Models, supervision determine banks’ risk weights – report

    Investors have a hard time comparing the riskiness of the major global banks because there are differences in how each bank calculates the potential danger of their assets, according to a report by the Basel Committee on Banking Supervision.
    Based on tests of how 15 major banks assign risks to a simple, hypothetical portfolio of financial instruments, the Basel Committee found differences, either due to supervisory decisions or due to the in-house models that banks use to calculate risk.
    “While some variation in risk weightings should be expected, excessive variation arising from bank modelling choices is undesirable when it does not reflect actual risk-taking,” said Stefan Ingves, Chairman of the Basel Committee and governor of Sveriges Riksbank.
    The Swiss-based Basel Committee, which includes banking supervisors from almost 30 countries, sets global standards and has been tightening its rules in recent years in an effort to prevent another global financial crises.
    The Committee’s analysis of how banks assess the risks from financial instruments is important because the global financial crises in 2007-2009 was largely triggered by major losses on banks’ investments in housing related securities that were held in their trading books.

    Banks assign risks to their investments, known as risk weightings, and the riskier the investment, the more capital banks have to set aside – the capital ratio – in case the investment turns sour.
    But the financial crises showed that banks completely underestimated the risk of the mortgage-backed securities on their books and banking supervisors have now tightened their rules, telling banks to set aside more and higher quality capital.
    The review of banks’ risk weighting is part of the Basel Committee’s fundamental review of banks’ trading book with the aim to ensure that the new Basel III rules, which are currently being phased in, are applied consistently across the world.
    A similar study of risk weightings in banks’ banking book by the Basel Committee is also underway. 
    Banks differentiate between trading and banking books with their trading books holding securities and instruments that are used in trading, either for the bank’s own profit or on behalf of its customers. Banks value those securities based on market prices.
   The banking book typically comprises securities that are not actively traded but held to maturity and therefore accounted for differently.
    “The analysis used to compile this report provides national supervisors with a much clearer understanding of how the risk models of their banks compare with those of international peers. This will allow national supervisors to take action where needed,” the Basel Committee’s Ingves said.
    In their review, the banking supervisors found that differences in banks’ trading positions were reflected in risk weightings but it was difficult for investors “to assess how much of the variation reflects differing levels of actual risk and how much is a result of other factors.”
    One reason for the variation in risk weightings was due to decisions by local banking supervisors that were applied to all banks in one country or to individual banks.
     An example of such a difference is a restriction by supervisors on banks assigning varying risks to different types of assets, a factor that accounted for around one-fourth of the total variation in the hypothetical portfolio used in the review.
    These local decisions typically resulted in higher capital requirements and differences in risk weightings across jurisdictions, the Basel Committee said.
   Another important reason for different risk weightings was the models used by banks.
    “The exercise found that a small number of key modelling choices are the main drivers of the remaining model-driven variability,” the review said.
    Banking rules allow for some flexibility in how banks measure risks so the Committee was not surprised to find some variation, and the aim of the study was not determine optimal variation.
    Using the hypothetical portfolio of securities in a test was a way for supervisors get a better understanding of what elements in banks’ models lead to different risk weightings.

Investors “In Great Danger” If They Don’t Own Gold, Warns Faber, as GDP Drop Sees US Fed Press On with QE

London Gold Market Report
from Adrian Ash
Thurs 31 Jan, 08:00 EST

The PRICE of GOLD held onto most of yesterday’s $15 jump at $1676 per ounce Thursday morning in London, ticking back as Asian and European stock markets fell after Wednesday’s surprise drop in US economic output figures.

Silver also eased back, but held at 1-week highs above $32 per ounce after rising yesterday in gold’s “slipstream” as one bullion-bank analyst put it.

“This Friday’s [non-farm US payroll] report remains crucial,” says a note from Swiss bank UBS – currently encouraging its institutional clients to buy gold outright rather than as a credit-risk deposit.

“Some adjustments to [gold] positioning are likely to emerge” after Wednesday’s ‘no change’ decision from the US Federal Reserve on zero interest rates and quantitative easing.

“But overall, the gold market should resume subdued trading,” says UBS, “as is typical ahead of a key event” such as the monthly jobs report.

Russia’s foreign ministry meantime condemned a reported Israeli air-strike on a military research unit inside Syria, saying Thursday that – if confirmed – this “unprovoked attack [would] blatantly violate the UN Charter.”

Shares in Italy’s struggling Banca Monte dei Paschi di Siena – founded in 1472 – steadied as the Italian central bank weighed MPS’s second bail-out request in four years after it hid losses of €500 million on a 2008 derivatives deal.

German banking giant Deutsche Bank lost €2.2bn ($3.0bn) for the last 3 months of 2012, it said today.

“A year ago, the mood in Europe was horrible and nobody could see how on earth stocks could go up,” says Gloom, Boom & Doom author and money-manager Marc Faber, who urged CNBC anchor Maria Bartiromo to buy gold earlier this week.

“Now since May 2012, less than a year ago, Portugal, Spain, Italy, France, are up between 30 and 40% and Greece has doubled…!”

Factory-gate prices across France and Italy fell in December from November, new data showed today.

House prices in the year to October fell 2.5% across the 17-nation Eurozone, with Spain’s home-price drop accelerating to 15.2%.

“For the first time in four years,” Faber continued Wednesday, pointing to the US stock market, “since the lows in March 2009, I love this market. Because the higher it goes the more likely we will have a nice crash, a big time crash.

“You are in great danger if you don’t own any gold,” Faber had earlier told Bartiromo.

Near-term, reckons Deutsche Bank analyst Xiao Fu – and despite Wednesday’s $15 rise on poor US growth data and the Federal Reserve’s no-change decision on zero rates and QE – “Gold lacks a convincing catalyst near term to take it convincingly higher and instead remains susceptible to opportunistic selling.”

But “Any thought given to reining in some of the Fed’s buying power will now be shelved,” counters Ed Meir in his daily note for INTL FCStone.

“[Wednesday’s] GDP number clearly shows that the US economy is still far from capable to muster its own momentum without key fiscal and monetary stimulus.

“In the least, this should provide an element of support to the precious metals group, at least over the short term.”

After creating and spending first $1.4 trillion on mortgage and Treasury bonds in 2008, and then a further $600 of T-bonds starting in 2010, the US Fed will likely acquire a further $1.1 trillion of US government debt with its current program of quantitative easing, according to a Bloomberg survey of analysts.

“Given the sluggish [US] economy,” says precious metals strategist Eugen Weinberg at Commerzbank, “it would be premature to discuss [the Fed] abandoning the quantitative easing programme.

“Despite the noticeably higher risk appetite displayed by market players of late, gold demand is thus unlikely to ebb away completely. On the contrary, high sales of US gold coins in January, and renewed inflows into the gold ETFs recently, point to relatively robust demand for gold.”

Over in India – most likely the world’s #2 gold consumer market in 2012 behind China – the economic affairs secretary contradicted the finance minister yesterday over plans to raise gold import duties again, in a bid to curb household appetite to buy gold, widely blamed for India’s yawning trade deficit.

Two days after Palaniappan Chidambaram told the Financial Times that New Delhi is considering “some other steps to moderate the import of gold” further, Arvind Mayaram told Reuters that “I don’t think there is any plan as of now.”

Adrian Ash

Gold price chart, no delay   |   Buy gold online

Adrian Ash is head of research at BullionVault, the secure, low-cost gold and silver market for private investors online, where you can buy gold and silver in Zurich, Switzerland for just 0.5% commission.

(c) BullionVault 2013

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.


Concerns Regarding US Economy Leads to Losses for USD

Source: ForexYard

The US dollar took losses against several of its main currency rivals yesterday, amid concerns regarding the US economic recovery, highlighted by a worse than expected Advance GDP figure. Meanwhile, the euro extended its bullish trend, as positive signs out of the EU banking sector encouraged investors to shift their funds to riskier assets. Today, investors will be paying attention to news out of both the EU and US. The German Unemployment Change and US Unemployment Claims figures, set to be released at 8:55 and 13:30 GMT, both have the potential to generate market volatility.

Economic News

USD – Dollar Remains Bearish amid Disappointing US News

Decreased confidence in the US economic recovery, highlighted by a worse than expected Advance GDP figure, caused the US dollar to extend its recent bearish trend throughout the day yesterday. Against the Swiss franc, the greenback fell more than 80 pips during European trading, eventually reaching as low as 0.9135. The GBP/USD gained more than 60 pips during mid-day trading, eventually peaking at 1.5798, before a slight downward correction brought the pair back to the 1.5775 level.

Today, the main piece of US economic news is likely to be the weekly Unemployment Claims figure, set to be released at 13:30 GMT. Analysts expect today’s news to come in at 362K, which if true, would represent an increase in unemployment claims from last week, and may result in additional losses for the greenback during afternoon trading. Later in the week, traders will not want to forget to pay attention to the US Non-Farm Payrolls figure, as it is expected to generate extreme volatility for the dollar before markets close for the weekend.

EUR – Confidence in EU Economic Recovery Helps Boost Euro

Confidence in the euro-zone economic recovery boosted risk taking in the marketplace yesterday, which helped the euro extend its bullish trend vs. most of its main currency rivals. Specifically, a rejuvenated European banking sector encouraged investors to shift their funds to higher-yielding assets, including the euro. The EUR/USD was able to reach a new 14-month high at 1.3561 during mid-day trading, while the EUR/JPY gained more than 100 pips during the European session to trade as high as 12384, a 33-month high.

The main piece of European news today is likely to be the German Unemployment Change figure, set to be released at 8:55 GMT. As the biggest economy in the euro-zone, news out of Germany tends to have a significant impact on euro pairs. If today’s news comes in above the forecasted 9K, risk aversion among investors may cause the euro to reverse some of its recent gains during mid-day trading. Conversely, if today’s news signals additional improvements in the EU, the common-currency could extend its gains.

Gold – Gold Turns Bullish Following US News

A disappointing US Advance GDP figure led to speculations that the Fed will leave its current monetary easing policy in place for the foreseeable future, which resulted in significant gains for gold during afternoon trading yesterday. The precious metal shot up more than $16 an ounce after the news was released, eventually reaching the $1680 level.

Today, gold traders will want to pay attention to the US Unemployment Claims figure, set to be released at 13:30 GMT. If the figure signals a further slowing down in the US economic recovery, investors may shift their funds to gold and boost prices further.

Crude Oil – Oil Takes Losses amid US Demand Worries

Oil prices took moderate losses during afternoon trading yesterday, amid concerns regarding a decrease in demand in the US, the world’s leading oil consuming country. Oil prices fell close to $0.75 during mid-day trading, eventually reaching as $97.40 before bouncing back to the $97.60 level.

Turning to today, oil traders will want to pay attention to unemployment indicators out of both Germany and the US. If either of the indicators signals improvements in either the US or Germany, investors may shift their funds to riskier assets, which would in turn boost oil prices.

Technical News


A bearish cross is close to forming on the weekly chart’s Slow Stochastic, indicating that a downward correction could occur in the near future. This theory is supported by the Relative Strength Index on the same chart, which is currently approaching overbought territory. Opening short positions may be the best option for this pair.


The Williams Percent Range on the weekly chart has fallen in into oversold territory, signaling that an upward correction could occur in the near future. This theory is supported by the Slow Stochastic on the daily chart, which is close to forming a bullish cross. Opening long positions may be the best choice for traders.


The Relative Strength Index on the weekly chart is currently overbought territory, indicating that a downward correction could occur in the near future. Furthermore, the Slow Stochastic on the same chart has formed a bearish cross. Opening short positions may be the best choice for traders.


Most long-term technical indicators show this pair trading in neutral territory, meaning a definitive trend is difficult to predict at this time. Traders may want to take a wait and see approach for this pair, as a clearer picture is likely to present itself in the near future.

The Wild Card


The Slow Stochastic on the daily chart is close to forming a bullish cross, indicating that an upward correction could occur in the near future. Furthermore, the Relative Strength Index on the same chart has fallen into oversold territory. This may be a good time for forex traders to open long positions ahead of possible upward movement.

Forex Market Analysis provided by ForexYard.

© 2006 by FxYard Ltd

Disclaimer: Trading Foreign Exchange carries a high level of risk and may not be suitable for all investors. There is a possibility that you could sustain a loss of all of your investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with Foreign Exchange trading.


Malaysia holds rate, to keep policy while inflation low

By     Malaysia’s central bank kept its benchmark Overnight Policy Rate (OPR) steady at 3.0 percent, as widely expected, saying its policy stance remains supportive of growth while inflation is contained.
    Bank Negara Malaysia (BNM), which has held its policy rate unchanged since June 2011, said data showed that the domestic economy had expanded at a robust pace in the fourth quarter of 2012, driven by sustained domestic consumption and investments with some improvement in the external sector.
    This year, the central bank expects domestic demand to continue to expand with private consumption supported by higher income and stable employment while investments will be led by capital spending in the domestic-oriented sectors, the oil and gas industry and infrastructure.
    The global economy, which is showing signs of improvement, albeit at an uneven pace, will provide additional support to Malaysia’s economy, BNM said, adding there were still downside risks to the prospect for global growth.
    “The MPC considers the current stance of monetary policy to be supportive of the economy while inflation remains contained,” the bank said after a meeting of its Monetary Policy Committee.
    Malaysia’s inflation rate has been trending downward since mid-2011 to hit 1.2 percent in December, the lowest since February 2010, and below November’s 1.3 percent.
    For 2012, inflation averaged 1.6 percent, down from 2011’s 3.2 percent, but the central bank expects inflation to pick up this year. However, inflation should still remain modest, the BNM said, as some global food prices and domestic factors push up prices.
    “Nevertheless, given modest global growth prospects, pressures from global commodity prices is expected to be contained,” the central bank said.
    Malaysia’s economy has been expanding largely at the same pace in the last couple of years, with gross Domestic Product up by 3.3 percent in the third quarter from the second quarter for an annual rate of 5.2 percent, down from 5.6 percent, but up from the first quarter’s 5.1 percent.
    Economists expect the BNM to hold interest rates steady during the first half of this year but then to raise rates in the second half as inflationary pressures start to rise, expectations that are likely to strengthen given the central bank’s reference to keep its current policy stance while inflation is contained.
    Malaysia’s economy is expected to expand by 4.5-5.5 percent in 2013.

Market Review 31.01.2013

Source: ForexYard


The euro traded just below a 14-month high of 1.3586 against the US dollar during overnight trading last night, after the Fed decided yesterday to leave their policy of monetary easing in place. Against the JPY, the common-currency lost just over 30 pips during the Asian session, and is currently trading at 123.30, slightly below a recent 2 ½ year high.

Both crude oil and gold saw relatively little movement last night, as investors eagerly await a key US jobs report tomorrow for clues as to the current state of the American economic recovery.

Main News for Today

US Unemployment Claims- 13:30 GMT
• Analysts expect today’s news to show a minor increase in unemployment claims from last week
• If the predictions are true, the dollar could take additional losses against its main rivals ahead of tomorrow’s all-important Non-Farm Payrolls figure

Read more forex news on our forex blog

Forex Market Analysis provided by ForexYard.

© 2006 by FxYard Ltd

Disclaimer: Trading Foreign Exchange carries a high level of risk and may not be suitable for all investors. There is a possibility that you could sustain a loss of all of your investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with Foreign Exchange trading.

USDCHF’s downward movement extends to 0.9093

USDCHF’s downward movement from 0.9388 extends to as low as 0.9093. The pair is now facing 0.9083 previous low support, a breakdown below this level will indicate that the longer term downtrend from 0.9971 (Jul 24, 2012 high) has resumed, then further decline towards 0.8500 could be seen. Initial resistance is at 0.9150, and the key resistance is located at the downward trend line on 4-hour chart, only a clear break above the trend line resistance could bring price back to 0.9400 zone.


Daily Forex Forecast

Here’s Why We’re Still Buying This Stock Market



The Financial Times ran the headline, ‘US growth hit by surprise setback’.

The article notes:

‘The US economy shrank 0.1 per cent at an annualised rate in the fourth quarter of 2012, the first contraction in three years, rattling financial markets and highlighting the danger of across-the-board federal spending cuts due in March.’

But was it really a surprise?

We don’t think so. The US S&P 500 index fell 0.39%. That’s barely a blip when you look at the big picture. The index is up almost 900 points – more than doubling – since the 2009 low.

Of course, we’re not saying stock markets will keep going up. Nothing goes up forever. But we do wonder: has the market finally weaned itself off central bankers to focus on company fundamentals?

If it has, then there could be more good news ahead for stocks

Today the S&P 500 is within a sniff of the all-time high it hit in 2007. The Dow Jones Industrial Average is even closer.

(We won’t mention the Nasdaq Composite index, that still has a long way to go to beat the dot-com top…although it is the best performing of the indexes since the 2009 bottom.)

There’s no arguing that stocks have gained thanks to US Federal Reserve money printing. But there’s another point to remember. Stocks have also gone up because the Fed’s money printing has filtered through to their bottom line.

It’s True, Printed Money Has Entered the Economy

We know that by looking at the earnings history for stocks in the S&P 500. As the following chart shows, earnings have risen 68.5% since 2009:

Data Source: Stern School of Business, New York University

So yes, the Fed has printed up a storm, but perhaps contrary to what some people claim, the printed money has made its way into the US economy.

Now, let’s make something clear. We’re not saying this justifies the Fed’s actions. Printing money isn’t the long-term solution to fixing the economy.

But what we are saying is that in the short-term at least, the printed money does benefit some companies, and by extension it does benefit some investors.

And it’s not just a few companies either. Remember that there is more diversification in the US stock market than the Australian stock market. For instance, financial stocks only account for 15.7% of the S&P 500. The biggest sector is information technology at 18.3% (that’s where the real innovation takes place, not in banking).

Compare that to the Australian share market where financials make up 42.3% of the S&P/ASX 200 index, and information technology accounts for just 0.7%! Although don’t get us wrong, that doesn’t mean the Aussie market lacks technological innovation.

Companies Doing Better Than Forecast

But anyway, back to the point. Is the stock market now ignoring the Fed? As we say, the S&P 500 fell just 0.39% after the ‘surprise’ economic contraction.

That’s not the only evidence. According to CNBC:

‘Earnings keep rising: We started the fourth-quarter estimates at about 3 percent growth for the S&P 500. Today, with nearly 40 percent of the S&P 500 component companies reporting, earnings growth is at 5.15% percent, according to S&P Capital IQ. Revenue growth, which was essentially zero last quarter, is now at 4 percent.’

But here’s the important bit:

‘Some 67 percent are beating earnings estimates (the 12-year average is 62 percent), while 65 percent are beating revenue estimates (the 12-year average is 61 percent). Last quarter, only 38 percent beat revenue estimates.’

Like it or not, and agree with it or not (we mean the money printing), companies are seeing revenue growth, and most companies are beating analysts’ earnings estimates.

While that’s nice, and hopefully you’ve seen your portfolio grow in recent months, nothing can last forever. The world’s most famous doom and gloom investor, Marc Faber, says stocks ‘are very overbought’.

But Faber does attach a caveat to his comment. He goes on to say, ‘but it is also possible that we have a mild correction in February and then a further increase in stock prices.’

Why does he say that? Well, he thinks ‘corporate profits will disappoint in 2013.’

So far, corporate profits aren’t disappointing. In fact, as we’ve shown you, most companies are delivering results above estimates.

Stick to the Strategy: Dividends and Small-Cap Growth

For over a year we’ve said that investors should ignore the Fed and central bank money printing. We said that ‘none of it matters’.

If we’re right about the reason for the stock market rally, it could be that the rest of the market has finally caught up with our view.

Right now markets here and overseas have certain key levels in their sights. The US indexes are near record highs, and the Aussie stock market is close to 5,000 points.

We’ll agree the market could stumble from here.

But we advise a relatively conservative approach to investing. Stick to blue-chip stocks that pay dividends and use small-cap stocks for speculative growth.

Bottom line: we’re still buying this stock market, and there’s nothing we’ve seen so far that causes us to change our mind…even a ‘surprising’ US GDP number.


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From the Port Phillip Publishing Library

Special Report: The Big Money Secret of Ironstone Mountain

Daily Reckoning: Why the China Bulls Should Watch Their Chairs

Money Morning: Revealed: Inside the Mind of a Share Trader

Pursuit of Happiness: The Bad Joke That Saved Your Freedom of Speech

Australian Small-Cap Investigator:
How to Make Money From Small-Cap Stocks

Long Live the Twinkie! How Bankruptcy Became the Twinkie’s Saviour


You remember when Hostess declared bankruptcy last November? There were outcries that the iconic snack pastry would be gone forever. Speculators began to stockpile the tasty treats

As Zero Hedge documented, eBay featured the following items:

  • For a price of $89.95, three boxes of SEALED Box of Hostess Chocodiles 3×10 Chocolate Twinkies
  • For a price of $99.99, four boxes of SEALED Box of Hostess Chocodiles 4×10 Chocolate Twinkies
  • For a starting bid of $500, one Box of Twinkies; Unopened
  • For a starting bid of $10, and a price of $595, a box of 10, opened and half-eaten
  • For a starting bid of $5,000, a single Twinkie
  • And finally, for a starting bid of $10,000 … a box of Twinkies (‘one of the last boxes that will be available, its seller helpfully notes, before the Zombie Apocalypse’)

Even now, there’s a rotting Twinkie for sale on eBay. Supposedly, Twinkies will remain edible for decades, even outliving their cellophane wrappers (or so goes the mythology).

The belief was that unyielding union workers could make the Twinkie vanish. But that’s not how real capitalism works. However, we understand the confusion.

In this bailout economy, whenever an enterprise is on the rocks, the workers cry out to their political friends that the employer must be saved or the jobs and products will be lost for good.

Uncle Sam Sticks His Nose In

The government and media preached that not only would General Motors and Chrysler perish if the taxpayer didn’t step in, but all of the suppliers would be gone as well. Millions would lose their good, high-paying jobs.

The Center for Automotive Research, a Michigan think tank, estimates that the bailout saved 1.5 million U.S. jobs by keeping GM and Chrysler, and the companies that depended on them, in business.

Uncle Sam shoveled $80 billion to the automakers, some of which has been paid back through a GM IPO. The taxpayers still own a slug of Government Motors and will be made whole only if or when the shares reach $51 (currently trading at $28). Chrysler still owes $1.3 billion.

And remember, this rescue happened in 2009. Time flies when you’re bailing out.

The automakers are now making a profit, but the U.S. Treasury’s latest figures estimate the Detroit bailout will ultimately cost taxpayers $25.1 billion. This number has been revised upward more than once, so don’t carve it in stone. Let’s just say at least $25.1 billion.

So $25 billion divided by 1.5 million jobs comes to nearly $16,700 per job.

Meanwhile, Hostess Brands couldn’t reach an agreement in November with the Bakery, Confectionary, Tobacco Workers and Grain Millers International Union and began liquidation.

According to the company’s website, ‘The wind down was necessitated by an inflated cost structure that put the company at a profound competitive disadvantage. The biggest component of the company’s costs was its collective bargaining agreements that covered 15,000 of 18,500 employees.’

The Obama administration must be more partial to cars than pastries. Administration officials were nowhere to be found as the company circled the drain.

The shutdown of Hostess meant the closure of 33 bakeries, 565 distribution centers, approximately 5,500 delivery routes, and 570 bakery outlet stores, as well as the loss of 18,500 jobs.

The company was founded in 1930 and built some iconic brands such as Hostess, Wonder Bread, Nature’s Pride, Dolly Madison, Butternut Breads, and Drake’s brands.

General Motors was founded in 1908 and owns iconic brands such as Chevrolet, Buick, Cadillac, and GMC.

Chrysler was founded in 1925 and owns brands such as Chrysler, Jeep, Dodge, Ram, Fiat, Mopar, and SRT.

How Markets Work

Here we are less than three months after Hostess filed for liquidation and the bids are flooding in for the assets of the company. Its hoping to sell the brands, factories, and other assets for $1 billion.

Flowers Foods Inc. bid $390 million for the bread brands. United States Bakery Inc. agreed to pay $28.85 million for the Sweetheart, Eddy’s, Standish Farms and Grandma Emilie’s bread brands, four bakeries, 14 depots and some equipment.

‘We believe the assets and brands will allow us to provide fresh-baked Franz Bakery products to a wider and diverse geographical base,’ Bob Albers, United States Bakery’s chief executive, said in a statement.

Two bids came in Monday for cakes and bread that brought the total offered to more than $440 million. These aren’t final bids, but are what’s known as ‘stalking horse’ bids.

Stalking horse bidders are selected by the company to make the initial bid in a bankruptcy auction. This allows the distressed company to avoid low bids on its assets. Once the initial bid is put in place, competing bids can commence.

Hostess then selected C. Dean Metropoulos & Co. and their financial partner Apollo Global Management to provide the initial bid for its cake brands that include Twinkies, Ding Dongs and Ho Hos.

As I write, Forbes is reporting that Metropoulos and Apollo will bid $400 million for the treats. This would set a tasty floor for the bidding, and if they were outbid, they would earn a breakup fee.

The point to all this is that the beloved Twinkie will be back on the shelves before you know it. Plus, many of the jobs required to make them will be reinstated. Yes, there may be fewer of them and they may be lower paying, but hungry consumers will be served.

Taxpayer cost per job saved: nothing!

Writing for a couple months ago, Lenny DeFranco wrote, ‘Let’s recognize that a company like Hostess is supposed to go out of business. Liquidation is a proper burial when you sell products no one wants and are unable to change.’

DeFranco said the whole idea that union wage demands and management incompetence took down the company was nonsense. ‘I think Twinkies lost their appeal when the possibility of having to survive a nuclear hellscape passed, or when people realized that subsisting on them in such a scenario would lead to a more agonizing death than leukemia,’ he sniffed.

The Market Resurrects the Twinkie

Well, Mr. DeFranco, the market is speaking, and the score looks to be Twinkie 840 million, DeFranco 0.

The same liquidation proceeding would have sorted out the brands, jobs, and assets of the automakers four years ago if Washington would have kept its nose out of it.

No doubt some company would have bought Jeep, Cadillac, and the rest with production never missing a beat. Instead, taxpayers are $25 billion poorer, not to mention the odious CAFE standards Washington forced into the deal.

It turns out the Twinkie has an official shelf life of 25 days – not exactly immortal, but a long time for a baked good. But a fresh new supply is likely just months away.

Long live the Twinkie, thanks to bankruptcy

The lesson for economics, investors, and everyone is that bankruptcy can be a new beginning, a rebirth, the most bullish sign there is. It is not an end, but a light that shows the way to a wonderful future.

Bankrupt but unsubsidized business can be a great place to place your bets on future growth. Now, if only all the bailed-out zombie institutions that are weighing on U.S. growth could be so lucky.

Douglas French
Contributing Writer, Money Morning

Publisher’s Note: This article originally appeared in Laissez Faire Today

From the Archives…

Why the News Could Get Worse for Apple Shareholders
25-01-2013 – Kris Sayce

How to Play the EU Referendum for Profit
24-01-2013 – Kris Sayce

Here’s Why I’m Proudly Bullish About China’s Economy
23-01-2013 – Dr. Alex Cowie

How to Find Stocks for Troubled Times: Keep Scalable Businesses in Mind
22-01-2013 – Nick Hubble

Why It’s Still Not time to Buy the Japanese Stock Market
21-01-2013 – Murray Dawes

Japanomics, the Incredible Shrinking Russia, and More

By The Sizemore Letter

The following is an excerpt from the January 2013 HS Dent Forecast.

“The message was clear—deflation was the fault of Japan’s inadequately fertile womenfolk, not the officials of the Bank of Japan.”  —Financial Times, January 12, 2013

Economics is usually a gentlemanly topic, but if there is one subject that irrationally makes me want to roll up my sleeves and slug the first person that walks by, it is the subject of prices—or specifically inflation and deflation.

With all due respect to the late Milton Friedman—a fine economist and policymaker whose body of work I take seriously—his claim that “Inflation is always and everywhere a monetary phenomenon” is some of the most flawed logic I have ever seen in an economics book (and let me stress that economics books are not short on flawed logic).

Friedman reveals an arrogant “Fed-centric” view of the universe in which Ben Bernanke is an all-powerful godlike figure who can manipulate prices at will, like some sort of cartoonish James Bond villain.  And it completely ignores the role played by demographics and the millions of buy and sell decisions made by individual consumers.

For a man that preached free-market economics, it was a remarkably Soviet mindset.

Unfortunately, due in part to Friedman’s fame, it also happens to be the prevailing mindset among economists and most financial journalists.  The quote above about deflation being caused by the lack of fertility among Japan’s “womenfolk” is absolutely correct.  But don’t tell that to the Financial Times.  The writer used those words to mock the Bank of Japan for failing to stop the deflation that has been wrecking the Japanese economy for the past two decades—again, a central-bank-centered view of the universe. (As a point of reference, prices in Japan haven’t risen since Bill Clinton was the governor or Arkansas.  Seriously.  It’s been that long.)

Whenever a male writer uses words like “womenfolk” and notes a lack of fertility, it can come across as being a little parochial or even sexist.  I have no interest in criticizing Japanese family planning decisions or in telling a Japanese woman how many kids she should have.  It’s none of my business.  But I am here to explain what Japan’s birth dearth means for inflation and economic growth.

A low (and falling) birthrate since the 1950s has caused Japan’s population to age beyond anything seen in the modern world.  Imagine the age demographics of Boca Raton, Florida…but spread across a country of 120 million people.

Our buying and selling decisions as consumers are largely a product of our age.  I bought a house last year.  Why did I do something so phenomenally stupid?  Because I’m 35 years old and have two rowdy young boys who need a backyard to run in.  I also recently bought a new couch.  Why?  My three year old spilled grape juice on the old couch and ruined it.

My father, on the other hand, just turned 70.  He’s looking to sell his large suburban house.   He doesn’t need the space and is tired of paying for the maintenance and taxes.  And he has no interest in buying new furniture.  If anything, he’ll be selling some of his existing furniture when he downsizes.

Why do I share this?  Because every other family in the developed world goes through a similar consumer lifecycle.  And in the case of Japan, aging consumers have not been replaced with young families—which has led to lack of consumer demand and flat prices.

We’re not the only people who have studied Japan’s demographics or to suggest that changing demographics have had a major impact on the Japanese economy.  But, to be frank, most everyone else misses the point entirely.

Another (male) Financial Times writer wrote a headline titled “More Women in the Workplace Can Help Restore Japan’s Growth” (Mure Dickie, December 18, 2012).

Hey, I’m all for giving equal opportunities, and Japan’s attitudes towards women are several decades behind most of the rest of the developed world. And certainly, Japan’s stodgy old companies could benefit from fresh ideas and fresh talent, be it male or female.

Yet Dickie’s argument suggest that all Japan needs to jumpstart growth is more workers.  He should be careful what he wishes for.  More workers—and more production—in the absence of new consumer demand will simply lead to more oversupply and more deflation.

Sagging demographics or not, Japan may finally get inflation…and get it in spades.  Prime Minister Abe is embarking on some of the loosest fiscal policies in modern Japanese history, and he is putting major pressure on the Bank of Japan to push down the value of the yen.

At some point, Japan’s creditors will lose faith in its abilities to make good on its gargantuan debts—which are roughly double the size of America’s debts, adjusting for the size of the economy.  And when that happens, the yen will fall and interest rates will soar to levels that make debt service impossible.

Japan will get inflation at that point.  But it won’t be the mild 1-3% inflation they’re hoping for.  It will be Weimar-style hyperinflation.

That day of reckoning may take another couple years.  Until then, expect more of the same—flat-to-slightly declining prices and a sickly domestic economy.

The Incredible Shrinking Russia

Japan isn’t alone in fighting a demographic war it can’t win.  Its neighbor to the west—the Russian bear—has had a distinct shortage of cubs in recent decades.  Since the end of the Cold War, Russia has lost nearly 5 percent of its population to early deaths, emigration, and—most critically—to a lack of new births.

If the Japanese attitude towards women is a little behind the times, I’m not sure there are words to describe Russia’s.  In a recent speech on Russia’s demographic crisis and its lack of children, President Vladimir Putin stopped to comment that “Our women know what to do and when.”

You gotta gift, Vladimir.  Youuuu.

You gotta gift, Vladimir. Youuuu.

I didn’t see the speech, but I’m assuming the comment was accompanied with a wink and probably some inappropriate hand gestures or pelvic thrusts.  (Though to be fair, this is Vladimir Putin we are talking about, not Silvio Berlusconi.)

You can say what you want about Vladimir Putin, that he is a thug, a dictator, a nationalist…  But I will give him credit, for whatever it is worth, for one point.  And that is his realization that Russia’s demographic decline is a major crisis.

Putin pushed one of the most aggressive pro-natal policies in modern history in one of his prior terms as president.  He proposed paying Russian mothers $10,000 per child for every child after their first. And remember, $10,000 goes a lot further in most of Russia than it does here.  That is roughly equivalent to one year’s wages for the average Russian worker.  An equivalent sum in the United States would be closer to $30,000.

Putin also recently blocked the adoption of Russian children by American parents.  His public rationale was the high-profile death of a Russian orphan due to negligence on the part of his adoptive parents.  But given the content of his speeches in recent years, I would say his real motivation is keeping more Russians in Russia.

Russians have a history of being stoic in the face of seemingly hopeless battles, as anyone who has studied World War II would agree.  But this time, the battle is truly unwinnable.

Russia had a mini baby boom during the perestroika years under Gorbachev, in the 1980s.   These Russians are now in their peak years for family formation and childbirth.  That should be good news, right?

Well, despite the large bulge of Russians in the family formation stage, the increase in Russian births of the last few years hasn’t been big enough to push Russia above the replacement rate.  As of 2011, the fertility rate was barely 1.6 babies per woman.  You need 2.1 babies just to prevent your existing population from shrinking.

And it’s about to get a lot worse.  The number of women of childbearing age is projected to decline by nearly 10% between 2011 and 2020—just seven years from now.  And it will decline by another 10-15% by 2025…and another 10-12% by 2030.

If Russia has fewer potential mothers every year from now until 2030, it’s hard to see them turning their population decline around.  Each remaining woman of childbearing age would have to have more children to compensate, and it would be an understatement to say that this would be unlikely.

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Follow-Up to “Diageo: The Ultimate 12- to 18-Year Investment”

By The Sizemore Letter

Back in June, I mused that Diageo (NYSE:$DEO), the maker of Johnny Walker Scotch whisky and other brands, was The Ultimate 12- to 18-Year Investment.” It was, of course, a reference to the length of time that Scotch needs to be aged in order to be marketable (or drinkable).  Scotch can be officially be called “Scotch” after just three years of aging, but good luck convincing a discerning gentleman to buy it.

This is what makes Scotch whisky such a fantastic business to be in.  Unlike, say, vodka, which can be produced from anything, has little in the way of start-up costs, and has no aging requirements, Scotch has incredible barriers to entry.   Vodka brands come and go, but the scotch brands you see today are the same ones that were in your grandfather’s liquor cabinet.

On a side note, readers have asked me why I write “whisky” at some times and “whiskey” at others.  “Whiskey” can be bourbon, Irish, or rye whiskies. “Whisky” refers to Scotch or Canadian whisky only.  I do not recommend  getting these spellings confused in the presence of a Scotsman.

Returning to the business at hand, the Financial Times reported that there is something of a Scotch distillery boom underway in Scotland (see “Demand puts whisky industry in high spirits.”)

Over the next four years, £2 billion in new distillery investment is planned.  To give an idea of how big this is, the total value of Scotland’s whisky exports in 2012 was £4.3 billion.

Not surprisingly, the big names like Diageo are far and away the largest investors, but new craft distillers are popping up as well.  These newcomers will have a hard time for the reasons I discussed in the prior article, but the fact that they exist at all is testament to the strength of the whisky boom.

As I’ve written before, the boom in Scotch and other luxury spirits is really an emerging markets boom and, particularly, a China boom.  As China’s new upper-middle class and nouveau riche climb the social ladder, they are developing a taste for premium Western brands.  Much of the new whisky being distilled in Scotland will be shipped across the sea to China.

I’ve grown somewhat cautious towards booze stocks of late (see “A Hangover in Booze Stocks?” though I continue to hold Diageo on the Sizemore Investment Letter’s Drip and Forget portfolio.  I continue to reinvest the dividends on autopilot, but at current prices I am reluctant to make major new purchases.

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