Peter Schiff: What Bernanke Should Have Left Janet Yellen at His Last Press Conference

The press has framed Ben Bernanke's valedictory press conference last week in heroic terms. It's as if a veteran quarterback engineered a stunning come-from-behind drive in his final game, and graciously bowed out of the game with the ball sitting on the opponent's one-yard line. In reality, Bernanke has merely completed a five-yard pass from his own end zone, and has left Janet Yellen to come off the bench down by three touchdowns, with no credible deep threats, and very little time left on the clock. 

The praise heaped on Bernanke's swan song stems from the Fed's success in initiating the long-anticipated (and highly feared) tapering campaign without sparking widespread anxiety. So deftly did the outgoing chairman thread the needle that the market actually powered to fresh all-time highs on the news.

There can be little doubt that the Fed's announcement was an achievement in rhetorical audacity. In essence, they told us that they would be tightening monetary policy by loosening monetary policy. Surprisingly, the markets swallowed it. I believe the Fed was forced into this exercise in rabbit-pulling because it understood far better than Wall Street cheerleaders that the economy, despite the soaring gains in stocks and real estate, remains dependent on continued stimulus. In my opinion, the seemingly positive economic signs of the past few months are simply the statistical signature of QE itself. Even Friday's upward revision to third-quarter GDP resulted largely from gains in consumer spending on gasoline and medical bills. Another major driver was increased business inventories fueled perhaps by expectations that QE supplied cheap credit (and the wealth effect of rising asset prices) will continue to encourage consumer spending.

But to many observers, the increasingly optimistic economic headlines we have seen over recent months have not squared with the highly accommodative monetary policy, making the arguments in favor of continued QE untenable. Even taking the taper into account, the Fed is still pursuing a more stimulative policy than it had at the depths of any prior recession. As a result, as far as the headline-grabbing taper decision, the Fed's hands were essentially tied. But they decided to coat this seemingly bitter pill in an extremely large dollop of honey. 

More important than the taper "surprise" was the unusually dovish language that accompanied it. More than it has in any other prior communications, the Fed is now telling the markets that interest rates - its main monetary tool - will remain far more accommodative, for far longer, than anyone previously believed. Abandoning prior commitments to raise rates once unemployment had fallen below 6.5%, the new statement reads that the Fed will keep rates at zero until "well after" the unemployment rate has fallen below that level. No one really knows what the new target unemployment level is, and that is just the way the Fed wants it. On this score, the Fed has not simply moving the goalposts, but has completely dismantled them. With such amorphous language in place, they appear to be hoping that they will never have to face a day of reckoning. This is a similar strategy to that of the legislators on Capitol Hill who want to pretend that America will never have to pay down its debt.

At his press conference Bernanke went beyond the language in the statement by hinting that we should expect consistently paced, similarly sized reductions through much of the year, and that he expects that QE will be fully wound down by the end of 2014. The outgoing Chairman may be writing a check that his successor can't cash. He also made statements about how monetary policy needs to compensate for "too tight" fiscal policy that is being delivered by the Administration and Capitol Hill. Does the chairman believe that $600 billion annual deficits are simply not enough... even with our supposedly robust recovery? By the time President Obama leaves office, the national debt may well have doubled in size, and he will have added more to the total of all of his predecessors from George Washington through the first five months of George W. Bush's administration combined! How can Bernanke possibly say that our economic problems result from deficits being too small?

It's easy to forget in the current euphoria that a majority of market watchers had predicted that the first taper announcement would be made by Janet Yellen in March of 2014. But perhaps with a nod toward his own posterity, Ben Bernanke may have been spurred to do something to restrain his Frankenstein creation before he finally left the lab. But no matter who pulled the trigger first, this initial $10 billion reduction in monthly purchases has convinced many that the QE program will soon become a thing of the past.

But without QE to support the markets, in my opinion, the US economy will likely slow significantly, and the stock and real estate markets will most likely turn sharply downward. [To understand why, pick up a copy of the just-released Collector's Edition of my illustrated intro to economics, How An Economy Grows And Why It Crashes.] If the economic data begins to disappoint, I believe that Janet Yellen, who is much more likely to be concerned with full employment than with price stability, will quickly reverse course and increase the size of the Fed's monthly purchases. In fact, last week's Fed statement was careful to avoid any commitments to additional tapering in the future, merely saying that further changes will be data dependent. This means that tapering could stall at $75 billion per month, or it could get smaller, or larger. In other words, Yellen's hands could not be any freer. If the additional cuts never materialize as expected, look for the Fed to keep the markets convinced that the QE program is in its final chapters. These "Open Mouth Operations" will likely represent the primary tool in the Fed's arsenal. 

  

Despite the slight decrease in the pace of asset accumulation, I believe that the Fed's balance sheet will continue to swell alarmingly. As the amount of bonds on their books surpasses the $4 trillion threshold, market watchers need to dispel illusions that the Fed will actually shrink its balance sheet, or even halt its growth. Already fears of such moves have pushed up yields on 10-year Treasuries to multi-year highs. Any actual tightening could push them significantly higher. 

We have much higher leverage than what would be expected in a healthy economy, and as a result, the gains in stocks, bonds, and real estate are highly susceptible to rate spikes. If yields move much higher, I feel that the Fed will have to intervene to bring them back down. In other words, the Fed will find it much harder to exit QE than it was to enter. 

In the meantime, the Fed's open-ended commitment to keep rates at zero, despite the apparent recovery, should provide an important clue as to what is really happening. We simply have so much debt that zero is the most we can afford to pay. The problem, of course, is that the longer the Fed waits to raise rates, the more deeply indebted we become. As this mountain of debt grows larger, so too does our need for rates to remain at zero. So if our overly indebted economy cannot afford higher rates now, or in the next year or two, how could we possibly afford them in the future when our total debt-to-GDP may be much larger?

As he left the stage from his final press conference, Ben Bernanke should have left a giant bottle of aspirin on the podium for his successor Janet Yellen. She's going to need it.

Peter Schiff is the CEO and Chief Global Strategist of Euro Pacific Capital, best-selling author and host of syndicated Peter Schiff Show.

Basically, It's Over

A parable about how one nation came to financial ruin.
http://www.slate.com/articles/business/moneybox/2010/02/basically_its_over.single.html

In the early 1700s, Europeans discovered in the Pacific Ocean a large, unpopulated island with a temperate climate, rich in all nature's bounty except coal, oil, and natural gas. Reflecting its lack of civilization, they named this island "Basicland."

The Europeans rapidly repopulated Basicland, creating a new nation. They installed a system of government like that of the early United States. There was much encouragement of trade, and no internal tariff or other impediment to such trade. Property rights were greatly respected and strongly enforced. The banking system was simple. It adapted to a national ethos that sought to provide a sound currency, efficient trade, and ample loans for credit-worthy businesses while strongly discouraging loans to the incompetent or for ordinary daily purchases.

Moreover, almost no debt was used to purchase or carry securities or other investments, including real estate and tangible personal property. The one exception was the widespread presence of secured, high-down-payment, fully amortizing, fixed-rate loans on sound houses, other real estate, vehicles, and appliances, to be used by industrious persons who lived within their means. Speculation in Basicland's security and commodity markets was always rigorously discouraged and remained small. There was no trading in options on securities or in derivatives other than "plain vanilla" commodity contracts cleared through responsible exchanges under laws that greatly limited use of financial leverage.

In its first 150 years, the government of Basicland spent no more than 7 percent of its gross domestic product in providing its citizens with essential services such as fire protection, water, sewage and garbage removal, some education, defense forces, courts, and immigration control. A strong family-oriented culture emphasizing duty to relatives, plus considerable private charity, provided the only social safety net.

The tax system was also simple. In the early years, governmental revenues came almost entirely from import duties, and taxes received matched government expenditures. There was never much debt outstanding in the form of government bonds.

As Adam Smith would have expected, GDP per person grew steadily. Indeed, in the modern area it grew in real terms at 3 percent per year, decade after decade, until Basicland led the world in GDP per person. As this happened, taxes on sales, income, property, and payrolls were introduced. Eventually total taxes, matched by total government expenditures, amounted to 35 percent of GDP. The revenue from increased taxes was spent on more government-run education and a substantial government-run social safety net, including medical care and pensions.

A regular increase in such tax-financed government spending, under systems hard to "game" by the unworthy, was considered a moral imperative—a sort of egality-promoting national dividend—so long as growth of such spending was kept well below the growth rate of the country's GDP per person.

Basicland also sought to avoid trouble through a policy that kept imports and exports in near balance, with each amounting to about 25 percent of GDP. Some citizens were initially nervous because 60 percent of imports consisted of absolutely essential coal and oil. But, as the years rolled by with no terrible consequences from this dependency, such worry melted away.

Basicland was exceptionally creditworthy, with no significant deficit ever allowed. And the present value of large "off-book" promises to provide future medical care and pensions appeared unlikely to cause problems, given Basicland's steady 3 percent growth in GDP per person and restraint in making unfunded promises. Basicland seemed to have a system that would long assure its felicity and long induce other nations to follow its example—thus improving the welfare of all humanity.

But even a country as cautious, sound, and generous as Basicland could come to ruin if it failed to address the dangers that can be caused by the ordinary accidents of life. These dangers were significant by 2012, when the extreme prosperity of Basicland had created a peculiar outcome: As their affluence and leisure time grew, Basicland's citizens more and more whiled away their time in the excitement of casino gambling. Most casino revenue now came from bets on security prices under a system used in the 1920s in the United States and called "the bucket shop system."

The winnings of the casinos eventually amounted to 25 percent of Basicland's GDP, while 22 percent of all employee earnings in Basicland were paid to persons employed by the casinos (many of whom were engineers needed elsewhere). So much time was spent at casinos that it amounted to an average of five hours per day for every citizen of Basicland, including newborn babies and the comatose elderly. Many of the gamblers were highly talented engineers attracted partly by casino poker but mostly by bets available in the bucket shop systems, with the bets now called "financial derivatives."

Many people, particularly foreigners with savings to invest, regarded this situation as disgraceful. After all, they reasoned, it was just common sense for lenders to avoid gambling addicts. As a result, almost all foreigners avoided holding Basicland's currency or owning its bonds. They feared big trouble if the gambling-addicted citizens of Basicland were suddenly faced with hardship.

And then came the twin shocks. Hydrocarbon prices rose to new highs. And in Basicland's export markets there was a dramatic increase in low-cost competition from developing countries. It was soon obvious that the same exports that had formerly amounted to 25 percent of Basicland's GDP would now only amount to 10 percent. Meanwhile, hydrocarbon imports would amount to 30 percent of GDP, instead of 15 percent. Suddenly Basicland had to come up with 30 percent of its GDP every year, in foreign currency, to pay its creditors.

How was Basicland to adjust to this brutal new reality? This problem so stumped Basicland's politicians that they asked for advice from Benfranklin Leekwanyou Vokker, an old man who was considered so virtuous and wise that he was often called the "Good Father." Such consultations were rare. Politicians usually ignored the Good Father because he made no campaign contributions.

Among the suggestions of the Good Father were the following. First, he suggested that Basicland change its laws. It should strongly discourage casino gambling, partly through a complete ban on the trading in financial derivatives, and it should encourage former casino employees—and former casino patrons—to produce and sell items that foreigners were willing to buy. Second, as this change was sure to be painful, he suggested that Basicland's citizens cheerfully embrace their fate. After all, he observed, a man diagnosed with lung cancer is willing to quit smoking and undergo surgery because it is likely to prolong his life.

The views of the Good Father drew some approval, mostly from people who admired the fiscal virtue of the Romans during the Punic Wars. But others, including many of Basicland's prominent economists, had strong objections. These economists had intense faith that any outcome at all in a free market—even wild growth in casino gambling—is constructive. Indeed, these economists were so committed to their basic faith that they looked forward to the day when Basicland would expand real securities trading, as a percentage of securities outstanding, by a factor of 100, so that it could match the speculation level present in the United States just before onslaught of the Great Recession that began in 2008.

The strong faith of these Basicland economists in the beneficence of hypergambling in both securities and financial derivatives stemmed from their utter rejection of the ideas of the great and long-dead economist who had known the most about hyperspeculation, John Maynard Keynes. Keynes had famously said, "When the capital development of a country is the byproduct of the operations of a casino, the job is likely to be ill done." It was easy for these economists to dismiss such a sentence because securities had been so long associated with respectable wealth, and financial derivatives seemed so similar to securities.

Basicland's investment and commercial bankers were hostile to change. Like the objecting economists, the bankers wanted change exactly opposite to change wanted by the Good Father. Such bankers provided constructive services to Basicland. But they had only moderate earnings, which they deeply resented because Basicland's casinos—which provided no such constructive services—reported immoderate earnings from their bucket-shop systems. Moreover, foreign investment bankers had also reported immoderate earnings after building their own bucket-shop systems—and carefully obscuring this fact with ingenious twaddle, including claims that rational risk-management systems were in place, supervised by perfect regulators. Naturally, the ambitious Basicland bankers desired to prosper like the foreign bankers. And so they came to believe that the Good Father lacked any understanding of important and eternal causes of human progress that the bankers were trying to serve by creating more bucket shops in Basicland.

Of course, the most effective political opposition to change came from the gambling casinos themselves. This was not surprising, as at least one casino was located in each legislative district. The casinos resented being compared with cancer when they saw themselves as part of a long-established industry that provided harmless pleasure while improving the thinking skills of its customers.

As it worked out, the politicians ignored the Good Father one more time, and the Basicland banks were allowed to open bucket shops and to finance the purchase and carry of real securities with extreme financial leverage. A couple of economic messes followed, during which every constituency tried to avoid hardship by deflecting it to others. Much counterproductive governmental action was taken, and the country's credit was reduced to tatters. Basicland is now under new management, using a new governmental system. It also has a new nickname: Sorrowland.

Russia Crisis Haunts Deutsche Bank’s Smith Seeing China Bust

China’s push to open up its economy is winning praise from Goldman Sachs Group Inc. to Morgan Stanley and Jefferies Group LLC, which predicted last month a “massive” multiyear bull run for stocks.

John-Paul Smith doesn’t share the enthusiasm.

When the Deutsche Bank AG equity strategist looks at the country, he says he detects some of the same signs of a financial meltdown that led him to predict Russia’s 1998 stock market crash months in advance. China’s expansion is being fueled by soaring corporate borrowing, a high-risk model that needs to be replaced by the kind of free-market measures and budget cuts that fed Russia’s growth in the aftermath of the country’s default and subsequent 44 percent monthly tumble in the Micex Index (INDEXCF), Smith said.

“There is potential for a debt trap in industrial companies which can trigger an economy-wide financial crisis as early as next year,” Smith said in an interview from London on Dec. 12, a day after he issued a report predicting China’s slowdown will lead to a 10 percent decline in emerging-market stocks next year. “If I am wrong on China, I am wrong on everything.”

Smith’s 2013 call for a drop of at least 10 percent in developing-country stocks has proven prescient. The MSCI Emerging-Markets Index has slid 6.1 percent, trailing the 22 percent rally in MSCI’s developed-markets measure. The Shanghai Composite Index, the benchmark equity gauge in the world’s second-biggest economy, has lost 7.7 percent, heading for its third annual decline in four years. The measure rose 0.4 percent at 11:13 a.m. after falling for nine days.

Goldman, Jefferies

The selloff in Chinese (SHCOMP) stocks has eased since mid-November, when the government’s top policy makers pledged the biggest expansion of economic freedoms in at least two decades. Measures included encouraging private investment in state-controlled industries, accelerating convertibility of the currency and liberalizing interest rates, an initiative that helped drive interbank borrowing costs to a six-month high last week.

Morgan Stanley said the free-market push will boost consumption, technology and health-care stocks while Jefferies Group said companies in industries including auto and insurance will do the best amid the bull market rally. Goldman Sachs upgraded Chinese equities to overweight in part because of the country’s “commitment to reform, which seems quite palpable.”

Smith, who has been bearish on China since he joined Deutsche Bank in 2010 from Pictet Asset Management, said he wants to see how the government carries out the policy changes.

Three-Decade Career

The economy is at risk of expanding less than 5 percent annually over the next few years, he said. Gross domestic product has grown less than 8 percent in each of the past six quarters, down from a high of 14 percent in 2007.

“The proof will be in the implementation,” said Smith, who’s the global emerging markets equities strategist at the Frankfurt-based bank. “It will be very interesting to see if they really intend to go down the same ‘hard state liberal economic’ path that Russia did from 1999 to the autumn of 2003. So far, there is no indication they are prepared” for that.

Smith, 52, has honed his market acumen over a three-decade career. Raised in the English town of Glossop, near Manchester, he studied modern history at Oxford’s Merton College before going to work as a European fund manager with Royal Insurance in 1983. From there, he did stints at TSB Investment Management, Rothschild Asset Management and Moscow-based Brunswick Brokerage, before joining Morgan Stanley in 1995 as a Russian equity strategist.

Russia Visit

It was at Morgan Stanley that Smith made the call that he’s still best known for today, a forecast that got its inspiration in part from a visit he made in 1997 to a port city 600 miles (965 kilometers) south of Moscow.

In Rostov-on-Don, he got an up-close look at a combine-harvester maker that surprised him: the company was taking a year to build its planned weekly quota, it was still employing two-thirds of its Soviet-era workforce and it was drowning in unpaid bills and barter deals.

That trip helped Smith understand the growing financial crisis that would lead Russia to devalue the ruble and default on $40 billion of domestic debt in August 1998.

In a June 1997 report, he wrote that investors may not have begun to “really focus on the possible fallout” from companies’ growing financial struggles. Smith highlighted the Rostov-on-Don trip in a January 1998 note in which he reiterated that investors were too optimistic. Two months later, he wrote that Russia had to “sort the situation out” that year or its financing burden would become unsustainable and trigger a devaluation.

‘The Savior’

In the aftermath of the collapse, Smith turned bullish on Russian stocks at an investors’ meeting in New York in 1999. The market soared 235 percent that year. He calls it the best forecast of his career.

“I suggested that Russia was now cheap and should be an overweight and the meeting ended very quickly indeed amid some expressions of minor outrage,” said Smith, who is underweight Russian stocks today.

Following those calls, Smith spent nine years at Pictet, first as head of emerging markets equities where funds managed by his team almost quadrupled to $9 billion between 2001 and 2005. His Eastern European Trust Fund, with 40 percent of its assets in Russian equities on average, outperformed the MSCI Emerging Market Eastern Europe dollar index by 1.5 percentage points at the end of 2005.

“When he joined Pictet in 2001, it was like the second coming as the savior of our emerging markets business,” Stephen Barber, a managing director at parent company Pictet & Cie, wrote in a farewell note about Smith in June 2010. “He did seem to perform miracles in the years that followed, as our emerging markets business recovered strongly.”

Too Early

While Barber said that Smith had an ability to avoid getting caught up in the market euphoria, he often made his calls too early.

“When he was with us, he was for a long period bearish on China,” Barber said. “The analysis was absolutely correct but in the meantime, you can miss out on a bull market.”

“When you have a great strategist who has these insights, you have to nurture these insights, not kill them,” he said.

Smith wrote an article for the Financial Times in December 2007 saying he sensed that the worst in the subprime mortgage crisis was over and that the U.S. market was poised to rally. The worst financial crisis since the Great Depression followed.

The analyst, who has also been wrongly bearish on oil since April 2011, says he learned to never take a strong view without obtaining detailed understanding of the underlying fundamentals, such as what types of instruments were being held in the financial industry.

Credit Boom

Smith’s China call is another strong view. His colleagues at other banks are underestimating the risks, he said.

China’s total credit, including items off bank balance sheets, climbed to about 190 percent of the economy by the end of 2012 from 124 percent in 2008, according to Fitch Ratings Ltd. That was faster lending growth than inJapan during the late 1980s that foreshadowed two decades of deflation, and in the U.S. before the financial crisis of 2008.

“It is really at the corporate level and at the micro level in China that the fate of the financial market and the economy there is going to be determined,” Smith said. “China is not such a safe haven as most market commentators appear to believe.”

Multiple Owners Structure and Effects on Vacancy Rate in Dubai Infastructure

The Index tower on Dubai’s answer to Wall Street has 23 floors of empty offices out of the 25 it opened in 2011. A few hundred feet away, buildings controlled by the Dubai International Financial Centre are almost full.

The difference is ownership. The office space in the Index on Sheikh Zayed Road was sold in pieces to nine different investors under a system known as strata title, according to developer Union Properties PJSC (UPP), meaning potential tenants face the prospect of having multiple landlords. The DIFC buildings have one owner, making it easier to lease large amounts of space to individual companies.

Offices that were divided into smaller parts to speed up sales and fund development have vacancy rates stuck at levels seen at the height of Dubai’s real estate crisis even as homes, malls, hotels rebound. That’s unlikely to change unless the government can find a way to persuade multiple owners to act as one on leases, according to Nick Maclean, broker CBRE Group Inc.’s managing director for the Middle East.

“If all owners put their shares into a single structure and nominate one to negotiate and lease the whole building, that would solve the problem,” he said in an interview in Dubai. “But there has to be some compulsion to ensure that the majority of owners are not prejudiced by the lack of cooperation from one or two.”

Unattractive Option

Office buildings with strata title are proving unattractive to tenants that need large spaces, leading to vacancy rates that are higher than properties with one owner. The total vacancy rate for the city stands at about 43 percent, CBRE data showed. Of that, strata buildings are more than 50 percent empty, Maclean said.

Offices with one owner in the most attractive areas north of Sheikh Zayed Road have vacancy rates of about 12 percent, he said. Jones Lang LaSalle Inc. (JLL), another broker, says vacancies of single-owned buildings in the central business district, which includes the DIFC, are around 30 percent.

“The type of company that would look for a single ownership building wouldn’t even consider a strata building,” said Dana Williamson, head of agency for Jones Lang in the Middle East and North Africa. That means single owners of buildings mainly face competition for tenants from each other and not the market that includes strata properties, she said.

No Collaboration

A minority of owners can torpedo any leasing agreement, depriving other investors in the same tower or even the same floor of the ability to rent their offices and generate income, Maclean said. CBRE (CBG) has tried without success to convince individual owners in several commercial towers with low occupancies to rent in concert with their fellow investors.

“It’s nearly impossible,” he said. “They bought for capital growth and they’re just not interested in any collective action, partly because they are suspicious” of each other.

CBRE, working with law firms, has produced papers proposing legal changes that would help boost demand for strata buildings, Maclean said. Dubai’s Real Estate Regulatory Agency didn’t respond to questions about how the market is governed.

The shortcomings of strata title aren’t confined to existing buildings. As developers complete properties that were sold in advance, at least 58 percent of the commercial space being added in Dubai in the next three years will be offices held under strata ownership, according to CBRE. The majority will hit the market in 2016.

Asia Calling

“There are amazing buildings that are being delivered in Dubai,” said Alexis Waller, a partner at Clyde & Co. whose firm works with international companies moving to the city. “Super-quality new offices aren’t attracting the institutional investors or large-scale tenants because of the way they were subdivided.”

Funds and large investors from Malaysia and Hong Kong to Saudi Arabia and Kuwait have been scouting for commercial buildings, retail space, hotels and other property investments in Dubai since it won the rights to host the World Expo 2020 last month, Maclean said.

“The problem there is very little supply that fits the needs of institutional investors looking for stable and income-generating assets,” he said. The majority of such assets tend to be owned by the government or wealthy families with little need or desire to sell.

While the rate of tenants taking office space has picked up, vacancies remain high because of the new offices coming onto the market, Maclean said. Jones Lang also said the new supply is keeping the vacancy rate up.

Australian Model

Strata titles were first introduced in Australia in 1961 to help manage apartment blocks owned by various landlords. They divide a building horizontally, creating layers of ownership. The practice started in Dubai in 2007 with a law to govern ownership of jointly owned properties modeled on Australia, though the law wasn’t enforced until regulations were issued by the Real Estate Regulatory Agency in 2010.

“The principle of majority rights isn’t unusual,” Waller said. It exists in markets such as Singapore, where 80 percent of owners can force the minority to sell, she said. The government of New South Wales, Australia, is also considering a law that would allow 75 percent of a building’s owners to force a sale. Usually, such laws concern residential properties and deal with sales, not rentals, she said.

Legal issues arise “when you impose something on someone who bought a property,” Waller said. “They should decide how they want to use it within the applicable laws.”

Economic Surge

Dubai’s economy is headed for the fastest annual expansion in six years after growing 4.9 percent in the first half, according to government data. The rebound has been propelled by an improvement in the hospitality, tourism and retail industries. Home values climbed by an average of 18 percent through the third quarter compared with the previous year as the recovery spread beyond prime areas such as Downtown Dubai and the Palm Jumeirah artificial island, Jones Lang said in an Oct. 9 report.

The resurgence is prompting developers to ignore the total vacancy rate and start adding more space that will have a single owner.

“We are seeing some landlords being confident enough to push the button and build or restart projects put on hold after the crisis,” Jones Lang’s Williamson said.

Tecom Investments LLC, held by Dubai ruler Sheikh Mohammed Bin Rashid Al Maktoum, is constructing 10 office buildings with about 1.5 million square feet (140,000 square meters) of space, the company said by e-mail. The Dubai World Trade Centre is also proceeding with a plan to build an entire office district between Emirates Towers and the Dubai’s convention center.

New Ambitions

The state-owned Dubai Multi Commodities Centre plans to start building the world’s tallest commercial tower in 2015, the company said in November. DIFC, a tax-free business zone, is seeking investors for a plan to add buildings with a value of 15 billion dirhams ($4.1 billion) Executive Director Brett Schafer said in an October interview.

Dubai hasn’t seen many transactions involving single-owned office buildings “because there is a serious lack of institutional investment-grade product in Dubai,” Williamson said. “There are just not that many of them.”

The sheikhdom was 23rd in a ranking of the world’s most expensive office rents, with an average of about $93 per square foot a year, CBRE said in a Dec. 19 report. London’s West End district was first, unseating central Hong Kong, with rents of $259 per square foot.

CSE to implement minimum free float from January

The capital market watchdog Securities and Exchange Commission (SEC) is likely to issue a directive in early part of next year, setting out rules on the ‘minimum mandatory continuous free floating limits’ for Colombo Stock Exchange (CSE) listed companies, according to a top official.

SEC’s Officer in Charge (OIC) and Director Investigations Dhammika Perera said the directive would come as a blanket rule which must be applied by all listed entities— big or small, domestic or multinational.

The new rules will require a Main board listed company to maintain a minimum of 20 percent stake in the hands of the public while the requirement for a Diri Savi board listed company is 10 percent.

“Having said that, we do not expect all these companies to have their 20 percent or 10 percent stake in the hands of the public on the following day of the directive. We will give them some time to increase their existing public stakes to the stipulated levels over time. But eventually all will have to up their public free float to these levels,” he insisted.

The draft rules in the public consultation paper issued by SEC in September 2013 said they would allow two years from the effective date of the rules for all the listed entities to increase their public shareholding to the stipulated levels, but the increase must happen at least by 5 percent per annum.

Furthermore, SEC will have the discretion to reject or grant extensions for companies that fail to maintain the minimum public float. In the event of no further extension time is granted, those companies will be penalized by transferring them to the Default board.

However, the yet to be issued directive will have some leniency on Main board listed companies while some exemptions might be granted for them if the circumstances warrant.

“We might consider some of the requests on a case-by-case basis and they might be allowed some kind of leniency on the rule if the circumstances warrant. But no exemptions will be granted for Diri Savi board listed companies,” he added.

Mirror Business learns that exemption might be granted for entities whose market capitalization of the public float is maintained at minimum Rs.5 billion. But this will also depend on the number of shares and the percentage stake held by the public is in agreeable terms to the SEC.

The absence of a sizable free float is often cited as a deterrent to a more transparent and a liquid stock market. Hence the Colombo bourse is becoming less attractive for foreigners and foreign funds who seek easy exit whenever they want.

However the lack of liquidity in the Colombo bourse was also proved helpful to avert sudden massive capital outflows during the heightened Fed tapering fears this year. On the contrary, emerging markets like Indonesia, India and Brazil which have liquid capital markets saw massive outflows during the same period.

Setting up of minimum continuous free float limits has been on SEC’s agenda for the last three years and it never took off having twice called for the public comments back in September 2010 and July 2011.

“This time we received many representations for our consultation paper and we took all the measures to incorporate their concerns as much as possible in drafting the directive,” Perera said. (DK)
http://www.dailymirror.lk/mirror-stock-watch-live/40304-cse-to-implement-minimum-free-float-from-january-.html

Top foreign travelers to US

The United States travel and tourism industry is one of the fastest growing sectors and doesn't seem to be slowing down.

The travel and tourism sector grew at an annualized rate of 2.5 percent in the third quarter of 2013. Not only is the industry growing along with the economy, it's doing so despite a slowing growth in prices.

Direct travel spending in the US by domestic and international travelers grew 5.3 percent to $855.4 billion last year. Of this total, $128.6 billion was spent by international travelers visiting the United States.

During 2012, 66.97 million foreign travelers came to the United States. Of these, 59.5 million or 89 percent came from 20 foreign countries. 

Travel visits 2012

Country	Arrival
Canada	22,698,986
Mexico	14,509,341
UK	3,763,381
Japan	3,698,073
Germany	1,895,952
Brazil	1,791,103
China	1,474,408
France	1,455,720
South Korea	1,455,720
Australia	1,122,180

Bad News For Ford, Bad News for the Auto Industry

Shares of Ford have continued to plunge today following yesterday’s gloomy earnings guidance, and are now down 8% this week.Toyota Motor (TM) has declined just 0.6% this week, while General Motors (GM) has ticked up 0.3%  and Honda Motor (HMC) has advanced 1.1%.

Don’t expect them to continue to stay afloat, as Morgan Stanley’s Adam Jonas and team warn that the causes of Ford’s disappointment are industry-wide. They write:

The biggest source of disappointment was Ford’s guide on their N. American volume which is expected to decline despite a market up 5%, $3 gas, cheap money and easy credit. This should send a chill to OEM competitors, suppliers and dealers alike. The auto cycle may be in even later innings than we realize.

We think the culprit is pricing/competition – not just from the Japanese – but from everybody. The market is clearly moving from a ‘need to replace’ to a ‘can’t afford to pass up a great deal’ consumer mindset. Competition in the small to mid-size super-segment is particularly high. Ford takes the admirable, but painful, decision to sacrifice volume. The sources of the warning are mostly NOT Ford specific. We see a material read-across to peers. [General Motors] may want to send Ford a Christmas card for getting investor expectations to include some of the market pressures outside of its control. Ford may make more money in small cars, but [General Motors] swims in the same waters.

And that seems to have been the conclusion in the market today, as the major automakers see their stock prices decline. Shares of Ford have dropped  2.4% to $15.27 at 1:50 p.m., General Motors has fallen 2.8% to $40.13, Toyota Motor has declined 2.1% to $118.54 and Honda Motor is off 1.6% at $40.78.

U.S. housing, jobs data weaken, but overall economic picture still upbeat

WASHINGTON (Reuters) - U.S. home resales hit a near one-year low in November and new filings for unemployment benefits unexpectedly rose last week, putting a wrinkle in an otherwise brightening economic picture.

The reports on Thursday came a day after the Federal Reserve gave the economy a vote of confidence by announcing that it would reduce its monthly $85 billion bond buying program by $10 billion starting in January.

"Things have not changed. It's still a marginally rosier outlook in the short-term," said Jacob Oubina, senior U.S. economist at RBC Capital Markets in New York.

The National Association of Realtors said sales of previously owned homes fell 4.3 percent last month to an annual rate of 4.90 million units. That was the lowest since December last year and the third straight monthly drop.

A rise in interest rates since the spring and fast-rising home prices have shut some potential buyers out of the market, dampening home sales in recent months.

Economists polled by Reuters had expected home resales to fall only to a 5.03 million-unit pace in November.

Housing market fundamentals, however, remain solid. Household formation is rising steadily from multi-decade lows, which in turn is keeping demand for housing supported and encouraging builders to undertake new projects.

Median home prices increased 9.4 percent from a year-ago and the share of distressed properties - foreclosed and short sales - declined over the same period.

The inventory of previously owned homes on the market slipped 0.9 percent to 2.09 million units, representing a 5.1 months supply at November's sales pace. That compared to 4.9 months' worth in October.

A 6.0 months' supply is normally considered healthy.

"We are starting to reach a point where we are seeing a shift from a speculative investor driven recovery to one that is going to be more represented by the traditional buyers and sellers that make housing decisions based on lifestyle," said Budge Huskey, chief executive officer at Coldwell Banker Real Estate in Madison, New Jersey.

Stocks on Wall Street were little changed after rallying the prior session. U.S. Treasury debt prices fell, while the dollar rose against a basket of currencies.

SEASONAL VOLATILITY

In a separate report, the Labor Department said initial claims for state unemployment benefits increased 10,000 last week to 379,000, the highest level since March.

But other labor market indicators have pointed to a strengthening in job growth, and economists discounted the data, which covered the period for the government's December nonfarm payrolls survey.

"The rise was likely due to year-end holiday seasonal layoffs, which the government struggles to adjust properly at this time of year," said Mei Li, an economist at FTN Financial in New York.

"Nevertheless, claims will have to be watched closely in coming weeks. If the rise does not quickly reverse it will be a sign there is more going on."

A third report showing factory activity in the U.S. mid-Atlantic picked up last month offered an upbeat signal on labor market conditions. The rise in the Philadelphia Federal Reserve Bank's business activity index was driven by gains in employment measures and new orders.

China faced most scrutiny in 2012 over investments in U.S

WASHINGTON (Reuters) - Chinese companies faced the most scrutiny over their U.S. acquisitions last year, eclipsing British firms for the first time, according to a report issued on Thursday.

Chinese corporations filed 23 notices with U.S. regulators in 2012, up from 10 in 2011 and nearly quadruple the number in 2010, according to the Committee on Foreign Investment in the United States, or CFIUS.

This compared with 17 notices from companies from the United Kingdom last year, the report said.

CFIUS, an interagency group chaired by the Treasury Secretary, reviews transactions that would bring U.S. businesses under foreign ownership for national security concerns. Most of its reviews stay secret unless companies choose to disclose them, but once a year the group must file a report to Congress about general trends.

Speaking about the latest report, a senior Treasury official said the higher number of Chinese deals under review was consistent with growing Chinese investment in the United States.

There was $11.5 billion worth of deals by Chinese companies in the United States in 2012, which was a significantly higher figure than in any year other than 2007, according to Thomson Reuters data.

U.S. politicians are eager to attract Chinese investment as a source of new jobs and economic growth. And Chinese companies have also become more comfortable with U.S. deals, despite the 2005 rejection of China National Offshore Oil Corp's $18.5 billion attempt to buy U.S. energy company Unocal. CNOOC's bid was thwarted by fierce political opposition because of national security concerns.

CFIUS also recommended that U.S. President Barack Obama block a Chinese firm's acquisition of wind farms close to a U.S. naval training site.

But CFIUS cleared Chinese plans this year to buy Smithfield Foods, the world's largest pork producer, despite concerns among some U.S. lawmakers about food safety.

In its report, CFIUS also said it no longer sees that some foreign governments have a coordinated strategy to acquire valuable U.S. technology by buying U.S. firms, as it saw for 2011.

(Reporting by Anna Yukhananov; Editing by Eric Walsh)

Gold eyes worst week in three months on taper sell-off

SINGAPORE (Reuters) - Gold languished at a six-month low on Friday and was on the edge of tipping over to a 3-1/2 year trough after the Federal Reserve's move to cut back its bond-buying stimulus prompted a huge sell-off.

The metal is heading for its worst weekly performance in three months and its biggest annual loss in 32 years.

FUNDAMENTALS

* Spot gold had gained 0.2 percent to $1,191.91 an ounce by 0016 GMT, after earlier hitting its lowest since June at $1,185.10. Gold touched $1,180.71 in late June - its weakest since 2010.

* On Wednesday, the day of the Fed announcement of a $10 billion cut in its monthly bond purchases, gold fell 1 percent. But the selling picked up on Thursday, with the metal losing 2 percent.

* It has lost nearly 4 percent for the week, and 29 percent for the year.

* The Fed's $85 billion in monthly bond purchases, along with other monetary stimulus measures, had fuelled a big run-up in gold prices in the last few years, with the metal hitting an all-time high of $1,920.30 in 2011.

* However, with an improving economy and stubborn low-inflation in the United States, gold's appeal has dropped off.

* SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, said its holdings fell 3.90 tonnes to 808.72 tonnes on Thursday.

* Russian precious metals and gems repository Gokhran may consider buying palladium on the market to increase its stocks, its new head Andrey Yurin said, signalling a possible change in strategy.

Devyani Khobragade arrest: US must apologise, accept fault, says Kamal Nath

New Delhi, Dec 19 (ANI): Union Minister Kamal Nath on Thursday said the United States must apologise for arresting diplomat Devyani Khobragade.

"America must apologise and accept their fault. Only then, will we be satisfied," Nath told reporters here.

On Wednesday, US Secretary of State John Kerry spoke to National Security Advisor Shivshankar Menon and expressed 'regret' over the incident.

In telephone call to Menon, Kerry expressed also hope that this isolated episode would not harm the close and mutually respectful ties between the two countries.

Earlier, New Delhi strongly contested the allegations levelled against Khobragade and protested against her arrest and strip search by U.S. Marshals.

Prime Minister Manmohan Singh termed the arrest and ill treatment meted out to Khobragade as deplorable, and hoped that the United States would understand India's loud and clear message on the issue.

External Affairs Minister Salman Khurshid told Parliament that the government fully stands by Khobragade and will bring her back and restore her dignity.

The Indian Government had, on Tuesday, announced several steps to strip American diplomats and their families of privileges, including withdrawing all airport passes and stopping import clearances for the U.S. Embassy.

The U.S. was also asked to provide a list of all Indian nationals working with its Consulates, including domestic servants, by December 23. Security barricades outside the embassy consulates and other institutions under the jurisdiction of the embassy was also removed.

Khurshid maintained that Khobragade was a victim of a conspiracy created by her maid servant Sarah Richards, who has been absconding.

Despite all efforts by New Delhi, police in New York has not been able to trace Richards till now, and Khurshid suspected that the maid was set up by conspirators under a definite plan to humiliate the diplomat.

He said the immediate concern of the government is that no further indignity is meted out to Khobragade.

The government, he said, is following all legal procedures to deal with the situation. Referring to the anger and anguish expressed by the members, Khurshid assured them that the government would not let them down.

He said the adverse U.S. action would be repulsed in the strongest possible manner.

Khurshid said the paramount concern of the government is to intervene effectively and strongly to protect Khobragade's dignity and honour.

He also assured the House that the diplomat will be brought back to India with all respect and every action would be taken to restore her dignity and modesty.

Earlier this week, political leaders cut across party lines to refuse to meet a U.S. Congress delegation till the diplomatic row is resolved.

Senior leaders like Lok Sabha Speaker Meira Kumar, Home Minister Sushil Kumar Shinde, Congress vice president Rahul Gandhi and BJP prime ministerial candidate Narendra Modi have refused to meet the U.S. Congress delegation.

National Security Advisor Shiv Shankar Menon cancelled meetings in Delhi with the delegation. Menon has described Khobragade's treatment as "despicable and barbaric."

Devyani's father, Uttam Khobragade, a former IAS officer, said: "My daughter is brave, but I am worried. There is more than what meets the eye. She has not done anything wrong."

Devyani Khobragade, 39, was arrested on Thursday. She has been accused of lying on the visa application for an Indian national who worked at her home from November 2012 to June 2013 for less than four dollars an hour. (ANI)

Total Volume of Saturn Moon Titan's Otherworldly Seas Calculated

The lakes and seas on Saturn's largest moon Titan hold massive amounts of liquid hydrocarbons — 40 times more than are found in Earth's proven oil reserves, new observations by NASA's Cassini spacecraft suggest.

Titan, which is about 1.5 times bigger than Earth's moon, harbors about 2,000 cubic miles (9,000 cubic kilometers) of liquid methane and ethane on its frigid surface, researchers announced last week. The hydrocarbons are almost all contained in an area near Titan's north pole that's just 660,000 square miles (1.62 million kilometers) in size, a region slightly larger than Alaska.

The find indicates there is something favorable in the geology that restricts most liquid to Titan's northern hemisphere, researchers said. The prime suspect is regional extension of the moon's crust, a process that on Earth created fault lines with depressions and mountain ranges parallel to each other. [Tour Titan's Hydrocarbon Seas (Video)]

"We think it may be something like the formation of the prehistoric lake called Lake Lahontan near Lake Tahoe in Nevada and California, where deformation of the crust created fissures that could be filled up with liquid," Randolph Kirk, a Cassini radar team member at the U.S. Geological Survey in Flagstaff, Ariz., said in a statement issued by NASA last week.

Titan is often pegged as a prime location to understand more about Earth, especially because it is the only solar system body other than our planet known to have stable liquid on its surface. Titan is also large — it's bigger than Mercury — and has active weather, including possible cyclones.

Newly released radar data from Cassini also measured the depth of Ligeia Mare, a first for any lake or sea on Titan. Ligeia, Titan's second-largest sea, is made up of methane, scientists said, and is about 560 feet (170 meters) deep, making at least part of it deeper than the average found in Lake Michigan.

"This was possible partly because the liquid turned out to be very pure, allowing the radar signal to pass through it easily. The liquid surface may be as smooth as the paint on our cars, and it is very clear to radar eyes," NASA officials wrote in a press release about the discovery.

NASA also released a new photomosaic of Cassini images showing the bodies of liquid hydrocarbon in Titan's northern hemisphere.

The $3.2 billion Cassini mission launched in 1997 and has been orbiting Saturn since 2004. In recent months, scientists noted several changes as summer approaches in the northern hemisphere of Titan, such as a surprising rise in the moon's atmosphere.