THE DISTILLERY: CFD complicity

They are just three words with so much potential for profit and so much potential for catastrophic pain and loss.  

Contracts for difference (CFDs), benign derivatives in competent hands, or a highly leveraged punt on an outsider in the 5th at Randwick? It seems from the morning's commentary today that you "pays your dough and takes your chances", your competence is assumed by the promoters, your knowledge of these products (which are banned in the US) taken for granted. Your chances for help from regulators – zilch.

So, like so many issues in the sharemarket, the key regulator, ASIC, is worried and is going to "crack down" on contracts for difference. How do we know this? Because ASIC told us yesterday that CFDs are bad for us – they really, really are.

The Australian's Rebecca Urban  wrote that, "Promoters of the controversial and highly leveraged derivative product, contracts for difference, face tougher regulation. This is unless they voluntarily introduce stricter measures to protect retail investors. The threat comes after an extensive review by the watchdog found many investors were oblivious to the risks of CFDs, the bulk of which are traded over the counter and without oversight from any regulatory body."

But John Durie in The Australian went straight to the point: "Retail investor greed and stupidity are the key reasons behind much of the hundreds of millions dollars lost in corporate collapses – from Storm to Westpoint to Sonray Capital – and the trick is to minimise the losses without killing the market in the process. ASIC commissioner Greg Medcraft did his best with yesterday's warnings to both contracts-for-difference issuers and retail punters, with the message that buying these products is the same as borrowing money for a trip to the TAB or poker machine alley."

And Fairfax's Adele Ferguson didn't mess around with metaphors or analogies. "ASIC's guide does not challenge this structure, call for tighter liquidity requirements, or suggest that non-broker brokers be regulated along similar lines to stockbrokers, or that CFD providers report to ASIC daily the trades executed and who made them... The OTC market lacks transparency, so it is hardly surprising that most share price manipulation and insider trading happens through CFD trading. If ASIC is serious about reform it should replace its talk with action."  Don't hold your breath. Business Spectator's Sarah Danckert spotted ASIC's softening on CFDs way back in March.

From there, it was off on a plethora of subjects. Fairfax's Ian Verrender took Rio Tinto's CEO, Tom Albanese, to task for his speech in London last week where he warned governments about taxes and other moves to limit profits. Verrender said that as a result of this speech: "If the European Union had reservations about the iron ore tie-up between the mining giants BHP Billiton and Rio Tinto, it no doubt would have been stunned by Tom Albanese's extraordinary remarks in London last week."

Business Spectator's B in the KGB (Stephen Bartholomeusz) looked at the latest statement from Sigma Pharmaceuticals on its 'bid' from Aspen Pharmacare of South Africa. He reckons Sigma is tap dancing madly to try and get a higher offer. "Today's statement treads a fine line. On one hand it signals Sigma's willingness to continue "working with Aspen to assist it to improve the proposal for Sigma shareholders" – which is a backhanded way of saying Sigma isn't trying to frustrate Aspen but wants more than 55 cents a share." Bryan Frith in The Australian shared the same views: "SIGMA Pharmaceuticals appears to be having an each-way bet in refusing to extend exclusivity for Aspen Pharmaceuticals. But at the same time it is declining to reject the South African group's lowered offer price." The AFR suggested that Sigma may have a buyer for its generics business, but then the company trailed that suggestion in its statement yesterday.

In the category of get some easy publicity so stick out a report with 'election', 'interest rate rises' and 'banks' mentioned in the first few paragraphs, Macquarie Equities struck gold yesterday and got a bite from Eric Johnson in the Fairfax broadsheets . He wrote: "Bank executives are among those hoping for an early federal poll, with many lenders feeling the squeeze of rising funding costs but unwilling to raise mortgage rates during an election campaign. 'An inability to reprice in mortgages is set to continue at least for another six weeks, given the election,'' Macquarie Equities analyst Michael Wiblin said yesterday. ''However, the unintended consequences of this situation will only get worse, with no repricing and increasing funding costs.''

And it was double gold with The Australian's Scott Murdoch writing: "Australia's biggest banks could be forced to raise interest rates independently of the Reserve Bank to cover higher funding costs. But it is not likely to happen until after the federal election."

On page 1, the AFR looked at how banks are trying to seduce clients with money laying around in accounts, into doing something with their loot (give it to us, we'll give it a nice home?) and Chanticleer took another wander down the superannuation track and discovered rorts, fee clippers and others with their snouts in our super (what about the federal government?) from a report on outsourcing from APRA, the regulator. It makes frightening reading, especially for those in retail funds.

The Australian's economic editor, Michael Stutchbury took another pot shot at Prime Minister Julia Gillard and the Labor Party. "In her previous super-ministry extending from education to the workplace, Gillard portrayed herself as the minister for productivity. And setting out her personal philosophy yesterday, she spoke of the virtues of hard work, the Australian larrikin embrace of informality, and the need to move forward rather than defend the way things have been in the past. But how does this square with moves by her Fair Work Australia to make it illegal to hire teenagers to work for a couple of hours after school serving behind the shop counter or collecting supermarket trolleys? That's previously been allowed in Victoria, South Australia and Western Australia but has now been banned under the three-hour minimum in the new "modernised" national retail award."

But the best effort this morning came from Fairfax's China correspondent, John Garnaut who wrote a scene setter for a conference on China tomorrow.  

"Australia's export prices remain about as good as they have been in a century, but the peak is now behind us. What we have seen in the past few years is as good as it will get. Last week alone iron ore spot prices fell 9.4 per cent and Brazil-China freight prices fell 20 per cent. China's trade figures showed iron ore imports fell 14 per cent last month, measured year-on-year, after rising an average 8.4 per cent each month until May. However, for my money these policy debates will be swamped in coming years by the core question of whether and how a one-party state can make itself accountable. Over-construction will continue so long as officials receive great financial incentives and few political and legal disincentives against bribery and stealing land. State-dominated heavy industry will continue to over-produce so long as the services sector is stunted by politically powerful state monopolies."

Now reports like this are far more important to Australia's understanding of our future than sterile navel gazing that mixes domestic everyday politics with passing economic comment and analysis. According to Bloomberg and the Steel Index, spot iron ore prices hit $US118.10 a tonne yesterday. That's well under the current quarterly index price from the likes of BHP and Rio.

Apart from John Garnaut, wouldn't it be nice if those who run the AFR, The Australian and the business pages in other papers, treated China in the same way as the Financial Times does, seriously, with backgrounders like this for Thursday's release of  the second quarter growth and inflation figures.

"The G20 appears to be placing a large bet on China's policymakers. At their summit last month, one developed country after another, bar the US, said they would cut fiscal deficits. As a result, there will be unusually keen interest in China's second-quarter growth figures, which are expected on Thursday. China's economy needs to slow from the turbocharged growth in the second half of last year and first quarter of this, which was fuelled by a huge increase in bank lending. But the second-quarter figures will be one of the early signs of whether China can pull off a measured cooling or whether the economy will slump when stimulus is taken away." And among the G20, Australia probably has the most at stake.

In a similar vein, Paul Krugman  takes the US Federal Reserve to task for not recognising the growing threat from deflation in the US. "We aren't literally suffering deflation (yet). But inflation is far below the Fed's preferred rate of 1.7 to 2 percent, and trending steadily lower; it's a good bet that by some measures we'll be seeing deflation by sometime next year. Meanwhile, we already have painfully slow growth, very high joblessness, and intractable financial problems. And what is the Fed's response? It's debating – with ponderous slowness – whether maybe, possibly, it should consider trying to do something about the situation, one of these days. The Fed's fecklessness is, to be sure, not unique." Fairfax picked up this column and published it this morning.

And finally, a column to unite us all, from Lucy Kellaway, the FT's management agonista. Workplaces of the world unite.. you have nothing to lose but those silly performance appraisals. Do it now, okay!

"Last week Samuel Culbert, a business school professor in California, went on US radio to say that all appraisal systems were total baloney. He thinks even less of them than I do. They were a throwback to the bad old days of management by objective, he said, and only persisted because they allow evil managers to hold employees down and because HR managers are like the KGB when it comes to hoarding information." Having been an appraiser and been appraised, hear, hear. They add absolutely nothing.