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Sunday, December 30, 2007

The liberal skew in American higher education

It's not suprising to me that American professors are more liberal than American population as a whole. "44 percent of professors are liberal, 46 percent moderate or centrist, and only 9 percent conservative. The corresponding figures for the American population as a whole, according to public opinion polls, are 18 percent, 49 percent, and 33 percent, suggesting that professors are on average more than twice as liberal, and only half as conservative, as the average American".
 
But why certain fields are more conservative than others are really puzzling (see table below, source: Neal Gross and Solon Simmons, "The Social and Political Views of American Professors").  I am surprised to find that economic professors are not the most "conservative" ones, instead Accounting and Engineering professors are

For details, read Posner and Becker's blog on this

 

something about Singapore and her SWFs

source: WSJ

Little Island That Could

Singapore Aims to Stand Out
In Capital-Rich Asia
By Helping U.S. Firms

The tiny city-state of Singapore is trying to confirm its reputation as a global financial heavyweight by pumping its money into ailing Wall Street firms.

The latest indication: News that state-owned investment company Temasek Holdings Pte. Ltd. is in advanced talks to invest as much as $5 billion in Merrill Lynch & Co.

[singa]
The financial district of Singapore.

Around the world, government-controlled investment companies like these -- also known as "sovereign-wealth" funds -- have been investing billions of dollars in the West's struggling financial institutions. Morgan Stanley recently announced a $5 billion investment from China Investment Corp., a Chinese-government-led fund. And Citigroup recently sold a stake in itself to an Abu Dhabi fund. A few months ago Chinese-controlled Citic Securities agreed to invest in Bear Stearns Cos.

Temasek's investment would be that fund's first major foray into U.S. assets. But a sister fund has already been shopping: The Government of Singapore Investment Corp., about two weeks ago said it will team up with an unnamed Middle Eastern investor to inject $11.5 billion into Swiss bank UBS AG, with the Singaporeans putting up around $9.6 billion of the total.

Significantly, many investments like these are in the form of minority stakes, rather than controlling stakes, presumably to diminish possible political fallout.

"I'm sure in their deliberations, they are thinking about how they will be received by their host countries and the public at large," says Mark Mobius, who manages emerging-markets portfolios for Franklin Templeton Investments.

Temasek itself learned a lesson about political risk recently after buying control of a Thai telecommunications company from the family of former Prime Minister Thaksin Shinawatra. Under terms of that deal, Mr. Thaksin's family avoided paying taxes on its profit. Public outrage over the incident in Thailand fueled antigovernment protests that ultimately led to Mr. Thaksin's ouster.

Both Temasek and GIC say they will be passive investors in Merrill and UBS. Yet their rapid-fire investments in recent weeks seem at least partly calculated to send the message that Singapore is a sophisticated financial player capable of deploying capital quickly.

In addition, with its investment in UBS -- one of the biggest managers of wealth globally -- GIC appears to push Singapore closer to its goal of establishing itself as a private banking hub.

The investments are part of a longstanding strategy by Singapore -- a speck on the map near Malaysia, Thailand and Indonesia -- to build its reputation as a global financial center as it struggles for influence with emerging regional powerhouses like China and India.

The island-state has long tried to woo regional financiers from Hong Kong by touting the city-state's cleaner air and more affordable housing. And whereas, in the past, Hong Kong has sometimes seemed to view a rising number of hedge funds in Asia with wariness, Singapore has offered seed capital to start-up managers.

[singapore]

Singapore has also sought to attract "knowledge" industries such as technology and biotech by offering tax breaks and a hands-off regulatory environment to global companies. And it promotes itself as a center of Islamic finance -- significant given its proximity to Malaysia and Indonesia -- as well as a financial stepping-stone for doing deals in India.

Singapore derives its financial muscle in part from decades of trade surpluses with the rest of the world, and a government-led investment strategy dating back to 1974, when Temasek was established as a holding company consisting mainly of stakes of state-owned Singaporean companies.

Starting with a portfolio of 354 million Singapore dollars (about US$243 million at current exchange rates) in 1974, Temasek's assets now total about S$164 billion, reflecting the city-state's own transformation from sleepy tropical port into a thriving hub of global finance and transport.

GIC, set up in 1981 to manage the country's foreign reserves, oversees "well above" US$100 billion in assets, according to its Web site.

Traditionally, it has shied away from taking large stakes in publicly traded companies. The recent UBS deal represents a major break with that policy.

Temasek's chief executive, Ho Ching, is an engineer by training with a graduate degree from Stanford University. She previously worked in the Ministry of Defense, later becoming CEO of Singapore Technologies Group. Ms. Ho also is the wife of Singapore's Prime Minister, Lee Hsien Loong, and daughter-in-law of its founding former prime minister, Lee Kuan Yew.

Under Ms. Ho, who took over Temasek in 2002, the company has pushed aggressively to diversify away from Singaporean assets into overseas markets, particularly financial services. It sank billions of dollars into state-owned Chinese banks before they sold shares to the public. Those deals have yielded spectacular profits amid a boom in Chinese shares.

 

Singapore Responds To Investment Article

Your article "Little Island That Could -- Singapore Aims to Stand Out in Capital-Rich Asia by Helping U.S. Firms " (Money & Investing, Dec. 22) claims that Singapore is trying to confirm its reputation as a global financial heavyweight by having Government of Singapore Investment Corp. invest in UBS AG, and Temasek Holdings Pte. Ltd. in Merrill Lynch & Co. Both GIC and Temasek Holdings invest with the sole objective of maximizing long-term financial returns. They make investment decisions independent of Government and of each other. They do not invest to "send the message that Singapore is a sophisticated financial player capable of deploying capital quickly." Neither is it their job to "push Singapore closer to its goal of establishing itself as a private banking hub." The Government would, in fact, be concerned if either were "pumping its money into ailing Wall Street firms" for any non-commercial reasons.

Laurence Lien
Director of Governance & Investment for Permanent Secretary
Ministry of Finance
Singapore

 
 


 

Saturday, December 29, 2007

The unintended consequence of Fed's rate cuts

Mr. Ranson argues that market expectations of further Fed's rate cuts may be the reason that has been stalling the real economy, as evidenced by corporate bond spreads between Baa vs. Aaa bond yields. I certainly see the merits of such argument in home purchases: potential home buyers will wait longer, and wisely so, in anticipation of more price falls in the future, thus further beating down the housing market.

However, I am not convinced on the causal relationship, i.e. it's Fed's rate cuts that made matter worse...maybe the real reason is the delay of the subprime's spillover effect.

Last word, if we look at the corporate bond spread over a longer period, you may find it less scared. In fact in 2003, when we were completely out of recession of 2001, the spread was much higher than today.






The Fed's Predicament
By DAVID RANSON

Day by day forecasters, already pessimistic, lose further confidence in the economy. I too must plead guilty to being drawn in, although I had argued for months that the economy would come through the subprime mess more or less unscathed.

However, the indicator on which we at my firm rely most -- the tightness of spreads in the quality end of the corporate bond market -- has abruptly changed. As recently as a couple of weeks ago, these spreads were tighter than they had been all year. Now it seems that the corporate bond market has begun to corroborate the general panic.

If enough people in a crowded theater stand up and cry fire (when there isn't one), they can set off an unnecessary catastrophe. I believe that what is happening now is a classic example of this mechanism, and that the Federal Reserve is the central player in the drama.

Market-based forecasting of the economy is not a new idea; theoretically, the stock market should be a harbinger of the future economy. But the credibility of market-based forecasting has long been compromised by the stock market's abysmal record as a forecaster.

During turbulent periods, as we have been experiencing since late July, the market is hurled to and fro daily by alternating fear and relief. But spreads in the corporate bond market have an excellent record of forecasting the economy and don't seem to suffer from this vulnerability. And, until recently, they have remained aloof.

Far better than the stock market, the spread between corporate Baa and Aaa bond yields tracks the immediate future of the overall economy closely and consistently. The logic of his very sensitive indicator is simple. Spreads between yields of slightly different grade reflect the market's perception of risk. A slower economy simply means more risk.

The necessary data are published on a daily basis, though not necessarily watched closely, by the Fed. Our research suggests that the timeliness of the spread signal, and its lack of volatility, make it a better indicator than even the GDP estimates themselves on a short-term basis. Better still, it is a leading indicator, providing a forward picture of what GDP data can only show us in the rearview mirror.

Throughout the mortgage-market panic, spreads remained tight, allowing us to predict (correctly) that there would be no significant slowdown in the economy until now. This remains true as far as the rest of 2007 is concerned.

But just in the last couple of weeks, the Baa/Aaa spread has broken through 100 basis points for the first time in several years. Having traded in a range between 85 and 95 basis points all year, it had widened to nearly 120 basis points by mid-December, suggesting a hit to GDP and consumer spending by the first quarter of 2008. According to the most recent data, it has fallen back a bit and the estimated slowdown still looks moderate in severity. But if spreads were to widen further, it could be more acute.

It looks to me unlikely that the unraveling of the subprime mortgage boom is directly responsible for this change. Bond yield spreads should have widened months ago, if that had been the economic threat so many forecasters thought it was. Bond-market data indicate that the economy was weathering the credit crunch perfectly well until this most recent jump in the Baa/Aaa yield indicator.

But there could be a connection between the threat to the economy and Washington's misplaced efforts to address the turmoil. The Fed's policy is quite naturally based on the universally accepted notion that prices affect economic activity. It assumes that an interest-rate cut will promote borrowing and that, in turn, will boost the economy. But there is one aspect of this theory that it has missed: the role of expectations.

In this space, 16 years ago, I argued that "economic activity is often free to migrate from unfavorable to favorable climates," and that one of the less-recognized examples is "the migration of GNP from one time period to another," motivated by "an urge to exploit expectations about the future."

Consider the following thought experiment. The Fed is in the position of an industrial company that fears a shortfall in the demand for its product. The simple solution is to cut the price. The firm does so, but what if its customers are unimpressed and lobby for a deeper one?

The company is uncertain and opts to "wait and see" whether an additional price cut is necessary. The board of directors, which meets every six weeks, promises to announce its decision at the next meeting. In the meantime, pressure for more cuts intensifies and customers postpone their purchases in the expectation of getting a lower price.

Imagine the predicament in which that company now finds itself. Whether or not the first price cut was sufficient, further cuts are widely expected, and sales continue to slump. That induces the disappointed directors at their next meeting to cut again. Now every additional price cut creates expectations that cause sales to slump further. This chain of events repeats itself -- until something breaks. This occurs when the firm wakes up to what is happening, and manages to convince its customers that there will be no more price cuts. At that point, finally, sales bounce back and stability returns.

So, ironically, when the Fed cuts interest rates to support the economy, it can actually create a slump -- by cutting rates slowly and reluctantly enough to encourage more and more aggressive hopes of further cuts. Fortunately, the downward spiral cannot last forever and, when it stops, the economy will snap back. But in the meantime, the Fed has been tripped up by another instance of the law of unintended consequences. It looks to be in the process of precipitating the very recession it is trying to head off.

Mr. Ranson is head of research at H.C. Wainwright Economics Inc.






--
**************************************
Paul D. Deng
Department of Economics
Brandeis University
IBS, MS 032
Waltham, MA 02454
http://www.pauldeng.com/

Ten Virgins and Moral Hazard

source: WSJ 

Wisdom, Folly in Turmoil

The kingdom of heaven will be like 10 virgins who took their lamps and went out to meet the bridegroom. Five of them were foolish and five were wise. The foolish took their lamps but did not take any oil with them. The wise, however, took oil in jars along with their lamps.

The foolish ones said to the wise: "Give us some of your oil; our lamps are going out." "No," they replied. "There may not be enough for both us and you."

--Matthew 25, abridged

The biblical parable of the 10 virgins is sometimes used to make a financial moral: Those who don't take precautions have to face the consequences. "Wise" ones end up paying the price. Here's a retelling of the story for modern times:

[Breakingviews]
All Invited: Left, Citigroup ex-CEO Charles Prince; at right, former Merrill Lynch CEO Stan O'Neal.

The first virgin was Stan O'Neal. He ran Merrill Lynch, an investment bank. He took big bets with its cash. For a few years, he made good profits. But then the bets turned sour and the firm took an $8.4 billion hit. Luckily, Stan had a nice board. It said he could take all his stock awards and benefits from previous years -- without any deduction for the new losses. Stan retired with $161 million in his back pocket.

The second virgin was Rock, also known as Northern Rock. The British bank borrowed lots of money short-term because it was cheap and lent it out for long-term mortgages. It pocketed the spread. That was very profitable for a few years. But then funding dried up. Fortunately, when Rock ran out of money, a charming man from the British government named Alistair Darling provided £56 billion ($111 billion) through loans and guarantees, an offering of almost £1,000 from every man, woman and child in the land.

The third virgin was Charles Prince of Citigroup. He played a clever game of lending money without it appearing on the bank's balance sheet. Better still, he copied Rock's trick of borrowing cheap short-term money and investing it in better-yielding long-term assets. Chuck was so happy he couldn't stop dancing. But then the music stopped. Chuck lost his job but not the fat bonuses he'd collected in previous years.

The fourth virgin was Fannie Mae. She was in the business of lending people money to buy houses. But she was imprudent with her sums. She didn't put aside enough cash to back those loans. She's not too worried, though. If worst comes to worst, Fannie's rich uncle, Sam, will be sure to come to bail her out.

The fifth virgin was called Hedge. It was a nickname from his favorite game: "Hedge I win, tails you lose." He ran a fund. The deal with investors was that every year he made them money, he'd keep 20% of the profits. For several years, Hedge made a packet. But then, in one big bet, he lost much of his investors' money. Of course, he didn't refund them 20% of the losses.

There were five other virgins. They worked hard in industry rather than finance, saved rather than borrowed, paid their taxes, didn't speculate on subprime mortgages and didn't run hedge funds. They didn't get fat bonuses, either, during the bubble or during the crunch. They weren't running risks -- or, at least, that's what they thought. The snag is that, after the Federal Reserve's Ben Bernanke and his French cousin, Jean-Claude Trichet started spraying around cheap cash to bail out Stan, Chuck, Fannie and the like, inflation started seeping into the economy. That eroded the real value of the "wise" virgins' savings.

In the Bible, the bridegroom allows only the wise virgins to come to the wedding feast. The foolish ones are shut out. In this financial version, all 10 virgins are invited. The bridegroom looks around the room and scratches his head. Which are the real fools?



--
**************************************
Paul D. Deng
Department of Economics
Brandeis University
IBS, MS 032
Waltham, MA 02454
www.pauldeng.com

Friday, December 28, 2007

China's Financial Sector to Open Further

WSJ, Dec. 28
 
China May Let Foreign Brokers Do More -- Including Trading 

BEIJING -- China is cracking open the door for foreign investment banks seeking entry into China's booming stock market -- but just barely, at least for now.

In coming days, China's securities regulator is expected to outline rules for global investment banks looking to set up joint ventures to tap the country's domestic exchanges. Morgan Stanley and Credit Suisse Group have already signed preliminary agreements for joint ventures that will be governed by these rules.

Foreign investment banks will be able to take a maximum 33% stake in new local underwriting joint-ventures, a cap that could be raised to 49% over time, according to a person briefed by Chinese regulators on the plans. These joint ventures initially will be limited to securities-underwriting activity, for an unspecified "seasoning period" after which regulators can decide whether to grant other licenses that extend their range of business to include proprietary trading (bets with the firm's own money), brokerage services and money management, the person said.

At the same time, foreign investors will be allowed to invest in established Chinese brokerages with smaller stakes and less control. The new rules for foreign investment in existing brokerages are likely to be modeled on control limits for investors in Chinese commercial banks, the person briefed by regulators said.

In China, individual foreign investors are allowed to own as much as 20% of a domestic commercial bank. Total foreign investment in a single domestic bank is capped at 25%.

The China Securities Regulatory Commission didn't reply to a request for comment. In a statement earlier this month, it said the new rules would "relax restrictions" on foreign equity participation in domestic securities firms and "clearly define the conditions and sequence for progressively expanding the scope of securities joint-ventures."

The new rules give future entrants into the onshore market less access than what the two major foreign players that currently manage securities joint-ventures in China -- Goldman Sachs Group Inc. and UBS AG -- have. Both won key approvals for local joint ventures before regulators shut the door on other applicants in late 2005. Other smaller joint-venture securities firms exist in China but don't have the profile of those run by Goldman and UBS.

Global investment banks without a domestic joint-venture have long courted Chinese business from outposts in Hong Kong, connecting Chinese firms to the international capital flowing through the Hong Kong or U.S. exchanges.

With the Chinese government pushing the development of the domestic markets in Shanghai and Shenzhen, global investment banks haven't been able to reap the rewards of China's domestic stock boom.



--
**************************************
Paul D. Deng
Department of Economics
Brandeis University
IBS, MS 032
Waltham, MA 02454
www.pauldeng.com

Thursday, December 27, 2007

McKinnon's Rescue Plan for the Dollar

My question to McKinnon is, If inflation is the worry, why not just raise interest rate?
 
December 27, 2007; WSJ 
 

A Rescue Plan for the Dollar

By RONALD MCKINNON and STEVE H. HANKE

Central banks ended the year with a spectacular injection of liquidity to lubricate the economy. On Dec. 18, the European Central Bank alone pumped $502 billion -- 130% of Switzerland's annual GDP -- into the credit markets. The central bankers also signaled that they will continue pumping "as long as necessary." This delivered plenty of seasonal cheer to bankers who will be able to sweep dud loans and related impaired assets under the rug -- temporarily.

But the injection of all this liquidity coincided with a spat of troubling inflation news. On a year-over-year basis, the consumer-price and producer-price indexes for November jumped to 4.3% and 7.2%, respectively. Even the Federal Reserve's favorite backward-looking inflation gauge -- the so-called core price index for personal consumption expenditures -- has increased by 2.2% over the year, piercing the Fed's 2% inflation ceiling.

[Illo]

Contrary to what the inflation doves have been telling us, inflation and inflation expectations are not well contained. The dollar's sinking exchange value signaled long ago that monetary policy was too loose, and that inflation would eventually rear its ugly head.

This, of course, hasn't bothered the mercantilists in Washington, who have rejoiced as the dollar has shed almost 30% of its value against the euro over the past five years. For them, a maxi-revaluation of the Chinese renminbi against the dollar, and an unpegging of other currencies linked to the dollar, would be the ultimate prize.

As the mercantilists see it, a decimated dollar would work wonders for the U.S. trade deficit. This is bad economics and even worse politics. In open economies, ongoing trade imbalances are all about net saving propensities, not changes in exchange rates. Large trade deficits have been around since the 1980s without being discernibly affected by fluctuations in the dollar's exchange rate.

So what should be done? It's time for the Bush administration to put some teeth in its "strong" dollar rhetoric by encouraging a coordinated, joint intervention by leading central banks to strengthen and put a floor under the U.S. dollar -- as they have in the past during occasional bouts of undue dollar weakness. A stronger, more stable dollar will ensure that it retains its pre-eminent position as the world's reserve, intervention and invoicing currency. It will also provide an anchor for inflation expectations, something the Fed is anxiously searching for.

The current weakness in the dollar is cyclical. The housing downturn prompted the Fed to cut interest rates on dollar assets by a full percentage point since August -- perhaps too much. Normally, the dollar would recover when growth picks up again and monetary policy tightens. But foreign-exchange markets -- like those for common stocks and house prices -- can suffer from irrational exuberance and bandwagon effects that lead to overshooting. This is precisely why the dollar has been under siege.

If the U.S. government truly believes that a strong stable dollar is sustainable in the long run, it should intervene in the near term to strengthen the dollar.

But there's a catch. Under the normal operation of the world dollar standard which has prevailed since 1945, the U.S. government maintains open capital markets and generally remains passive in foreign-exchange markets, while other governments intervene more or less often to influence their exchange rates.

Today, outside of a few countries in Eastern Europe linked to the euro, countries in Asia, Latin America, and much of Africa and the Middle East use the dollar as their common intervention or "key" currency. Thus they avoid targeting their exchange rates at cross purposes and minimize political acrimony. For example, if the Korean central bank dampened its currency's appreciation by buying yen and selling won, the higher yen would greatly upset the Japanese who are already on the cusp of deflation -- and they would be even more upset if China also intervened in yen.

Instead, the dollar should be kept as the common intervention currency by other countries, and it would be unwise and perhaps futile for the U.S. to intervene unilaterally against one or more foreign currencies to support the dollar. This would run counter to the accepted modus operandi of the post-World War II dollar standard, a standard that has been a great boon to the U.S. and world economies.

The timing for joint intervention couldn't be better. America's most important trading partners have expressed angst over the dollar's decline. The president of the European Central Bank (ECB), Jean Claude Trichet, has expressed concern about the "brutal" movements in the dollar-euro exchange rate. Japan's new Prime Minister, Yasuo Fukuda, has worried in public about the rising yen pushing Japan back into deflation. The surge in the Canadian "petro dollar" is upsetting manufacturers in Ontario and Quebec. OPEC is studying the possibility of invoicing oil in something other than the dollar. And China's premier, Wen Jiabao, recently complained that the falling dollar was inflicting big losses on the massive credits China has extended to the U.S.

If the ECB, the Bank of Japan, the Bank of Canada, the Bank of England and so on, were to take the initiative, the U.S. would be wise to cooperate. Joint intervention on this scale would avoid intervening at cross-purposes. Also, official interventions are much more effective when all the relevant central banks are involved because markets receive a much stronger signal that national governments have made a credible commitment.

This brings us to China, and all the misplaced concern over its exchange rate. Given the need to make a strong-dollar policy credible, it is perverse to bash the one country that has done the most to prevent a dollar free fall. China's massive interventions to buy dollars have curbed a sharp dollar depreciation against the renminbi; they have also filled America's savings deficiency and financed its trade deficit.

As the renminbi's exchange rate is the linchpin for a raft of other Asian currencies, a sharp appreciation of the renminbi would put tremendous upward pressure on all the others -- including Korea, Japan, Thailand and even India. Forcing China into a major renminbi appreciation would usher in another bout of dollar weakness and further unhinge inflation expectations in the U.S. It would also send a deflationary impulse abroad and destabilize the international financial system.

China, with its huge foreign-exchange reserves (over $1.4 trillion), has another important role to play. Once the major industrial countries with convertible currencies -- led by the ECB -- agree to put a floor under the dollar, emerging markets with the largest dollar holdings -- China and Saudi Arabia -- must agree not to "diversify" into other convertible currencies such as the euro. Absent this agreement, the required interventions by, say, the ECB would be massive, throwing the strategy into question.

Cooperation is a win-win situation: The gross overvaluations of European currencies would be mitigated, large holders of dollar assets would be spared capital losses, and the U.S. would escape an inflationary conflagration associated with general dollar devaluation. For China to agree to all of this, however, the U.S. (and EU) must support a true strong-dollar policy -- by ending counterproductive China bashing.

Mr. McKinnon is professor emeritus of economics at Stanford University and a senior fellow at the Stanford Institute for Economic Policy Research. Mr. Hanke is a professor of applied economics at Johns Hopkins University and a senior fellow at the Cato Institute.

States' Shifting Populations

12/27/07, WSJ

The growth in the population of several of what have been the fastest-growing U.S. states – Arizona, Florida and Nevada, particular – is slowing as fewer Americans are moving there. The Census Bureau's annual estimate of state population changes cover the 12 months ending July 1, 2007. They also show that people continue fleeing the Midwest -- especially Michigan, one of two states to lose people – and that the Mountain states in the West continue to post large population gains as people arrive from California and elsewhere.

Wednesday, December 26, 2007

Shoppers be ready for more sales

 
 
 

WSJ: Retail Rush Falls Short, Now Come More Sales 

Spurred by heavy discounting, U.S. shoppers spent furiously in the days just before Christmas. But holiday retail sales appeared to still fall short of industry expectations, setting the stage for bigger markdowns in the increasingly important post-Christmas period.

The 11th-hour rush helped strengthen a weak holiday season. From the day after Thanksgiving to midnight Monday, total retail sales, excluding automobiles, rose 3.6% over the previous year, according to MasterCard SpendingPulse, a unit of MasterCard Advisors. But factoring out spending on gasoline -- which soared thanks to a 27% average price increase since this time last year -- retail sales increased a lackluster 2.4%. Industry forecasts had predicted gains of 3.5% to as high as 4.5%.

QUESTION OF THE DAY
 
[Go to story.] 1
How many days are you working this week? Share your response in the Question of the Day2.

"The surge at the beginning of the season and the surge at the end of the season definitely resulted in the modest growth that we saw," Michael McNamara, vice president of research and analysis for MasterCard Advisors, said in an interview yesterday. "If we didn't have those surges, it would have been a negative story."

The SpendingPulse data includes sales in stores and online. It also covers spending at restaurants and on gift cards, though retailers don't book revenue from card sales until they are redeemed. The data are based on sales activity in the MasterCard payments network, and also estimates for payments made by cash and checks. It doesn't represent MasterCard Inc.'s corporate results.

Procrastinating shoppers in the final weekend before Christmas fueled an 18.7% sales gain over the same weekend last year, according to ShopperTrak RCT Corp., which tracks sales in retail outlets nationwide. "We saw a definite trend for the consumer to go after the deal," said David Jaffe, president and chief executive of the Dress Barn Inc. womenswear chain.

Now, retailers are rolling out more sales and freshening up stores with new merchandise to capitalize on an expected post-Christmas shopping rush. Mr. Jaffe and others predict the promotions after Christmas will be deeper and more comprehensive as retailers seek to rid themselves of fall merchandise, clear out poor-selling inventory and capitalize on gift-card redemptions.

HOLIDAY SALES NEWS TRACKER
 
[Image] 3
The holiday blog4 provides a look at holiday-sales news and trends, including how stores are performing, what products are moving and how consumers are faring, from around Thanksgiving through New Year's Day.

Shoppers reined in their spending for long stretches of the holiday season amid concerns that the continuing credit crisis and the subprime-mortgage meltdown are pulling the economy into a recession. "It's just that insecurity. We've been a little conservative," said Vince VanZago as he and his wife, Kate, left a Costco Wholesale Corp. store in the Denver suburb of Arvada, Colo., Sunday. The couple estimates this year's holiday spending was half their usual $1,200.

Among the season's strong performers was the e-commerce sector, which posted a 22.4% gain in online sales over last year, according to SpendingPulse. Luxury retailers, including high-end apparel, posted a 7.1% gain, excluding weak jewelry sales. Including jewelry, the luxury category declined 1.9%. Costco, which caters to shoppers making bulk purchases, reported strong sales of seasonal gifts and food that more than offset weaker-than-expected jewelry sales.

Cooler weather late in the season inspired shoppers to snatch up outerwear and fall fashions, SpendingPulse said, boosting the specialty-apparel industry to a final 1.4% gain after an anemic 0.5% rise halfway through the shopping season. Menswear sales increased 2.3%, while footwear sales rose 6%.

[Shoppers visit the Manhattan Macy's store on Christmas Eve.]
Shoppers visit the Manhattan Macy's store on Christmas Eve.

Perhaps the season's biggest loser was women's apparel, which declined 2.4% despite a late rally. Luxury retailer Neiman Marcus Inc., which posted higher sales and net income in its latest quarter ended Oct. 27, noted earlier this month that certain fall looks from European fashion lines didn't sell as well as expected. The clothing, as well as unsold fall handbags and shoes, now have been discounted.

Nancy Weiss and her daughter Nathalia Rodela were among those out scouting for bargains Monday. "The sales have been really good this year," said Ms. Weiss, a 52-year-old flight attendant, as she scanned racks of designer clothes marked down by 30% on top of an earlier 20% reduction at Neiman Marcus in NorthPark Center, a high-end mall in Dallas.

Electronics, which offered the must-have gifts of Nintendo Co.'s Wii game console, videogames and Apple Inc.'s iPods and iPhones, registered red-hot sales, though the sector registered a gain of only 2.7% over last year. That figure appears low because MasterCard includes appliance sales in the category, which tempers the sales gains of more coveted items. As personal electronics have become smaller, cheaper and easier to use, they are displacing toys and apparel sales, said Craig Johnson, an analyst with retail-research firm Customer Growth Partners LLC in New Canaan, Conn.

[January Rising]

Retail experts had predicted better inventory planning would help stores avoid widespread markdowns this year. But Wal-Mart Stores Inc. unveiled thousands of long-term price cuts three weeks before Thanksgiving, prompting toy retailers and others to follow. The discounts "started earlier, they got a little deeper, meaning bigger percentages off, and they were certainly more frequent," said Marshal Cohen, chief industry analyst at market-research firm NPD Group.

Retailers, expecting shoppers to return in force this week, are preparing a range of strategies. Last year, shoppers spent $58 billion at U.S. stores and restaurants in the seven days following Christmas, marking a 4.3% increase from the same period a year earlier, according to SpendingPulse. Electronics and teen apparel are typically strong during this week.

Some retailers hope to entice after-Christmas shoppers with new, full-price merchandise. Williams-Sonoma Inc. plans to unveil a new line of natural cleaning products called "Pure and Green," including scents such as "olive oil and coriander." Limited Brands Inc.'s Victoria's Secret will debut a limited-edition fragrance called "More Pink Please" at $20 and $47, depending on the concentration.

But the main draw will be a new wave of sales promotions that already have begun. Coldwater Creek Inc., which caters to mature professional women, is offering a 50% discount on everything on its Web site through midnight Friday.

Overstock.com Inc. is among the online retailers offering free shipping on purchases through the end of the month. Department-store giant Macy's Inc. emailed customers about discounts of 20% to 65% on its Web site. Shoppers at Victoria's Secret who buy one bra can get a second bra half off today and tomorrow.

As gift cards have grown more popular, January has siphoned sales from December and November in recent years. Last year, January sales made up 25% of the three-month period's total, up from 23.6% in the 2000-01 season, according to ShopperTrak.

Retailers stepped up their marketing of gift cards this year, touting them as ideal for hard-to-please recipients and cheaper to mail than bulkier gifts. Many Wal-Mart stores this season had as many as 18 gift-card stations. More retailers joined Wal-Mart, Best Buy Co. and Circuit City Stores Inc. in allowing holders to redeem gift cards online.

An NPD Group survey conducted this month found that 61% of 63,000 respondents intended to give gift cards this season. Jim Loftus, a 60-year-old retired boilermaker in the Denver suburb of Conifer, Colo., bought gift cards for Apple's iTunes and Target Corp. stores this year for his five grandchildren because hitting the stores involves "too many people, too much of a headache," he said.

The National Retail Federation predicts gift-card purchases will total $26 billion this season, up from $24.8 billion last year and $18.5 billion in 2005. For many stores, the key to sales growth lies in enticing redeemers to spend more than the allotment on their card.



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**************************************
Paul D. Deng
Department of Economics
Brandeis University
IBS, MS 032
Waltham, MA 02454
www.pauldeng.com

China focused hedge funds don't deserve hefty fees

 
 
China Hedge Funds Post Big Gains,
But Are They Worth Hefty Fees?
 

The latest year-to-date performance numbers from hedge funds that invest in China's red-hot market appear impressive. But stumbles by some funds in November raise questions about whether they are worth the heavy fees.

The average China-focused hedge fund is reporting a double-digit percentage gain for the 11 months ended in November, with a few up more than 100%.

788 China Fund, managed by Heritage Fund Management of Switzerland, was up 104%. Golden China Fund, managed by China-based Greenwoods Asset Management, was up 100%, while several other funds were up 30% or more, according to performance data reviewed by Dow Jones Newswires.

Anyone Could Have Scored?

But the numbers belie a worrisome performance picture for some funds. Chinese stocks have been a guaranteed moneymaker this year, so investors could have made impressive returns without paying hedge-fund fees. The Shanghai Composite Index returned 82% during the same time period, while the Hang Seng returned 44% -- better than returns at some hedge funds.

A number of hedge funds took hits last month when Chinese stocks tumbled, raising questions about their ability to weather volatility. The Golden China Fund, for example, lost 9.3% in November, while the more recently launched Golden China Plus Fund, which focuses on high-growth companies and private equity, dropped 13%, bringing its year-to-date return to 30% at the end of November, according to performance data reviewed by Dow Jones Newswires.

Officials from Greenwoods Asset Management didn't return a request for comment.

A China-focused hedge fund run by Ginger Capital Management in Hong Kong, meanwhile, lost 17% last month, bringing its annual return to 40%. Officials from Ginger Capital Management didn't return a request for comment.

"What investors want to be looking for is risk-adjusted returns," said Christopher M. Schelling, director of strategic research with Thomson Corp. "I wouldn't be surprised if these Shanghai indexes give back a big portion" of their recent gains in coming months, he added.

One Winning Fund

One fund that seems to have weathered the November storm is 788 China Fund, which was up 2.4% last month despite a drop of 9% in the Shanghai Composite Index. Karim Daou, deputy manager of Heritage Fund Management, said the fund invests based on a macro strategy, moving in and out of sectors depending on their broader performance outlook.

"One of the main objectives is to protect the assets, then to beat inflation and interest rates, then to make performance," Mr. Daou said. "We're not benchmarked [to an index], so we have the flexibility needed to protect the portfolio."

While it isn't clear what exactly was behind losses in some funds, Veryan Allen, who advises institutional investors in Japan on investments including hedge funds, said the drops are a "red flag," suggesting the managers are "very long" and not managing risks well enough.

"One of the myths about China is that you can't go short," said Mr. Allen, adding that there are lots of ways to hedge, including shorting U.S.-listed American depositary receipts.

Investors who want only long exposure to China's growth can just as easily skip the hedge funds and their heavy costs, Mr. Allen said. He recommends investors take a look at China exchange-traded funds, which invest in baskets of stocks like mutual funds but trade on an exchange like stocks.

An investment in the iShares FTSE/Xinhua China 25 Index Fund ETF, for example, would have returned 72% through the end of November.

"We can all make money when the sun is shining," Mr. Allen said. "If for whatever reason you think China's going up, you might as well go with the simplest and cheapest and most direct product."



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**************************************
Paul D. Deng
Department of Economics
Brandeis University
IBS, MS 032
Waltham, MA 02454
www.pauldeng.com

inside China's Morgan deal

a good piece from WSJ.
 
 
Morgan's Helping Hand in China
Ardent Mack Aide From Beijing Lends Stature, Local Ties  

BEIJING -- Morgan Stanley's landmark deal to sell a $5 billion stake in itself to China marks a bold move by Chief Executive John Mack. If it pans out, it also will owe some of its success to the long experience and local ties of Wei Sun Christianson, Mr. Mack's steadfast lieutenant and point woman in China.

The surprise deal, announced Wednesday, gives the state-owned China Investment Corp., or CIC, a stake of as much as 9.9% in Morgan Stanley at a time when the U.S. investment bank is staggering under a multibillion-dollar write-down. While initiated by Mr. Mack, the agreement also helps solidify Ms. Christianson's status as one of China's premier deal makers, and perhaps the country's most prominent female investment banker.

[Wei Chrstianson]

The 51-year-old Ms. Christianson, born in Beijing, hails from a pioneering generation of Chinese who went abroad to study in the early years of China's economic overhauls and later returned to help reshape the country's financial system. Among the fellow Chinese she met in New York while studying at Columbia University School of Law in the late 1980s was Gao Xiqing, a Duke University-trained lawyer who later helped found China's stock markets. Mr. Gao today is president and chief investment officer of CIC, which was founded in September to manage $200 billion of China's $1.4 trillion in foreign-exchange reserves.

It isn't clear precisely what role Ms. Christianson and Mr. Gao, both of whom were in New York for Wednesday's announcement, played in the deal. Ms. Christianson declined to comment, and Mr. Gao couldn't be reached. But their involvement in the tie-up reflects the rising profile of their generation of Chinese in global finance, as China becomes an important force in world markets.

The CIC investment could prove a boon to both CIC and Morgan Stanley, although it also risks feeding suspicions among some U.S. politicians that the Chinese fund is seeking to obtain control of strategic assets -- something CIC officials have long denied. For Morgan Stanley, it provides an infusion of capital, while for CIC the bet could prove lucrative if the U.S. investment bank is able to successfully emerge from its current woes.

CIC's strategy under Mr. Gao and his boss, Lou Jiwei, a former Chinese vice minister of finance, appears to be a mix of opportunistic big bets and more restrained portfolio investment. Mr. Gao and his colleagues have shown an appetite for prominent deals with the Morgan Stanley stake and a $3 billion stake in Blackstone Group LP earlier this year.

[Xiqing Gao]

Ms. Christianson has spent much of her career working with Mr. Mack, following him when he left Morgan Stanley in 2002 to join Credit Suisse Group, departing from Credit Suisse when he was ousted in 2004, then rejoining Morgan Stanley in early 2006 after Mr. Mack's return there. In between, she spent 14 months as Citigroup Inc.'s lead investment banker in China.

Ms. Christianson didn't set out to be a banker. Growing up during the Cultural Revolution, a period of chaos from 1966 to 1976 when much of China ceased to function, she was unable to go to college until the late 1970s. When she could, she enrolled at a language institute in Beijing to study English and was on track to become a translator at the foreign ministry.

Eager to attend graduate school, she jumped at a chance to go to the U.S. in the 1980s. She graduated with honors in 1985 from Amherst College in Massachusetts, becoming the school's first China-born graduate, before attending Columbia's law school on a scholarship. It was at Columbia that she met her husband.

New York at the time was home to a small and tight-knit group of Chinese students studying law and finance -- subjects almost completely alien to a generation that had grown up with Maoism. Mr. Gao, who had graduated from Duke in 1986, was working at the now-defunct law firm Mudge Rose Guthrie Alexander & Ferdon.

"At the time, most Chinese going overseas were aiming to study science," said Li Xiaoming, a friend of Mr. Gao's who graduated from Duke's law school in 1990 and is now managing partner of White & Case's Beijing office. "There were probably about ten Chinese lawyers then at Wall Street firms, making it a close group." Ms. Christianson and Mr. Gao remained friends as she climbed the investment-banking ladder and he rose through the ranks of China's bureaucracy.

After helping found the stock markets, Mr. Gao became vice chairman and chief executive officer of Bank of China's investment-banking arm and later served as vice chairman of the country's securities regulator and its national social-security fund.

Ms. Christianson briefly served as a regulator at the Hong Kong Securities and Futures Commission. After her third child was born, she decided she wanted a career switch and jumped into finance. Morgan Stanley gave Ms. Christianson her first break in 1998. "I was willing to try and ready to fail," she said in an earlier interview.

Today, Ms. Christianson, Mr. Gao and others of their generation are perpetuating the tradition they helped establish, by recruiting Chinese talent from overseas. CIC, for example, recently hired Li Yingru, a young Chinese who studied in the U.S. and had spent about a year and a half working at the California Public Employees' Retirement System.

 
 


 

Monday, December 24, 2007

Recession or not?

With recent econ stats all looking (surprisingly) good, why people still fuss about recssion? Here included are some heated debates on the topic: 3 videos from CNBC's Kudlow and one quant piece from Jim Hamilton.

http://www.cnbc.com/id/15840232?video=612803140
http://www.cnbc.com/id/15840232?video=613298026
http://www.cnbc.com/id/15840232?video=613298033



The bears must wait another quarter

by James Hamilton

Currently available data on consumer spending make it very unlikely that we'll see negative real GDP growth for the fourth quarter.

The BEA reported on Friday that seasonally adjusted real consumption spending grew at a 6.5% annual rate between October and November. As Calculated Risk has noted in the past, this takes much of the guesswork out of predicting what the fourth-quarter numbers will turn out to be. The quarterly consumption component of real GDP is just the average of these monthly numbers, so we now have two of the three months that will go into 2007:Q4 consumption spending.

Following CR, blue bars in the graph below represent the growth rate of the average real consumption during the first two months of a quarter relative to the average real consumption over the first two months of the previous quarter; (my numbers differ slightly from CR's in that I've measured growth rates from changes in the natural logarithm, which correspond to continuous compounding and make the algebra a little simpler). Green bars in the graph report the actual growth rate for the quarterly consumption component of real GDP. The October and November 2007 data imply an estimate of the growth rate of real consumption spending of 3.2% during the fourth quarter of 2007.


pce_dec_07.gif

The two-month estimate has an R2 of 80% in predicting the actual quarterly numbers, and a root mean squared error of 80 basis points. The latter can be used to construct a 95% confidence interval for the 2007:Q4 forecast. The 3.2% estimate for 2007:Q4 implies a confidence interval between 1.6% and 4.8%. That Normal confidence interval can also be bootstrapped, by the way-- only 4 out of the 69 errors since 1990:Q3 exceed 160 basis points in absolute value.

With 2007:Q4 real consumption growth in the ballpark of 3%, it's extremely unlikely that we'll see the negative real GDP growth for 2007:Q4 that some analysts had been predicting before the strong November retail sales figures came in.




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**************************************
Paul D. Deng
Department of Economics
Brandeis University
IBS, MS 032
Waltham, MA 02454
http://www.pauldeng.com/
My strong critic toward sovereign wealth funds (SWFs) was buttressed by Becker's recent piece that explains its fundamental flaws.


Why Sovereign Funds?
by Gary Becker

The growth of large government managed funds during the past few years has been spectacular. These funds are estimated to manage between $2-3 trillion, and their assets are increasing rapidly. Sovereign funds have grown mainly because of the run-up in fossil fuel and other commodity prices, although China is creating a large fund with the capital earned from its trade surplus in goods. If present energy and commodity prices continue, sovereign funds could have over $10 trillion in assets within a few years. I do not believe that the scale of these funds is a healthy development for these countries.

The largest fund is that by The United Arab Emirates, which is thought to have assets of about $900 billion. Next in size are the funds from Singapore, Saudi Arabia, Norway, and China: each has capital of about $300 billion. Following these giant government funds are another 20 or so funds with much smaller amounts of capital. Oil producing countries have about two thirds of the capital of all sovereign funds. The aggregate assets of sovereign funds greatly exceed the approximately $1.5 billion invested in hedge funds.

During the past couple of years, sovereign funds have begun to invest more aggressively in international companies. For example, the Abu Dhabi Investment Authority recently gave cash infusion of $7.5 billion to Citigroup to help replace bank capital that had been depleted due to the credit crunch. China's State Foreign Exchange Investment Corp invested in the IPO of the large private equity company, Blackstone, and was embarrassed after the stock declined greatly from the issuing price. Sovereign funds have made other investments in private companies, and many more are expected.

With only a few exceptions, such as the fund of the Norwegian government, sovereign funds are secretive and not at all transparent. Lack of transparency is a major obstacle to citizens of countries with secretive sovereign funds in determining whether the money that automatically flows to the funds is being well spent. Even estimates of the total assets of most sovereign funds have to be arrived at through guesswork, and except for an occasional well-publicized transaction, their asset allocations are kept private. While private equity and hedge funds have also been criticized because they are little regulated- I do not share this criticism- they are paragons of voluntary disclosure and good governance compared to the vast majority of sovereign funds. Private equity and hedge funds voluntarily disclose information mainly because they compete vigorously for funds, whereas sovereign funds automatically get their resources because of government ownership of oil producing and other commodities.

Compounding the adverse effects of the extreme secrecy is that managers of these funds, being government employees on fixed salaries, have only limited financial incentives to try to achieve higher returns for given risk. Even when those in charge of sovereign funds hire private managers for some of their capital, there is still what economists call a principal-agent problem because government officials choose the managers. As a result, one would expect that the management of these funds would be excessively conservative to avoid investment blunders and bad publicity, or that managers would be tempted toward corruption by companies that want to attract investments from these funds. Or governments will use the funds for other government purposes, such as the just announced unwise decision by Brazil to create a sovereign fund to intervene in the foreign exchange market to shore up that country's currency. Given that little information is available, it is very difficult to discover whether a fund is managed too conservatively, or whether corruption affects investments in a significant way.

A major reason behind the growth of sovereign funds is the desire by oil producing and other countries to avoid what happened during previous booms in commodity prices. Vast revenues in the past were spent with little concrete results to show later on. Countries now recognize that the enormous boom in their export prices, such as oil close to $100 a barrel, is not likely to last. That makes it prudent to save rather than spend most of the revenue that is being collected. The desire to save the surplus is commendable, but that consideration alone does not imply that governments rather than households should do the saving.

Central banks and fiscal agencies should accumulate assets during years with high oil and other commodity prices, or what are in other ways unusually good times, in order to protect against the adverse effects of bad times on fiscal and foreign trade deficits. However, the Abu Dhabi fund and the other large funds, and many smaller ones, have far more assets than is necessary for cyclical management of government portfolios. Instead of government funds retaining the excess assets, they should be distributed as national dividends, or as reductions in taxes.

One advantage of distributing most of a funds' assets as dividends, or reduced taxes, is that since families at different stages of the life cycle have very different investment needs, they would invest such a dividend in ways that best suit their individual needs. Younger couples that are investing in children, and actively accumulating wealth, will spend their dividends on buying homes, cars, and other consumer durables, saving for the education of their children, and investing in mutual funds and other financial intermediaries. Since older persons with adult children already own their homes and other durables, they would spend their dividends mainly on conservative financial instruments.

To be sure, countries accumulating some of the largest funds are not at all democratic, so that any national dividend would only go to a relatively small fraction of the total population. But so too are any benefits from the investments of sovereign funds, so a national dividend would not be any worse in this dimension.