90 seconds at 9 am: Deficit inertia

90 seconds at 9 am: Janet Yellen to replace Bernanke; IMF warns on early taper; UST 10yr bond sale; gold, oil decline; Holden trapped; NZ$1 = US$0.830 TWI = 76.9

10th Oct 13, 8:16am by David Chaston

Here's my summary of the key overnight news in 90 seconds at 9 am, including news that Bernanke's replacement is decided.

President Barack Obama has nominated Janet Yellen as chairman of the US Federal Reserve. That puts the world’s most powerful central bank in the hands of a key architect of its gigantic stimulus program and the first female leader in its 100-year history.

Although early reactions are positive, markets were expecting the move. The Dow and S&P are higher now, but tech stocks are dragging the NASDAQ lower.

However, the IMF has warned that if the US starts it tapering too early, that would risk huge declines in global bond values, up to US$2.3 trillion they say.

The US Treasury sold a 10yr bond this morning and yields came in at 2.66%, well below the 2.95% in the previous auction. Investors are still not worried about the budget and debt ceiling standoff, for which there is no progress to report.

China is enamoured with its opening of a new Free Trade Zone in Shanghai. The move is raising equity prices for firms that can benefit in the zone, which does seem an odd reaction.

Gold dipped below US$1,300 overnight and still shows a loss on the day, despite a late move higher. Oil fell more than US$2/barrel overnight and is now just over US$101 for the US benchmark and back to its lowest levels of the month.

In Australia, carmaker Holden, who is looking for an increase in taxpayer support to continue manufacturing in the country, has reportedly flatly rejected the Government's requirement to export more. It says cars made there are just too expensive for that.

Locally, we are expecting the REINZ home sales data today, along with the September PMI.

The NZ dollar starts today unchanged at 83.0 USc, 88.0 AUc, and the TWI is at 77.0.

The easiest place to stay up with today's event risk is by following our Economic Calendar here »

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10 Comments

by Stephen Hulme | 10th Oct 13, 9:56am 1381352160

Investors are still not worried about the budget and debt ceiling standoff, for which there is no progress to report.

Maybe. But I would look a little deeper into the factors that underpin the funding model of industrial size asset purchases. Namely Repurchase Agreements - serenity is not a word I would use to encompass the emotions represented in this chart. - Read more

Fidelity took no chances that all will be well.

by Stephen Hulme | 10th Oct 13, 11:22am 1381357322

Mighty River Power (MRP) will buy back up to $50 million worth of the company's shares, taking advantage of the low share price and a strong annual profit.

The purchase of up to 25 million shares - or two per cent of listed shares - will start on Tuesday and could continue until October 14 next year. The long timeframe is necessary to avoid a short term share price spike. Read more

Cripes, the Mighty River Power directors must have lost their nerve or were forced to defend over exuberant share price valuation models prior to the float - Are they using borrowed money to undertake this action thus adding to the demands from energy users and tax payers alike? If not they should return the money to the company owners. Nothing worse than directors choosing winners, particulary when it is their own failing company.

Nonetheless, the entitled amongst us must be squealing loudly in someone's ear - this is a bailout.

by Stephen L | 10th Oct 13, 11:25am 1381357502

Good link, thanks.

A couple of other excerpts stood out to me.

Withers said the board took into account MRP's out-performance against the annual 2013 forecast.

The company's net profit of $114.8 million for the year to June was $20m above the forecast in its initial public offer prospectus published in April, despite the summer drought.

If the company has already achieved $20 million more in profit than planned, then that is another $10 million in cost to the citizens of NZ from selling half the company; either as overcharging for electricity, or foregone dividends.

The MRP board could have used some of the above-forecast profit to pay a special dividend to shareholders but Withers said the share buyback was preferable.

This was the most interesting bit. If the government plans to keep 51% of the company indefinitely, (as it has always said) then it should be totally indifferent to the share price, and only interested in the long term dividend cashflow. So the Board has acted in the interests of the 49% shareholders it seems to me.

Will the government now sell half the shares to be bought back? Or will it let its shareholding lift to greater than 51%?

The whole exercise is a tragic farce.

by iconoclast | 10th Oct 13, 11:46am 1381358768

Shares purchased in Buy-Backs are usually cancelled

The 2% of "total shares" are being purchased from the 49% shareholders or 4% of their holdings which will reduce the 49% to 45% and push the 51% to 55%

by iconoclast | 10th Oct 13, 11:33am 1381358022

And the winner is

Mighty River chairwoman Joan Withers said the board believed that the buyback, representing less than 2 per cent of the company's shares, was a prudent use of capital.

The board's view is that a purchase of our shares, at this time and at current market prices, provides a return above the company's cost of capital and will be value-enhancing for our shareholders.

Yes, 2% of issued shares is 4% to the majority shareholder

And the winner is - the 51% shareholder who goes to 55% at no cost

by Stephen L | 10th Oct 13, 1:04pm 1381363460

The cost to the 51% shareholder is 51% of the $50 million being spent buying these shares back; which otherwise could have been distributed to them as dividends. Any suggestion that it is at no cost is laughable. Even if they are bought back at less than the float price, I wouldn't take any satisfaction- am not convinced the government should be in the business of shorting its own assets to profit by buying them back more cheaply later. Presumably Goldman and friends won't return any commission from the sale that happened only 6 months ago.

Nevertheless I suppose I should be happy. Winston Peters' buy back is happening much faster than probably he or I imagined.

by Anarkist | 10th Oct 13, 11:44am 1381358688

Stephen Holme,

I think the matter is a little more murky than that. The story did arouse my suspicions in light of the fact that over the years corporate directors around the world have employed stock or share buyback schemes to boost the value of their own share portfolios that they've either bought themselves or have been granted via stock options in lieu of higher direct compensation packages.

"During the 1980s and 1990s, corporate managers increasingly chose to use corporate earnings for stock repurchases (buy-backs), or to increase corporate liquidity, rather than to pay dividends. In Stock Repurchases and Incentive Compensation(NBER Working Paper No. 6467) , Christine Jolls suggests that part of the explanation for this trend may lie with the increased use of stock options in executive compensation packages. Now extremely popular across a wide range of firms, stock options give the holder the right to purchase stock at a specified price. Unlike holdings of actual stock, though, stock options do not pay managers any dividends.

While a dividend transfers cash from a firm to its outside owners without any reduction in the number of outstanding shares of stock, a repurchase uses the same corporate cash to reduce the number of shares outstanding. Therefore, the value of a share of stock is diluted by the payment of a dividend but is not diluted by a share repurchase. So stock options are more valuable after a repurchase than after a dividend. Indeed, Jolls finds that the average executive in her sample of firms with repurchase activity enjoyed a $345,000 increase in stock option value as a result of the repurchase activity. Thus there appears to be a strong incentive to neglect dividends in favor of share repurchases."

http://www.nber.org/digest/nov98/w6467.html

"MightyRiverPower directors have taken advantage of the slide in the state-controlled power company's price since its listing, buying up shares before trading restrictions for the board kick in at the end of the month.

Shares in MRP were unchanged at $2.44 today, still below their $2.50 listing price, having shed almost 11 percent from the high it reached on its debut on May 10. The stock is rated an average 'buy' according to a Reuters survey, with a median price target of $2.82."

http://www.sharechat.co.nz/article/804f5717/mrp-directors-mop-up-shares-as-price-slides-blackout-period-looms.html

Woe and behold, this is what I found after a brief Google search. These corporae directors will undoubtedly make a tidy sum since they bought in a trough and will sell at a peak in share value.

by Stephen Hulme | 10th Oct 13, 12:13pm 1381360438

You prompted me to find Bill Parish's web page - he was an indignant critic of Microsoft's stock related financial engineering activities more than 10 years ago. I am not sure some of the more technical, but nonetheless revealing articles can still be read.

by Anarkist | 10th Oct 13, 2:27pm 1381368421

hmm, I wonder what long term investors like the NZ Super scheme and Kiwi Saver funds will think about the shenanegins of these directors when it will materially affect the cashflows generated by their shareholdings. Will be good for short term speculative investors, but bad for shareholders who are interested in the dividends.

by Boatman | 10th Oct 13, 11:17am 1381357020

I reckon its all over for Holden in Oz .

Why should the Aussie Taxpayer subsidize something that most middle income Aussies cannot afford to buy ?

I pick we will see more Isuzu's branded as Holdens , being assembled by Isuzu in Thailand , and more Koreans built in Korea being branded as Holdens.