That’s something fiscal stimuli could never do.

More Washington-mandated belt-tightening is all but assured as the population ages and entitlement expenditures increase. But at least the stimulus from the nation’s energy pioneers will keep flowing for years to come, taking some of the edge off austerity.

Read more at Reuters Breakingviews.

Dec. 27 2012 10:33 AM

U.S. Housing Doesn't Need Another Government Bailout

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Home prices may have stuttered in October, but they are up 4.3 percent annually

Photo by Tim Boyle/Getty Images

America’s housing market doesn’t need another government bailout. But the White House is mulling plans to rescue homeowners trapped by underwater mortgages and above-market mortgage rates by allowing them to refinance into cheaper government-backed loans. Luckily, its latest musings look like a pipe dream.

The Obama administration is considering two proposals, according to the Wall Street Journal, to fix a problem that has been vexing government officials for years. Many borrowers with private mortgages own homes that are worth less than the loan or whose interest payments are higher than the average 3.4 percent for a 30-year fixed-rate mortgage.

Some 900,000 borrowers fall into this category, according to Barclays and JPMorgan. One proposal would allow such borrowers to refinance into a cheaper loan guaranteed by Fannie Mae or Freddie Mac. Another would lower their monthly payments by restructuring their loans even if they aren’t in danger of imminent default.

The first plan, however, needs Congress to be on board. That’s unlikely. A raft of new guarantees would put even more taxpayer dollars at risk on top of the $188 billion Uncle Sam has injected into Fannie and Freddie. And plenty of lawmakers already want to dismantle the two failed housing agencies.

The second proposal has a better chance of moving off the drawing board since it doesn’t require lawmakers’ approval. Yet bondholders are likely to howl in protest. Loan modifications mean less cash flow for those who own mortgage-backed securities. If borrowers aren’t in danger of defaulting, it’s unfair, and imprudent, to punish investors who will be instrumental in reviving private capital’s role in home finance.

The blossoming recovery in the housing market also indicates that another government-led rescue isn’t needed. Home prices may have stuttered in October, but they are up 4.3 percent annually, according to the S&P/Case Shiller index. Meanwhile, a 12 percent rise in rental income is helping clear housing inventories as investors snap up foreclosed properties. And the Congressional Budget Office reckons that refinancing above-market loans would only prevent a small number of foreclosures. With animal spirits reviving, Washington should be planning its exit from dominating home finance, not extending its occupation.

Read more at Reuters Breakingviews.

Dec. 24 2012 3:41 PM

Washington May Finally Take Up Mortgage Reform

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Home prices and existing home sales have risen steadily this year while inventory fell to a 10-year low

Photo by Tim Boyle/Getty Images

America’s lawmakers may finally take reforming housing finance seriously in 2013. Assuming Congress settles the deficit debate, sorting out the government’s role in funding home loans should be its next stop. And a number of obstacles are dissolving.

U.S. taxpayers are on the hook for at least 90 percent of the nation’s mortgages through Fannie Mae, Freddie Mac and the Federal Housing Administration – a dramatic increase since 2007. But Frannie’s guarantee fees are now so low that private lenders cannot compete to wrest back market share.

Increasing the fee is the simplest policy fix. But that doesn’t wholly address the future role for Fannie and Freddie, which between them needed $188 billion of taxpayer aid to stay afloat. The general consensus is that they should be wound down – even some Democrats and the Treasury are on board.

But there’s no plan of action because the environment seemed too tricky. That’s now changing. The housing market is recovering. Home prices and existing home sales have risen steadily this year while inventory fell to a 10-year low.

Some regulatory certainty is coming as well. The Consumer Financial Protection Bureau should finalize what constitutes a qualified mortgage in January. This will exempt lenders from certain lawsuits. That will then enable the Federal Reserve and five other watchdogs to define the meaning of a “qualified residential mortgage” that will set standards – such as how much equity a borrower has in a property – for prime loans that lenders won’t need to retain a chunk of. New documentation standards will also improve transparency.

So banks and investors should feel comfortable taking on more mortgage risk. Meanwhile, Congress now has an advocate who wants mortgage reform front and center: incoming House Financial Services Chairman Jeb Hensarling.

Some hurdles remain. Industry lobbyists will make a stink about reform. Lawmakers can still make dumb decisions. And any new financing framework is likely to be implemented over several years to avoid a crash. But if lawmakers don’t realize that 2013 is a prime time to take up housing reform, it’s hard to imagine when they ever will.

Read more at Reuters Breakingviews.

Dec. 20 2012 3:35 PM

The Federal Reserve's Crackdown on Foreign Banks Is a Price of Stability

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Federal Reserve Board Governor Daniel Tarullo has proposed a rule thatwould require big foreign banks to create intermediate holding companies for their U.S. subsidiaries.

Photo by Alex Wong/Getty Images

The Federal Reserve’s unilateral crackdown on foreign banks is necessary. The regulator’s requirement that overseas lenders properly capitalize their U.S. arms is a prudent way to protect the local and global financial system. The Fed’s approach could prompt other regulators to follow suit. But the fear that fragmentation could stifle global banking looks overblown.

The proposed rules, spearheaded by Fed Governor Daniel Tarullo, would require big foreign banks to create intermediate holding companies for their U.S. subsidiaries. These entities would be required to comply with the same capital standards as the homegrown lenders that the Fed already regulates – even if the parent bank has capital to spare. And if the institution’s U.S. assets are $50 billion or more, the subsidiary also needs a 30-day buffer of liquid assets.

Some bankers are concerned that the Fed’s locally-minded approach could catch on elsewhere: British regulators have already made similar demands of European banks with large operations in the City of London. If capital is trapped in local markets, it will be harder for banks to expand lending in other parts of the world. This makes operating in multiple jurisdictions more costly – and could crimp economic growth.

Yet even if so-called subsidiarization becomes the norm, a slightly less efficient system of allocating capital seems a small price to pay for a more stable banking system. Besides, the Fed can credibly argue that Wall Street’s position in global finance makes the United States a special case. It hosts one of the largest, and deepest, capital markets on the planet and trades in the world’s most coveted currency. The fountain of available short-term funding makes foreign bank subsidiaries – particularly those with a big presence in the repo market – vulnerable to financial shocks. If the bank’s parent company – or its home government – is unwilling or unable to plug the hole, U.S. taxpayers could potentially be on the hook.

The Fed’s rules will be painful for the likes of Deutsche Bank, which could be forced to inject billions of dollars into its U.S. subsidiary. Still, the Fed’s proposals should make one of the world’s financial hubs – and by implication the global system – safer.

Dec. 19 2012 5:38 PM

Is the New York Times About To Be Sold?

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Arthur Sulzberger Jr., publisher of the New York Times, may be preparing to sell his newspaper.

Photo by YASUYOSHI CHIBA/AFP/GettyImages

Expect the Ochs-Sulzbergers to make headlines in their own New York Times in 2013. The family that controls the U.S. paper of record has loyally seen it through some dark days. With the Gray Lady now on sturdier financial ground, they have a better chance to find a safe custodian at a decent price – maybe someone like billionaire New York Mayor Michael Bloomberg. The window of opportunity could close quickly.

After unloading peripheral businesses like About.com, the Times has about $1 billion of cash. Debt and pension obligations also amount to around $1 billion, but the overall operations are profitable and should generate about $175 million of EBIT next year. Owners long starved of dividends, led by the Ochs-Sulzbergers, will want them restored.

The dozens of family members, who own about 15 percent of the $1.2 billion company but control it with super-voting shares, should consider going a step further. In five years, they’ve collectively lost on paper half their Times-based fortune. Those eager to remain custodians of the heirloom could see their numbers dwindle as relatives cash out.

Beyond some sense of responsibility to their ancestors, it’s hard to see why they wouldn’t all opt to sell. Despite a more stable balance sheet and nearly 600,000 digital subscribers, the outlook isn’t necessarily bright. The industry’s advertising revenue has tumbled by half in just seven years and is still shrinking. The digital side can’t help fast enough. The ratio of print losses to online ad gains clock in at a dismal 19-to-one.

Shutting down the Times’ costly print operations now would damage newsroom morale and the newspaper’s clout, but the step is inevitable. The right owner could see it through that difficult period, as well as preserve both the family’s and the newspaper’s legacy.

Bloomberg is one candidate, Warren Buffett is another. Waiting too long could eventually leave the company as a more distressed seller. Instead, by negotiating from a relative position of strength, the Ochs-Sulzbergers stand a better chance of securing not only their own fates, but that of the New York Times.

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