Chinese wall goes up in smoko

Citigroup Insider-Trading Suit Follows Sydney Sidewalk Chat

(Bloomberg) -- Citigroup Inc. is being sued by Australia's securities regulator after a cigarette break between two of the company's employees on a Sydney sidewalk led to a probe into insider trading, a court document shows.

Paul Darwell, head of equity derivatives, on Aug. 19 met with trader Andrew Manchee outside the company's Park Street offices and told him to stop buying Patrick Corp. shares for Citigroup's account, according to a claim filed yesterday by the Australian Securities and Investments Commission.

Manchee, who then sold 192,352 Patrick shares, had bought more than 1 million earlier that day.

The case is the first of insider trading brought against a company in Australia. Citigroup Chief Executive Officer Charles Prince, 56, last year imposed a ``five-point plan'' to improve compliance at the world's biggest bank by market value.

Citigroup paid $4.7 billion in the past two years to settle suits over the collapse of Enron Corp. and WorldCom Inc., and shut its private bank in Japan after failing to make adequate money-laundering checks.

Update to Citigroup ASIC matter

Further details are now available to update my prior post about the Citigroup ASIC investigation, as reported by Reuters in a wire story Friday 31 March 2006 15:22:35 AEST by Daniel Morrissey, editing by Richard Pullin.

According to the Reuters report (which I have re-arranged somewhat),
Citigroup denied all the charges made by ASIC.

Citigroup is extremely disappointed by the action taken today by ASIC because we don not believe ASIC has any basis of a claim and that this is an attempt to regulate the proprietary trading desks which are a feature of all major investment banks," a Citigroup spokeswoman said.

Australia's corporate policeman said on Friday a Citigroup Inc. subsidiary engaged in insider trading on a A$4.6 billion bid by transport group Toll Holdings Ltd. for rival Patrick Corp. Ltd.

[ASIC] said it had identified "substantial proprietary trading" by Citigroup in Patrick shares on Aug. 19, the last business day before Toll announced its share-and-cahs bid on Aug. 22. "This is a significant case raising two very important issues for the securities industry: having adequate arrangements for managing inside information and dealing with conflicts of interest", ASIC Deputy Chariman Jeremy Cooper said.

The watchdog has filed civil penalty proceedings in the Federal Court of Australia seeking, among other things, a declaration Citigroup broke Australia's corporation law. The case is before the court on April 28.

Citigroup, the world's biggest bank by market value, faces a fine of up to A$1 million if the court rules in favour of ASIC. ASIC also said it was seeking orders that Citigroup put in place adequate procedures for dealing with conflicts of interest and to stop Citigroup trading in shares on its own account while advising clients with an interest in the price of those shares.

Toll said the legal action would not affect its hostile takeover offer for Patrick, Australia's largest ports operator. "Toll retains Citigroup as investment adviser in the Patrick offer," the company said in a statement.

A bad case of gas

Jim Rogers, the long time commodity bull, noted that chasing commodities and chasing commodity companies are two entirely different things; chalk and cheese.

As reported in Got the shaft, Rogers gave this example:

How does investing in commodities compare with stock investing in terms of the average investor?

Jim Rogers: It couldn't get any simpler. And if you start looking into commodities, you'll see that commodities are a lot simpler and easier to analyze than stocks.
For instance, natural gas is pretty dumb stuff. If there's too much gas, it's going to go down. If there's too little, it's going to go up.

Natural gas doesn't know who Alan Greenspan is, or care; it just cares about supply-and-demand. And once you've made that analysis, it's a lot easier to buy and sell natural gas than to start analyzing 300 natural gas companies around the world, where you have to worry about management and balance sheets and stock markets and unions and environmentalists and dozens of other things.

And you believe commodities can be less risky than stocks, too?

Jim Rogers: Well, Enron was a natural gas company. Enron went to zero. Natural gas can never go to zero. It can go down, obviously, but it can never go to zero.

The situation involving Australia's export of gas from its Northwest Shelf project to China is exactly the kind of thing Rogers was on about. You can have a great commodity and manage yourself out of its benefits, as Sons of Gwalia did with gold.

The Australian Financial Review is reporting that Australia may have dudded itself out of $20 BILLION dollars in its contract arrangements with CNOOC.

A landmark gas contract with China stands to cost Australia's biggest natural resources project up to $20billion in lost sales due to contractual terms that fail to account for the increase in oil prices to record levels.

Ahead of tomorrow's arrival in Australia of Chinese Premier Wen Jiabao, it has been revealed that a 25-year gas contract between the China National Offshore Oil Company and the North West Shelf Venture was struck at prices that are half those enjoyed by project operator Woodside Petroleum on other major contracts.

The 2002 liquefied natural gas (LNG) contract, hailed at the time by Prime Minister John Howard as Australia's biggest energy deal, does not contain clauses allowing the six North-West Shelf partners to alter prices in line with changes in the oil price, potentially costing $3.5 billion in lost revenue over the next six years alone.

The Australian Financial Review understands the contract locked in the price of Australian LNG against an oil price at the low end of the LNG price cycle of about $US20 a barrel. This has been confirmed by the Chinese buyers.

"We paid [a price equivalent to] about $US20 per barrel for the first phase of the Guangdong LNG terminal. The price will stay unchanged for 25 years, with annual imports of 3.7 million tonnes," CNOOC chief executive Fu Chengyu said.

This means the contract is capped at an oil price significantly lower than the current oil price of about $US60 a barrel. This would equate to lost revenues of $3.5 billion over the next six years and potentially $20 billion over the next 25 years if the LNG market prices remain high.

Details of the price of the contract have not been released by the North-West Shelf partners, but analysts have now been able to piece together just where the LNG was priced.

The partners include Woodside, Shell, BP, BHP Billiton, Chevron and MiMi, a partnership between Japan's Mitsui and Mitsubishi Corporations.

This is now half the price at which the vast bulk of Woodside's LNG contracts are trading. And they are the contracts that were negotiated in the 1980s and 1990s. Woodside in the fourth quarter of last year enjoyed an average LNG price of $US320 a tonne.

The pricing structure of the Chinese contract was significantly inferior to that of the pricing structure of the Japanese and Korean contracts of the late 1980s and 1990s. Unlike the Chinese deal, these contracts enabled some participation in a rising oil market.

The 2002 deal compares miserably with another LNG agreement around the same time to supply China with 2.6 million tonnes of LNG annually from 2008 from the BP-led Tangguh field in Indonesia The Chinese have renegotiated the terms of that deal, but have not offered to renegotiate the North-West Shelf deal. Industry sources said the oil price ceiling of the Tangguh contract, at which the related LNG price was capped, had recently been raised from $US25 a barrel to between $US40 and $US45 a barrel, more than double that of the Australian deal.

This deal measured against the average of Woodside Petroleum's other, mainly Japanese, contracts will leave at least $3.5 billion on the table for deliveries over the next six years.

A spokesman for the North-West Shelf joint-venture partners said there were strong non-price benefits of the LNG deal, including securing Australia's place as the first shipper of LNG to China, potentially the fastest-growing LNG market in the world.

"Having a relationship with China is of much greater benefit than the alternative. There is significant upside for first movers," the spokesman said.

But the gas exporters are not crying over spilled milk, not in this heady commodity market, anyway. The AFR is also reporting about the great export opportunities for gas that are opening up with Indonesia:

Woodside Petroleum and Chevron Corp might be best placed among LNG companies in Australia to benefit from surging demand for the fuel as Indonesia faced difficulty in meeting supply contracts, a consultant said.

Woodside's $5 billion Pluto liquefied natural gas project and Chevron's Gorgon venture were likely to be the next projects to start up, said Frank Harris, co-head of global LNG at Edinburgh-based Wood Mackenzie Consultants. Inpex and ConocoPhillips also might capitalise on increased demand for Australian LNG, he said.

"Australia has to be the beneficiary of the situation in Indonesia," Mr Harris said. "Australia is perceived as a blue-chip supplier with huge reserves upside, while all its key competitors in the Pacific basin supply business have got some sort of issue."

Malaysia might have difficulty supplying high-quality gas to its LNG plant, while Qatar had a moratorium on additional gas exports and Iran looks increasingly uncertain as a future LNG supplier, Mr Harris said.

Australia has about eight potential new LNG projects or expansions, in addition to an expansion underway at the Woodside-operated North-West Shelf venture, the country's biggest LNG project. ConocoPhillips this quarter started up the nation's second LNG project, in Darwin.

The federal government said this month it planned to work with the nation's $17billion oil and gas industry to almost quadruple LNG exports to more than 50million tonnes a year within a decade.

ASIC investigating Citigroup unconscionable conduct

The headlines are fresh and details scant, but it appears the Australian Securities and Investment Commission is investigating Citigroup over allegations of proprietary insider trading. It seems Citigroup was acting for Toll Holdings Ltd., which has been making a hostile run on Patrick Corp., and that there was some suspect trading by Citigroup in Patrick "the last business day prior to Taoll making an announcement of the bid to the market", quoting off a Dow Jones Newswires report.

Citigroup got a mention in the Stew a few days back in relation to some coincidental market trading (and I have no idea if Citigroup was involved in it, so am not doing anything other than drawing attention to the coincidenc) before it announced in New York that it was turning from bearish to bullish on commodities. See On yer bikes, then.

Guambat has also mentioned that proprietary trading profits are becoming the largest, and most risky, part of the profits of some of the large investment banks: Risque business.

To find other references to Citigroup in the Stew, click here or type "citigroup" in the empty search box at the top left of this window and click on "Search this blog".

Voting against is also democracy

Anwar Ibrahim has an opinion piece in the Herald today (which looks like it ran previously in the LA Times) that resonates with some of the thought I was trying to express yesterday in my post Unpopularly elected, where I criticised Bush for failing to nurture democracy, as opposed to ramming democratic form down Middle Eastern throats. Anwar Ibrahim was Mahathir Mohamad's Deputy Prime Minister and annointed one until he started to have his own ideas - and express them - when he got bundled up, beat up and jailed on trumped up charges of homosexual acts.

The vote alone won't set them free

SINCE September 11, 2001, the US has pursued what it calls a "forward strategy of freedom", predicated on the belief that a dearth of democracy in Muslim countries has led to the spread of a deadly strain of Islamic extremism. Emboldened by a hard-won ideological victory over the regimes in Eastern Europe during the Cold War, the US has again sought to foment democracy abroad to ensure security at home.

But as the first returns come in, there is growing anxiety in the US about the character of these nascent, freely elected governments. Some have begun to question whether these countries have the innate ability to sustain democracy.

Although it cannot be denied that US initiatives have contributed significantly to developments in the Middle East, fear is growing that radicals might hijack democracy. Recent Islamist electoral successes in Iran, Egypt and the Palestinian territories have prompted questions about the ability of liberal forces to prevail against fundamentalism.

For the US, the fear is real, although perhaps tinged with a bit of Islamophobia: how terrible an irony it would be if this grand effort to spread liberty abroad resulted in anti-US Islamic states imposing Sharia, or Islamic law, on their people.

The example of Hamas's ascension in Gaza and the West Bank presents obvious difficulties. But it would be fallacious to assume that it was democracy that voted in Islamic extremism. More correctly, it was the years of corruption and abuse of power by the Fatah-led administration that voted Hamas into power. If the exercise of democracy is about venting people's anger and dissatisfaction with the powers that be, then the outcome was a foregone conclusion.

Be that as it may, there are some people who say "stability", not liberty, is what the US should be promoting in the Islamic world. Their view is that championing electoral democracy does not immediately serve US interests abroad, particularly in the war on terrorism, and that the hearts and minds of terrorists and suicide bombers are not turned by the virtues of democracy. They say the war against terrorism must be waged with an iron hand, not soft gloves woven from the fabric of constitutional liberties.

These views on democracy and stability in the Muslim world are not only wrong but carry grave consequences.

In a way, Washington's strategy might be viewed as expiation for past sins, when the US was a stumbling block to democracy in the Middle East. Iran was a democracy in 1953 when the CIA engineered the coup that transformed it into an absolute monarchy. The US has supported other tyrants in the region, including Saddam Hussein. All of this in the name of stability and security in the decades-long confrontation with the communist bloc.

Is the US really caught between the Scylla of supporting dictators and the Charybdis of promoting democracies that could bring Islamist radicals to power? The best answers to the question of whether the US should reassess its strategy lie in Indonesia and Turkey, refreshing examples of Muslim democratic self-assertion.

Seven years ago, Indonesia plunged headlong into democracy after more than 30 years of autocratic dictatorship. As the largest Muslim nation in the world, it stands out as perhaps the most significant political phenomenon in the recent history of democracy. Indonesians have gone to the polls twice since, and they overwhelmingly rejected the Islamist radicals, who then tried to push their agenda through other avenues. Again, this was met with a resounding "no" by the Indonesian people, including major Muslim organisations.

The media in Indonesia are free and the elections are fair. Fundamental liberties are enshrined in the constitution and recognised and respected by the powers that be. For example, unlike in neighbouring Malaysia, Indonesians may gather to protest against government decisions and policies without fear of reprisals. Arbitrary arrests and political detentions are unheard of.

As fledgling democracies, Indonesia and Turkey still have a long way to go. In Indonesia, it is in fulfilling the socioeconomic objectives of democracy that can happen only over time. In Turkey, the containment of an unrestricted military establishment has aided that country's European Union ascension. Nevertheless, they now stand as beacons, for Muslim nations and for those who seek to help them.

To be successful in its efforts to spread freedom, the US must remember that constitutional democracy cannot take root in a society, secular or Islamic, without the firm commitment of the politically empowered to protect the fundamental rights to liberty, equality and freedom of all.

The true cultivation of democracy requires more than the introduction of elections. It also requires establishing democratic processes and levelling the political playing field. It needs the guarantee of a separation of powers and the liberation of the judicial system from the stranglehold of autocrats and tyrants. Most of all, it requires the protection of fundamental liberties and a free press.

It is in these prerequisites that the US and the Muslim world need to invest, with far more effort, for the causes of liberty to truly prevail.

Just two mates

FM to PM: Do you think that cartoon is offensive?

PM to FM: What cartoon? Not that Danish thing again?

FM to PM: No. That one in the Indonesian paper.

PM to FM: They're all just bloody cartoons, Mate. Not worth taking to the streets over it.
Why do you ask, Two Dingos Fucking?



Cartoon a grotesque stunt, says Downer
Cartoon fury over Papua row

Unpopularly elected

George Bush is no stranger to the vagaries of the ballot box. Neither is he a novice to fixing the problem when the vote fails to go his way.

Having "brought" democracy to Iraq and Palestine (er, or whatever it is that passes for that stateless concept), GeeDubya is displeased at the choices they've made for duly elected leaders, and will either get the one he wants or will pack up his toys and go home.

Bush tells Iraqi P.M. to step down

The Bush administration has told Iraqi Prime Minister Ibrahim al-Jaafari he is unacceptable as head of the next government, the New York Times reports.

Redha Jowad Taki, a member of parliament, told the Times that U.S. Ambassador Zalmay Khalilzad passed on "a personal message from President Bush" at a meeting last Saturday. Taki, who was at the meeting, said Khalilzad told Shiite leader Abdul-Aziz al-Hakim that Bush "doesn't want, doesn't support, doesn't accept" Jaafari.

Jaafari and other Shiite leaders are not taking the message well.

"How can they do this?" asked Haider al-Ubady, a spokesman for the prime minister. "An ambassador telling a sovereign country what to do is unacceptable."

Bush's Call for Ouster of Iraq's Prime Minister Widens Rift with Shias

Friction between the Americans and the Shia, who make up 60 per cent of Iraq's 27 million population, escalated sharply after at least 16 Shi'ites were killed in the al-Mustafa mosque by Iraqi and American Special Forces on Sunday night. Many Shia believe that the US was shocked by, and is not ready to accept, the success of the Shia Alliance in the election on December 15.

The prolonged negotiations on forming a new national unity government has served to underline the fissures dividing Shia, Sunni and Kurds. The Alliance has called for security to be handed over to the Iraqi government in the wake of the al-Mustafa incident.

The government led by Mr Jaafari for over a year is a Shi'ite-Kurdish coalition, but the Kurds accuse Mr Jaafari of failing to honour agreements on the return of Kurds to Kirkuk and other places from which they were expelled by Saddam Hussein.

Dr Mahmoud Othman, one of the Kurdish negotiators engaged in trying to form the new government, told me yesterday: "Jaafari has been in power one year and he has failed. He's not fit for the job and we should try somebody else." He criticized Mr Jaafari for acting as if he only represented one party and not the whole country. Since he became prime minister last year the Ministry of the Interior has been accused of running anti-Sunni death squads.

Unless he chooses to step down Mr Jaafari may not be finished since he is still the chosen Shia candidate and other Shia leaders may not want to break ranks. The unity of the Shia Alliance is also supported by Grand Ayatollah Ali al-Sistani and the Hawza (the religious hierarchy) as well as by the Iranians.

The prolonged and rancorous negotiations on the make up of the new Iraqi government gives a false impression that it will be a powerful body. In reality central government authority is now very limited in much of Baghdad, Basra and Mosul, the three largest cities in the country.

There is almost a complete breakdown in law and order. Iraqi society is dissolving because of the breakdown of law and order. Sami Mudhafar, Higher Education and Scientific Research Minister, said recently that he wanted to lay to rest exaggerated accounts of the number of university professors murdered in the last three years. He said the true figure was only 89 professors killed over three years, Mr Mudhafar's other piece of comforting news was that there was no murder campaign directed against the Iraqi intelligentsia and they were simply being killed because they lived in Iraq. In addition to the professors 311 teachers have been killed in the last four months. He added that the government was too weak to defend anybody: "I myself was target of an assassination attempt recently and the government has failed to obtain any lead on the party behind it."

Countries say new government must meet international demands

On the day Hamas leader Ismail Haniyeh and his 24-member Cabinet were sworn in to take the Palestinian helm, the United States and Canada on Wednesday formally cut ties with the government.

U.S. diplomats and contractors were already expressly forbidden from contact with Hamas, U.S. State Department spokesman Sean McCormack told reporters, adding that the new order was necessary to avoid any confusion, because the U.S. still has contact with Palestinian Authority President Mahmoud Abbas.

"We are now in a period of transition and change from a Palestinian Authority that was committed to seeking a two-state solution, seeking peace with Israel via negotiation, to a Hamas-led government which does not," McCormack said.

The militant organization came to power via a landslide victory in January's Palestinian elections. Though the organization runs a network of social and charitable organizations for Palestinians, it refuses to renounce violence or recognize Israel's right to exist.

The U.S., Israel and European Union consider Hamas a terrorist group and say it must reverse its stances on violence and Israel. The United States and Canada say Hamas must also abide by past Palestinian agreements to seek a two-state solution to the Israeli-Palestinian conflict.

Acting Israeli Prime Minister Ehud Olmert has delivered an ultimatum, which he reiterated at a victory rally for his Kadima party after Israeli elections Tuesday, stating that Israel's borders will be defined in the next four years, with or without Palestinian input. Olmert's current plan is to evacuate small Jewish settlements in the West Bank and annex the larger ones.

Though there have been few signs that the Hamas-led government is ready for fruitful talks with Israel, Haniyeh said Wednesday that Palestinians were not averse to all negotiations with their neighbors.

After being sworn in as Palestinian prime minister, Haniyeh gave Abbas his blessing to negotiate with Israel, according to the Israeli newspaper, Haaretz. "If the PA chairman, as the elected president, wants to jumpstart talks, we have no objection to it," the Israeli newspaper, Haaretz quoted Haniyeh as saying. "If whatever (Abbas) presents to the people as a result of the negotiations serves our interests, then we will also redefine our position."

The existing U.S. "no contact" order forbade diplomats from dealing with groups deemed to be terrorist organizations. It also required all contractors receiving U.S. funding to sign pledges promising they would have no contact with such groups. Audits are conducted to make sure they keep their word.

The State Department issued a travel warning February 27, banning all U.S. government employees from traveling in the West Bank or Gaza except on "mission-critical business." The warning said American employees of the embassy in Tel Aviv, Israel, and the consulate in Jerusalem, were not allowed to use public transportation or patronize discos or nightclubs.

Wednesday's beefed-up order does not prohibit contact with Abbas or non-Hamas members of the Palestinian Parliament.

Canadian Foreign Affairs Minister Peter McKay on Wednesday said his country was cutting ties with the Palestinian government because it hasn't "addressed the concerns raised by Canada and others concerning nonviolence, the recognition of Israel, and acceptance of previous agreements and obligations, including the road map for peace."

However, International Cooperation Minister Josee Verner added that Canada remains committed to a two-state solution and will continue to provide some assistance to Palestinians. "Working with our partners and through the United Nations, its agencies and other organizations, Canada will continue to support and respond to the humanitarian needs of the Palestinian people," Verner said.

The United States, too, is reviewing its aid programs to the Palestinians, and McCormack emphasized Wednesday that Hamas will not receive any U.S. funding. "We're looking at ways that we can increase humanitarian aid to the Palestinian people," McCormack said. "On the other hand, we've said it before, and I'll reiterate it, that we are not going to provide funds to a terrorist organization."

McCormack was asked Monday about Haniyeh stating he was ready for dialogue with the Quartet, made up of the U.S., the EU, Russia and the United Nations. "The onus is now on Hamas," McCormack responded. "But in terms of dialogue, Hamas needs to meet the conditions laid out by the international community."

Now, I know this reportage sounds like I have some issues with the action Bush is taking here, when actually I don't. My issues predate this. I see nothing wrong in withdrawing ambassadors, isolating leaders and doing all the things that diplomacy allows when dealing with hostile and obstreperous adversaries, even ones governed by democracies.

And I am totally agreed that trying to bring democratic ideals and institutions to states traditionally ruled over by religious sects or self-appointed monarchs, dictators or parties which do not allow for free speech, popular vote and public accountability is a good idea.

My only whinge (and it is not shrill) about these particular instances is that Bush should have seen these difficulties coming and should have done a better job, particularly in Iraq where the occupation determined the basic structure of these matters, of laying solid foundations, including taking the time and making a bona fide effort to allow the democratic institutions, in their infancy, to mature, rather than rushing it along with mere forms of democracy without the substance.

When Guambats rule the world, I'm sure it will be a much more harmonious place.

Too sexy

In the prior post, I mentioned the "Macquarie model", and Jeff Mathews' and Alan Kohler's take on it. In this post I extend the discussion into this sexy model.

The engine of this humming little sexy model is the ability to syphon off fees from every conceivable angle. It is user pays run rampant. The bank gets fees going into the deal, during the term of the deal and going out of the deal. They don't have to make a zack on the selling price (though that doesn't stop them from trying), because their main course is the fees.

When they acquire an asset, such as a toll road, they "package" the asset, set themselves up in a management facility, do the contract between the asset package and the management facility that sets their own fees, and often provide for a fabulous payout should the asset owners decide to sack them. Oh, and they get performance fees. They are getting hedge fund payments for running a municipal road.

As it works, most of the fees they pull out of a project are front loaded; they're no strangers to the present value concept. So, once a project "matures" they bail out. Then they move on to more assets. It's a great little earner for them, and a means to part pensioners, mainly, from their pension returns.

In explanation of that last statement, let me go back to the "friction" concept the Warren Buffet recently wrote about and which was discussed in Skim, scheme, scam and some Greek letters. This is how Buffet tells it:

How to Minimize Investment Returns
It’s been an easy matter for Berkshire and other owners of American equities to prosper over the years. Between December 31, 1899 and December 31, 1999, to give a really long-term example, the Dow rose from 66 to 11,497. (Guess what annual growth rate is required to produce this result; the surprising answer is at the end of this section.)

This huge rise came about for a simple reason: Over the century American businesses did extraordinarily well and investors rode the wave of their prosperity. Businesses continue to do well. But now shareholders, through a series of self-inflicted wounds, are in a major way cutting the returns they will realize from their investments.

The explanation of how this is happening begins with a fundamental truth: With unimportant exceptions, such as bankruptcies in which some of a company’s losses are borne by creditors, the most that owners in aggregate can earn between now and Judgment Day is what their businesses in aggregate earn. True, by buying and selling that is clever or lucky, investor A may take more than his share of the pie at the expense of investor B. And, yes, all investors feel richer when stocks soar. But an owner can exit only by having someone take his place.

If one investor sells high, another must buy high. For owners as a whole, there is simply no magic – no shower of money from outer space – that will enable them to extract wealth from their companies beyond that created by the companies themselves.

Indeed, owners must earn less than their businesses earn because of “frictional” costs. And that’s my point: These costs are now being incurred in amounts that will cause shareholders to earn far less than they historically have.

To understand how this toll has ballooned, imagine for a moment that all American corporations are, and always will be, owned by a single family. We’ll call them the Gotrocks. After paying taxes on dividends, this family – generation after generation – becomes richer by the aggregate amount earned by its companies. Today that amount is about $700 billion annually.

Naturally, the family spends some of these dollars. But the portion it saves steadily compounds for its benefit. In the Gotrocks household everyone grows wealthier at the same pace, and all is harmonious.

But let’s now assume that a few fast-talking Helpers approach the family and persuade each of its members to try to outsmart his relatives by buying certain of their holdings and selling them certain others. The Helpers – for a fee, of course – obligingly agree to handle these transactions.

The Gotrocks still own all of corporate America; the trades just rearrange who owns what. So the family’s annual gain in wealth diminishes, equaling the earnings of American business minus commissions paid.

The more that family members trade, the smaller their share of the pie and the larger the slice received by the Helpers. This fact is not lost upon these broker-Helpers: Activity is their friend and, in a wide variety of ways, they urge it on.

After a while, most of the family members realize that they are not doing so well at this new “beat my brother” game. Enter another set of Helpers.

These newcomers explain to each member of the Gotrocks clan that by himself he’ll never outsmart the rest of the family. The suggested cure: “Hire a manager – yes, us – and get the job done professionally.” These manager-Helpers continue to use the broker-Helpers to execute trades; the managers may even increase their activity so as to permit the brokers to prosper still more. Overall, a bigger slice of the pie now goes to the two classes of Helpers.

The family’s disappointment grows. Each of its members is now employing professionals. Yet overall, the group’s finances have taken a turn for the worse. The solution? More help, of course. It arrives in the form of financial planners and institutional consultants, who weigh in to advise the Gotrocks on selecting manager-Helpers. The befuddled family welcomes this assistance. By now its members know they can pick neither the right stocks nor the right stock-pickers.

Why, one might ask, should they expect success in picking the right consultant? But this question does not occur to the Gotrocks, and the consultant-Helpers certainly don’t suggest it to them.

The Gotrocks, now supporting three classes of expensive Helpers, find that their results get worse, and they sink into despair. But just as hope seems lost, a fourth group – we’ll call them the hyper-Helpers – appears. These friendly folk explain to the Gotrocks that their unsatisfactory results are occurring because the existing Helpers – brokers, managers, consultants – are not sufficiently motivated and are simply going through the motions. “What,” the new Helpers ask, “can you expect from such a bunch of zombies?”

The new arrivals offer a breathtakingly simple solution: Pay more money.

Brimming with selfconfidence, the hyper-Helpers assert that huge contingent payments – in addition to stiff fixed fees – are what each family member must fork over in order to really outmaneuver his relatives.

The more observant members of the family see that some of the hyper-Helpers are really just manager-Helpers wearing new uniforms, bearing sewn-on sexy names like HEDGE FUND or PRIVATE EQUITY. The new Helpers, however, assure the Gotrocks that this change of clothing is all-important, bestowing on its wearers magical powers similar to those acquired by mild-mannered Clark Kent when he changed into his Superman costume. Calmed by this explanation, the family decides to pay up.

And that’s where we are today: A record portion of the earnings that would go in their entirety to owners – if they all just stayed in their rocking chairs – is now going to a swelling army of Helpers.

Particularly expensive is the recent pandemic of profit arrangements under which Helpers receive large portions of the winnings when they are smart or lucky, and leave family members with all of the losses – and large fixed fees to boot – when the Helpers are dumb or unlucky (or occasionally crooked). A sufficient number of arrangements like this – heads, the Helper takes much of the winnings; tails, the Gotrocks lose and pay dearly for the privilege of doing so – may make it more accurate to call the family the Hadrocks.

Today, in fact, the family’s frictional costs of all sorts may well amount to 20% of the earnings of American business. In other words, the burden of paying Helpers may cause American equity investors, overall, to earn only 80% or so of what they would earn if they just sat still and listened to no one.

Long ago, Sir Isaac Newton gave us three laws of motion, which were the work of genius. But Sir Isaac’s talents didn’t extend to investing: He lost a bundle in the South Sea Bubble, explaining later, “I can calculate the movement of the stars, but not the madness of men.” If he had not been traumatized by this loss, Sir Isaac might well have gone on to discover the Fourth Law of Motion: For investors as a whole, returns decrease as motion increases.
* * * * * * * * * * * *
Here’s the answer to the question posed at the beginning of this section: To get very specific, the Dow increased from 65.73 to 11,497.12 in the 20th century, and that amounts to a gain of 5.3% compounded annually.

Alan Kolher, in the Skim, scheme ... post mentioned above identifies some of these "helpers" by another name, "platforms":

A system has now developed that involves financial advisers channelling money through platforms and master funds into wholesale fund managers who in turn partly invest in other funds called infrastructure trusts, which are paid extra performance fees [simply] for doing their job.
But the main purpose of them for the investment industry is to facilitate the extraction of an average of 2 per cent in fees, which are then divided between the fund managers, the financial planners and the platform provider (usually a bank). And as with supermarkets, the platform providers have the market power.

There are about 100 investment platforms and master trusts in Australia, but the top 10 have about 85 per cent of the market. They are, in order, NAB/MLC, AMP, CBA/Colonial, ING/ANZ, BT/Westpac, St George/Asgard, Axa (Summit), Aviva (Navigator), Mercer, Macquarie Bank. The vast majority of financial advisers has a relationship with one of these groups and most of their clients' money, whether it's allocated pensions, superannuation, or just private wealth to be invested, goes on the platform. The adviser then helps the client choose several of the often hundreds of options available within the platform.

The platform operators choose which investment products to have in their store and, as with food manufacturers dealing with supermarkets, the key job of a fund manager is to get onto the platforms.

All of this is pertinent to stories appearing in today's Herald. First off the cab rank is Stephen Bartholomeusz' comment, MIG spin-off should satisfy disaffected:

FOR the past six months shares in Macquarie Infrastructure Group have been languishing and the pressure on Macquarie to do something about it steadily increasing. This week it did.

Against the backdrop of rumblings of an attempt by security holders to strip Macquarie of its lucrative MIG-related fee streams, MIG announced plans on Monday to spin off three of its local assets, the M1, M4 and M5 tollways in Sydney, possibly through a $1.5 billion entitlements issue to MIG holders.

MIG has generated massive fee income for the bank in recent years - more than $700 million in the past five years. With the price in retreat, however, the bank wasn't going to collect any of the lucrative performance fee streams for a while. Thus it is as motivated as anyone to rekindle investor enthusiasm for MIG and to see the gap closed between its market price and its net asset value of $4.21 per share.

The restructuring announced on Monday may have been influenced by the market backdrop but appears to have been shaped by other factors as well - it is a logical step in MIG's progression.

The Sydney toll roads are the most mature assets in the MIG portfolio. MIG has added about as much value as it can. Not only does that limit their upside but it also undermines the case for the bank continuing to extract fat fees - they require little management attention.

The other characteristic the tollways have is that they are Australian assets, generating high quality cash flows and, importantly, franking credits.

Both their quality and their franking credits are diluted within the massive, increasingly international, MIG portfolio. Separated from the rest, and offered to Australian investors, they should be assigned greater value than would be attributed to them within MIG.

For Macquarie, cashing out a mature asset within MIG isn't a new pressure-induced phenomenon. MIG has sold about $3 billion of infrastructure assets/securities in just over three years. Having quintupled the value of the capital originally invested in the tollways, generating an internal rate of return of 30 per cent in the process, selling them/spinning them off at a $1.5 billion valuation isn't an unpleasant option.

The bank might have a continued role as responsible entity for the new vehicle containing the tollways but the fee income associated with managing them will drop sharply, if not entirely. Where Macquarie generates about $15 million a year of fees from the tollways today it is probable it will collect $5 million a year at most in future.

No doubt it will also receive some one-off fees for advising the new entity on the restructuring and arranging/ underwriting the spin-off but more important would be the longer-term effect on MIG.

Macquarie isn't going to change course as its model has an insatiable appetite for growth that can only be satisfied by offshore expansion.

Given that the less mature and less competitive US and Europe markets are where the opportunities are, and where Macquarie has a greater competitive advantage in sourcing and consummating deals - the bank has more people offshore seeking infrastructure-style opportunities than any other financial institution in the globe - the Australian assets within the MIG portfolio would in any event become an increasingly small proportion of the whole. The assets to be divested represent about 13.7 per cent of the current portfolio.

While it will increase the risk profile of the residual portfolio, the remaining assets have greater potential upside because of their relative immaturity and therefore the spin-off could produce an outcome where both sets of assets re-rated because they will be held by investors who are more interested in their particular financial characteristics than in a blend of mature and immature and local and international assets.

Thus the foreshadowed restructuring of MIG is a typical Macquarie deal - potential for transaction fees, neat financial engineering to make one and one add to more than two and the pursuit of a "win-win" outcome for the investors and the bank, particularly the bank.

Macquarie is being as pragmatic as ever in its push offshore. Where it finds the going too tough to get a bite of the assets, it nevertheless knows how to get a slice of the fees:
MacBank out of race for airport operator BAA

INFRASTRUCTURE group Ferrovial has appointed Macquarie Bank as the co-adviser for its £8.75 billion ($21.6 billion) takeover bid for the world's largest airport operator BAA, effectively killing speculation that the Australian investment bank could make a rival offer.

Ferrovial announced it had also given Macquarie Airports preemptive rights to buy the Spanish company's 20.9 per cent interest in Sydney Airport, valued at $1 billion. The deal could ultimately allow Macquarie Airports and funds aligned with the bank to raise their interest in Sydney Airport to about 84 per cent. Ferrovial has also given MAp first option to buy its £106 million stake in Bristol Airport.

Macquarie Bank will join Citigroup as the adviser to the Ferrovial-led consortium, which includes the Singapore investment firm GIC and the Caisse de dépôt et placement du Québec. BAA, which operates London's Heathrow, Gatwick and Stansted airports, has already rejected Ferrovial's bid as inadequate. BAA recently outbid several other airport operators, including MAp, for Hungary's Budapest airport with a £1.26 billion offer.

Aside from withdrawing from the race for airports in Budapest and Exeter in England, MAp has gone quiet on its expansion plans in Europe in recent months.

There have been concerns that growing competition for airport privatisations in Europe is over-inflating prices. MAp's two key priorities are lifting the profitability of its Brussels and Copenhagen investments.

Reflecting MAp's success in boosting non-aeronautical revenues at Sydney Airport, the group has focused on increasing revenues generated by car parking and retail rents at Brussels and Copenhagen airports.

Some of the talk-back gripe in Sydney the last couple of days has concerned the Sydney Airport's continuing squeeze on anyone even thinking of having to use the airport. Today's letters to the editor included the following:

Ready for rip-off

Tony Williams (Letters, March 29), Sydney Airport needs to have a look at Melbourne and Brisbane airports. Both have one-minute pick-up bays with a security guard to move overstayers along. Out of the plane, a call to your friend picking you up, and a rendezvous at the pick-up point. Works a treat, but obviously would rob Sydney Airport of $7 for minimum parking. Stephen Jackson Lilyfield

I read with wry amusement Tony Williams's comments about corporate greed at Sydney Airport. The other weekend, my mother and I needed to transfer between the domestic and international terminal. Considering what we'd already forked out in various airport taxes, I thought it a bit rich that I then had to pay $4.50 each way for the bus trip between the terminals. Why is it that this service is free at every other airport I have ever flown through? Nicole Wilcock Penshurst

It may be that Macquarie's halo is slipping.

Click here to see other posts with references to Macquarie Bank

Image attribution: http://www.michaelhanscom.com/eclecticism/2004/01/im_too_sexy_for.html

It's how big it is and what you do with it

"On Mar. 28, the state-run China Business News reported that the mainland's reserves hit $854 billion in February, outstripping Japan's reported stockpile of $850 billion."

So, combined, that means Japan and China own US$1.7 Trillion of US debt. Awesome, Dude.

China and Japan have propped up the value of the dollar and financed U.S. spending by continuing to absorb U.S. debt via the purchase of Treasury bills. Yet these purchases have sown unease, with some in Washington complaining that the United States has relinquished control of its destiny to foreigners.

"The U.S. could fear concerns that as China possesses U.S. debt, that could give China the ability to influence the U.S. financial situation," Shen said.

See also http://guambatstew.blogspot.com/2005/10/its-not-how-big-it-is.html

Seventh inning stretch?

A rookie Federal Reserve Board member set off a huge market rally a few months back by suggesting the Fed's rate rising was in its eight inning. Now I apologise to all the Aussies who know only enough about baseball as I know about cricket in the moniker I've pasted on this post, but there is some notion that generally speaking markets "cycle" up and down and that there are indicia that suggest just where you might be at any particular time in that cycle. It's the kind of stuff you fall back on to rationalise a particularly disingenuous trade or to justify a particular risky one. There is more art than science to the concept, but it does have a great deal of resonance with casual observation.

Alan Kohler puts it in terms of "legs", and he says the market has got a leg up to go (and for some reason I can only imagine a dog against a fire hydrant). He says, "Fear not, even as we enter upon the third leg":

THE traditional sharemarket boom cycle goes like this: in the first stage, interest rates fall and the market wakes up and rises strongly; in the second stage, earnings growth kicks in, companies consistently outperform profit forecasts and the sharemarket rises steadily; third stage is the takeover boom, followed by sharemarket's final spurt, as earnings growth is harder to come by and chief executives need to make acquisitions to keep getting paid in the manner to which they have become accustomed.

We are now entering the third stage: which doesn't mean it ends tomorrow, although there are a few top-of-the-cycle signs around, such as Macquarie Bank's willingness to sell something, and the three-day five-bagger uranium prospector Toro Energy (25c to $1.40 since listing last Friday). But don't be fooled - this is not the final stage of the boom.

Merger mania is upon us because the world is awash with money and because it's an easy way for CEOs to get some growth, or at least to disguise the lack of it. In many cases, for example Tattersall's and UNiTAB, it is just an index play: becoming bigger to climb the index rankings and get a higher rating.

It's not just happening in Australia, far from it. A London fund manager estimates that half of the companies in the FTSE 100 index are now involved in a takeover or are widely expected to be so soon. A European strategist told me he expected an explosion of M&A (mergers and acquisitions) activity in Europe in 2006, as companies look to extract cheaper production costs from an emerging eastern Europe and the big brand owners look to consolidate their market power across Europe.

But the key to the global burst of takeover activity is the cost of capital - corporate debt spreads are as low as they have been for a generation - because risk is being underpriced, on top of historically low bond yields. So while saver/investors are being underpaid for the risk they are taking, the risk-takers are being overcompensated or, rather, they're being given very cheap capital to take risks with.

As a result many takeovers can now be self-funding. Graham Harman at Citigroup estimates that half of the companies in the ASX 200 index could be acquired using 100 per cent debt and still be self-funding because their earnings yield after tax and interest is above the cost of corporate debt. It is enormously appealing for a CEO to make an "earnings accretive" takeover that creates greater scale and improves its position in the index, and the demand for its stock, and therefore his annual bonus. Directors are signalling that they believe their share prices are high, if not overvalued.

So does the apparent maturing of the M&A part of the cycle mean that the sharemarket is about to head south?

No. If anything, the opposite will happen - for a while. In my view global sharemarkets are not near a peak: the US market is about get a new lease on life as the Fed's tightening cycle ends, while Europe and Japan are both at the beginning of powerful bull markets.

In Australia the market has run a long way and small stocks with nothing but hopes - like Toro Energy - are going off like rockets. But the bears have not capitulated yet.

In my view, there will be no "blow-off" in the sharemarket and, therefore, no crash, until there has been a capitulation by the bears - in particular by those investors who refuse to accept that spot commodity prices should be used for their resource company earnings forecasts.

The share prices of BHP Billiton and Rio Tinto have both tripled in three years to $27 and $78 respectively, yet most analysts still use much lower commodity prices than those prevailing now to value them.

Goldman Sachs JBWere this week put out a note hypothetically valuing them using spot prices instead of their own commodity price forecasts: BHP Billiton comes in at $39.99 and Rio Tinto at $101.64 - 50 per cent and 30 per cent higher respectively.

Either commodity prices will collapse soon (very unlikely), or the bears will buckle under the pressure of missing the unstoppable rise of the largest stock in the market and buy in a panic.

That panic, when it comes, might be an opportunity to sell a few to the losers who missed the first 100 per cent of the rise.

Alan Kohler has been around markets longer than Guambat has been tending stew, so it is with more than a little temerity that I get a smight picky on some of his views. My caution stems from the learning process that the markets are going through these days, the "iteration" factor.

I think some of the old processes he describes so well are fast-forwarding. We see that the recovery from external shocks like terrorist bombings has gone from weeks to days to hours. I think there is a set up going on that will actually see the US markets fall on the final rate hike because the traders have already anticipated the notional relief rally. I think the "blow off" will come quicker than we think.

But I do agree with him that we are not there yet. Still, after the huge record-breaking run we've seen in the last short while, which comes on top of a precedentially steep three year run, that there are not enough bears left standing to look for them to capitulate because they failed to use spot prices in their valuation models (an argument always made when commodity cycles are at their top). Indeed, it may well be that the latest run is just the kind of panic buying from endangered bears that he says you've made it to the tender parts of the top of the last leg.

And to add a bit more background anecdotal evidence of the kind that usually shows up near market tops, consider these two articles appearing on the same page as Kohler's komment:

Walker to cash in on the boom and sell up

LANG WALKER, one of the country's more colourful property players, has joined a list of industry tsars and decided to cash out of his multibillion-dollar empire.

Mr Walker, who turns 61 in July, will sell either part or all of his Walker Corp, which has assets worth close to $5 billion and developments in the pipeline worth a similar amount. The property tycoon's wealth was estimated to have risen to $1.16 billion in the 2005 BRW Rich List, up from $759 million the previous year.

Marc Besen, Ralph Sarich and Kevin Seymour are among other property operators who recently revealed they are offloading their shopping centres and office towers at premium prices to take advantage of the strongest commercial market in nearly 20 years.

Reserve warns of market risks

THE Reserve Bank has accused financial markets of "myopia" in their pricing of risk, warning that a significant readjustment may be on its way.

A period of unusually stable global growth and inflation has lulled investors into a false sense of security, the central bank said yesterday, helping to drive global bond yields well below their long-term averages.

"While the current environment of very low volatility may continue, experience suggests that when economic outcomes are consistently favourable over a run of years, investors tend to underestimate, and thus underprice, risk," the central bank warned in its quarterly financial stability review.

However, the Reserve also acknowledged the remarkable resilience of financial markets to potentially destabilising events so far, such as the US Federal Reserve's aggressive campaign of interest rate rises and the downgrading of several high profile corporate bonds. "The global financial system has comfortably ridden-out a number of tests of market sentiment," the central bank said.

And see Risque business and http://guambatstew.blogspot.com/2006/03/bulls-5005-bears-no-where-to-be-seen.html

Who polices the police?

That is, of course, a rhetorical question, asked with sufficient repetitiveness that it must signify a desihn flaw in the way we organise ourselves. Anyway, two more examples of it show up in the business pages of the Herald today.

A FORMER head of the National Crime Authority has blasted Australia's top prosecutor over his reluctance to take action against former Reserve Bank board member and tax adventurer Robert Gerard. Peter Faris accused the Commonwealth Director of Public Prosecutions, Damian Bugg, a fellow QC, of "bureaucratic blindness and ineptitude".

Mr Bugg told a recent Senate Committee it was wrong to say he was the "gatekeeper" to what was prosecuted and what was not. "We are totally dependent on what is referred to us," he said in discussions with Labor Senator Joe Ludwig about the Gerard case.

It was revealed last year Tax Office auditors believed Mr Gerard's company, Gerard Industries, established an elaborate insurance "sham" to evade tax, but that the Tax Office settled the case without imposing penalties or referring it to prosecutors.

Mr Bugg confirmed the Tax Office never referred the Gerard file to him. "The matter was never referred to my office," he said.

Mr Faris criticised the DPP last year over his failure to prosecute entertainer Steve Vizard for insider trading, yesterday said Mr Bugg's comments were technically accurate but missed the point. "In the world of real life it's not so much whether he has the legal power to direct the ATO to give him the Gerard brief, but whether he asked," he said.

Mr Faris said the Tax Office had its own agenda: collecting money rather than ensuring that criminal conduct was prosecuted. But if Mr Bugg was also uninterested, "that means nobody does it. It's a typical bureaucracy: 'It's not my job'."

A spokesman for the DPP said it was offensive to suggest he was protecting any person or institution. "To suggest that the DPP should seek to intercede in a case where it has no power to do so and has no brief, is to suggest that this matter be dealt with differently to the normal processes," he said.

QC's blast over Gerard inaction

THE Australian Stock Exchange [a privatised corporation which also serves as the public watchdog of the equity market exchange] insists a 15 per cent rise in a share price over 10 trading days doesn't warrant a speeding ticket.

The market regulator was responding to surprise that a swab had not been called for after Sydney Futures Exchange's stellar run in the two weeks prior to Monday's announcement revealing plans for a combined $5 billion business.

The start of the price rise just happened to coincide with the day talks began between the ASX and SFE.

ASX spokesman Gervase Greene told Xchange the rise in the SFE's share price was not "dramatic" enough to suggest news of the talks had leaked. Enough other factors were at play - including a 3.7 per cent rise in the All Ords over the period and Macquarie Bank pulling out of its bid for the London Stock Exchange - to explain the rise in the share price, Mr Greene said.

As Mr Greene put it, if any other company's share price had risen so fast over the same period it wouldn't "necessarily demand" a notification.

Given the ASX's involvement, the Australian Securities and Investments Commission has taken control of overseeing market compliance for this particular deal.

So what does ASIC think of the SFE's share price rise? "We cannot comment specifically, however ASIC monitors the trading associated with major market announcements," an ASIC representative said.

Punters can whinge all they like but the stewards are the jockey, owners and judges

NeoCon Pipes up in Australia

Now I would be the first to admit that I ain't no expert in international relations, politics or anything else for that matter. Indeed, the older I get, the stupider I seem to become. And the only advantage I get from that devolving intelligence is that I can ask stupid questions and not be embarrassed about it.

Like, is it US policy to simply wreck the Middle East to take the pressure off Israel?.

What makes me ask such an inordinately stupid question is stuff I'm hearing about Dr Daniel Pipes, who piped up in Australia recently. I never heard of him before (see, I told you how stupid I am), but did catch an interview he had with Mark Colvin (now, there is someone who knows everything, I'm sure) on my ABC. He seems a Very Important Person and well connected to certain links in Washington, and is really just a really nice, super-intelligent and reasonable guy, from the sound of his bio. The transcript of that interview is here, and you can see how he really overwhelmed anything Mark Colvin might know, really.

DANIEL PIPES: ... what I'm arguing against is the very widespread idea that we the Western countries and specifically the coalition countries are responsible for what happens in Iraq - I mean, something goes wrong in Iraq it's our fault, it's our problem, we must remedy it.

MARK COLVIN: Well what about the so-called pottery barn rule that Colin Powell is alleged to have told the President - you break it, you fix it.

DANIEL PIPES: I profoundly disagree with it. I think it is possible and necessary at times to go to war without taking responsibility for the country that you make war on.

MARK COLVIN: If you don't take responsibility for Iraq, then somebody else, for instance neighbouring Iran, may well do.

DANIEL PIPES: Well, let me turn around and say that if I thought that we the coalition countries could define the destiny of Iraq, could determine its outcome, I'd be happy to do it. I'd be happy to do what's necessary to make them free and prosperous.

I don't think we can. And by the way, although we're trying hard to keep the Iranians out of Iraq they're already there. The Prime Minister of Iraq is a pro-Iranian Islamist.

MARK COLVIN: But if you pulled out altogether, then Iraq, certainly the south, could become just an Iranian proxy.

DANIEL PIPES: Well, I didn't advocate pulling out altogether. I'm saying we should lessen… lower our sights, we should understand that we don't control Iraq, cannot control Iraq, and that developments in Iraq are developments that are primarily made by the Iraqis.

And so if they fight each other they fight each other. I hope they don't, I wish Iraq well, but I as a foreign policy analyst from the United States am not willing to take responsibility for what takes place in Iraq.

MARK COLVIN: Among the reasons you give for saying that civil war would not be a strategic tragedy is that it would invite Syrian and Iranian participation, hastening the possibility of an American confrontation with those two states. How can that be anything but a danger?

DANIEL PIPES: Well, there are those who would like to see the Syrians and Iranians contained, and this would be a way to do that.

MARK COLVIN: Well when you say contained, you can't… America can't afford to take them on in open warfare, can it?

DANIEL PIPES: America's good at open warfare. It's just not good at occupying countries.

DANIEL PIPES: I am not sketching out specific scenarios, but I'm just saying that the development of a civil war in Iraq is a horrible prospect, and I in no sense want it to happen.

But if one looks at it coolly, one sees that it's not, from an American or for that matter Australian point of view, a disastrous possibility. It's disastrous for those involved, but not necessarily for those of us on the outside.

Another person, William Rivers Pitt, had a slightly different take on the subject, which I post here only in the spirit of a "full and fair" report; I'll report, you decide.

Last week, George W. Bush got up before a gaggle of reporters and washed his hands of the mess in Iraq. The question of how long an American presence will remain in that country "will be decided by future presidents and future governments of Iraq," said Bush. To be fair, he isn't the only one. The entire administration appears to have become bored with the whole process.

Take Daniel Speckhard, for example. Speckhard is Director of the US Iraq Reconstruction Management Office, which is in charge of rebuilding Iraqi infrastructure ravaged by war and depredation lo these last three years. Speckhard is quoted in a report in last week's USA Today: "The Iraqi government can no longer count on U.S. funds and must rely on its own revenues and other foreign aid, particularly from Persian Gulf nations. 'The Iraqi government needs to build up its capability to do its own capital budget investment,' said Speckhard."

Really. They have no police or military to speak of, the hospitals are trashed, the lights won't stay on, the flow of potable water is screwed, roads and bridges are bombed out, hundreds of buildings are wrecked, the so-called "elected" government is totally powerless to contain or control the chaos within the country, headless bodies are popping up left and right, a dozen people die every day from bombings and executions, the entire country is careening towards civil war ... and somewhere in all this, Bush and his people expect the Iraqi government to "do its own capital budget investment."

I am going to find a china shop somewhere in the city and walk in with a free-swinging baseball bat. My goal, which will be clearly stated, will be to improve upon the place. I will spend the next three years meticulously destroying everything I see inside, from the cash registers to the display cases to the nice Royal Albert tea sets in the corner. Along the way, I will batter the brains out of any poor sod unfortunate enough to get in my way. When I am done, I will claim with as much self-righteousness as I can muster that none of the mess is my responsibility. I will then, of course, refuse to leave.

Hey, if the president can do it, it must be legal, right? Unfortunately, the difference between my china shop analogy and what the Bush administration is doing in Iraq is that I won't get anything out of it except an arrest record and a chance to enjoy my state's municipal accommodations. Bush and crew are reaping far better benefits from the mayhem they have caused.

Curiously, way back in 1987, Daniel Pipes urged the US to Back Iraq as a pawn to use against Iran. The Daniel Pipes website has collected all of his "electronically available" writings (the man is nothing if not prodigous), but this particular piece is not amongst them. One commenator, Prof Irfan Khawaja, pointed that out and also said this of Pipes:

As I see it, Pipes is neither the demon that his enemies have made of him, nor the savior that his champions have made him into. He is, on the one hand, an astute and courageous scholar of militant Islam who has said what needs to be said on that subject without worrying too much about winning popularity contests. On the other hand, however, he is an insensitive, careless, and unreliable journalist with a consistent pattern of exaggeration and misjudgment that he adamantly refuses to acknowledge or rectify. Both facts are real; neither should be ignored.

Pipes, in a detailed response to Khawaja's criticisms, merely had this to say about the "Back Iraq" article missing from his extensive archives:

As for the 1987 New Republic article not appearing on my website, www.DanielPipes.org: a review of my writings will reveal that dozens and dozens of my 1980s articles are not on the website yet, for the simple reason that I lack their electronic versions; should anyone volunteer to type up this New Republic piece or others from back then, I will gladly post the results.

Well, I don't know if a pdf file is an electronic recording (there's that ignorance thing popping up again), but there is a pdf file of the Back Iraq article available on the net.
In that article, Pipes and Laurie MyIroie argue "the fall of the existing [Saddam] regime in Iraq [to Iran] would enormously enhance Iranian influence, endanger the supply of oil, threaten pro-American regimes throughout the area, and upset the Arab-Israeli balance." Following are more excerpts:

"The United States must take clear military, economic, and political steps to demonstrate that it opposes the appeasement of Iran and considers an Iranian victory inimical to Western interests. Ironically, helping Iraq militarily may offer the best way for Washington to regain its position in Tehran. The American weapons that Iraq could make good use of include remotely scattterable and anti-personnel mines, and counterartillery radar.... although Khomeini's men will never love us, they could be made to fear us.

A more serious argument against a tilt toward Iraq is the danger that a victorious Baghdad would itself turn against pro-American states in the region - mainly Israel, but also Kuwait and other weak states in the Persian Gulf region. Under Saddam Hussein, Iraq has a history of anti-Americanism, anti-Zionism, support for terrorism, and friendliness toward the Soviet Union. But the Iranian revolution and seven years of bloody and inconclusive warfare have changed Iraq's view of its Arab neighbors, the United States, and even Israel.... Iraq is now the de facto protector of the regional status quo. Iran, the revolutionary state, is more likely to turn its weapons against Israel.

Some will say the United States should simply pull back and have nothing to do with either side in the Gulf war. Although it's true that we've bungled our prior involvement, the conflict is too important to ignore. At stake is the possible resurgence of anti-American fundamentalist Islam, the security of Western access to Persian Gulf oil, and potential Soviet predominance in the region. Abdication is not a responsible choice."

He now concedes, though, that Iraq may be lost to Iranian influence. He told Mark Colvin, "although we're trying hard to keep the Iranians out of Iraq they're already there. The Prime Minister of Iraq is a pro-Iranian Islamist." So, a civil war and a battered Iraq infrastructure may be just what is needed to keep Iran focused on its gains against Iraq's Sunnis rather than its other arch-enemy Israel. And while the focus remains on Iraq, Israel remains free to deal with "the Palestinian issue".

And Pipes, still in Australia, suggests it is time to take the gloves off on that one. Writing in The Australian he says,

AS Israelis go to the polls, not one of the leading parties offers the option of winning the war against the Palestinians. It's a striking and dangerous lacuna.

First, some background. Wars are won, the historical record shows, when one side feels compelled to give up on its goals. This is only logical, for so long as both sides hope to achieve their war ambitions, fighting either continues or potentially can resume.

Those goals are simple, static and binary. The Arabs fight to eliminate Israel, Israel fights to win the acceptance of its neighbours. The first is offensive in intent, the second is defensive. The former is barbaric and the latter civilised. For almost 60 years, Arab rejectionists have sought to eliminate Israel via a range of strategies: undermining its legitimacy through propaganda, harming its economy through a trade boycott, demoralising it through terrorism and threatening its population via weapons of mass destruction.

While the Arab effort has been patient, intense and purposeful, it has also failed. Israelis have built a modern, affluent and strong country, but one still largely rejected by Arabs.

This mixed record has spawned two political developments: a sense of confidence among politically moderate Israelis, and a sense of guilt and self-criticism among its Leftists. Very few Israelis still worry about the unfinished business of getting the Arabs to accept the permanence of the Jewish state. Call it Israel's invisible war goal.

All manage the conflict without resolving it. All ignore the need to defeat Palestinian rejectionism. All seek to finesse war rather than win it.

For an outside observer who hopes for Arab acceptance of Israel sooner rather than later, this avoidance of the one winning strategy prompts a certain frustration, one that's the more profound on recalling how brilliantly the Israelis understood their war goals early on.

Fortunately, at least one prominent Israeli politician advocates Israeli victory over the Palestinians. Uzi Landau notes simply that "when you're in a war you want to win the war".

He had hoped to lead the Likud in the present election but failed to win anything approaching a majority in his party and is ranked 14th on the election list this week, not even high enough to guarantee him a parliamentary seat.

So they experiment with compromise, unilateralism, enriching their enemies and other schemes. But as Douglas MacArthur observed: "In war, there is no substitute for victory."

The Oslo diplomacy ended in dismal failure and so will all of the other schemes that avoid the hard work of winning. Israelis must eventually gird themselves to resuming the difficult, bitter, long and expensive effort needed to convince the Palestinians and others that their dream of eliminating Israel is defunct.

Pipes has his backers, as his bio shows. He also has some detractors.

The bird's the word, in any language

Justice Scalia flips the finger in church

BOSTON, March 27 (UPI) -- U.S. Supreme Court Justice Antonin Scalia startled reporters in Boston just minutes after attending a mass, by flipping a middle finger to his critics.

A Boston Herald reporter asked the 70-year-old conservative Roman Catholic if he faces much questioning over impartiality when it comes to issues separating church and state.

"You know what I say to those people?" Scalia replied, making the obscene gesture and explaining "That's Sicilian."

The 20-year veteran of the high court was caught making the gesture by a photographer with The Pilot, the Archdiocese of Boston's newspaper.

"Don't publish that," Scalia told the photographer, the Herald said.

Tip o' the hat to the Arkansas Daily Blog for this one.

But then, did he really "flip the bird" or did he give the Sicilian "chin chuck"? Stop the ACLU says it was the latter, but in any event, "I say, so what if he did? They deserved it. WTH are they doing pestering him with those kind of questions right outside of a Church anyway?"

The currency/commodity conundrum

$A unloved as rates trump commodities (Link may requie subscription) The AFR reports:

Australia's shrinking interest rate premium and expectations of another US credit tightening kept the $A near 18-month lows overnight, despite surging prices for gold and base metals

Gold surged to three-week highs above $US567 an ounce, silver hit yet another 22-year high, while copper and zinc hit fresh record highs. Yet the $A sank to as low as US70.38, a level last seen in September, 2004, before moving back up to around US70.5 in early local trade.

Traders said the puzzling disconnect between the $A's weakness and commodity strength could be explained by the prospect of rising interest rates in the US, Europe and Japan alongside steady local rates.

"We doubt that the main driver of Australian dollar weakness is likely to disappear anytime soon - namely its fading allure as a yield play now that Japanese and Euro-zone interest rates will be heading higher," National Australia Bank currency strategist John Kyriakopoulos said.

Europe has raised rates twice since late last year and is expected to move again in the coming month, while Japan has signalled an end to its five-year old zero interest rate policy.

This has reduced the appeal of previously high-yielding currencies like the $A. As well, the local currency has suffered collateral damage at the hands of the New Zealand dollar after data last week showed the economy there skirting perilously close to recession

"The most prominent driver of the Australian dollar's slide is a clear unwinding of carry trades, where investors had borrowed in low-yielding currencies such as the euro, Swiss franc and Japanese yen to purchase high-yielding currencies like the Australian dollar," he said.

In a separate story, the AFR rounds out the picture:
Plenty of easy money despite the pinch (There's that subscription thing again.)

Investors wonder whether the monster sell-off in the high-yielding Australian and New Zealand dollars is a symptom of a coming convulsion in global markets. After all, the tightening in global liquidity conditions is worrying after an extraordinary era of cheap money funded an abundance of no-brainer risky investments that enriched many a trader these past years.

One of those gifts for speculators was the carry trade, a byproduct of super-low borrowing rates in places such as the United States and Europe. Japan, meanwhile, had a policy of stuffing extra liquidity into the banking system and borrowing rates at essentially zero. The carry trade - a strategy for borrowing at low short-term rates to buy higher-yielding assets - had never seemed easier or more rewarding. Investors in Japan, Europe and the US earned a tidy sum from $A deposits generating more than 5per cent and $NZ deposits more than 7per cent.

That tactic's clearly run out of puff where the $A and $NZ are concerned; rates here are at a standstill and likely to be cut over in fundamentally-poor New Zealand. Rates are rising in the US, Japan and Europe. Funding costs are higher. The rewards aren't what they used to be.

So why aren't there signs of distress in other asset classes whose values have been fattened by ample cheap money? Emerging market currencies have wobbled this month but the sell-off is relatively tame. Global equity markets are doing well. Equity market volatility, as measured by the Chicago Board Options Exchange's index, remains near decade lows. Commodity prices remain aloft. Corporate bond yield spreads over government bonds remain unusually tight.

There are specific reasons why the spasm's been contained to Down Under so far. First, rate cycles this end are well ahead of other nations. Growth is clearly slowing in New Zealand. Record amounts of $A and $NZ bonds held by foreigners are due to mature this year and going by the price action in the currencies, traders are betting the money's headed back north.

The speculative crowd, however, is making the most of one thing: momentum. This bunch of trend-followers tends to hop on one strategy en masse. Such an attitude begets excess. The herd's clearly doing its best to slam the $A under US70¢ - there's a chance stop-loss orders are clustered around that key level. Setting off those orders and engineering a steep fall in the currency would delight the mob that has, this month, pushed the net short position in $A futures to a record high. Being "short" a currency is effectively a bet that it will depreciate.

Of course, such an extreme position could also presage a sudden reversal in the $A's fortunes. There must be a fair few speculators out there feeling queasy about their large positions, especially if the $A doesn't oblige by going lower. They'll be quick to back out at the first sign things aren't going their way.

Will other markets feel the pinch of shrinking global liquidity? Yes. The free-lunch counter will eventually close. But, as things stand, global monetary conditions are still quite easy.

Global broad money growth, for instance, was running at about 10per cent year-on-year late last year, off a recent peak of about 15per cent in late 2003 but well up on 2000's 0.5 per cent. The main contributors to the explosion were Japan and the euro zone. Foreign exchange reserves have swelled markedly in recent years although, as UBS's strategists note, Japan and China's rate of accumulation has slowed significantly in recent months. Bank lending growth in the US, Japan and Europe has picked up strongly since 2004. And perhaps most importantly, UBS's team points out, real short-term rates in the G7 have edged higher very gently in the past few years and have just managed to drift above zero.

But there's a disturbing legacy of years of near-free money - the increasingly speculative cast to investment, even among individuals. In Japan, where households were famously conservative, margin trading in foreign currencies has boomed. But when you're handed free money, it's your duty to put it to work.

"Never have we had so much speculative money rushing around and much of it is in non-professional hands," says Westpac's Robert Rennie.

"The level of global liquidity is still so high. And Japanese mums and dads controlled 40 per cent of last year's capital movement out of Japan - that is a record. Money is sitting there looking for a home and it's becoming speculative. Part of this money may be more prone to panicking."

See, Risque business. Obviously all that speculative fervour is better left to the professionals. They know what they're doing. Keep the mums and dads out of it. Just as soon as they lose their dough.

On yer bikes, then

Now I get it. Tech stocks have new paradigms and new business models and a boom. Commodity stocks don't have booms; they have "supercycles". So, just ignore all that bullarkey I spewed about the dot.commodity boom.

Metals making for sweet spot 'supercycle'
Citigroup lifts price forecasts for copper, nickel, aluminum

Citigroup, forecasting tighter global supplies of copper and nickel, reversed its bearish stance on various metals Monday, saying those commodities, and more modestly aluminum and gold, are likely to make the most of a "supercycle" sweet spot.
Metals have shrugged off interest-rate jitters, intermittent weakness in oil and gas prices, several rounds of profit-taking and seasonal demand slowdowns, among other events, according to Citigroup.
Analyst John Hill wrote that a "drumbeat of operating outages/shortfalls" could introduce an extended period prices at more than $2.50 a pound for copper, more than $7 a pound for nickel and more than $1.25 a pound for aluminum. "As a consequence, we expect a wave of upward earnings estimates revisions, both short- and long-term, and a very favorable environment for the equities.
"This represents a significant change of opinion on copper and nickel, where the Citigroup global team is abandoning a longstanding bearish stance due to the prospects for synchronous economic growth, structurally tight inventories, sluggish new capacity additions, and recurring operating outages/shortfalls," Hill wrote.
The report upgraded shares of both Inco Ltd. and Alcan Inc. to buy and raised Phelps Dodge Corp. to hold. Inco rallied 1.4% to $49.74, while Alcan rose 0.7% to $45.62 and Phelps Dodge -- which Citigroup lowered to a sell late last year, a move it now concedes was a mistake -- gained 2% to $76.69.
As revised, Citigroup's forecast for copper prices is lifted to $1.85 a pound in 2006 and $1.50 a pound in 2007; nickel prices are expected to go to $6.23 a pound in 2006 and $5.75 a pound in 2007; aluminum prices are expected to be $1.02 a pound in 2006 and 90 cents a pound in 2007; and gold will reach $553 an ounce in 2006 and $560 an ounce in 2007.
"We continue to adhere to the Commodity Supercycle theory, believing that the combination of 15 years of underinvestment, thorough-going corporate consolidation, mounting regulatory/ [non-governmental organization] pressure, and input cost escalation are conspiring to prevent the industry from mounting a meaningful supply response to 'peak-peak' prices," Hill wrote.
This does not imply "perpetual levitation" for metals prices, according to the analysts, but rather sustainable "higher lows" in commodities and company earnings as well as financial catalysts in the form of balance sheet repair and common-stock and special dividend hikes and share buybacks.

Now that may sound like the earth has moved for Citigroup, especially having advised they are "abandoning a longstanding bearish stance". But this is what they had to say a year ago:

In Support Of The Super Cycle Thesis
February 09 2005 - Australasian Investment Review – (AIR)

Having hedged their bets for the past year the commodities team at Smith Barney Citigroup has now reached a definitive conclusion – commodities are in an extended cycle that in turn is part of a ‘Super Cycle’.This marks a change from their stance over the past twelve months where they considered the ‘Super Cycle’ to be a genuine possibility but felt there was insufficient evidence to confirm the thesis.

Citigroup’s admission runs parallel with commodity specialists at Macquarie and GSJB Were re-iterating their support for the Super Cycle theme.

While noting the commodity cycle is reaching maturity and is therefore producing some sell signals, Citigroup is confident of a sustained period of earnings growth and a quality of earnings not seen before in the sector and which will be enough to outweigh the conventional sell signals.

So what does a ‘Super Cycle’ mean? Importantly, it doesn’t mean commodity prices will simply rise in a straight line, as there will still be price cycles.

Rather, the ‘Super Cycle’ produces a sustained period of trend increases in real commodity prices, which is driven by higher trend growth as major economies industrialise and urbanise.

This is accentuated by the fact that increases in supply are insufficient to offset the resulting higher demand. The broker suggests the current cycle began in 2002 with China as the catalyst, given its current period of high economic growth is highly materials intensive.

As the cycle continues, Citigroup explains real commodity prices will continue to trend higher, to the point where the trend decline experienced over the last 30 years will reverse.

What are the implications of such a cycle? The obvious answer is higher commodity prices, with the broker having revved up its 2007 commodity price forecasts such that they now are above its long-term forecasts. While prices generally are expected to rise, some commodities are expected to outperform within the cycle.

In Citigroup’s view, the preferred commodity exposures in this cycle are the bulks – iron ore, coking coal and alumina, along with aluminium, zinc and gold.

In addition, the broker expects shareholders to notice an important difference between a ‘Super Cycle’ and an ordinary cyclical increase in commodity prices.

The broker highlights that resources companies can expect to generate strong free cash flow during the next few years, resulting in the transformation of balance sheets in the sector. On current forecasts the broker forecasts gearing levels in the industry to fall by US$13.7bn this year and another US$18bn in 2006, resulting in the possibility of the industry achieving a net cash position by 2007. Unless this cash is distributed. In addition, the broker notes equity currently remains more expensive than debt, meaning debt repayment is not the most efficient use of cash for most companies.

As a result, shareholders are likely to see significant increases in either dividends or capital management initiatives, such as the higher dividend and share buyback announced by Rio Tinto (RIO) with its profit result last week.

How these returns are made will depend on the environment for the company, with Australian and Latin American investors likely to see special dividends due to the tax advantages associated with them, while investors in the UK and the US are likely to see a higher level of share buybacks for the same reason.

As the broker notes, historically bullish cycles in commodity markets have come to an end for one of two reasons - declining demand or increases in supply.

While the broker expects demand for commodities to fall from the highs seen last year, continued strength in China and the US is to ensure demand remains above trend levels. But how is the market placed in terms of additional supply coming on stream? The broker estimates the ‘Stay in Business’ level of capital expenditure in the industry is about US$15bn annually.

Assessing the global capex spend for resource companies is obviously difficult, but on the broker’s forecasts this year’s total should hit a cycle peak of about US$30bn, suggesting some serious expansion in supply capabilities. But this isn’t an immediate problem in the broker’s view, as there is a lag time between capital expenditure and new supply coming on stream of about three years.

Also, the broker points out the Asian financial crisis of 1997 had severe repercussions for the resources industry generally, as the resulting evaporation of demand from Asia coincided with the end of a major capital expenditure cycle, forcing prices to fall sharply.

As a result, little new capital expenditure was made in the late 1990s and first few years of this decade, meaning the money being invested now is going into new projects with longer lead times, which emphasises the likelihood of a long lag between investment and new supply.

The broker also notes that after being burned in the Asian crises, companies themselves are now far more disciplined in terms of capital budgeting. Recent years has thus seen most companies place an emphasis on growth via the development of their own projects, as with most resource stocks having run somewhat already this is a far cheaper growth avenue than acquisitions.

So, WMC Resources (WMR) notwithstanding, management teams are in favour of careful capital expenditure rather than looking for takeover targets. Costs are also playing a more important role this time, as operating costs have continued to rise through the cycle due to exchange rate movements, higher energy and raw material costs and the mining of lower grade material.

This means many companies are failing to deliver on what is expected to be higher margins arising from stronger commodity prices. This cost impact has also been the result of companies noting the tightness of supply in many markets, which has seen production on the basis of maximising volumes rather than minimise costs.

In addition, while supply is increasing for some commodities, the broker notes it is supply from higher cost projects, with operations at the top of the cost curve being brought into production or marginal areas being mined, as current prices make it economic to do so.

On the broker’s numbers, a large portion of the higher costs can be traced back to the appreciation of the so-called ‘commodity currencies’.

This has had a particularly heavy impact on Australian and South African producers as unfavourable exchange rate movements have more than offset any benefits from higher commodity prices, with the A$ gold price a good example in recent years.

Despite these higher costs, the broker expects long-term average margins will still be broadly unchanged, meaning commodity prices will need to rise further to offset the higher input costs.

So where should investors look? As mentioned above, the broker considers the bulks to be among the most attractive plays currently. One characteristic of the bulk commodity industries is they rate highly both in terms of Return On Capital Employed (ROCE) and barriers to entry in the industry.

Backing up these advantages is the likelihood of continued favourable supply-demand conditions, with the broker noting that even despite recent capacity expansions by major producers of both iron ore and coal these markets are expected to remain very tight.

Aluminium and Alumina enjoy similar tight supply-demand outlooks, with the broker expecting capacity growth to be insufficient to meet projected growth in smelter capacity, forcing closures and the cancellation of some projects.

Zinc is also expected to move into a deeper deficit this year as concentrate supply is tight and supply increases will be limited due to production bottlenecks. For gold, the broker anticipates continued weakness in the US$ to support investment demand for the metal, while strength in ‘commodity currencies’ will pressure non-US gold producers.

Stock-wise, the broker lists several companies as among its preferred exposures. In bulks, the majors, BHP Billiton (BHP) and Rio Tinto (RIO) remain favourites, while Centennial Coal (CEY), Macarthur Coal (MCC) and Iluka (ILU) are also recommended.

For aluminium leverage the broker prefers Alumina (AWC), while Lihir (LHG) is the preferred Australian exposure to gold.

Several resource companies are seen as cheap, namely Zinifex (ZFX), Oxiana (OXR) and Minara Resources (MRE), with the broker noting the environment is less-favourable for single project or commodity companies with risks of production problems. (See Son of a Guambat's award winning portfolio: http://2005.studentshares.com.au/home.php?campusid=7)

Copyright Australasian Investment Review.

Now this is also interesting: Citigroup made a great deal of this latest conversion from commodity bear to commodity bull overnight Sydney time today, and so commodities were the major supports to the New York markets on an otherwise dreary day. Is it any coincidence that yesterday Sydney time the Aus market had yet another boom day, up almost one percent to 5088, with BHP Billiton and Rio Tinto front-running the pack? Yeah, I'm sure it is.


And now for something completely different, but cycle related. Baby Bat's best friend in high school, Nattie Bates, got gold in the Commonwealth Games. Onya Nattie!