Disasters still impacting CPI: economists

Published 3:57  PM,  22  Apr  2011 Last update 3:57  PM,  22  Apr  2011

AAP

Economists expect rising food and petrol prices will drive March quarter headline inflation to the upper end of the Reserve Bank of Australia's (RBA) target band.

The Consumer Price Index (CPI) is expected to have risen by 1.2 per cent in the quarter for an annual pace of 3.0 per cent, according to an AAP survey of 13 economists.

The RBA aims to keep headline inflation between two to three per cent over the course of the economic cycle.

The data will be published next week by the Australian Bureau of Statistics.

For underlying inflation, which strips out unusually large quarterly movements, the median forecast is 0.6 per cent for a 2.1 per cent annual pace.

Nomura chief economist Stephen Roberts said he excepted headline inflation at 1.2 per cent for the quarter for annual rate of 3.0 per cent.

" The big rising items in the CPI are food, transportation, also education, healthcare, tobacco and alcohol and also housing under pressure from rents," Mr Roberts said.

Factors affecting inflation include the destruction of fruit and vegetable crops by flooding and cyclones along the east coast in January and the price of oil rising amid political tension in the Middle East and North Africa.

Mr Roberts said the RBA could raise the cash rate from 4.75 per cent to 5.00 per cent in May if the CPI on a broad range of goods came in on the high side.

It is contingent on what happens to the CPI next week," he said.

" If the CPI is high but limited to food prices and oil prices, or transportation then the Reserve Bank will read through it and it will be another few months before will get another rate hike.

" Quite clearly, the terms of trade are starting to motor ahead and will motor ahead quite substantially in the second quarter because we've got export price increases coming through, not least of which is coal," Mr Roberts said.

" So that means a pre-emptive central bank will want to be lifting (interest rates) before that feeds through into pressure on wages and prices, which are likely to be there into the third and fourth quarter."

National Australia Bank senior economist David de Garis expects a March quarter CPI of 1.4 per cent for annual rate of 3.2 per cent.

" For the headline rate, you've got the higher petrol prices and higher food prices, particularly the higher fresh fruit and vegetable prices, from the flooding and Cyclone Yasi.

Mr de Garis expects inflation to be strong in the June quarter as well.

" We'll probably get a lot more of these food price rises coming though in the next quarter or so.

" Thereafter expect lower and lower quarter-on-quarter growth in headline inflation but probably some increase in underlying inflation as we see some of these upstream price cost pressures feed through as well as the higher wage costs," he said.

Oil prices tipped to ease in H2 as disruption fears wane

Published 10:06  PM,  21  Apr  2011

Reuters

LONDON - Crude oil prices are expected to fall to an average of $US108 a barrel in the third quarter, a Reuters poll showed, as analysts expect current highs around $US124 to dent demand and economic growth.

While analysts increased their forecast by around $US5 a barrel for the second quarter from a poll last month, oil is still expected to fall over the next two quarters.

Worries that strong oil prices could dent a fragile economic recovery returned to the fore after Standard & Poor's warned that the United States could lose its rating.

Disturbances in the oil-producing regions of the Middle East and North Africa have powered four months of bullish price increases.

" In our base case, prices remain elevated in the second quarter this year but correct downwards in the second half, as prices start to impact demand and markets appear oversupplied." Credit Agricole CIB analyst Christophe Barret said.

" We have Brent prices returning to $US85 a barrel in the second half of 2011."

According to the analysts polled, Brent will average $US108.16 a barrel in 2011, compared with last month's forecast of $US104.57 a barrel.

From an average $US113.99 a barrel in the second quarter prices are expected to fall to $US107.96 a barrel in the third.

US crude oil will average $US98.92 a barrel this year, up from a forecast of $US96.73 in the March poll.

For the second quarter, prices will average $US104.63 a barrel from $US99.84 a barrel while on the third quarter they will average $US100.81 a barrel from $US98.53 a barrel.

Brent was trading at about $US124 and US crude was just below $US112 on Thursday.

" We continue to expect that there will be no further disruption to oil supply despite the ongoing political uncertainty in North Africa and the Middle East," Caroline Bain from the Economist Intelligence Unit said.

" This will mean that the risk premium in the market will start to fade in the second half of 2011," adding that the strong prices could lead to some rationing in the first half of the year.

Downward correction on the cards

Analysts expect the geopolitical price premium associated with potential disruptions in other oil producing countries in the Middle East and North Africa (MENA) could wane, bringing crude futures back towards $US100 a barrel.

" Risks are still skewed to the upside but if price gains pick up pace and remain at lofty levels for prolonged periods, the ultimate impact should be dampening demand and subsequent downside oil price corrections," Daniel Hwang from Gain Capital said.

According to LBBW analyst Frank Schallenberger, there is still a " massive" premium of around $US20 a barrel because of the political tensions in the Middle East.

" I consider this premium to be something around $US20 a barrel. Should the political tensions vanish, prices will fall back to $US100," Mr Schallenberger said.

Some analysts believe that talk of demand destruction could seem premature for now, although data from MasterCard shows the recent strong prices at the pump in the United States of around $US3.81 a gallon saw retail demand for gasoline fall 1.6 per cent last week on a year-on-year basis.

" Outright prices are due for a downwards correction as fears of demand destruction take their toll and the novelty of the Libyan intervention wears off," JBC Energy said.

China's inflating social unrest

Karen Maley

Published 9:19  AM,  22  Apr  2011 Last update 9:02  AM,  24  Apr  2011

Fears that surging global food and energy prices will trigger rising social tensions in China have escalated following reports of an outbreak of protests by truck drivers at Shanghai’s major ports.

The protests began on Wednesday, with drivers blocking roads with their trucks and demanding the Chinese government take action against rising fuel prices. On Thursday, around 2,000 truck drivers reportedly confronted baton-wielding police near Shanghai’s biggest port, and strikes also broke out in other ports in the city.

The truck drivers’ protest comes as many question whether China is doing enough to combat mounting inflationary pressures. China’s inflation rate hit 5.4 per cent in March, its highest level in almost three years, while food prices surged by almost 12 per cent.

The People’s Bank of China, the country’s central bank, has responded by nudging interest rates slightly higher. Earlier this month, the bank announced its second interest rate for the year. As a result, the interest rate for one-year deposits will rise to 3.25 per cent, while the one-year lending rate has climbed to 6.31 per cent. The central bank has also imposed limits on bank lending by hiking the country’s reserve requirement ratio to a record high of 20.5 per cent.

But critics point out that Chinese interest rate hikes have barely kept up with inflation, and that, after adjusting for inflation, Chinese interest rates are negative. They estimate that China’s interest rates will need to rise by a further 2 or 3 percentage points in order to combat rising price pressures.

Faced with mounting social unrest, the Chinese authorities are relying more heavily on administrative controls to combat rapidly rising inflation.

Earlier this month, Unilever, the giant Anglo-Dutch consumer goods group, decided to postpone planned price rises on household staples, such as soap, shampoo and laundry detergents, after talks with Chinese authorities. Chinese shoppers had emptied supermarket shelves of such items following reports in state-owned media that major companies were planning price rises of between 5 to 15 per cent, from the beginning of April.

The Chinese government also sets the price for diesel and other fuels, and has tried to cushion the local economy against some of the adverse effects of soaring global oil prices. So far this year, the state-set price for diesel and gasoline has increased by around 10 per cent, even though the price of crude oil in global markets has surged by more than 20 per cent. But, as the latest truck drivers’ protests demonstrate, such price controls are not sufficient to quell rising outrage over higher food and energy prices.

The People’s Bank of China – the country’s central bank – has long pushed for allowing markets to have a greater role in setting China’s interest rate and exchange rate policy. Analysts believe that China needs higher interest rates and a stronger currency in order to combat inflation.

But the central bank has powerful institutional opponents in China, who argue in favour of keeping interest rates low in order to boost economic activity. And there are also concerns that a higher exchange rate will reduce the competitiveness of Chinese exporters, many of whom already operate on wafer-thin profit margins. As a result, China’s response to rising inflation looks set to remain half-hearted.

Meanwhile, many worry that the longer the Chinese government delays raising interest rates, the more aggressive the tightening will eventually become. And this could cause Chinese growth rates to slump, and trigger a major drop in commodity prices.

Wall Street looks abroad to maintain growth

Published 3:44  AM,  23  Apr  2011 Last update 6:19  AM,  23  Apr  2011

Reuters

NEW YORK - Large blue chips, including some consumer-oriented companies, will have to show they can counter sluggish developed economies by leveraging growth in emerging markets and technology -- if Wall Street is to maintain earnings momentum next week.

Companies like Microsoft, PepsiCo and Coca-Cola, unloved on Wall Street, could turn out to be good buys if they can show they justify higher valuations than investors are now willing to give them.

" If you see these Cokes and Pepsis and these kinds of multinational consumer names post good results, I think it is going to give the perception that the equity market can overcome a lot of these domestic issues," said Nick Kalivas, an analyst at MF Global in Chicago.

Before the recession, the consumer and financial sectors benefitted from huge credit expansion. Not so any more.

Growth is now concentrated in industrial, materials and energy stocks that benefit from strong demand in emerging markets, as well as a technology sector boosted by robust demand from businesses.

Average earnings growth across those sectors amounts to almost 33 per cent in the first quarter over a year ago, according to Thomson Reuters data. That is more than double the estimated growth for the S& P 500 and towers over the five per cent growth in a financial sector burdened by a weak housing market.

Investors will also want to see at least stable performance in developed markets as they gear up for a press conference by US Federal Reserve Chairman Ben Bernanke next week. Tough questions will be asked about what monetary policy will look like after the Fed's easy money policies come to a close at the end of June.

Embracing the unloved

Growth is scarce and it is driving up valuations in sectors where it is concentrated.

During the week, investors chased a host of relatively expensive technology names like Apple and VMware. Some valuations look extreme: Cloud computing company Saleforce.comis priced at nearly 300 times current earnings.

The trailing price-to-earnings ratio in the S& P's materials sector is more than 20 times current earnings compared with 16.3 for the whole market, according to data from Thomson Reuters' StarMine.

For investors like Whitney Tilson, a hedge fund manager at T2 Partners in New York, that is creating opportunities in unloved blue chips, where he is focusing his attention instead.

" There are a lot of big-cap blue-chip companies that are trading at moderate prices," he said.

" At a time when everyone is getting enamoured with high- growth darlings and commodities, that is precisely the time when we look to play defense and own boring companies that we think have a lot of growth."

One of those less favoured companies set to report next week is Microsoft. The company suffers from a reputation for slow growth and its price at nearly 11 times current earnings clearly reflects that.

Comparing Microsoft to Apple, Mr Tilson says that the former is an inherently better business as it is focused on software with marginal incremental production costs compared to Apple's consumer hardware business.

Apple is " a fabulous business, but I'm simply pointing out that you can own a better business, albeit one that is not growing as quickly -- but still growing nicely -- for half the price in terms of price-to-earnings multiple," Mr Tilson said.

Blowout earnings from Apple and exceptionally strong results from other big tech and industrial companies drove the three major US stock indexes higher for the week. The blue-chip Dow Jones industrial average ended the holiday-shortened week on Thursday at 12,505.99, its highest close for the year and its best closing level since June 5, 2008. For the week, the Dow and the benchmark Standard & Poor's 500 Index each gained 1.3 per cent, while the Nasdaq Composite Index climbed two per cent.

US financial markets were closed for Good Friday.

Earnings frenzy, talking Fed

Next week, 180 of the S& P 500 companies are set to report earnings. Of companies that have reported to date, 75 per cent beat analysts' expectations. That is just above the average over the last four quarters, but well above the average of 62 per cent since 1994, Thomson Reuters data showed.

" As people are lowering GDP (estimated) numbers seemingly weekly, the companies are still maintaining some pretty solid revenue growth and margins are staying intact," said Jerome Heppelmann, portfolio manager and chief investment officer of Old Mutual Focused Fund in Berwyn, Pennsylvania.

" I see it more as a broad-based continuation of the economic recovery," he said. " In some cases, the technology names are going to be more exposed and more levered to it."

While earnings are driving ahead at full force, investors will also focus on the first of the Federal Reserve's press conferences. The press briefing on Wednesday is scheduled to start after the rate-setting Federal Open Market Committee wraps up its two-day meeting. Bernanke, the Fed chairman, intends to give four press briefings a year.

There will likely be questions raised about the type of monetary policy the Fed will pursue when its $US600 billion bond-buying program, known as quantitative easing, or QE2 on Wall Street, draws to a close at the end of the June.

One school of thought says that QE2 drove the rally in stocks and commodities by underwriting the government's budget deficit and forcing money that would have gone into Treasury bonds into equity and commodity markets instead.

" What happens when QE2 ends and the government starts to withdraw some of that liquidity?" Mr Tilson asked. " How much of this is just artificial, deficit-driven, money-printing stimulus? And how much of it is really genuine? I don't know the answer to that, but I worry."

Sinopec to buy 4.3M metric tons of LNG annually

Sinopec to buy 4.3M metric tons of LNG annually from Australia

China Petrochemical Corp. (Sinopec) agreed to buy 4.3M metric tons of liquefied Nat Gas (LNG) annually from Australia Pacific LNG for 20 yrs, Sinopec Group, Sinopec’s parent company, said Thursday.

Sinopec Group said the gas will be delivered from Queensland, Australia to a planned Gas collection station in China’s Guangxi Zhuang Autonomous Region and other terminals.

Besides the Nat Gas deal starting from Y 2015, Sinopec also will buy 15% of the Australian company’s shares.

Australia Pacific LNG is owned by Origin Energy Ltd. and ConocoPhillips, with each company holding 50 percent of its stakes. The Sinopec investment will reduce the two companies’ stakes in Australia Pacific LNG to 42.5% each.

The deals are subject to the final approval of both Chinese and Australian authorities.

“The deals will help China acquire more gas supplies to meet domestic demand. Sinopec will continue to seek cooperation opportunities in Australia,” said Zhang Yaocang, the Company’s Vice General Manager.

LNG is a Nat Gas cooled and compressed into a liquid so it can be transported by ship. This convenient delivery method has made LNG a leading choice for China’s gas imports.

China imported 9.34M metric tons of LNG in 2010, up 75% from the previous year. The country’s LNG consumption will continue to increase by about 20% in Y 2011, according to Chinese energy authorities.

US dollar nears all-time low

Published 5:13  AM,  22  Apr  2011 Last update 4:46  PM,  22  Apr  2011

Reuters

NEW YORK - The US dollar is hovering near a three-year low against a basket of currencies, undermined by the spectre of low US interest rates and the crushing weight of the US budget deficit, with some players looking for it to test an all-time low when players return from the Easter holidays.

The US dollar index slipped to a three-year low of 73.735 on Thursday, having slipped below its 2009 trough of 74.170. It last stood at 74.061 on Friday, about 4.7 per cent above its record low of 70.698 marked in March 2008.

Trade was thin as many markets were shut for Easter. But some participants said the greenback's downtrend looked set to resume once players come back from the holidays.

" The market was generally positive on risk, with VIX (market volatility index) falling to a new low since the Lehman shock, so that's helping to push down the dollar," chief strategist at Credit Suisse Koji Fukaya said.

Some market players also said there is a perception that US economic recovery could sputter if the White House and Congress agree to reduce the deficit with significant spending cuts or tax hikes, which would likely force the Federal Reserve to hold interest rates at record lows even as other central banks raise them.

The US dollar's slide accelerated days after Standard & Poor's slapped a negative outlook on the United States' top AAA credit rating earlier this week.

The agency said a downgrade was possible if authorities can't slash the massive US budget deficit within two years.

" Although the market's initial reaction to the S& P announcement was muted, its impact is filtering through slowly," chief strategist at Sumitomo Mitsui Banking Corp Daisuke Uno said.

" The biggest reason behind the dollar's fall is waning investor confidence in US assets. The market is waking up to the fact that fiscal problems are not limited to euro zone periphery countries."

The euro fetched $US1.4575 , after hitting a 16-month high of $US1.4649 on Thursday.

Putting a brake on the euro's rally for now were option barriers at $US1.4650. Comments from European Central Bank Governor Jean-Claude Trichet that this month's rate increase would not necessarily be the first in a series and that there were no significant signs of second-round inflationary effects also prompted profit-taking in the currency.

While the euro and other risk currencies are riding high, some investors are starting to worry about a potential setback and trying to protect their long positions by selling put options, said a trader at a European bank.

" They hold long positions in cash, but they are also selling options to guard against black swan events," the trader said.

Such flows are helping to push up euro/dollar implied volatilities in recent days, with one-month volatility rising to around 11 per cent from around nine per cent in early April.

Dollar/yen traded at ¥81.84, near a three-week low of ¥81.61 hit on Thursday.

It has broken below key support around ¥82.00, a 38.2 per cent retracement of its rise from a record low hit in mid-March of ¥76.25 to a six-month high of ¥85.53 in early April.

Its next major support level is seen around ¥80.90, a 50 per cent retracement of the same rally.

" When it comes to the dollar/yen, I see limited downside risks. Clearly there's stronger fear about intervention after the earthquake than before. Even though it's not clear whether Japan and G7 will intervene again, the fact that they carried out joint intervention last month means a lot," currency analyst at Bank of Tokyo-Mitsubishi UFJ Teppei Ino said.

The US dollar also fell to a record low of 0.8782 Swiss franc on Thursday before settling down at around 0.8862 franc on Friday.

Australian dollar could test $US1.10

Published 10:20  AM,  22  Apr  2011 Last update 0:28  AM,  23  Apr  2011

Reuters

Hot commodity prices that have propelled the Australian dollar's meteoric rise could soon push it to $US1.10, its strongest since 1982 and a level that several weeks ago was considered unthinkable, though its momentum may slow considerably from there.

The Aussie, as it is called by dealers, has had a remarkable 10 per cent climb against the US dollar since mid March to a post-floatation high of $US1.0775, buoyed by relatively attractive interest rates, high metals prices and a persistent trade surplus.

It has posted an even steeper 16 per cent rise versus the yen, as carry trade strategies that finance purchases of high-yielding currencies and assets with low interest rate currencies come back in force.

The rapid rise above parity has seen the Australian dollar strengthen by roughly 1.6 US cents a week since late March and the run, which has been driven by a variety of investors, may not be over yet. At this rate, the Aussie will test $US1.10 in the next few weeks.

At 1500 AEST, the dollar was trading at $US1.0732.

" If you think the global economy is going to continue to gradually recover, then it would be dangerous to short the Australian dollar, apart from a short-term trade," AMP Capital Investors head of investment strategy Shane Oliver said.

Momentum funds, Japanese retail investors, corporate accounts and even Asian central banks have been cited by dealers as buyers of Aussie in the past several weeks, not really fitting the pattern of a speculative-driven frenzy that can launch a currency and then just as quickly cause it to tumble as profits are taken and positions closed.

Finding a top

Technical analysts have had their work cut out for them because of the dollar's seemingly inexorable rise.

But the $US1.10 level may represent a formidable top for the currency, using Elliott wave analysis as a guide. Elliott wave tracks the very long-term historical patterns and trend changes in an asset.

The dollar may be in a corrective pattern, measured in three legs A, B and C. In this view, it is close to forming a wave C that ends at $US1.1083. Wave A extended from 2001 to 2008, when the dollar climbed to 98.51 US cents from 47.75 US cents, Reuters Matching showed.

The global financial crisis triggered wave B, a sharp fall to 60.07 US cents that is now being reversed in a wave C pattern. In Elliott analysis, the size of the move in wave C should equal that in wave A.

That means $US1.1083 could be a major top. Of course, a sustained break above that level would reset the so-called wave count and therefore change the targets of the analysis.

Further out, longer-term investors looking at the charts may want to consider how relatively well Fibonacci projections have held up.

The 161.8 per cent projection of 2010's move from 93.89 US cents to the year's low of 80.66 US cents was $US1.0236. This level had capped rallies for the past six months – that is, until the current move above parity began last month.

The 161.8 per cent extension of 2008's large decline from 98.51 US cents to 60.07 US cents in the midst of the financial crisis mayhem is roughly $US1.2225.

Back down to earth?

A march higher in the Aussie will not be in a straight line, though. The temptation to take profits, even ahead of $US1.10 or ¥90, is strong, especially among short-term investors.

For example, the net long position of Japanese retail investors who trade on margin has been trimmed to $US1.2 billion from $US3.1 billion in mid March when the latest rally in the dollar began.

These investors might be tempted to increasingly cut their still-sizable long position as the Aussie nears $US1.10.

The dollar is expected to decline to $US1.00 in six months and then 98 US cents by this time next year, median forecasts of the latest Reuters poll showed.

Those who see longer-term support for the Aussie suggest even a serious bout of profit taking will not change the uptrend, which should continue as Asian central banks look to further diversify their holdings as they accumulate more US dollars to keep their currencies from appreciating too quickly.

A growing source of support for the dollar actually comes from exporters, who provide underlying demand now that Australia is running consistent trade surpluses.

The Reserve Bank of Australia (RBA) has so far been publicly sanguine so far about the impact of Aussie strength on exporters.

Constant talk of mergers and acquisitions in the booming mining industry and expectations for more rate hikes are also underpinning the currency.

Indeed, thanks to the unprecedented mining investment boom worth hundreds of billions of dollars, the RBA is predicting the economy will grow at a healthy four per cent pace each of the next two years.

This means the RBA, which has increased rates by 175 basis points since October 2009, will eventually resume tightening after being on hold for the past five months.

While interbank markets see only a one-in-three chance of the next rate hike coming by Christmas, many analysts expect the 4.75 per cent cash rate to rise to 5.25 per cent by year-end and 5.5 per cent by mid-2012.

Long-term Aussie bulls will not wait idly in their pen.

Samsung Vs Apple

Samsung files patent lawsuits against Apple

AAPL, SSNLF

Samsung Electronics Co. (PK:SSNLF) said Friday it had filed lawsuits against Apple Inc. (NASDAQ:AAPL) in South Korea, Japan and Germany, a week after its rival sued it over allegedly violating patents and trademarks of the iPhone and iPad.

Samsung said it filed suit Thursday in the Seoul Central District Court alleging infringements of up to 5 patents by Apple.

Separate suits were filed in Tokyo citing two patent infringements and in the German city of Mannheim citing three. ” Samsung is responding actively to the legal action taken against us in order to protect our intellectual property and to ensure our continued innovation and growth in the mobile communications business,” the company said in a statement.

Apple’s lawsuit, filed last Friday in San Francisco, claims Samsung allegedly copied the design of its iPhone and iPad. Samsung said at the time it had conducted its own research and development and would contest the allegations.

Obamanomics Unravels

US President Obama viewed failing on economy

As the US President socialized this week with the Hollywood and Silicon Valley “elite” who he is looking to “Money-Up” his re-election campaign, the continuing struggles of ordinary Americans should be his foremost concern and on his front burner.

“I travel around the country, and my poll numbers go up and down depending on the latest crisis, and right now gas prices are weighing heavily on people,” Mr. Obama told a roomful of actors, producers and studio executives Thursday night at a US$35,000 a couple fundraiser at Sony’s Culver City Studios.
It was classic political understatement from a Pol that has few good options to address and remedy # 1 problem on folk’s minds, but that neither he nor his Republican rivals can easily get a handle on: the rising price of gasoline and diesel fuel.

The issue has ignited a change in the perception of the broader US economy. Voters are feeling pessimistic about this, and more so than they were during the first months Mr .Obama held office in Y 2009, and those were perhaps the darkest days of recession in the USA.

Yes, optimism about the US economy boosted Mr. Obama’s approval ratings in January, a New York Times/CBS news poll released Friday showed that about 80% of US voters now feel the economy is flat to worse. A majority of Americans, 57%, now disapprove of the President’s handling of their overall economy.

People in the US now sense a diminished connection between their troubles and the priorities of their elected officials.

The Dems, led by Mr. Obama, and Republicans have been debating deficit reduction, and American voters have been paying more and more to fill their gas tanks, which now costs more than US$4 gal across the Country and US$5.00 gal in some cities. And though the job market is improving slowly improved, many are voters are still looking for full-time employment, and their homes remain at bargain basement prices.

The fact is that deficit and debt are a problem for the elite in Washington, Wall Street and other Countries, and so as a motorist drives down the street?and see the price of gas advertised at US$4.00 + gal, it points out in real terms that something is not right.

Mr. Obama took a shot at the problem this week when he announced the creation of a task force to find a “Scapegoat”, at the US DOJ to investigate fraud and manipulation in the gasoline markets.

But, the fact is that grandstand act will not go far to reduce the pressure Mr. Obama to release emergency stockpiles of Crude Oil, and open up drilling for Crude Oil in the Gulf of Mexico, where he shut it down last year. What he is not telling the voters that the main reason for the high prices for gasoline is that there has been huge shipments of the US stock pile to Central and South America recently

Ok, he met with voters and donors in California, Nevada and Virginia, and indicated he did not think Crude Oil prices were the only problem he faces as he heads into his re-election campaign. “When I talk to ordinary folks, they are not always paying attention,” Mr. Obama said at the event in Brentwood, California. “If you ask them about Medicare, they say, ‘I love that program, but I wish government was not involved in it’.” But, it is a government program and the voters do not know it.

Americans’ have an attention deficit that is problematic and will go from bad to worse for President Obama now more than ever, as he leads his fellow Democrats into tough congressional negotiations over the size and scope of government and the future of healthcare. Stay tuned…

The NYT/CBS poll showed 77 per cent of independent voters – the crucial voting block that helped Mr Obama win election in 2008 but who abandoned Democrats in the midterm elections in 2010 – believe that providing healthcare to the elderly is the responsibility of the federal government.

If Mr Obama can succeed in convincing those voters that the long-term deficit reduction plan proposed by Republicans would shift the burden of Medicare from the government to individual beneficiaries, possibly destroying the programme, he will have come a long way to bringing those voters back.

The problem is that for now, they are too busy looking at their petrol bill to pay much attention.

iPhone 5 Could Be Getting A Big Design Change After All

Despite persistent chatter that says the iPhone 5 will look just like the iPhone 4, Joshua Topolsky is reporting iPhone 5 will get a radical overhaul in the design department.

Topolsky had previously reported the iPhone 5 would be redone. He has some new details on how the look will change. He created the mocked up image, which is included on the right here.

As you can see, the phone is supposed to be tapered, it will have a minimal bezel, and the home button will be bigger, and could accommodate additional swiping gestures.

Topolsky hedges his report, saying, " this info isn’t fact," and " The versions of devices our sources are seeing could be design prototypes and not production-ready phones."

(We'd also think it's possible his sources are seeing early versions of what could end up being iPhone 6.)

Regardless, he asserts, " there are strong indications that Apple will surprise a public that’s expecting a bump more along the lines of the 3G to 3GS."

Where To Find The “Anti-Dollar” (Hint: It’s Not Gold)

Unlike gold, the “anti dollar” can be used to maximize other investments. I’ll reveal this currency in a moment.

But first, why would you want an “anti-dollar” in the first place?

The US has a multi-decade history of borrow and spend. Worse than that, it’s more extreme today than ever before. The government has to borrow about half of what it spends. And policy makers are printing money like crazy to “stimulate” the economy (even if they do give it fancy names like “quantitative easing”).

If there is more money but the same amount of things to buy with it, prices of the things go up, measured in money. This is inflation, and it shows up in different places at different times. Whether its food, gasoline or house prices.

This might sound a bit weird at first, but money has a price like everything else. Looked at in reverse, inflation means the “price” of money has gone down, when measured in “things.” Money has lost value. It buys less.

One way to protect yourself from inflation is to have investments in stronger currencies. These can be held as cash, bonds, stocks, or real estate. Where I live in Argentina, the locals keep their savings in dollars, because they keep their value better than Argentine pesos. Everything’s relative. But there are much stronger currencies than the US dollar.

One such strong currency is the Singapore dollar (SGD).

A hedge fund trader who is a friend of mine recently described it to me as an “Asian version of the Swiss Franc”. This is a big compliment. Switzerland’s currency has been strong for decades, and is well known as a safe haven in times of trouble.

The reason that Switzerland, and now Singapore, have strong currencies is that these countries live within their means. While the US borrows and spends, these countries earn and save. This is how people get rich, and it’s the same for countries. No one got rich by spending money faster than they earned it.

In 2009, Singapore’s current account balance – the net money coming into or going out of the country – was a surplus of $26 billion. That was just behind Saudi Arabia, the world’s biggest oil exporter. By comparison, the US had a deficit of $420 billion!

Singapore has very low external debt. That means it owes very little to people overseas. Again this is the opposite of the US, which owes trillions to places like China, Japan and Saudi Arabia.

And foreign exchange reserves – the country’s rainy day piggy bank – work out at $40,000 for every man, woman and child.

In the future, Singapore has a crucial advantage over Switzerland. Switzerland sits in the middle of the “old continent” of Europe, which looks set for a decade of slow growth and stagnation.

But Singapore sits in the middle of Asia – in fact right on some of the busiest shipping lanes in the world. And Asia is home to 60% of the world’s population, and with many decades of fast economic growth ahead of it.

This means that over time the Singaporean dollar is likely to gain value against the US dollar. In fact over the past five years it’s gained over 23% in value, measured in US dollars.

That’s a really useful kicker to any type of investment. So I’m on the hunt for ways to profit from the Singaporean “anti-dollar”. You should be, too.

Regards,

Rob Marstrand
for The Daily Reckoning

Here's What You Need To Know To Start A Franchise In China

Image: Flickr Commons

McDonald’s, KFC, Burger King, and Papa John’s have already set up shop in China.

Restaurant franchisors are moving into China for obvious reasons: 1.3 billion people, 230 million middle class consumers (as of 2005), the world's highest economic growth rate in the last 20 years, WTO membership, and more favorable franchise and contract laws make it a place for brands to grow rapidly.   

Opportunities are not only in the restaurant sector. Growth prospects across service industries that typically use franchising (real estate, retailing, hotels, etc.) abound in China.  The middle class in China is projected to grow to 600 million in the next 10 years, and the Chinese economy is projected to become the largest in the world by 2050.

Franchising is a niche strategy, essentially a contractual relationship between a franchisee and a franchisor regarding trading rights and obligations.  The franchisee has the right to market the brand and/or process of a franchisor in return for a fee and ongoing royalties. In the case of business format franchising, the franchisor transfers both the know-how and the brand of the business, and often provides additional support.  As firms go global, they face differences in the operating environments, economics, politics and culture.  Successful international franchising rests on the ability to adapt strategy that worked at home to other areas of the world.

There is a dark side, however, to franchising in China.  Franchising regulations have changed multiple times, creating an unstable environment for franchising contracts. The new regulations require a franchisor to invest and own outlets, rather than franchise them before being able to sell franchise rights in the country, for example. 

The Chinese market is still not culturally used to playing by the franchising rules, and remains uncommitted to protecting intellectual property rights.  Franchising requires a high degree of trust, legal protection, and recourse.  To succeed in the Chinese market, the best strategy is to enter one of the major cities using company-owned stores.  In this way, the franchisor can gain familiarity with the cultural, economic and legal environments.  Gaining an understanding of the nuances of the local market can help a company assess the potential for franchising.  This is what most of the large multinational chains, such as McDonald’s, KFC and Yum have done.

More caution is in order. While legal reforms have taken place, the laws still seem archaic and sporadically enforced.  And there remains insufficient protection for copyright, trademark and intellectual property.  Add the language barrier, the cultural distance between the West and China, and the fact that many Western brands are unknown in China, and it's clear that this is a challenging environment that requires careful consideration and planning.

Many global franchising companies franchise a very small percentage of their total outlets in China today while others, such as Kodak, do this extensively, even though they don’t use franchising in their home market.  Kodak, for example, wanted to create channels of distribution for its film, and thus developed a quasi-franchising film-development retail model for Kodak Express in China, relying on the promise of franchisees to buy paper and equipment from Kodak.  Royalties as such were not charged.

For those interested in the China market, Shanghai is an excellent entry point because the government has nurtured Shanghai as a magnet for economic growth.  In addition, the per capita income in Shanghai is over $11,000 in purchasing power parity (Kwan, 2002), among the highest in mainland China.  Shanghai offers numerous economic incentives, an increasingly westernized population, and large numbers of tourists and expatriates.  Shanghai is truly one of China’s top mega-cities.

In Shanghai, the fundamentals of successful restaurant franchising are similar to those in the West: consumers want flavorful food, delivered quickly and efficiently, in a clean, pleasant environment, and at an affordable price.  One recent survey of Shanghai residents conducted by the author revealed that consumers rated taste, service, atmosphere, price and brand name in declining order of importance when selecting a restaurant.

Given the cultural, social, political and infrastructure differences in Shanghai, complete standardization is unlikely.  The key is to assess what adaptation will be necessary.

Product - The product includes the novelty, service, atmospherics, and overall experience that the restaurant provides.  Traditional domestic restaurants are not direct competitors. Franchisors may be more successful by emphasizing the “Western-ness” of their products, making standardization viable.  Of course, minor modifications will be required to adapt to local tastes.  For example, Starbucks in Shanghai offers a sausage Danish while McDonald's serves seafood soup.

Promotion - Adaptation will depend largely on the product strategy.  Standardized products make a standardized message possible, while differentiated products require tailored messages.  Pizza Hut, for example, localized its business by decorating with large red " Double Happiness" signs, decorative firecrackers, traditional poetic couplets and the traditional Chinese character Fu (fortune) changing the design of the red roof to a Chinese feather calligraphy brush painted in red offering a customized " Xinyi" (goodwill) pizza from the Chinese New Year to the Lantern Festival.

Pricing - First-time visitors to Shanghai are amazed at the low prices of local goods.  International franchisors need not use local restaurant prices for reference.  As long as the product is of high quality, and presents a new concept of consumption, a higher price will signal quality and credibility.  But remember that average income is substantially lower than in the West.  Effective strategy might include portioning some products in sizes that can be purchased at very low price points.  Both McDonald's and KFC ran one Yuan (about 12 cents) ice cream specials to entice customers into the store.

Distribution - Three location strategies seem viable:

• Downtown - The commercial and cultural center, it boasts the greatest variety of restaurants.  But high rents have restricted growth.  Only 2,100 of over 29,000 restaurants are located in Xuhui and Jing-an, the busiest sections and the center of the downtown area.  Foreign restaurants are concentrated in Huaihai Lu, Maoming, Nan Lu and Henshan Lu -- streets of the French Quarter in old Shanghai.
  
  
• Special Economic Zones - Pudong, a financial center and the site of many multinational corporations and government offices, has 2,700 restaurants. Substantial residential construction is also underway.  Hongqiao, west of Shanghai, boasts over 1,300 restaurants and is a favorite of expatriates and foreign investors.
  
  
• Upscale Residential - About two million people have moved to suburban residential areas, made possible by numerous infrastructure projects that have increased the commutability of city workers.
  
  
• Target Markets - Three segments represent attractive targets for international restaurant franchisors.
  
  
• Foreigners and Expatriates - Short and long-term expatriates, visitors and tourists have relatively high incomes, and a willingness to pay a premium for familiar food with consistent quality.  Continued foreign investment will result in a growing expatriate population as well as an increase in tourism.
  
  
• Business People and Young Professionals - Includes educated professionals in the 25-50 age group.  They are likely to be the most receptive to new ideas, value the foreign dining experience, and possess sufficient discretionary income.
  
  
• Young Emperors - Preschool through college-age children.  There are an estimated 1.25 million one-child families in Shanghai.  Young Emperors command the attention of the extended family and have a substantial influence on family buying decisions.  A foreign restaurant that attracts these children will attract their parents and extended family as well.

Restaurant franchisors that miss the opportunity to enter China now will face intense competition from early entrants. It will be difficult for restaurant franchisors entering now to beat the scale and profitability of the already entrenched McDonald's and KFC. Nonetheless, the market is vast and great potential exists in many niches.

Despite the potential, doing business in China is difficult. The language and culture are remarkably distinct.  Franchisors should seek local partners who can help them navigate the local business environment.  A partner in the same industry with channels of distribution, industrial connections, and guanxi (personal connections) can greatly facilitate the success of the franchisor.