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Top 10 at 10: Beware a September crash; US banks 'still toxic'; Cheesey collateral; Dilbert

Top 10 at 10: Beware a September crash; US banks 'still toxic'; Cheesey collateral; Dilbert

Here is are my Top 10 links from around the Internet at 10 am. My apologies for lateness. This finance company news kept me busy. I welcome your additions in the comments below or please send your suggestions to me at We say a lot of things out loud at 1. Here come the predictions of another crash in September, October and November. This one is particularly disturbing because it comes from a sage who predicted the last one. Ambrose Evans-Pritchard at The Telegraph picks up that Royal Bank of Scotland strategist Bob Janjuah is forecasting an autumnal slump in the Northern Hemisphere. Janjuah sees the S&P 500 back near 500 from over 1,000 now. Yikes. HT AndrewJ.

"I expect this risk rally to continue into "“ and maybe through "“ a large part of August. What happens after that? The next ugly leg of the bear market begins as we get into the July through September 'tipping zone', driven by the failure of the data to validate the V (shaped recovery) that is now fully priced into markets." The key indicators to watch are business spending on equipment (Capex), incomes, jobs, and profits. Only a "surge higher" in these gauges can justify current asset prices. Results that are merely "less bad" will not suffice. He expects global stock markets to test their March lows, and probably worse. The slide could last three months. "A move to new lows is highly likely," he said.

2. Elizabeth Warren, the head of the Congressional Oversight Panel, speaks some home truths about the toxic debts still in the American banking system in this video below from MSNBC. HT Huffington Post and Nikki Pender via twitter.

"By and large, the toxic assets that brought us to this point are still on the books of the banks," she said. Warren, who's been leading the call of late to reconcile the shoddy assets weighing down the bank sector, warned of a looming commercial mortgage crisis. And even though Wall Street has steadied itself in recent weeks, smaller banks will likely need more aid, Warren said. Roughly half of the $700 billion bailout, Warren added, was "don't ask, don't tell money. We didn't ask how they were going to spend it, and they didn't tell how they were going to spend it." She also took a passing shot at Tim Geithner - at one point, comparing Geithner's handling of the bailout money to a certain style of casino gambling. Geithner, she said, was throwing smaller portions of bailout money at several economic pressure points. "He's doing the sort of $2 bets all over the table in Vegas," Warren joked.

3. Kapiti Coast broker and financial adviser Chris Lee writes in his weekly newsletter about the problems at Albany City and what might happen to the hotel and residential project and the bond holders owed NZ$23 million. It looks ugly in a property developer-funded-by-Mums-and-Dads-in-an-endless-trainwreck sort of way. I can't vouch for any of the facts. Westpac is apparently exposed to the tune of NZ$100 million.

Today, we are told (by implication) that the leasehold land is worth nothing, and in five years might not be worth $10 million. How can any investor reconcile this catastrophic difference? Will any Albany bond investor ever again invest in capital markets if the information available to help an investment decision is so variable or unreliable?

4. Canterbury University lecturer Eric Crampton writes a great blog called Offsetting Behavour. Here in this post he muses on the chances of a capital gains tax and any attempts to broaden and flatten the tax structure. He worries that any new Capital Gains Tax might be offset for a while by changes to other taxes, but that a new structure would eventually see rates ramped up again. Government spending cuts are what is really required. I think he has a point. HT Matt Nolan at TVHE

Unless the move to introduce a capital gains tax is coupled with serious spending cuts that hit medium term budget projections - like increasing the retirement age - a current move to introduce the new tax while cutting other taxes just isn't a stable equilibrium. It instead makes it more likely that the medium term budget problems are resolved by overall tax increases rather than by spending cuts. I rather prefer the latter, so I worry about moves that make the former more likely.

5. I wish I was William Bizzari. He works for a bank in Italy that runs two warehouses that store Parmesan cheese wheels as collateral for cheesemakers. This is a great story from Bloomberg with some killer quotes and detail that made me LMAO. One part of Bizzari's job is to turn the cheeses and bang them with a hammer to see if they make a hollow sound to show they've gone soft. Now that's due diligence. Wish we could have tapped a few property developers on the head...

So precious is the cheese that each 80-pound wheel, worth about 300 euros, is branded with a serial number so it can be traced if it is stolen. Thieves tunneled into one warehouse in February and made off with 570 pieces before they were apprehended by police. "Thank heavens we caught the robbers before they grated it," said William Bizzarri, 58, who manages the cheese vaults.

6. David Hargreaves at BusinessDay (stuff) has an interesting story about how Epic, the company that PGC bought into just a few weeks ago, has warned that its dividend could be cut because of a British regulatory review of its main Thames Water asset.

Epic - full name Equity Partners Infrastructure Company No1 - has also officially confirmed it is looking for more cash from existing investors. The minimum sought is $28 million, up to a maximum of $60 million. Epic is not sharemarket listed, but does have over 1500 shareholders. The company will soon become associated with listed Pyne Gould Corporation as it is managed by Equity Partners Asset Management (Epam), which is being bought by PGC for $18 million. Epam, currently controlled by PGC director and 10 percent shareholder George Kerr, also owns 10 percent of the Epic shares and will therefore be asked to contribute more money in the upcoming capital raising.

7. Jane Diplock from the Securities Commission tells Karyn Scherer at the NZHerald that she doesn't think a company should reveal to investors when it's in discussions with its bankers about a potential breach of a banking covenant. This is all in response to Bruce Sheppard's crusade.

A breach of banking convenants would be material and the commission would prosecute any public company that failed to disclose that. However, being close to a breach was different and might need to be debated, she said. "If a company is in negotiations with its bankers and it's trying to renegotiate a facility I'm not sure that's a matter of public interest if they achieve it and move on."

Hmmm. So when does nearly a breach become a breach? I suspect most bankers know there is a problem before it's declared to the public. I think the Securities Commission should be a bit more aggressive. 8. Diana Clement at The RaboPlus Blog has some useful tips on why an accountant and lawyer is a useful thing for anyone wanting to ...ahem...minimise their tax. It's a depressing read for a PAYE taxpayer like myself. So much time and money spent avoiding tax. What has this nation come to?

Even if you're on the minimum wage and have no investments, an accountant may recommend starting a very small business from home so that you could claim against the tax on your day job a portion of your rent or mortgage against tax and other items such as tea and coffee and computer equipment and consumables. Or if you're self employed, but have no investments, there may be ways with loss attributing qualifying companies (LAQCs) and other company structures to have some of your profits channelled to a non-earning spouse or children who pay tax at a lower rate. Using a good lawyer to draft a watertight family trust and pre-nuptial agreement, if necessary, is a must. These need to be robust in court. There are some real horror stories of trusts being bust open by ex partners, children's spouses and even the IRD. What's more corporate trustees, who control billions of dollars of family trust assets, have been accused by the Sunday Star Times of excessive fee-charging and haughty treatment of beneficiaries. The story, which is worth reading in full, was a real eye opener for anyone considering getting a family trust.

9. Mike 'Mish' Shedlock at Global Economic Analysis makes some good points about what to watch for when predicting when the financial world might end. He says we should watch the US corporate debt market closely. I am still worried about September, October and November being ugly months for markets and financial institutions in the Northern Hemisphere.

As long as corporate bonds fetch a good bid, which in turn allows companies to raise cash at decreasing costs, the stock market is likely to be reasonably firm. Note that the pullback in junk bonds began 3 days ago. I am skeptical the rally in bonds can last much longer, but until the corporate bond market starts showing increased signs of stress, equity bears expecting huge pullbacks are likely to be disappointed. Either way, it will pay to keep one eye on the credit markets to help ascertain long-term equity direction. In August of 2007 the corporate bond market cracked wide open. Although the S&P 500 made a new high in November, the corporate bond market didn't. It was the mother of all warning calls that most missed.

10. Interest rates look to be on the rise in Australia, with Reserve Bank Governor Glenn Stevens saying it will be appropriate to raise rates in the future, implying a tightening bias rather than the easing bias here in New Zealand, Bloomberg reported. And here's the version on our sister site

"There will come a time when the exceptional monetary stimulus in place at present will no longer be needed," Stevens said in his half-yearly testimony to parliament's economics committee in Sydney today. "It will then be appropriate for the board to do what it has done on past such occasions, namely to start adjusting interest rates back towards normal levels."

11. The Chinese are coming to Australia at least. China's Yanzhou Coal has bid US$3.5 billion to buy Australian coal miner Felix Resources in a recommended deal, Business Spectator reported.

Investment bankers say Yanzhou's acquisition of Felix is expected to win approval from Australia's Foreign Investment Review board (FIRB) as the assets of the mid-sized company are not strategic. If completed, Yanzhou's purchase of Felix would be China's third-largest cross-border deal this year, according to Thomson Reuters data.

12. US Treasury Secretary Tim Geithner is stuck in cloud cuckooland believing the US banks have shed their toxic assets and are now being much safer boys and girls. Elizabeth Warren above thinks not. For what it's worth I don't either. Here's the clucking from the man in control of the world's largest economy.

In an interview with The Wall Street Journal, Mr. Geithner pushed back against criticism that Wall Street, which is returning to profitability, hasn't changed its ways. "I don't think the financial system is reverting to past practice, and we won't let that happen," Mr. Geithner said. "The big banks are running with much less leverage now, much more conservative liquidity cushions. There has been a significant shrinking of their balance sheets, getting rid of bad assets and cleaning up. And the weakest parts of the system don't exist anymore."

Goldman Sachs has ramped up its bonuses and is taking more risk, according to its own results. The toxic assets remain on the books. The only thing that has changed is the bank share prices, which are being pumped up by printed money. If he is still in charge in December after another crash in September/October I'll eat my wallet. 13. (Bonus because I'm real late) On that note about inflated share prices, here is Felix Salmon from Reuters with a piece called 'When insolvent banks are worth billions' talking about how out of touch share prices are.

The stock market should be a way for investors to allocate their capital over the long term in fundamentally healthy companies. Right now, however, it's a casino. And the slightly safer market, in corporate bonds, is exactly the marketwe want to discourage from coming back: systemically speaking, equity markets are much less dangerous than debt markets. In any case, we're certainly nowhere near the point at which you can judge the health of a bank by looking at its share price. Which means that we're nowhere near the point at which requiring large shareholdings is the best way to give management a strong incentive to make their bank healthier. Maybe we should require that top executives start buying a lot of preferred stock instead.

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