Shaw Capital Management Investment Financial Market Summary 2010

Financial Markets: Sentiment in the financial markets improved considerably over the past month. There was less concern about the possibility of a move into a “double-dip” recession; and fears about sovereign debt defaults also eased.

The improvement in conditions intensified the debate about the relative merits of austerity measures and further stimulus in the current situation, and revealed a significant difference in the approach of the Fed and the European Central Bank.

Equity Markets: Most of the equity markets recovered strongly from the falls that had occurred at the end of June, helped by some encouraging corporate results in the US, and the relaxation of tension about debt defaults in Europe.

Wall Street led the rally, and markets in Europe were able to follow the upward trend, with the strength of the German economy providing significant support. The best performance amongst the major markets occurred in the UK, as investors continued to react favourably to the proposed measures announced by the new UK government to reduce the huge fiscal deficit. The worst performance amongst the majors occurred in the Japanese market as economic and financial conditions in Japan continued to deteriorate. Government bond markets received some support during the past month from the easing of tensions in the sovereign debt markets in Europe. The recent “shock and awe” support operation agreed by member of the euro-zone, and the decision by the European Central Bank to buy the bonds of some of the weaker countries, has provided some reassurance for investors; but considerable uncertainties remain about prospects for the bond market.

The Fed is suggesting that further stimulatory measures might be necessary, whilst at the same time the ECB is warning that reductions in spending programmes and increases in taxes were now necessary, in Europe, but also elsewhere in the industrialised world. Movements in bond markets have therefore been fairly limited over the month.

Currency Markets: The feature of the currency markets has been the swing in sentiment. This has allowed the euro to rally strongly, helped also by the improving sentiment about sovereign debt defaults; and sterling has also moved higher after the announcement of measures to reduce the fiscal deficit in the UK and the more favourable economic news on the UK economy. The best performance; has been achieved by the yen, as its “safe haven” status has been further enhanced by the more serious problems elsewhere in the currency markets.

Short-Term Interest Rates: There have been no changes in short-term interest rates in the major financial markets over the past month.

Commodity markets have benefited from the general improvement in financial markets over the past month. Significant gains have occurred in base metal prices, and in the prices of wheat and coffee amongst the soft commodities.

Precious metal prices have fallen back, and oil prices are basically unchanged over the month after rallying strongly from recent lows.

At Shaw Capital Management we give you the information and insight you need to make the right investment choices.

Shaw Capital Management Investment Equity Markets 2010 Part 1

Equity markets have rallied over the past month, sentiment has swung once again towards a more optimistic view of the prospects for the global economy, and concerns about sovereign debt defaults in Europe have eased.

Wall Street has recovered from the sharp sell-off in late-June, helped by some encouraging second quarter earnings reports; and markets in Europe have responded, with the UK market providing the best performance over the month. The worst performance amongst the major markets has occurred in the Japanese market because of disappointing economic news and increased political uncertainty after the setback for the government in the recent election.

The general improvement in the markets over the month is a welcome development. The gloom in April and May about economic prospects was clearly overdone. The US economy is performing as expected, and the Chinese authorities are clearly intent on preventing their economy from overheating.

The global economic recovery will therefore proceed at a slow pace. The sovereign debt crisis in Europe remains unresolved and defaults remain a real possibility. The risks have therefore increased in the bond markets, and this has provided support for the equity markets. So long as monetary policy remains supportive, the global recovery should eventually produce a sustainable improvement in bond prices; but some of the current uncertainties in the bond markets must be resolved before this can occur. The performance of the US economy remains the key factor is assessing the prospects for the equity markets. There has already been a request to Congress for additional spending programmes “to keep the economic recovery on track”, and although there has been no response so far, some action may become necessary. The excess gloom has disappeared, fears about sovereign debt defaults in Europe have eased, and there have been encouraging corporate results from a number of major companies, including Microsoft, Caterpillar, UPS, and Intel. Problems still remain in the banking sector, and have been reflected in the fall in earnings from investment banking at Goldman Sachs, Citigroup, Bank of America, and JPMorgan; but overall investors have been reassured that corporations are coping fairly well with the present situation. Mainland European markets have also recovered from the sharp falls. There has been encouraging news about the economic background in the euro-zone; fears about sovereign debt defaults have eased; and the latest “stress tests” have only revealed weaknesses in seven of the ninety-one banks that were included in the survey.

Euro Markets have therefore been able to follow the upward trend on Wall Street, and regain recent losses, despite the uncertainties that have still to be resolved.

Conditions are clearly continuing to improve in many areas of the euro-zone economy, and especially in

Germany, helped by the big fall in the value of the euro in the first half of the year, and the strong growth in many of the export markets in the developing world. German companies have taken full advantage of the competitive currency and the available export opportunities, and so, even though domestic demand has remained relatively weak, the German economy is now expected to grow by around 2% this year.

The situation is very different in Greece, Spain, Portugal, Ireland, and even in Italy, and these weaker economies are obviously acting as a drag on the overall performance of the area. The latest purchasing managers indices for both the manufacturing and services sectors of the area are higher, and argue against a pessimistic view of growth prospects; but for the moment we have left unchanged our modest forecasts of overall growth around 1.5% this year. The European Central Bank is clearly more optimistic about prospects. So far it has not raised its growth forecasts; but based presumably on the assumption that the recovery from recession is soundly based and self-sustaining, its reaction to the present situation contrasts sharply with the cautious view of the Fed. The president, Jean Claude Trichet, is arguing that further public spending cuts and tax increases should be introduced immediately, especially in Europe, but also elsewhere in the industrialised world. “Without the swift and appropriate action of central banks” he recently argued, “and a very significant contribution from fiscal policies, we would have experienced a major recession. But now is the time to restore fiscal sustainability”. It is not clear what the consequences of this view might be; but the central bank might even be encouraged to tighten monetary policy as the present programme of fiscal retrenchment develops.

At Shaw Capital Management we give you the information and insight you need to make the right investment choices.

Shaw Capital Management Investment Portfolio Performance 2010

We have made no changes in our portfolios this month. The swing in sentiment towards a more favourable view of prospects for the global economy is encouraging, and has been reflected in the recovery in equity prices. We have therefore decided to maintain our holdings in Euro & US equities. We continue to retain our 10% holding in cash deposits as a contingency measure. The sovereign debt crisis remains a very serious threat, thus we have zero exposure to bonds.

World Growth

There has been much talk in recent weeks of a ‘double- dip’ recession, as some weak figures have come out. However wobbles of this type are fairly typical in a recovery from a severe recession. In our view the recovery remains in line with the path we have laid out before. This was for a world recovery that would be restrained by raw material shortages, which would put constant upward pressure on their prices. So we see world growth this year at around the 4.5% rate, well below the 5.5% figure being registered at the height of the boom; notice that the world is not ‘catching up’ the lost output of 2009, rather it is reverting to a slower growth path from the lower output base. Even with this pattern raw material prices have been very strong, with oil for example near the $80 a barrel mark. The rises in these prices forced China and India to tighten policy and restrain their fast recoveries to prevent inflation. Even now in India inflation is not yet under control, having reached 13.9% in May, and policy will need to tighten further. On a lesser scale inflation has become threatening in a number of emerging market countries. So what we are seeing is that the fast-recovering countries mainly in East Asia are having to restrain their growth. Meanwhile in the OECD countries where inflation remains muted … or in the case of Japan deflation remains entrenched; growth is much weaker than in East Asia. The reason for the disparity of growth lies in the disparity of productivity growth.

In East Asia the movement of people out of low- productivity agriculture into high-productivity manufacturing using the technology imported from advanced countries implies huge productivity growth. In advanced OECD countries productivity growth is dependent on innovation, a much slower process. So we observe a world in which productivity and so GDP growth is restrained generally by tight raw material supplies and in which the OECD countries growth relatively more slowly also. This adds up to a weak recovery in OECD countries, which is what we observe. The picture is not likely to change. It will take time for new technologies and discoveries to shift the shortage of raw materials; there are parallels here with the 1970s and 1980s when it took until the end of the 1980s to ease the acute shortages built up in the earlier decades. By 1990 for example oil per unit of real world GDP had roughly halved from the mid-1970s and oil prices fell to low levels. Nevertheless this does not mean that employment growth need be weak or unemployment remains high.

Labour market flexibility … i.e. real wages falling relative to general productivity and willingness to adopt new practices … can encourage substitution of more labour for capital and raw materials. This is most obvious in service industries where there is plenty of scope for higher labour-intensiveness. Furthermore, service industries themselves can grow faster when labour is more flexible.

So could this weakness turn into a double-dip recession in the OECD? It might seem so if growth there is restrained by tight raw materials and if also governments are pursuing fiscal tightening; the only way might seem to be downward pressure on growth. But this is to leave out the role of monetary policy. In the OECD inflation targeting has been the unsung hero of macro policy; inflation has stayed down in the recovery and deflation kept at bay during the 2009 recession.

The reason lies in the effectiveness of inflation targeting in anchoring expectations. Surprisingly also, many inflation expectations mirrored in wage settlements and bond yields have remained around the 2% mark, reflecting the inflation targets set by most OECD central banks or governments. But it should not be a surprise; the targets have reflected a popular change in overall policy, towards outlawing high and variable inflation. We had it, people did not like it, and policy changed to stop it during the 1980s or at latest by the early 1990s. In the debate over recession and public debt the idea that inflation should be used to tackle either problem has barely been discussed, let alone advocated in any serious way.

What this has meant is that monetary policy has been quite unhampered by the fear of inflation in its aim to keep recovery on track. With OECD banking systems mostly in difficulties credit growth has been held down  — in most countries it is hardly positive. So monetary policy has had to use unconventional means to encourage investment and consumption. Interest rates on official lending have been kept close to zero and central banks have aggressively bought financial assets from the public, with the effect that the yields on these assets have been reduced.

These purchase programmes have now been stopped. But if recovery looks threatened they can be restarted and will again have a powerful effect through these asset markets.

Two decades ago such programmes would have raised inflation expectations. Today they are given the benefit of the doubt. Some people argue that they are quite safe because bank credit and broad money therefore are hardly growing; however, one cannot be sure that other financial channels are not replacing banks while they are so weak.

The truth seems to be that firms and people who need finance are mostly able to obtain it on quite cheap terms, so banks are being bypassed to a substantial degree. But inflation is not expected to result because it is widely (and correctly) believed that if inflation were to start rising monetary policy would be tightened. This belief does free central banks to take aggressive action to prop up the economy if it falters. In short we think that the recovery will continue much along the current lines because from above it is held down by raw material shortages while from below it is held up by potentially aggressive monetary policy, with the power to more than offset the dampening from fiscal retrenchment.

At Shaw Capital Management we give you the information and insight you need to make the right investment choices.

Shaw Capital Management Newsletter: Summary

Equity Markets. All the major equity markets, and most of the emerging markets,

have moved higher over the month.

Wall Street has provided most of the momentum, encouraged by

optimistic comments from the Fed and by the flow of favourable

corporate results.

Markets in mainland Europe have responded, despite the

uncertainties about debt defaults; the UK market had coped well

with a disappointing Budget statement that has left all the difficult

decisions until after the forthcoming general election; and the best

performance amongst the major markets has occurred in the

Japanese market as it has recovered from earlier weakness.

Shaw Capital Management Newsletter: Summary. Financial Markets. The mood in the financial markets has become more optimistic

again over the past month.

There are still concerns about the prospects for the some economies;

and the latest agreement amongst the member countries of the

euro-zone to offer help to Greece “if this becomes necessary” has

been received with considerable scepticism in the markets.

This has not really eased the fears about the possibility of sovereign

debt defaults. But there have still been no significant moves towards

“exit strategies” by central banks and governments, and so monetary

and fiscal policies remain stimulatory, and this has helped to

reassure investors that the global economic recovery will continue,

even if the pace in the Euro zone is disappointing.

Government bond markets have had another difficult month. The

latest agreement amongst the member countries of the euro-zone

to offer help to Greece has not been well received, Greek bonds

have continued to weaken, and this has provided further momentum

to the switching operations out of the bonds of weaker countries.

For most of the past month these switching operations benefited

the major bond markets; but towards month-end a series of

disappointing auctions led to a sharp fall in the world bond market

and increased the overall mood of uncertainty.

The massive funding requirements resulting from the measures to

counter the recession are clearly putting great strain on all the

bond markets.

Movements amongst the major currencies have been fairly limited

over the past month, but the markets remain very uncertain. The

dollar has retained its “safe haven” status, despite the sudden

weakness in the world bond market.

Investors and traders have awaited further evidence about debt

problems in Europe that might affect the euro, and about the policy

decisions in the UK after the general election that might affect

sterling; but the view in the markets seems to be that both currencies

will fall further against the US dollar.

The yen has also weakened over the month, with the move

attributed to the resumption of “carry-trade” operations financed

by cheap yen borrowings.

Short-Term Interest Rates. There have been no changes in short-term interest rates in the

major markets over the month.

Shaw Capital Management Newsletter: Summary. Commodity markets have been encouraged by the general

improvement in sentiment, but have produced a mixed

performance.

Base metal prices are sharply higher, but soft commodity prices

are mixed, with the further big fall in sugar prices as the main

feature.

At Shaw Capital Management we give you the information and insight you need to make the right investment choices.

We look forward to working with you and being the open architects of your financial well being.

Every investor will achieve better long-term risk-adjusted results by working with a true open architecture advisor.

Our philosophy is simple: almost every investor will achieve better long-term risk-adjusted results by working with a true open architecture advisor.

Before Shaw Capital launched the open architecture revolution, investors had to make the unhappy choice between selecting an advisor who was independent, but unsophisticated (the traditional pension and endowment consulting firms), or selecting an advisor who was sophisticated but had conflicting interests (global banks, trust companies, money management firms).

Today, virtually all investors faced with the challenge of managing a significant pool of capital can access open architecture advice.

A true open architecture firm is completely independent of the rest of the financial services industry and accepts compensation only from its clients.

In addition, open architecture firms must make the financial commitment to hire only the most experienced advisors, and those advisors must apply their experience to the issues that will most affect their clients' wealth.

Matters like asset allocation and manager search are simply too important to be left in the hands of young analysts.

We are proud of our role in leading the open architecture revolution, and look forward to introducing you to its benefits.

South Korea’s output is continuing to accelerate, and the government needs to exit from its accommodative economic policies earlier than anticipated. The HSBC Korea’s purchasing managers’ index (PMI) rose from 55.6 in January to 58.2 in February — the highest since December 2007. New orders are coming in, and there are rising backlogs of unfulfilled orders. Shaw Capital Management: South Korea’s Economy - Employment too is rising suggesting that the current pace of growth will be sustained for the next several months. Inflation paced a little with consumer prices up 3.1% in January from a year earlier. But inflation in Korea is likely to remain stable for some months. The central bank is expected to tighten its monetary policy by starting to raise interest rates from the current record low of 2% in the later part of the second quarter as the government retains its focus on job creation and growth. Shaw Capital Management: South Korea’s Economy - Exports expanded 31% year on year, better than Reuters’ forecast of 22.7%. South Korea posted a much larger-than-expected trade surplus of $2.33 billion in February as ship deliveries boosted exports, while imports fell as holidays reduced crude oil and natural gas demand. The government expects a monthly trade surplus of more than $1 billion from March as demand improves. The current-account surplus is most likely to dwindle to around $17 billion this year from $42.7 billion in 2009 as imports rise. A new Bank of Korea governor, widely expected to be a more pro-government figure, will not rush to raise rates after taking office in April. Exports grew 31% from a year earlier to $33.27 billion, faster than the expected rise of 21%, while imports climbed 36.9% to $30.94 billion, exceeding a forecast of an expansion of 34.0%. South Korea, which is heading the G20 group of leading economies wants to leave an imprint of its presidency. Shaw Capital Management: South Korea’s Economy - It is trying to introduce a system of international currency swaps which it hopes will reduce global imbalances by lessening the need for countries to accumulate reserves, seen as one of the causes of last year’s financial and economic crisis. Shaw Capital Management - Every investor will achieve better long-term risk-adjusted results by working with a true open architecture advisor. Our philosophy is simple: almost every investor will achieve better long-term risk-adjusted results by working with a true open architecture advisor. Before Shaw Capital launched the open architecture revolution, investors had to make the unhappy choice between selecting an advisor who was independent, but unsophisticated (the traditional pension and endowment consulting firms), or selecting an advisor who was sophisticated but had conflicting interests (global banks, trust companies, money management firms). Today, virtually all investors faced with the challenge of managing a significant pool of capital can access open architecture advice. A true open architecture firm is completely independent of the rest of the financial services industry and accepts compensation only from its clients. In addition, open architecture firms must make the financial commitment to hire only the most experienced advisors, and those advisors must apply their experience to the issues that will most affect their clients' wealth. Matters like asset allocation and manager search are simply too important to be left in the hands of young analysts. We are proud of our role in leading the open architecture revolution, and look forward to introducing you to its benefits.

Shaw Capital Management Korea:  World wide recovery appears to have firmed up. In the UK the statistics have lagged behind the anecdotal signs of the same thing. No one still believes the ONS’s peculiar decision to call a revised GDP drop of 0.2% in the third quarter (now revised down from an initial estimate of 0.4%). The UK now have not merely surveys of purchasing managers but also

employment, production and retail sales figures, all of which suggest that the economy levelled off in the third quarter and could have possibly also started expanding then, and was definitely expanding in the fourth.

Shaw Capital Management: Debit Policy is Working Well in UK & US Part 2 of 2 The reason seems to be that the operation of the ‘inflation tax’ is arbitrary and therefore seen as unfair—those who pay it are often the most vulnerable—e.g. with pensions invested in government bonds—while those with wealth and good advisors can usually avoid it. Ordinary taxation, however unpopular it may be, can be spread across the populace in a fair way, and so can normal ‘Treasury cuts’, which command wide respect as the only way of checking inevitable bureaucratic waste.

Since debt has been issued over a long period on the assumption of such a target, the gain to the Treasury from a burst of inflation would be large; it would act like a windfall tax on bond investors.

Shaw Capital Management Korea: Debit Policy is Working Well in UK & US Part 2 of 2 - So what each of these governments needs to do is put in place a mechanism for the medium term that first brings down the deficit and then ensures that the debt/GDP ratio falls slowly with growth. Meanwhile for some time to come there will be a need for monetary ease as the financial system is nursed back to health; this will keep the financing costs down.

The growth rate of credit to the non-bank private sector remains exceedingly low; while other sources of liquidity have increased as noted earlier, it is still clear that liquidity is not generally available on competitive terms to many small firms and ordinary households.

What has happened so far is that larger firms and wealthier households have benefited from low rates of interest while small firms and poorer households have found it difficult to gain access to finance at all. This is no basis for a modern economy to function well and recover confidently. Yet it is clear that restoring competitive finance when banks have been so damaged will take some time; there is no definite date when one can yet predict it will occur, what with the new capital required, the new procedures to be implemented, the paying-off of government to be done and so forth.

Shaw Capital Management Korea: Debit Policy is Working Well in UK & US Part 2 of 2 - So what each of Our conclusion is that quantitative easing has worked to partially offset the credit crunch and will continue to be needed as the banking system is rebuilt. Furthermore fiscal policy too will need to be supportive throughout the coming fiscal year, 2010/11—even though a process must be set in place to reduce the public deficit over the following 5 10 years.  The threat posed by the banking crisis was massive and has not gone away; and while it is premature to celebrate, the policy response has so far been effective. It needs to be continued.

Shaw Capital Management: South Korea’s Economy

South Korea’s output is continuing to accelerate, and the government needs

to exit from its accommodative economic policies earlier than anticipated.

The HSBC Korea’s purchasing managers’ index (PMI) rose from 55.6 in

January to 58.2 in February — the highest since December 2007. New orders

are coming in, and there are rising backlogs of unfulfilled orders.

Shaw Capital Management: South Korea’s Economy - Employment too is rising suggesting that the current pace of growth will

be sustained for the next several months. Inflation paced a little with

consumer prices up 3.1% in January from a year earlier. But inflation in

Korea is likely to remain stable for some months.

The central bank is expected to tighten its monetary policy by starting to

raise interest rates from the current record low of 2% in the later part of

the second quarter as the government retains its focus on job creation and

growth.

Shaw Capital Management: South Korea’s Economy - Exports expanded 31% year on year, better than Reuters’ forecast of 22.7%.

South Korea posted a much larger-than-expected trade surplus of $2.33

billion in February as ship deliveries boosted exports, while imports fell as

holidays reduced crude oil and natural gas demand.

The government expects a monthly trade surplus of more than $1 billion

from March as demand improves. The current-account surplus is most

likely to dwindle to around $17 billion this year from $42.7 billion in 2009

as imports rise. A new Bank of Korea governor, widely expected to be a

more pro-government figure, will not rush to raise rates after taking office

in April.

Exports grew 31% from a year earlier to $33.27 billion, faster than the

expected rise of 21%, while imports climbed 36.9% to $30.94 billion, exceeding

a forecast of an expansion of 34.0%.

South Korea, which is heading the G20 group of leading economies wants

to leave an imprint of its presidency.

Shaw Capital Management: South Korea’s Economy - It is trying to introduce a system of international currency swaps which it

hopes will reduce global imbalances by lessening the need for countries to

accumulate reserves, seen as one of the causes of last year’s financial and

economic crisis.

Shaw Capital Management - Every investor will achieve better long-term risk-adjusted results by working with a true open architecture advisor.

Our philosophy is simple: almost every investor will achieve better long-term risk-adjusted results by working with a true open architecture advisor.

Before Shaw Capital launched the open architecture revolution, investors had to make the unhappy choice between selecting an advisor who was independent, but unsophisticated (the traditional pension and endowment consulting firms), or selecting an advisor who was sophisticated but had conflicting interests (global banks, trust companies, money management firms).

Today, virtually all investors faced with the challenge of managing a significant pool of capital can access open architecture advice.

A true open architecture firm is completely independent of the rest of the financial services industry and accepts compensation only from its clients.

In addition, open architecture firms must make the financial commitment to hire only the most experienced advisors, and those advisors must apply their experience to the issues that will most affect their clients' wealth.

Matters like asset allocation and manager search are simply too important to be left in the hands of young analysts.

We are proud of our role in leading the open architecture revolution, and look forward to introducing you to its benefits.

Shaw Capital Working Management News Worldwide: The Big China Question – 3 May 2011

MAY4

http://goldnews.bullionvault.com/china_overtake_050320112

Will China really overtake US in five years?

ACCORDING TO the International Monetary Fund (IMF) “World Economic Outlook,” China’s output will surpass that of the United States in 2016 – only five years from now, writes Martin Hutchinson, contributing editor at Money Morning.

But don’t worry. The IMF calculation is based on “purchasing power parity” (PPP), which does not reflect real money. It relies on projecting China’s stellar growth rates five years into the future. And it relies on Chinese official statistics, which are more than a little questionable.

In fact, after the media storm that resulted, the IMF apparently even soft-pedaled its prediction that China would leapfrog the United States in just five years; in a subsequent interview, an IMF spokesman reportedly said that, by non-PPP measures, the US economy “will still be 70% larger by 2016.” A recent World Bank forecast concluded that China could overtake the United States by 2030.

The IMF prediction – and the attention it continues to draw – serves a useful purpose, particularly if it’s given the scrutiny that it deserves.

For global investors with China-based holdings, it reminds us of that country’s long-term potential – and the fact that such potential is always tempered by near-term risk. For the rest of us, it reminds us that China’s ascendance is inevitable – in fact, is already happening – and will be with us for a long time, even if that Asian giant isn’t immediately going to overwhelm the rest of the world.

And for our elected leaders in Washington, the IMF report – false alarm or not – should serve as a wakeup call to attack and address the many problems that threaten this country’s global leadership.

I had some problems with this prediction from the moment it hit the headlines.

Let’s start with the IMF statistics themselves. They measure gross domestic product (GDP) on the basis of “purchasing power parity,” rather than by market exchange rates.

That makes sense if you’re comparing living standards: If you are talking about what the typical China consumer can buy, he or she is about one-sixth as well off as his or her American counterpart, not one-twentieth.

However, the use of the PPP measure makes much less sense when looking at international trade or political power. That’s because individual purchasing power includes such items as haircuts, which are much cheaper in Beijing than in Boston (except, doubtless, at a couple of very overpriced salons in Shanghai or one of the other burgeoning financial centers) and cannot easily be traded internationally.

On the other hand, goods that are traded internationally are subject to global market forces and are generally about the same price everywhere they are sold. In fact, some of those goods may even be cheaper in the United States, since our distribution system is more efficient and our tariffs lower.

That’s also true of large-scale armaments; you will be able to get the People’s Liberation Army (PLA) soldiers to work for much less than their US counterparts, but the cost of a fighter jet or a missile with certain capabilities is pretty much standard around the world.

So even if the IMF’s 2016 forecast was an accurate one, there’s no way that China would be able to project as much military power as the United States, or to distribute as much foreign aid and subsidies to client states.

For at least a decade beyond 2016 – and probably more – China will be a substantial No. 2 … a market that can’t be ignored … but not No. 1.

When you are estimating future growth rates, the farther out you go, the more inaccurate your predictions become: If you were to take China’s current growth rate and project it forward 50 years into the future, the Asian giant would have absorbed the whole of world GDP and be starting work on Mars.

Even a five-year projection – such as the one the IMF put forth – does not allow for the possibility that China will experience an economic hiccup before that period ends. The recent news that China has just fired the head of its $270 billion high-speed rail network for embezzlement, and is now running the trains 30 miles per hour slower than before for safety reasons, indicates that – in a command economy like China’s – much of the apparently soaring output may have been wasted.

My 1990 Economist diary claimed that the centrally planned East Germany was richer than the free-market Britain; as a native Brit who had recently visited East Germany, I can tell you that this wasn’t the case – in fact, it wasn’t even close.

Indeed, when the Berlin Wall came down, we saw the former Comecon (Council for Mutual Economic Assistance) economies lose as much as 60% of their GDP as factories closed because their output was uncompetitive in the free market. Similarly, up to half of China’s GDP may be wasted: Think of all the empty offices and apartment blocks, developed by state-guaranteed companies, all of which are held as assets on the balance sheets of China’s banking system.

Long-term, there’s no question that China has great potential. At the same time, however, I think it very unlikely that China’s economy will make it to 2016 without a major banking crisis, which will knock back its GDP for several years.

The IMF numbers aren’t the only ones that I feel are suspect – so, too, are many of China’s growth statistics. GDP figures are announced immediately after the end of each quarter, which given China’s size and diversity means they must reflect the wishes of the leadership more than any measurement of reality.

Sometimes, of course, the leadership may wish to record lower growth, to show that some monetary or fiscal tightening is working. But I’ll bet that most of the time, the temptation is to “round up,” as opposed to rounding down.

Far too many Western analysts and observers spend most of their time in the major urban centers, where growth has been fastest, and therefore aren’t aware of, don’t get to see, or even purposely ignore, stagnant areas or places where central planning has wasted billions. The prolonged rapture about the Chinese high-speed rail plan by a number of US commentators is one good example of a case in which too many reporters took too many of China’s claims at face value and failed to examine the challenges and problems that were hidden by the hype.

So my guess is that, even now, China’s GDP and growth rates are not as impressive as reported.

The bottom line: China is big, getting bigger, and its growth can’t be ignored – especially given its long-term investment potential. But there are near-term challenges, many of them substantial. If China does not have a major economic trauma, then indeed by 2030 or so it will be close to overtaking the United States. But we have a lot more than five years in which to make the necessary adjustments.

Shaw Capital Management Factoring: Netflix CEO: We Don’t Want World War III With Cable

http://money.cnn.com/2011/05/03/technology/netflix_streaming_growth/?section=money_latest

By Julianne Pepitone, staff reporter May 3, 2011: 6:19 PM ET

NEW YORK (CNNMoney) — Netflix CEO Reed Hastings is pleased with his company’s massive growth, but he fears that getting too large will start “an Armageddon” with cable networks.

Hastings talked about Netflix’s “niche” philosophy — a Goldilocks-esque business plan of staying “not too big, not too small” — in a panel discussion Tuesday at the Wired Business Conference in New York City.

Panel moderator Chris Anderson, the editor in chief of Wiredmagazine, asked Hastings who is “most threatened” by Netflix as it expands its streaming video content.

“We’ve consistently said getting into current season [TV] or newer movies would not be profitable for us,” Hastings said. “It would be an Armageddon. It would be World War III, and we likely wouldn’t survive that battle.”

Anderson then read a quote from a Comcast exec who said that Netflix doesn’t compete with TV, it competes with reruns.

Hastings acknowledged that his company doesn’t expect to compete on sports and breaking news, which are suited to live broadcast. “[Netflix is] not every single thing all of you folks want to watch, but it’s $8 a month,” he said. “It’s choosier content.”

Still, it’s clear that one of Netflix’s top priorities is upgrading the quality and depth of the content it has available for instant streaming. On top of licensing its first original series — “House of Cards,” starring Kevin Spacey and due out in late 2012 — Netflix has recently snapped up some choice reruns, including “Mad Men” and the first season of “Glee.”

“You have to make a deal with the content owner,” Hastings said. “Luckily we’re bigger now, so we can write the check and get the content flowing.”

That’s a costly and time-consuming process, but it’s been in the game plan all along. Netflix (NFLX) attracted most of its giant subscriber base — which now tops 22 million in the U.S. — through its DVDs-by-mail rental service. But streaming has been the real goal ever since the company’s inception in 1997, according to Hastings.

“We had set up the whole business essentially for streaming, but the network wasn’t big enough years ago,” he said. “But in 2005 we clicked on YouTube and watched cats on skateboards — and we thought, it’s here! Since then, we’ve had so much fun finally delivering on our name: Net. Flix.”

Shaw Capital Working Management News Worldwide: Cisco braces for biggest layoffs in its history

MAY13

http://www.reuters.com/article/2011/05/12/cisco-idUSN1210284720110512

Thu May 12, 2011 5:26pm

* Analysts, on average, see Cisco cutting 3,000 jobs

* Could be biggest layoff in company’s 26-year history

By Jim Finkle

BOSTON, May 12 (Reuters) – Cisco Systems Inc (CSCO.O) is expected to cut thousands of jobs in possibly its worst-ever round of layoffs to meet Chief Executive John Chambers’ goal of slashing costs by $1 billion.

Four analysts contacted by Reuters estimated the world’s largest maker of network equipment will eliminate up to 4,000 jobs in coming months, with the average forecast at 3,000. That would represent 4 percent of Cisco’s 73,000 permanent workers. It also has an undisclosed number of temporary contractors.

Cisco’s previous record layoffs was set in fiscal 2002, when the company shed some 2,000 jobs, according to Canaccord Genuity analyst Paul Mansky.

That was back when the Internet bubble burst, ending a period of unrestrained spending on technology products as Internet start-ups and old school companies alike rushed to establish a Web presence.

But this time, Cisco cannot point to bad market conditions or a weak economy as excuses for wielding the ax to its payroll. Instead, Chambers last month took responsibility for mistakes in managing Cisco, saying it needs to focus on its core businesses and be more disciplined about expanding into new areas. [ID:nN05159515]

Thus, some of the layoffs are expected to come from businesses that Cisco pulls out of in coming months. Chambers, who has led Cisco for 16 of its 26-year history, has said he will pull out of some nonstrategic areas where Cisco is not the No. 1 or No. 2 player.

A month ago Chambers said Cisco would dump its Flip video camera business, ax 550 jobs and take a charge of $300 million related to the move. [ID:nN12157279]

He has yet to disclose which business will be next to go, but Cisco has invested heavily in a wide range of consumer products that have yet to take off, including its Umi home video conference system and home security cameras.

Cisco said on Wednesday that it planned to trim its workforce as part of a plan to cut some $1 billion in costs from its annual budget. Executives declined to comment on how many jobs they will cut, saying they will make an announcement by the end of summer. [ID:nN11260314]

Wall Street analysts, who were disappointed with the low revenue forecast that Cisco gave for the current quarter and the coming fiscal year, said they were pleased to see Cisco taking quick and decisive action on restructuring.

“It’s hard to criticize the pace and scope,” said Colin Gillis, an analyst with BGC Partners. “We all love the billion dollars in cost savings, but you never cheer people losing their jobs.”

Nonetheless, Cisco shares fell 4.8 percent on Wednesday, as analysts said it would take many quarters to revive the company. [ID:nL3E7FR05U]

One of Cisco’s key challenges will be to boost the revenue and profit margins of its single largest business — selling switches that form the backbone of the Internet and corporate networks — with a smaller workforce.

That unit’s sales have fallen in the past two quarters amid steep competition from Hewlett-Packard Co (HPQ.N) and Juniper Networks (JNPR.N), whose sales are growing.

Cisco’s planned job cuts stand out at a time when most other U.S. technology companies have started to add jobs after cutbacks during the recession. HP said last week that it was hiring more people to sell switches.

Cisco Chief Financial Officer Frank Calderoni said in an interview late on Wednesday that he did not know when switching sales will start to grow again.

“Part of the issue in there is competing with lower-priced competitors,” said Alkesh Shah, an analyst with Evercore Partners. “By cutting these costs — as well as being more aggressive in pricing — they will be able to be more competitive.”

(Reporting by Jim Finkle; Editing by Richard Chang)

Shaw Capital Management Factoring: Mortgage Rates Decline; 30-Year Fixed At 4.63% – Freddie

http://online.wsj.com/article/BT-CO-20110512-713709.html

MAY 12, 2011, 10:32 A.M. ET

DOW JONES NEWSWIRES

Mortgage rates, including the average rate on 30-year fixed mortgages, declined again this week, according to Freddie Mac’s (FMCC) weekly survey of mortgage rates.

“Mortgage rates continued to decline this week following a mixed employment report,” Freddie Chief Economist Frank Nothaft said, noting the economy added the most workers in 11 months in April, though the unemployment rate rose to 9%, its highest reading since January.

Rates had slumped for much of last year, setting record lows in the process, as yields on Treasurys slid amid economic uncertainty. Before recent declines, rates had been rising this year. Mortgage rates generally track the yields, which move inversely to Treasury prices. Yields moved back near their lows of the year Thursday morning as investors sought save-haven investments with weakness in commodities and global equities.

Source: Freddie Mac

The 30-year fixed-rate mortgage averaged 4.63% for the week ended Thursday, down from the prior week’s 4.71% average and 4.93% a year ago. Rates on 15-year fixed-rate mortgages were 3.82%, down from 3.89% the previous week and 4.3% a year earlier.

Five-year Treasury-indexed hybrid adjustable-rate mortgages averaged 3.41%, down from 3.47% the prior week and 3.95% a year earlier. One-year Treasury-indexed ARMs were 3.11%, down from 3.14% the prior week and 4.02% a year earlier.

To obtain the rates, the fixed-rate mortgages required payment of an average 0.7 point, while the five-year adjustable required 0.6 point and one-year adjustable required a 0.5 point. A point is 1% of the mortgage amount, charged as prepaid interest.

-By Matt Jarzemsky, Dow Jones Newswires; 212-416-2240; matthew.jarzemsky@dowjones.com

The UK and the Budget: Shaw Capital Management Korea

In the UK it is obvious that there is no possibility of continuing

with budget deficits of some 13% of GDP, the present prospect if

no action is taken.

Unfortunately however the recent UK Budget produced no credible

plan for dealing with this problem. It swept it into the lap of the

new government after the May election, whatever that government

is.

The UK and the Budget: Shaw Capital Management Korea. The UK cannot delude themselves that rapid resumed growth will

lead to a rapid return of the previous revenue streams. UK growth

in most forecasts, ours included, is projected as slow.

In our view there is a good reason: the continuing shortage of oil

and raw materials worldwide prevents rapid growth for the world

as a whole and since emerging market economies are continuing

to grow rapidly that restricts the growth possibilities in countries

like the UK and other developed countries.

We are already seeing inflation spread into China and other

emerging countries, forcing a tightening of policy.

It seems likely that this tightening will be enough to restrain world

growth to rates that will not push commodity prices much higher.

So even the fast-growing world economies are being forced to limit

their growth ambitions; as for the UK they are achieving ‘recovery’,

but hardly enthusiastic growth.

All this will only change when innovation in raw material use has

freed up net world supplies.

Fortunately the flexibility of the UK labour market has restricted

the jobs fallout. Unemployment has peaked below 8% (just over 5%

on the benefit-claimant measure) as people have opted for wage

freezes or cuts and shorter hours … so there is underemployment

but not the disaster of double-digit unemployment rates.

But this environment is one in which tax revenues will not recover

much and in which the demands for public spending will continue.

Time will tell how big the ‘structural deficit’ … that will emerge

once the recovery is complete … may be.

But policy decisions cannot wait until this is better known. So in

this Budget the need was to produce a five-year public sector

adjustment plan.

Two things should guide this plan: keeping the taxes down and

competitive, so that growth and innovation resume, and restoring

efficiency in public spending.

The UK and the Budget: Shaw Capital Management Korea. Spending cuts

To begin with the last, the current government unleashed a massive

surge in public spending from 2000, raising it by 8% of GDP before

the crisis raised it by more again.

Everyone knew that without reform and gradual increases, such

money would be wasted; there is no practical way to spend such

vast sums without raising wages and wasting money on speculative

projects.

Productivity in the public sector duly slumped and public sector

remuneration including pensions has surged past the private sector

where market forces suggest pay should be higher to reflect greater

insecurity.

The UK and the Budget: Shaw Capital Management Korea. To reduce public spending back to where it started in 2000 as a

share of GDP (at around 36%) would require it to grow in real terms

by about 16% less than real GDP over the next five years.

Since total GDP growth over that period is likely to be about 10%,

that means that spending must be cut by about 1% a year in real

terms.

This is a feasible target. The UK Treasury under Gordon Brown

became a brute instrument of spending increase, oddly somewhat

against the protests of some departments worrying about wasteful

effects. The UK Treasury was never traditionally like this … very

much the opposite, a place from which wringing money was like

getting blood from stones.

It should be returned to its traditional function of restraint; Treasury

control, old-style, is the best instrument for forcing departments

to find the economies they privately know they can make.