Off the Wires

China's lock on market for rare earth elements: Why it matters

October 20th, 2010  |  Source: CS Monitor

 

China said Wednesday it will 'continue to provide rare earths to the world,' but it also plans to cut exports.

Here's a Q&A on what all the fuss is about.

From Capitol Hill and the Pentagon to high-tech labs and assembly plants, seldom have such obscure names been such a hot topic of discussion. Names such as dysprosium, gadolinium, and praseodymium.

So-called 'rare earth' elements (they're actually as abundant as nickel or tin) are used in such elements as fiber-optic cables. These elements are also used in electronics and green technologies.

Prase-o-what?

They are mined from Earth's crust, and they are among a unique group of chemical elements vital to making many high- and low-tech products – from iPhones, hybrid cars, and jet-fighter engines to aluminum baseball bats. Such elements also are deemed essential to fielding a new generation of green-energy technologies.

The concern: The US imports almost all of these rare earth elements from China, which currently produces about 97 percent of the world supply. If China were to cut exports for geopolitical leverage, or reduce and tax exports in anticipation of meeting burgeoning internal demand, prices for these elements - and the products they appear in - could jump.

Indeed, over the past 24 hours reports from China have indicated the country could reduce its export quotas by 30 percent next year, following a 72 percent reduction during the second half of this year. Others suggest China might ease up a bit on export limits. And Japan has felt China's rare earth wrath for the past several weeks after China stopped exports of rare earth elements to the island nation over a boundary dispute.

If sustained, such moves could turn some of the most desirable rare earth elements into "unobtainium," at least for several years while mining in other countries ramps up, some experts warn.

What are rare earth elements?

They are a group of 17 elements buried in the middle of the periodic table of elements. The first was discovered in 1787.

Through the early 1940s, they were largely a chemist's curiosity. But then US chemist Frank Spedding figured out how to separate and purify rare earth elements. Twenty years later, researchers began discovering their usefulness.

Despite the name, a throwback to their initial discovery, these elements are as abundant as tin or nickel. But they are tough to mine and extract.

Deposits appear worldwide. The US Geological Survey (USGS) puts total global reserves at 99 million metric tons. China hosts some 36 million metric tons. US reserves are estimated at 13 million metric tons.


Companies in appeal for US tax amnesty

October 19th, 2010  |  Source: FT.com

 

The treatment of “cash on the sidelines” is becoming an increasingly pointed political and economic issue in the sluggish recovery, with Republicans blaming uncertainty created by Democratic healthcare and financial reforms for companies’ reluctance to invest and create jobs.

But some large groups say that US tax rules are a more important barrier.

JPMorgan estimated that for some companies, so-called trapped cash amounts to more than 75 per cent of cash balances. To use the cash domestically, they would have to pay tax, typically of 25-35 per cent.

“We do have overseas cash and we would be very supportive of a repatriation holiday,” said Keith Sherin, chief financial officer of General Electric. “If you think about it, there is a lot of cash trapped overseas. If companies could bring that back at more competitive tax rates, I think it would be good for the US economy.”

The eight largest technology companies together have about $200bn in cash, with CiscoMicrosoftGoogleApple and Oracle topping the list, when financial companies and those with large funding arms, such as GE, are excluded.

“Some of our clients tell us that this issue is among the most distortionary elements of their financial policy,” said Marc Zenner, managing director in the corporate finance advisory group at JPMorgan. “It interferes with the optimal allocation of capital, restricting the use of that cash for strategic transactions or to return funds to shareholders.”

Cisco has said that about 80 per cent of its $40bn cash pile is located overseas and has called for the US government to loosen taxation rules to enable companies to repatriate cash earned overseas.


Income Inequality: Too Big to Ignore

October 18th, 2010  |  Source: NYT.com

 

 

PEOPLE often remember the past with exaggerated fondness. Sometimes, however, important aspects of life really were better in the old days.

 

During the three decades after World War II, for example, incomes in the United States rose rapidly and at about the same rate — almost 3 percent a year — for people at all income levels. America had an economically vibrant middle class. Roads and bridges were well maintained, and impressive new infrastructure was being built. People were optimistic.

By contrast, during the last three decades the economy has grown much more slowly, and our infrastructure has fallen into grave disrepair. Most troubling, all significant income growth has been concentrated at the top of the scale. The share of total income going to the top 1 percent of earners, which stood at 8.9 percent in 1976, rose to 23.5 percent by 2007, but during the same period, the average inflation-adjusted hourly wage declined by more than 7 percent.

Yet many economists are reluctant to confront rising income inequalitydirectly, saying that whether this trend is good or bad requires a value judgment that is best left to philosophers. But that disclaimer rings hollow. Economics, after all, was founded by moral philosophers, and links between the disciplines remain strong. So economists are well positioned to address this question, and the answer is very clear.

Adam Smith, the father of modern economics, was a professor of moral philosophy at the University of Glasgow. His first book, “A Theory of Moral Sentiments,” was published more than 25 years before his celebrated “Wealth of Nations,” which was itself peppered with trenchant moral analysis.

Some moral philosophers address inequality by invoking principles of justice and fairness. But because they have been unable to forge broad agreement about what these abstract principles mean in practice, they’ve made little progress. The more pragmatic cost-benefit approach favored by Smith has proved more fruitful, for it turns out that rising inequality has created enormous losses and few gains, even for its ostensible beneficiaries.

Recent research on psychological well-being has taught us that beyond a certain point, across-the-board spending increases often do little more than raise the bar for what is considered enough. A C.E.O. may think he needs a 30,000-square-foot mansion, for example, just because each of his peers has one. Although they might all be just as happy in more modest dwellings, few would be willing to downsize on their own.

People do not exist in a social vacuum. Community norms define clear expectations about what people should spend on interview suits and birthday parties. Rising inequality has thus spawned a multitude of “expenditure cascades,” whose first step is increased spending by top earners.

The rich have been spending more simply because they have so much extra money. Their spending shifts the frame of reference that shapes the demands of those just below them, who travel in overlapping social circles. So this second group, too, spends more, which shifts the frame of reference for the group just below it, and so on, all the way down the income ladder. These cascades have made it substantially more expensive for middle-class families to achieve basic financial goals.


Cotton hits record high after poor crops

October 17th, 2010  |  Source: FT.com

 

Cotton prices soared to a nominal record high on Friday amid heavy buying in China, the world’s largest importer, and disappointing crops in major producing nations including Pakistan.

The rise in the price of cotton will reverberate through the textile industry, forcing clothing companies to either pass the increase on to the consumer or face lower margins. While the impact is likely to be muted on high-priced clothes, it could be more noticeable in cheaper items such as t-shirts and underwear.

Clothing companies including UK-based Nextand jeans maker Levi Strauss & Co have already announced price hikes due to rising cotton costs.

In New York, ICE December cotton futures surged to a record high of 119.80 cents per pound, surpassing the previous record set in 1995. Later, cotton traded up 3.13 cents to 118 cents per pound.

The ICE cotton contract had its origins on the former New York Cotton Exchange, founded in 1870 after the US Civil War.

In real terms, adjusted by inflation, cotton prices are however far away from the modern history’s all time-high of more than 400 cents per pound set in 1973. At current levels, real cotton prices are at the highest since 1996.

 

Cotton inventories hit decade low - Sep-21


$200 million spent by outside groups this election

October 14th, 2010  |  Source: Sunlight Foundation

 

Here is the latest on outside spending this election from the Sunlight Foundation, via our Follow the Unlimited Money tracker:

Spending by outside groups trying to influence the mid-term elections increased by a staggering $78 million in the last week, pushing the total spent by non-profits, labor unions and party committees to more than $200 million this cycle. That's an 80 percent increase from 2006.

"Super PACs"--groups that register with the FEC their intention to raise unlimited funds and run independent expenditure ads--have spent a total of $21.4 million so far.

In the last four days alone, the top five spending organizations disclosed spending $13.8 million and that figure includes a spike in spending by two of the party committees (the Democratic Congressional Campaign Committee and the National Republican Senatorial Committee). American Crossroads andCrossroads GPS--both of which are advised by Republican strategist Karl Rove--and the National Association of Realtors round out the top five spenders.

The DCCC has upped its spending considerably than previous weeks and has spent more than $6.3 million over the last four days, mostly on opposition ads. Crossroads GPS, a 501(c)4 group that doesn't disclose its donors, spent $2.4 million mostly on close Senate races.

During the 2006 mid-term election, outside spending by all these groups totaled just $111 million in mid-October.

Read the full story online at the Sunlight Reporting Group.


Banks fret over deflation

October 14th, 2010  |  Source: Fierce Finance

 

Is it time to start thinking about deflation and what it would mean to your bottom line? More banks are doing as much.

SunTrust has set up a special committee to analyze its exposure to deflation, Reuters reports. BB&T "ran its books through a stress test to gauge the bank's performance in a scenario in which there is deflation for the next 10 years, as part of the bank's own internal projections of various economic scenarios", notes Reuters.


More banks--including Regions Financial and Synovus--are warning about the potential risk of deflation in SEC filings. While deflation is often said to be good for creditors, deflation in a large enough dose can be toxic.

"As Japanese banks discovered in the last decade, deflation means that collateral values decline, giving a bank bigger losses on failed loans," notes Reuters. "And loans may become more likely to fail, as borrowers tire of paying high rates of interest to finance assets that are worth much less than they had been previously. A second credit crisis could emerge."

It remains to be seen if we are heading headlong into a deflationary environment, but it pays to be prepared. Stress tests are in order.

For more: 
- here's the article


Insurers Now Embracing Investment Outsourcing in Greater Numbers

October 13th, 2010  |  Source: Insurance Asset Manager

 

The Insurance Asset Manager (IAM) Annual Survey 2010 Edition, published today, reveals that the financial crisis prompted a sharply higher number of the world’s largest insurance companies to seek outside expertise to help manage their investments.

The IAM Survey, which analyzed data from 50 US-based investment firms that specialize in managing outsourced insurer assets, showed a total of $1.47 trillion in insurance company general account and subadvised assets as of Dec. 31, 2009 -- an increase of 32% compared with the Dec. 31, 2008 total of $1.11 trillion. Third-party general account assets under management (AUM) topped the $1 trillion mark for the first time.

The number of multi-line insurer clients retained by the IAM Survey’s universe of 50 third-party investment managers totaled 104, an increase of 90% compared with 55 at year-end 2008. It was the crisis, according to industry observers, that encouraged very large insurers to shed traditional reservations and add external investment skills to their established in-house capabilities.

By comparison, this same group of investment managers reported 7% increases in both single-purpose property & casualty (P&C) and reinsurance company clients (945 vs. 883 and 179 vs.167, respectively) and a 2% increase in life/health (L/H) company clients (753 vs. 740).

Commented Gary J. Madich, chief investment officer of JPMorgan Asset Management's global fixed income group, “It was time to put a better focus on the investment portfolio and to figure out how it translates back to the balance sheets, assets and liabilities, and core businesses.”

BlackRock took first place in the IAM Survey rankings. Second was Deutsche Insurance Asset Management, followed by GR-NEAM, Conning and Wellington. Propelling BlackRock to the top of the leaderboard was a 59% year-on-year jump in general account insurance assets, to $191.27 billion. Deutsche, while giving up its perennial top spot to BlackRock, also had an excellent year, ending with $172.80 billion.

 

Further information about the IAM Annual Survey 2010 Edition, which is priced at $600.00, is available at www.insuranceassetmanager.com/subscribe or Highlights of the IAM Survey are available at www.insuranceassetmanager.com/survey.


Soaring prices threaten new food crisis

October 11th, 2010  |  Source: FT.com

 

Fears of a global food crisis swept the world’s commodity markets as prices for staples such as corn, rice and wheat spiralled after the US government warned of “dramatically” lower supplies.

An especially hot summer in the US, droughts in countries including Russia and Brazil and heavy rain in Canada and Europe have hit many grain and oilseed crops this year. This has raising concern of a severe squeeze in food supplies and a repeat of the 2007-08 food crisis.

 

The US Department of Agriculture, in a closely watched report, predicted that the country’s stocks of corn would halve to their lowest levels in 14 years.

It warned of a “much tighter supply picture” for corn and barley, the two main feedstocks used to fatten cows, sheep, pigs and poultry.

Shares in some of the world’s biggest meat packers tumbled. US-listed Tyson Foods fell 7.7 per cent. Shares in other food producers also declined.

“I think we have a food crisis right now,” said Hussein Allidina, head of commodities research at Morgan Stanley.

 

Speculators at fault for food prices, says poll - Oct-10

Lex: Commodities: self-defeating rally? - Oct-08

In depth: Global food crisis - Oct-08

beyondbrics: Food file - Oct-05

Wheat and corn rise as Ukraine limits exports - Oct-07


It’s Not Nice to Mess With J.R.

October 9th, 2010  |  Source: NYT.com

 

WHEN he played the oil tycoon J. R. Ewing Jr., in “Dallas,” the long-running, ’80s-era nighttime soap opera, Larry Hagman didn’t get mad at his adversaries. He got even.

Last week, Mr. Hagman, 79, got even once again. This time it was against his broker.

A securities arbitration panel awarded Mr. Hagman and his wife Maj, 82, a big victory against Citigroup, which had overseen some of the couple’s investment accounts. The three arbitrators who heard the case ordered Citigroup to pay the Hagmans $1.1 million in compensatory damages — slightly less than the $1.345 million they had requested — as well as $439,000 in legal fees.

But the kicker was the punitive damages award in the case, which accused Citigroup’s brokerage unit, Smith Barney, of fraud, breach of fiduciary duty and failure to supervise the broker overseeing the Hagmans’ funds. The panel ordered Citigroup to pay $10 million to charities chosen by Mr. Hagman.

The award was the largest given to an individual this year, according to the Financial Industry Regulatory Authority, which oversaw the arbitration. The Hagman award was also the only one in which a panel ordered that punitive damages go to charity, Finra said.

Finra has been recording arbitration awards for 21 years, and Mr. Hagman snared the ninth-largest amount ever awarded. A spokesman for Citigroup said that “we are disappointed and disagree with the panel’s finding and we are reviewing our options.”

That suggests that Citigroup — which said in its own defense that it wasn’t responsible for the losses — might seek to overturn the award. But arbitrations are rarely reversed. Moreover, it’s hard to imagine an award destined for charitable organizations being overturned.

So here’s what happened to the Hagmans: In 2005, they moved their account from a registered investment adviser to Lisa Ann Detanna, a broker at what is now Morgan Stanley Smith Barney. (When the couple first invested with Smith Barney, Citigroup still owned it; Citigroup sold a controlling stake in the brokerage to Morgan Stanley in 2009.)

According to documents produced in the Hagmans’ case, Ms. Detanna quickly began upending the couple’s portfolio, taking it from a conservative blend of 25 percent stocks and 75 percent fixed income and cash to the opposite: 75 percent stocks and the rest cash and bonds.

Never mind that when the Hagmans first sat down with Ms. Detanna, they told her they needed income-producing investments that would preserve their principal, according to the documents.

Ms. Detanna also sold Mr. Hagman a $4 million life insurance policy that required onerous annual premium payments of $168,000.

PHILIP M. AIDIKOFF, a lawyer at Aidikoff, Uhl & Bakhtian in Los Angeles, represented the Hagmans in the case.

“Like most retail customers, Mr. Hagman trusted Morgan Stanley Smith Barney to do what they said they would do,” he said. “He told the broker that he and his wife were conservative and did not need to take any significant risk with the assets they were transferring. This knowledge of the conservative risk tolerance was confirmed over and over to my clients.”

When the market fell, Mr. Hagman’s lawyer argued, the account’s losses were far larger than they would have been had Ms. Detanna maintained the conservative portfolio. And the life insurance policy, which Mr. Hagman did not need and was therefore unsuitable according to his lawyer, generated losses of almost $437,000 when sold. The losses included an exit fee of $168,610, which Citigroup extracted when Mr. Hagman sold the policy.

Mr. Hagman, who recently returned from Europe, where he made personal appearances for “Dallas” fans, said he was surprised by the award but felt it was justified. “I hire people to take care of these things for me,” he said in an interview. “I felt a little bit taken advantage of.”

Documents produced in the case by Morgan Stanley Smith Barney confirmed that the firm had been advised repeatedly of the conservative nature of the Hagmans’ investment preferences. The firm also produced materials indicating that a portfolio mix dominated by equities, as the Hagmans’ portfolio was, does not qualify as conservative.

Nevertheless, Ms. Detanna piled the couple into stocks.


Hands off the warfare state!

October 9th, 2010  |  Source: The Economist

 

 

ARE they worried? When the presidents of DC's two most powerful conservative think tanks team up with America's most prominent cheerleader for war to jointly author a Wall Street Journal op-eddefending the United States' unfathomably colossal military budget, one suspects a bit of anxiety.

The folks of the tea-party movement are clearly upset at what they see as out-of-control spending, and frequently express a desire to slash the size of government. A quick glance at the federal budget is enough to see that military spending is far and away the largest expense after Medicare and Social Security. That fact combined with the observation that America's titanic military budget is larger than the military budgets of China, Britain, France, Russia, Germany, Japan, Saudia Arabia, Italy, South Korea, Brazil, Canada, and Australia combined is more than enough to suggest to common sense that there's room here to cut a bit of fat.

But not so fast! According to AEI's Arthur Brooks, Heritage's Ed Feulner, and theWeekly Standard's Bill Kristol, any attempt to shrink the big government of garrisons and guns will "make the world a more dangerous place, and ... impoverish our future." Whose side are you on, tea partiers?

Messrs Brooks, Feulner, and Kristol assert that military spending "is neither the true source of our fiscal woes, nor an appropriate target for indiscriminate budget-slashing in a still-dangerous world". They aver that "anyone seeking to restore our fiscal health should look at entitlements first, not across-the-board cuts aimed at our men and women in uniform".

This is bogus. Sure, Medicare and Social Security cost more, but spending on war and its infrastructure remains a titanic expense. The path from debt, whether for governments or families, is to cut back across the board. If you're in the red and you spend a ridiculous amount of your income on your porcelain egret collection, the fact that you spend even more on rent and student loan payments is obviously no excuse not to cut back on egret miniatures. And, in fact, America's martial profligacy is a "true source of our fiscal woes". According to Joseph Stiglitz and Linda Bilmes:

There is no question that the Iraq war added substantially to the federal debt. This was the first time in American history that the government cut taxes as it went to war. The result: a war completely funded by borrowing. U.S. debt soared from $6.4 trillion in March 2003 to $10 trillion in 2008 (before the financial crisis); at least a quarter of that increase is directly attributable to the war. And that doesn't include future health care and disability payments for veterans, which will add another half-trillion dollars to the debt.

As a result of two costly wars funded by debt, our fiscal house was in dismal shape even before the financial crisis—and those fiscal woes compounded the downturn.

Perhaps because they see the wrong-headedness of their line of defence, Messrs Brooks, Feulner, and Kristol retreat to the claim that in order to make money, America has to spend money:

Furthermore, military spending is not a net drain on our economy. It is unrealistic to imagine a return to long-term prosperity if we face instability around the globe because of a hollowed-out U.S. military lacking the size and strength to defend American interests around the world.

Global prosperity requires commerce and trade, and this requires peace. But the peace does not keep itself.

Again: completely shabby. The real question at issue here is how much military spending is necessary to keep the trade routes open, and how much of that the United States must kick in. By asserting, rather audaciously, that America's level of military spending is not a "net drain" on the economy, they imply the return on the marginal trillion is positive. I doubt it. The return on the three trillion blown on the war on Iraq, for example, is certainly much, much, much less than zero once the cost of removing financial and human capital from productive uses is taken into account. Also, if prosperity requires peace, it's utterly mysterious how starting expensive wars is supposed to help.   




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