Changing of the Foreign Policy Guard

Posted on February 21, 2013 by Brett Calhoun

In his first official address, United States Secretary of State John F. Kerry promoted the idea of America increasing its international diplomatic engagement, despite tough economic times.   “Deploying diplomats today is much cheaper than deploying troops tomorrow,” Secretary Kerry was quoted as saying.   Secretary Kerry’s stance indicates he intends to be a strong advocate for the U.S. Foreign Service.

Secretary Kerry gave several other indications of his priorities in his new position.  He touched on increasing economic ties with Africa, a continent that hosts ten of the world’s fastest growing countries and with which China has become far more invested than the United States.

Secretary Kerry also called for comprehensive action on climate change, sparking expectations of more bilateral green energy projects.  Some commentators also wondered whether TransCanada’s Keystone XL pipeline may not be given approval.  The pipeline is intended to transport bitumen, described by many environmentalists as ‘dirty oil’, from Alberta to the U.S. Gulf Coast and has drawn a lot of controversy.

Next week, Secretary Kerry begins a trip that will take him to several European and Arab states.  The focus of the European discussions will be the Euro Zone’s fragile economy.  In the Middle East, Secretary has highlighted his concern about the Syrian civil war.

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Changing of the Foreign Policy Guard

Posted on February 21, 2013 by Brett Calhoun

In his first official address, United States Secretary of State John F. Kerry promoted the idea of America increasing its international diplomatic engagement, despite tough economic times.   “Deploying diplomats today is much cheaper than deploying troops tomorrow,” Secret

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A Girl’s Best Friend, Part 2

Posted on February 20, 2013 by Brett Calhoun

Diamonds are a USD $13.5 billion industry annually.  Like oil, diamonds are often a key component of Gross Domestic Product (GDP) for a producing country.

About 65% of the world’s diamonds are sourced in Africa.  Of African countries, Botswana is a top producer along with Zimbabwe, South Africa and Sierre Leone. Diamonds account for about 45% of Botswana’s GDP.  The fall in diamond pricing resulted in the value of Botswana’s diamond exports dropping 20% in 2012, though a growing indigenous cutting and polishing industry actually improved the country’s balance of trade.

Some exporters are also contending with trade restrictions. Zimbabwe has been under European Union trade sanctions since 2002 due to the government’s human rights abuses and violations of democracy. These sanctions include an import ban on diamonds produced by the state owned Zimbabwe Mining Development Corporation (ZMDC).  This past Monday, the European Union agreed to lift sanctions on ZMDC within one month of Zimbabwe holding free and fair elections.

Consumer awareness of the diamond industry has grown in the past decade, with more consumers concerned about ‘blood’ diamonds fueling wars and forced labor in African countries. Such was the case in Sierre Leone prior to the end of its civil war in 2002.  Now the majority of diamonds are regulated the Kimberly Process, an international certification scheme to which countries are admitted to upon committing to a transparent and worker safe mining environment. Critics contend the Kimberly Process is ineffective. And in fact some of Zimbabwe’s diamonds, recognizable by their green/brown tint, have made their way to Antwerp despite the ban.

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A Girl’s Best Friend, Part 1

Posted on February 19, 2013 by Brett Calhoun

This past Monday evening, 8 armed men pulled off a diamond heist at Brussels Airport.  The thieves, armed with machine guns, entered and exited through a hole they had cut into a security fence.  They made away with an estimated EUR €50 million in uncut diamonds.

Antwerp, Brussels is the site of the world’s largest diamond trading center.  Approximately EUR €150 million worth of diamonds moves in and out of the city on a daily basis.  The heist has sent shockwaves through the industry and will potentially impact diamond prices.

Diamond prices fell by 12% in 2012, hit by softening demand as many consumers continued to grapple with weak economies and less discretionary income.

The price decline has definitely been felt by diamond companies. DeBeers, a multinational diamond miner, announced a 45% drop in 2012 operating profits due to lower sales and prices.  DeBeers sells approximately 70% of the world’s uncut diamonds.  Many articles have been written about DeBeers’ control of the diamond market (what some name a cartel) leading to the artificial inflation of diamond prices.  Traditionally during recessionary periods, DeBeers has stockpiled diamonds to limit supply and maintain prices.  However this period of economic weakness has continued for too long making the practice prohibitively expensive.

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Turbulence in the Airline Industry

Posted on February 18, 2013 by Brett Calhoun

The airline industry is seeing a lot of activity.  The year kicked off with the announcement of the US Airways – American Airlines merger, which still must be approved by regulators.  If the merger passes all anti-trust issues, it will create the world’s largest airline, allowing US Airways to compete with Delta and United Airlines.  Both Delta and United have undergone large mergers of their own in the past few years.

While the industry as a whole has been profitable (2012 net profit of USD $6.7 billion on revenues of USD $637 billion), many established carriers have been under severe pressure from discount competitors and high fuel prices.  Additionally, the recession has meant fewer travelers. The above mentioned American Airlines declared bankruptcy in 2011. The challenging environment has led many airlines to attempt to cut labor costs, their largest expense after fuel, which has incited conflict with labor groups.

Recently employees of Iberia Airlines, which merged with British Airlines in 2011, went on strike  to protest pay cuts and layoffs that culminated today in clashes with the police.  Other smaller airlines that are in the midst of or only recently ended labor strikes include Oman Air, South African Airways, Thai Airways, Tunis Air and others.

The profitability of the airline sector is expected to improve in 2013; the International Air Transport Association projects a slight net profit margin increase from 1% (in 2012) to 1.3%.

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The UK Holiday Season Has Been a Thrifty One

Posted on February 17, 2013 by Brett Calhoun

Holiday retail sales are usually a strong revenue boost for companies producing consumer goods. People shopping for Christmas, Hanukkah, Eid and general gift giving, as well as the many events like office parties, lead to increased consumer spend. Increased spending is typically seen throughout the holiday season which is considered to end at the beginning of February.

Retailers in the United Kingdom have not been so lucky this year. Retail sales in January dropped due to a combination of bad weather, inflation pressure and a generally fragile economy making potential customers feel poorer and less willing to spend money. The UK Office of National Statistics released some stark figures yesterday, revealing that sales volumes had dipped 0.6% month over month. The dip is especially startling when compared to recent analyst projections of a rise in sales volume of 0.4%.

Unfortunately, economic growth is expected to remain weak and inflation is expected to remain high in the UK, continuing to reduce the buying power of consumers. Retail sales account for approximately 20% of the UK’s Gross Domestic Product. Some blame the UK’s weak growth on the austerity program being implemented by the conservative government. There is a lot of fear of falling back into a recession which would be a great strain for the already battered UK economy to endure.

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Bermuda: Reinsurance Capital

Posted on February 16, 2013 by Brett Calhoun

The Caribbean island of Bermuda is best known by laymen for its beautiful sandy beaches and accompanying resorts.  In finance circles, it is known as the unofficial capital of the reinsurance industry.  Reinsurance is insurance for insurance companies.  Individuals and companies seek to reduce or share their risk by purchasing insurance. Insurance companies must also pass on some of their portfolio risk. Hence the re-insurance industry was born.

At the end of January, Fitch Ratings, a credit ratings agency, issued a positive outlook for Bermuda reinsurers .  The industry lived up to these expectations last week when three of Bermuda’s largest reinsurance companies; EverestRe, RenaissanceRe and PartnerRe, posted profits despite the impact of Hurricane Sandy. PartnerRe reported fourth quarter 2012 net income of USD $112 million, a dramatic rise over a USD $18 million loss in the same period the previous year.  For the same period, EverestRe reported net income of USD $59 million, a 43% year over year increase. Finally, RenaissanceRe reported USD $49 million, a 49% year over year decline, for the same period.

Bermuda has used the reinsurance sector to diversify away from tourism and agriculture, other key components of the country’s economy. The sector has been critical in sustaining Bermuda’s economy during the worldwide recession.

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The Meat Industry Takes a Reputational Blow

Posted on February 15, 2013 by Brett Calhoun

Beginning in January of this year, horse meat has been found in several ready-made beef products such as Findus frozen lasagna.  Up to 16 countries in Europe might be affected with confirmed cases in the United Kingdom, France, Ireland and Sweden.  Third party suppliers are under suspicion of intentionally and fraudulently supplying horse meat instead of beef.  In some regions of Europe, horse meat is cheaper than beef.  The danger is that horses that have not been raised as livestock but for other purposes, such as racing, may have medicines in their systems that are harmful to humans.

The high and climbing number of countries impacted by the scandal illustrates the complexity of the food industry in Europe.  Indeed in most Western countries, food might travel thousands of miles before consumers take one bite.  Regulations, oversight and enforcement of regulations can differ country to country, region to region.  Thus, when a problem is discovered, it can be difficult to trace its source.

In addition, mass retailers have strong buying power which they leverage to get low prices from meat processors.  The processors in turn pressure their suppliers for better pricing.  The pressure, combined with the fact that DNA testing is not standard, can make cheaper horse meat an appealing ‘substitute’ for suppliers.

The meat industry now faces losses in consumer confidence, similar to the Mad Cow Disease (bovine spongiform encephalopathy) scares in 1999 and 2001.  Findus subsidiaries in South Africa, Italy and Switzerland have already released campaigns assuring consumers that the company’s tainted products were not sold in those respective countries.   To rebuild its reputation, the industry will have to demonstrate improved supervision and commitment to quality.

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Valentine’s Day as Economic Stimulus

Posted on February 14, 2013 by Brett Calhoun

Valentine’s Day is a revenue bonanza for companies selling candy, flowers and jewelry.  The hospitality industry, restaurants and hotels especially, also benefit greatly.  A previously very Western holiday has spread across the world with regional and national variations.

In the United States, Valentine’s Day spurs an estimated USD $20 billion in consumer spending.  Two thirds of that spending is on food,  a significant portion of which is candy.  Chocolate is the most gifted item; 36 million of the iconic heart shaped boxes are projected to be sold this month.   Large candy corporations such as Mars Inc. benefit from having a high margin product (key raw ingredients such as sugar are relatively cheap) sell in high volumes.

Valentine’s Day also drives the USD $11 billion chocolate industry in Japan.  Half of the chocolate industry’s proceeds are received in February.  Tradition there differs from the United States and Western Europe.  In Japan, gift-giving is one directional; women buy presents for men.  In the U.S. and U.K.  men are estimated to spend twice what women spend on Valentine’s Day celebrations and gifts. Japanese men reciprocate on another holiday, White Day, which takes place in March.

The popularity of Valentine’s Day is a more recent phenomenon in India, where it has developed into an estimated as a USD $27 million industry.  In India, Valentine’s Day is not confined to a single celebration; it is actually a week of romance.   The week begins on February 7th with Rose Day, followed Proposal Day, then Chocolate Day, Teddy Day, Promise Day, Kiss Day, Hug Day and finally the penultimate, Valentine’s Day.  Like in the United States, Indian men far outspend women in celebrating the holiday.

An oft repeated axiom is that Hallmark invented Valentine’s Day in its present form in the United States.  It seems Hallmark or another corporate Valentine beneficiary would do well to take inspiration from the Indian market and make Valentine’s Day, Valentine’s Week.

Happy Valentine’s Day!

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Investors Ignore North Korea’s Nuclear Test

Posted on February 13, 2013 by Brett Calhoun

The South Korean stock market, the Kospi Index, barely reacted to North Korea’s nuclear weapons test that occurred this past Tuesday, falling only 0.26% in that day’s trading and since gaining ground.   In the two prior North Korean nuclear tests  foreign investors panicked and withdrew from the market, while the hoarding buying practices of citizens actually sent certain stocks (such as companies selling packaged foods) higher, resulting in high volatility overall. 

Currently the sentiment is that the ‘misbehavior’ of North Korea does not affect the strong fundamentals of South Korea.  South Korea’s incoming president, Park Geun-hye, takes office on February 25th and is thought to be moderate in her stance on North Korea. That is not to discount the  threat posed by North Korea’s possession of nuclear weapons.

North Korea’s nuclear test evoked the ire of adversaries and allies alike.  North Korea’s staunchest ally; China, on which it depends for significant aid and support against United Nations sanctions, openly and vehemently opposed the nuclear test.  It is worrying that China seems to have much less influence with North Korea than was originally thought.

The United Nations Security Council condemned the nuclear test and called an emergency session to discuss additional sanctions on South Korea.   The international community is hopeful that China will be more supportive of any new round of sanctions. South Korea has put forth a measured military response deploying its missile defense system.

It seems that North Korea’s intentional self-isolation cuts both ways; while it seems no one can sway the country from its nuclear pursuit, its actions also have a smaller impact on the region and the world.

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