Obama takes campaign for manufacturing revival to factory floor | LSE prepares "High Growth Segment" of main market | Banks reportedly scrap plans to withdraw from Libor panel
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14 February 2013
CFA Institute: Financial NewsBrief
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American Airlines and US Airways boards approve merger
The boards of US Airways and AMR, American Airlines' parent company, gave final approval to a merger of the two airlines. Industry experts described the deal as the last great mega-merger in U.S. aviation. If the $11 billion all-stock deal closes, it would create the world's biggest airline and put four major airlines in control of 86% of air travel in the U.S. The Washington Post (tiered subscription model) (14 Feb.), The Arizona Republic (Phoenix) (tiered subscription model) (14 Feb.), Fort Worth Star-Telegram (Texas)/Sky Talk blog (13 Feb.)
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Obama takes campaign for manufacturing revival to factory floor
President Barack Obama took his campaign to rally support for a package of proposals aimed at strengthening manufacturing in the U.S. to the floor of an engine factory in Appalachia. He called upon Congress to support job training and the creation of manufacturing institutes that he proposed in his State of the Union address. The cost of doing business offshore is rising and many companies are finding it less expensive to open manufacturing facilities in the U.S., Obama said. The Washington Post (tiered subscription model) (13 Feb.), The Charlotte Observer (N.C.) (13 Feb.), The New York Times (tiered subscription model) (13 Feb.)
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LSE prepares "High Growth Segment" of main market
The London Stock Exchange plans to offer a listings market that encourages initial public offerings by smaller companies. The "High Growth Segment" will serve as a "stepping stone" for firms interested in a full listing, according to the LSE. "This is about removing barriers and attracting some of the really exciting companies to the London market," said Marcus Stuttard, head of U.K. primary markets. The Telegraph (London) (tiered subscription model) (13 Feb.), The Guardian (London) (13 Feb.), Financial News Online (U.K.) (subscription required) (13 Feb.), Financial Times (tiered subscription model) (13 Feb.)
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Banks reportedly scrap plans to withdraw from Libor panel
The U.K. Financial Services Authority recently warned major banks, including Rabobank Group and BNP Paribas, against withdrawing from the panel that sets the London Interbank Offered Rate. The warning has prompted several banks to forgo plans to pull out, sources say. The Wall Street Journal (tiered subscription model) (13 Feb.)
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CME and BATS up against clock in U.K. trading-platform race
BATS Global Markets and CME Group expect to gain regulatory approval to operate trading platforms in London before the Financial Conduct Authority replaces the Financial Services Authority. The transition is scheduled April 1. The exchange operators have applied to become recognized investment exchanges. The Wall Street Journal (tiered subscription model) (13 Feb.)
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Reader Survey
What is likely to provide Apple shareholders the highest risk-adjusted rate of return on the company's excess cash balances?
Common stock dividends, including a one-time or a series of special dividends  44.97%
Share repurchases  32.18%
Acquisitions  9.22%
Current capital-investment policy  8.39%
Issuance of preferred stock, as proposed by hedge fund manager David Einhorn  5.24%
Poll analysis:
The $137 billion in cash that Apple has sitting on its balance sheet exceeds the entire market values of technology peers Cisco Systems and Intel, prompting investors to consider anew how Apple should invest this stockpile or otherwise return it to shareholders. Nearly 45% of 946 respondents to this week's poll think Apple shareholders would be best served if the company returned at least a portion of its excess cash to its shareholders by way of either an increased dividend or special dividends, while just over 32% of respondents believe share repurchases would offer stockholders the best risk-adjusted return. Acquisitions are widely viewed as a less attractive option, with support from just 9% of respondents. And despite the tremendous value delivered to shareholders over the past decade, only 8% of NewsBrief readers think Apple's current capital-investment policy offers the best return prospects. Hedge fund manager David Einhorn shares this view, which explains the reason he recently proposed that Apple issue a "perpetual preferred" stock. Only 5% of respondents think this proposal is the best course of action for Apple. With cash representing about 31% of its market capitalization, Einhorn thinks Apple shares are being penalized by the market and that the issuance of preferred shares would help to unlock considerable value in the common stock. Critics of this strategy, including Aswath Damodaran, see Einhorn's plan as financial engineering rather than value creation. Apple has said that its management "has been in active discussions about returning cash to shareholders." Overlooked by many is the fact that $94.2 billion of Apple's cash balance is held by its foreign subsidiaries and, absent a change in tax law, repatriating it to pay for dividends or share repurchases would incur taxes. In March of 2012, Apple announced that it would start paying out $45 billion to shareholders over three years via dividends and buybacks. It seems most likely that Apple will accelerate or expand this plan. -- David T. Larrabee, CFA, Director, Member and Corporate Products, CFA Institute
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Market Activity
Asian-Pacific markets rise, with Hong Kong leading gains
Most Asian-Pacific markets rose Thursday amid mixed data from the U.S. and Japan. Hong Kong's Hang Seng Index advanced 0.9%. Japan's Nikkei 225 gained 0.5%. Australia's S&P/ASX 200 added 0.7%. South Korea's Kospi edged up 0.2%. India's Sensex was down 0.6%. Chinese and Taiwanese markets remained closed for Lunar New Year. MarketWatch (14 Feb.), The Economic Times (India) (26 Feb.)
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Italy's cost of borrowing climbs
With a general election weeks away, Italy's cost of borrowing is rising. The Treasury sold €3.45 billion worth of notes maturing in 2015 at 2.3%, well above 1.85% in January. Bloomberg (13 Feb.), Reuters (13 Feb.)
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Bets on falling yen pay off big for U.S. hedge funds
Major U.S. hedge funds have generated billions of dollars of profit by betting that the Japanese government will successfully drive down the yen's value. George Soros has posted profit of almost $1 billion from bets against the yen since November, said people who know the firm's trading positions. Other big-name firms have done as well. Financial Times (tiered subscription model) (13 Feb.), The Wall Street Journal (tiered subscription model) (14 Feb.)
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Economics
Japan is stuck in recession as GDP continues to fall
Japan's economy contracted in the fourth quarter, marking the third quarterly decline in a row and leaving the nation in recession, according to the Cabinet Office. Gross domestic product dropped an annualized 0.4%, the government said. The data come as Prime Minister Shinzo Abe pushes for increased stimulus to end deflation. Bloomberg (14 Feb.), Reuters (14 Feb.), NHK World (Japan) (14 Feb.)
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Obama's backing sparks optimism for U.S.-EU trade deal
President Barack Obama's public support for a free-trade agreement between the U.S. and the EU is widely applauded across Europe and has raised hope that a long-discussed deal will be implemented. Challenging economic conditions could be key to reaching a trade deal, which has always been bogged down, experts said. The New York Times (tiered subscription model) (13 Feb.)
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Foreclosure filings decline 28% in U.S.
U.S. residential foreclosure filings decreased 28% last month compared with January 2012, according to RealtyTrac. The number of filings, 150,864, was the smallest since April 2007. California legislation slowing first-time default was a big factor, RealtyTrac says. Bloomberg (14 Feb.)
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Weak economy prompts IEA to cut oil-demand estimate
The International Energy Agency, responding to feeble economic growth worldwide, has scaled back its forecast for oil demand this year by 90,000 barrels a day. The agency expects demand to rise 0.9% compared with 2012. Bloomberg (13 Feb.), Platts/The Barrel blog (13 Feb.)
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China makes headway in turning yuan into global currency
China's careful but determined effort to make the yuan an important currency in global trade is delivering results, giving the yuan an increasingly bright future, according to The Economist. "China's currency has resumed its stately appreciation against the dollar, climbing by 2.5% since its July trough," the magazine notes. "Hong Kong's yuan deposits have grown steadily since September (although they have yet to regain their 2011 peak) and the [offshore yuan] is once again trading at a premium to its onshore cousin." The Economist (tiered subscription model) (09 Feb.)
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Advisers must pay attention to affluent clients' collections
Financial advisers should give close attention to wealthy clients' collections and make sure items are inventoried, valued and insured, experts say. A Northern Trust survey found that 20% of Americans with more than $1 million available to invest have acquired collections worth enough to be considered investments. Reuters (13 Feb.)
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Geopolitical/Regulatory
Fearing currency war, G-7 affirms market orientation
Responding to Japanese policy apparently targeting a certain rate of inflation, the Group of Seven says it remains committed to market determination of currency value, in a bid to avert a currency war. Fiscal and monetary policies "have been and will remain oriented toward meeting our respective domestic objectives using domestic instruments, and that we will not target exchange rates," G-7 finance ministers and central bank governors said. The Wall Street Journal (tiered subscription model) (12 Feb.)
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U.S. firms express concerns about European transaction tax
U.S. financial institutions and other businesses argue that a proposed tax on financial transactions in Europe ignores international treaties, overreaches and would hurt the global economy. The EU is scheduled Thursday to outline the plan, which could raise as much as €35 billion annually. Financial Times (tiered subscription model) (14 Feb.), Bloomberg (14 Feb.), The Wall Street Journal (tiered subscription model) (13 Feb.)
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Financial Products
Guggenheim debuts ETF investing in Singapore dollar
Guggenheim Partners has brought to NYSE Arca an exchange-traded fund giving exposure to the Singapore dollar. The CurrencyShares Singapore Dollar Trust holds Singapore dollars directly, rather than through derivatives or short-term fixed-income securities IndexUniverse.com (13 Feb.), ETF Trends (13 Feb.), AdvisorOne (13 Feb.)
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