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Fed Seen Slowing Stimulus With QE Cut by End of This Year

Last updated: 09:12 02 May 2013 BST, First published: 08:12 02 May 2013 BST

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Fed Seen Slowing Stimulus With QE Cut by End of This Year Here is are two sections from this topical item from Bloomberg:

Withdrawing accommodation after an open-ended program of bond buying is unprecedented territory for the central bank, said LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York . Cutting purchases by about a third would allow the Fed to gauge the reaction of the economy and investors. If the economy strengthens, the Fed could keep tapering purchases, he said. If   interest rates   rise and threaten growth, policy makers could renew easing.

You want to see how the market is going to digest a cut in purchases so you want to do it in a way that minimizes the disruption, said LaVorgna, who was among economists in the Bloomberg survey.

The Fed began purchasing $40 billion a month of mortgage- backed securities in September and announced in December additional purchases of $45 billion a month of   Treasury securities .

The FOMC in a statement after its last meeting on March 20 reiterated a pledge to keep buying bonds until the labor market improves substantially. Bernanke said at a press conference the same day that policy makers are considering a proposal to appropriately calibrate bond purchases based on the performance of the economy, including the job market.

And:

St. Louis Fed President   James Bullard   has proposed the Fed alter purchases by $10 billion to $15 billion per meeting depending on the outlook for the economy. Such an approach may put too much precision on it, Gapen said.

I can't tell you there's a meaningful economic difference between $85 billion a month and $70 billion a month, said Gapen, a former Fed economist.

Fed Vice Chairman   Janet Yellen   and New York Fed President William C. Dudley have backed the idea of adjusting purchases, without providing an estimate of how much to shrink or enlarge them at each step.

Calibrating bond buying will provide the public with information regarding the committee's intentions and should reduce the risk of misunderstanding and market disruption as the conclusion of the program draws closer, Yellen said last month in a speech in Washington.

My view In other words, it does not get better than this in terms of monetary policy accommodation from the Fed. Logically, as this message sinks in, investors will begin to conclude that it can only get worse.

No wonder Mr Bernanke wants to retire at the end of his current term in January 2014! I mean no disrespect Mr Bernanke is a nice, mild mannered gentleman who has experienced the fun part of saving the world', while Rouriel Noubini said it could not be done. Plenty of others agreed with him.

The task of unwinding QE, which involves removing the mother of all punch bowls, is likely to be unsettling.

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Martin Spring 's On Target: Global Giants' Attractive Offspring My thanks to the author for his ever-interesting investment letter. It is posted in the Subscriber's Area but here is a brief sample from the middle section:

An interesting investment concept advanced by fund managers Global Thematic Investors is to favour companies in emerging economies that are the offspring of major multinationals that hold most, or at least a substantial portion, of their locally-listed shares.

These children have the advantages of being able to offer the well-established brands of, and access to the manufacturing skills and research of, their parents, while selling into buoyant consumer markets with rapidly-expanding middle classes where they often enjoy monopoly-type pricing power.

A good example is Unilever Indonesia , 85 per cent owned by the eponymous Anglo-Dutch consumer goods giant, but listed in Jakarta , where you as a foreign investor can invest relatively easily in the shares. Its annual earnings growth has averaged 20 per cent over the past five years.

If your company distributes essential goods like soap, shampoo, cooking oil or baby milk, and is dominant in that business, your business has monopoly characteristics, GTI explains.

A dominant brand, and the consumer trust that goes with that dominance, almost guarantees you outsized profits. This is the secret of the likes of Nestlé, Procter & Gamble and Unilever all over the world.

My view This issue has an extensive section which addresses issues mentioned in the email of the day which I posted yesterday: On purchasing affiliates of dividend aristocrats.


First Images of Giant Hurricane Swallowing Saturn I attribute it to global warming.

And you think you have bad weather!



Additional commentary by Eoin Treacy

German exports virtually immune to yen depreciation This article by Eric Hayman and Heiko Peters for Deutsche Bank may be of interest to subscribers. Here is a section:

German and Japanese companies are competitors in both their domestic markets (bilateral trade) and third-country markets. As the share of bilateral trade in both exports and imports is relatively small, the negative impact of the JPY's depreciation on Germany's overall economy is limited. The share of German exports to Japan in overall deliveries amounts to only 1.6% and the share of imports from Japan to 2.4%.

At the same time, the two countries differ considerably as regards their most important exports markets. While Europe is Germany's most important sales market by far, in the case of Japan it is Asia. This relatively minor regional overlap is reflected in the lower weighting of the JPY (approx. 7%) in the nominal effective euro exchange rate versus its 20 major trade partners. A 40% depreciation of the yen therefore results in an appreciation of the effective exchange rate by only about 3%. This regional structure leads us to conclude that the adverse effects of a JPY depreciation are unlikely to hurt the overall German economy.

My view Germany has been one of the greatest beneficiaries of the Euro's creation not least because it gave its efficient manufacturers an advantage in currency differentials against regional competitors. The Euro was a catalyst for European companies to expand aggressively within the currency union as they sought to gain the best possible advantage from the lowering of trade barriers. As a result many companies relegated expansion in Asia, Latin America and Africa to the back burner. However, the contraction of the Eurozone's economy over the last few years has made the expansion of markets in the world's major population centres all the more alluring.

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Las Vegas Sands Can Now Hire A Chinese Auditor This article by Francine McKenna for Forbes may be of interest to subscribers. Here is a section:

A filing dated today, April 29, reported that PwC's Hong Kong member firm has also resigned the audit of Sands China Limited. Las Vegas Sands used PwC Hong Kong for the Chinese portion of the audit, the majority portion, related to its holdings in Macau. The U.S. casino companies list their Chinese operations separately on the Hong Kong Stock Exchange while retaining a majority interest in the operations. The China-based subsidiaries of the U.S. casino companies are required to have a China-based auditor for their Hong Kong stock exchange listing and to prepare a report that the primary U.S. audit firm can depend on for the consolidated report. Wynn uses Ernst & Young Hong Kong, and MGM China uses Deloitte Touche Tomahtsu in Hong Kong. Melco Crown Entertainment, the big Macau-based casino operator with ADRs listed on NASDAQ, uses Deloitte Touche Tomahtsu. None of the Big Four audit firms in Hong Kong used by the casinos to audit their Chinese operations have ever been inspected by the PCAOB.

Since the majority of its revenue and assets are in China, Las Vegas Sands could now choose a smaller Hong Kong firm like BDO's member firm to be the primary auditor. (BDO inherited Skechers recently after the KPMG inside trader scandal caused that firm to resign and likes doing gaming audits.) The U.S. BDO firm would audit the minority U.S. portion and then send it over to Hong Kong for final review. The SEC and Department of Justice wouldn't be able to touch the Chinese workpapers or force the Chinese auditor to testify in any of their investigations.

My view The casino sector is not exactly lauded for the transparency of operations but there is no doubting that they tend to be high cash flow businesses. As Las Vegas companies continue to expand their presence in China, where demand for gaming is on a secular upward trajectory, there is no avoiding engaging in practices that are seen as part of doing business in that part of the world. Ensuring that such operations remain off US regulators' radar will remain a challenge as will maintaining the favour of local government officials.

US, European and Asian gambling shares retain a high degree of commonality regardless of whether they are casino or online oriented. Generally speaking European companies have tended to rely on online gaming for growth while US companies have been aggressively expanding in Asia. As demand for gaming increases, I thought it might be instructive to highlight some of the manufacturers of gaming equipment since they should be experiencing demand growth.

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Eoin's personal portfolio: commodity profit taken
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Amplats to reveal restructuring plans next week This article from Reuters appeared in today's Mineweb newsletter and may be of interest to subscribers. Here is a section:

Its initial restructuring plan, unveiled in January, called for the mothballing of two mines near the platinum belt city of Rustenburg and cutting up to 14,000 jobs, almost a quarter of Amplats' workforce and 3 percent of South Africa's miners.

That prompted the one-day closure of several Amplats operations by the militant Association of Mineworkers and Construction Union (AMCU), which emerged last year as the dominant labour group in the platinum sector after a bloody turf war with the rival National Union of Mineworkers (NUM).

An announcement of job cuts may spark fresh strikes and has raised the spectre of a repeat of last year's labour violence and wildcat action that led to over 50 deaths and cost companies and the state billions of dollars in lost revenue.

My view The relatively high marginal cost of production represents a significant challenge for a number of platinum miners. Ambitious wage demands by South African unions might yet represent a bridge too far for more than few mining companies who may be forced to shutter capacity. This should represent a medium-term cushion for platinum metal prices which have been ranging mostly between $1400 and $1800 since late 2011. A bounce of approximately $100 took place over the last couple of weeks but prices will need to hold above $1400 on the current pullback if the benefit of the doubt is to be given to higher to lateral ranging.

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The Chart Seminar 2013 This year marks the 44th year of The Chart Seminar and our first venue will be in London on May 9th and 10th at the Radisson Edwardian Hampshire on Leicester Square. With so much activity in the last few weeks I am greatly looking forward to some lively discussions.

The full rate is £950 + VAT. (Please note US and Australian delegates, as non EU residents are not liable for VAT). The early booking rate of £875 for non-subscribers expires on March 31st. Paid-up Fullermoney subscribers are offered a discounted rate of £850. Anyone booking more than one place can also avail of the £850 rate for the second and subsequent delegates. 

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