The wrap-up from Davos: One of the best weeks ever! A big dump in mid-January left a solid base of 1.5 metres in the valley and 2.5 metres at the summit. This was topped up last week, bringing a nice dusting of powder on the immaculately groomed slopes of Davos and nearby Klosters.
Temperatures were cold, dropping as low as 20 below zero but winds were generally light. Best skiing was to be had on the Jakobshorn and Parsenn. The only drawbacks to the otherwise perfect conditions were reports of crowds of rich old people on the Rinerhorn – and too many Americans, refugees perhaps from the horrific ski season in the United States.
Forecast: cautious optimism.
In the wake of the World Economic Forum, the US Congress voted for another $US1.2 trillion ($1.1 trillion) increase in the debt ceiling and borrowings rose by $US120 billion to $US17.5 trillion in just one week.
Can President Barack Obama make it to the election in November without another increase in the debt ceiling? It will go down to the wire.
The good news is the US economy is displaying signs of recovery, albeit a tepid one. It will need to recuperate to meet its interest bills alone.
The bad news is that Europe seems to be getting worse, although bond yields have been coming down from red-alert levels thanks to the bellicose stimulus by the central bank.
This year, the G7 nations need to borrow $US7.3 trillion – yes, seven thousand three hundred billion. Twelve zeros. They have to come up with $US570 billion just to pay their interest bills, more than twice what they thought they would need at last year’s chinwag in Davos.
Governments will be competing with their corporations, which have taken advantage of desperately low interest rates to gear up. They need to roll almost $US1 trillion this year as well. All up, against prospects of slowing growth in Europe and meagre growth in the US, about $US18.5 trillion in debt has to be rolled over in the next four years.
Is this mathematically possible? Markets have risen of late, though volumes have been pitiful, almost foreboding. Still, equities are the only place to get a half-decent yield, and this is sustaining the sharemarket.
Also competing for capital on global credit markets are the good old Australian banks. Roughly a third of their funding is sourced from overseas. This is why they cry poor. It is pre-emptive crying. If these markets dry up, so do the funds for the hallowed Australian mortgage market.
The banks’ problem is that they have been crying poor forever, it seems – while drumming up record profits and ratcheting their bonuses into the stratosphere – so when the crunch comes, or if it comes, few may lend credence to their wailing and gnashing of teeth.
The issue comes to the fore again soon, as the big four quarterly updates start to flow in the coming week before the Commonwealth Bank unveils its results on February 15. Macquarie Equities is predicting a net profit of $3.62 billion for the half year, up a mere 3.4 per cent. On the Macquarie prognosis, ”weak asset growth and margin pressures” bring a ”sombre tone” to this bank earnings season.
And since demand for credit is unlikely to suddenly rebound, expect cost cuts to keep earnings ticking along. This week’s pogrom by Westpac on the jobs front is a sign of things to come.
Down the road, a few hours’ west of Davos, is the tax haven of Zug, where the boys from Glencore finally went public with their bid to mop up Xstrata. The $80 billion merger proposal, slapping together the secretive commodities trader with the big commodities producer, should bequeath a cleaner, less shady structure.
The market likes it; it is not so enamoured of murky cross-shareholdings and related party set-ups these days. And the deal should have implications for Rio Tinto and BHP, which also boasts offices in Zug. It presents an integrated, even bigger player in coal, copper and iron ore, and one with big assets in Australia.
If this were the deal of most moment, the deal of most interest this week was the Facebook float which has sent capital marketers and attendant media into paroxysms of delight.
Will it go up, or down? Is it a Google, or a MySpace?
Did you know that one is permitted no more than 5000 friends on Facebook? Surely this is discrimination against highly friendly people. At least they allow their users to ”friend” anybody.
Besides bringing friends together who have never and may never meet, this is a business which has tapped into global narcissism and prurience like no other. There are 100 billion friendships on Facebook and 845 million active users of the website, and 483 million daily.
Still, priced at $US75 billion-plus, the float looks expensive. Net profit is just $US1 billion and revenue $US3.7 billion. We are talking a price-earnings multiple of 75 when Google trades on 19.5 and the mighty Apple on 12.5.
And, as opposed to Apple, which just handed in a 100 per cent rise in quarterly profit, Facebook’s growth was 40 per cent last year, already tailing off from its rate of 165 per cent the year before.
A terrific reach and a beautiful margin, but unless they can refashion their model to dramatically leverage their users, without intruding too much, Facebook’s price is a ”dislike”.