Research Watch

PORTFOLIO POINT: This is a sampling of the week's best research notes. In a world of too much information, we hope our selection helps you spot the market's key signals.
Even the Swiss are not immune '¦ “Switzerland, a banking redoubt considered until recently to be literally and figuratively above the global financial tumult '¦ [has] announced a bailout plan for its biggest bank, UBS. Hit harder than any other European financial institution by losses stemming from bad investments in subprime American mortgage debt, UBS will receive a lifeline worth as much as $US60 billion from the Swiss National Bank. The country’s other banking powerhouse, Credit Suisse, announced that it would raise $US8.75 billion in fresh capital from private backers, including the Qatar Investment Authority, after turning down the offer of direct government help '¦ For the Swiss, whose supposedly prudent, discrete banks are as much of an international symbol as neutrality, the Matterhorn or Swiss Army knives, the idea of the government having to shore up the financial system is a humiliating comedown '¦ Many individual Swiss shareholders believe their banks should have stuck to the private wealth business they have long dominated, rather than getting caught up in what they consider the casino-like world of Wall Street.” (New York Times, October 16)

And what are the next European economies to be iced '¦ “Investors are asking themselves whether Hungary is the next Iceland '¦ [But] Capital Economics say if you are trying to spot the next funding crisis in Eastern Europe, Hungary could be the wrong target. Ukraine is more vulnerable, but the Baltics, the Balkans and Turkey all face strains in continuing to finance their current account deficits. Unsurprisingly, those countries with the largest current account deficits also have the largest stock of external debt '¦ Hungary does have a reasonably high external financing requirement relative to GDP. This reflects a high external debt burden caused by the large current account deficits it ran in the early part of this decade. But other countries – notably the Baltics and Balkans – have much larger funding gaps as a share of GDP. And in plain dollar terms Turkey has a huge external financing requirement '¦ In fact, once political risk is factored in, Ukraine could be most vulnerable to a balance of payments crisis, despite the fact that it’s overall external deficit is smaller '¦ Watch out.” (FT Alphaville, October 16)

More banking mistakes '¦ “It pays to have good spreadsheet skills. We're just now learning that Barclays wound up with scores of Lehman Brothers trading positions that it never meant to buy when a pair of very junior lawyers attempted to reformat an Excel spreadsheet and convert it into a PDF document. The result was that a 'hidden’ column of 179 contracts not intended to be purchased became unhidden, and when Barclays filed the document with the court it wound up picking up the contracts '¦ The Lehman/Barclays sale closed on September 22, with the over-inclusive list of contracts. We don't know what the financial ramifications of Barclays picking up these unwanted positions might be. But it's not a harmless error. Motions have been filed with the court to undo the error, and a hearing is scheduled for November 5.” (Cluster Stock, October 16)

Private equity titans join hedge funds in solidarity '¦ “Private equity groups must shoulder some of the blame for the current financial crisis and should use the aftermath as an opportunity to change the way the industry operates, Henry Kravis, a founding partner of Kohlberg Kravis Roberts, has said. Speaking at a keynote address at the Super Return Middle East conference in Dubai '¦ Kravis said: 'It is clear that everyone bears some blame for the crisis. All of us need to accept responsibility for the damage done to the free market system '¦ The current situation is terrible’.” (Financial News, October 16)

But Dubai aviation still flying high '¦ “The opening of Dubai Airport's new terminal is a sign that Middle Eastern airlines are bucking global trends and prospering '¦ Dubai Airport’s new terminal three symbolises the region’s bullish aviation outlook. The sleek, modern tube-like building is home to Emirates Airlines’ world hub and provides necessary facilities to handle the continued growth in traffic between Asia and points east '¦ The Airports Council International (ACI) predicts that even in today’s weak economic climate, Middle Eastern airlines will continue to see strong passenger growth. It predicts passenger growth of 5.5% in 2008 and 7% in 2009, making the Middle East the fastest-growing region in the world. Passenger growth in Asia-Pacific will be 4.3% in 2008 and 6.9% in 2009, according to the ACI '¦ But a new terminal is not all Dubai is building. Forty kilometres across the desert, construction of the emirate’s second airport – Dubai World Central-Al Maktoum International Airport – is well under way. That airport, in addition to having a final capacity of 120 million passengers annually, will fuse logistics, cargo and passenger capabilities together in a new aero-city. Its first phase is due to open in 2009.” (Finance Asia, October 15)

Messages in the music '¦ “Is Rihanna a closet economist? '¦ Any one of the pop singer’s many hits is a template for banker music: simple, catchy, allowing numerous opportunities to launch one’s hands in the air and point at things '¦ it didn’t come as much of a surprise to see her at a nearby table at my spot Rose Bar the other night '¦ arguing over something scribbled on a napkin '¦ I thought it might be album sales projections, but it looked exactly like the current TED spread. No way, I thought, looking again. Rihanna caught my eye and we shared a long, hot gaze – she had that knowing, defeated look of someone who has been studying the credit markets for quite some time '¦ Rihanna has been lacing her music with economic commentary and subtle guidance targeted directly at the finance industry. In March of 2007, just as the credit crunch was beginning '¦ Rihanna released a song stressing the act of supporting those close to you in need. With the words, 'You can stand under my umbrella,’ she forecast a series of acquisitions, loans, and, ultimately, the bailout. Looking back, was that song meant for Jay-Z, or Hank-P? The data points are numerous: the root of the crunch – Sell Me Candy; the alarm – SOS; and what lies ahead of us – Rehab. But Rihanna’s observations are most poignant in Disturbia, where she describes, with startling accuracy, the current, troubled state of the financial ecosystem '¦ Rihanna makes reference to the fact that historically, the premier banks have stayed out of the commercial banking business. But now, Goldman and Morgan are deposit funded entities and retail and investment banking exist side by side '¦ In her latest single, Live Your Life, Rihanna takes the opportunity to encourage disheartened young financiers to stay the course.” (Leveraged Sell-Out, October 16)

Hard times continue at mega-rich Russian watch '¦ “The champagne-quaffing crowd of Moscow's fashion elite are beginning to feel the weight of the global financial crisis as it spreads from the bankers and investors through the strata of Russian society. Hundreds of green-shelled oysters were served on silver platters '¦ to celebrate the opening of a new store by one of Russia's most celebrated designers, 40-year old Igor Chapurin, but for some the mood was sombre '¦ 'It's become harder to chase payments, the industry is not working so well right now. I'm worried,’ said [music promoter Dmitri] Ashman, who will soon open an exclusive nightclub, 'Kitschcock', in the city centre '¦ Usually abuzz with Moscow's rich, the shop was populated only by the mounds of black caviar and giant lobsters left untouched in fridges '¦ [Igor Chapurin] put on a brave face. 'The worst is when you have panic, the worst is when you have hysteria. I'm glad that in Moscow we're not seeing that,’ he said, standing in a brightly lit white room lined with his fur and taffeta creations. 'My friends, who are very rich, who are very, very rich, and some also who are in the middle class, they are handling themselves in a very dignified and calm way’.” (Reuters Life, October 16)