Wednesday, February 22, 2017

3 banks just landed key roles on what could be the biggest IPO of all time

3 banks just landed key roles on what could be the biggest IPO of all time

Saudi AramcoA Saudi Aramco employee sits in the area of its stand at the Middle East Petrotech 2016, an exhibition and conference for the refining and petrochemical industries, in Manama, Bahrain, September 27, 2016.REUTERS/Hamad I Mohammed
(Reuters) - Oil company SaudiAramco [IPO-ARMO.SE] has selected JPMorgan Chase & Co, Morgan Stanley, and HSBC Holdings Plc as lead underwriters for its planned initial public share offering, the Wall Street Journal reported on Tuesday, citing people familiar with the matter.
The listing of Aramco is expected to be the world's biggest initial public offering and could raise up to $100 billion. The IPO is the centerpiece of the Saudigovernment's ambitious plan, known as Vision 2030, to diversify the economy beyond oil.
Saudi authorities are aiming to list up to 5 percent of the world's largest oil producer on both the Saudi stock exchange in Riyadh, the Tadawul, and on one or more international markets.
Saudi Arabian Oil Co, known as Saudi Aramco, was not immediately available for comment. JPMorgan and HSBC declined to comment while Morgan Stanley did not immediately respond to a request for comment.
Aramco received proposals from at least six banks for an advisory role on the IPO, sources familiar with the process told Reuters earlier on Tuesday.
Local and major international banks including Morgan Stanley, HSBC and Citigroup Inc were among those asked to pitch for an advisory position with Aramco, Saudi-based industry sources said last month.
JPMorgan was close to being selected as an underwriter, Reuters reported on Friday, citing a source. Aramco also recently chose boutique investment bank Moelis & Co as an adviser.
The IPO plan has been championed by Deputy Crown Prince Mohammed bin Salman, who oversees the country's energy and economic policies. Last year, he said he expected the IPO would value Aramco at a minimum of $2 trillion, and that the figure might end up being higher.
Saudi Arabia is considering two options for the shape of Aramco when it sells shares in the national oil giant next year: either a global industrial conglomerate or a specialized international oil company, industry and banking sources have told Reuters.
SaudiAramco has also appointed international law firm White & Case, which has a long-established relationship with the state oil giant, as legal adviser for its IPO, sources familiar with the matter told Reuters earlier this month.
Saudi Arabia is favoring New York to list Saudi Aramco, while also considering London and Toronto, the Wall Street Journal reported on Monday.
The oil giant also held discussions with the Singapore Exchange regarding a potential secondary listing, Reuters reported this month. 
(Editing by Diane Craft and Edwina Gibbs)
Read the original article on Reuters. Copyright 2017. Follow Reuters on Twitter.

Sunday, February 19, 2017

How America can take control in the South China Sea

How America can take control in the South China Sea

Xi JinpingChinese President Xi Jinping attends a meeting at the United Nations European headquarters in Geneva, Switzerland, January 18, 2017.REUTERS/Denis Balibouse
Rex Tillerson, the former ExxonMobil chief who just became the new U.S. secretary of state, might not be causing the same level of global disruption as his boss, President Donald Trump. But in his Senate confirmation hearing on Jan. 11, he sent shockwaves through the China-watching community, vowing: “We’re going to have to send China a clear signal that, first, the island building stops and, second, your access to those islands also is not going to be allowed.”
These remarks instantly gave rise to a global consensus that spanned hawks in China to doves in the West. An editorial in the Global Times, a prominent mouthpiece for Chinese nationalists, warned: “Unless Washington plans to wage a large-scale war in the South China Sea, any other approaches to prevent Chinese access to the islands will be foolish.”
Former Australian Prime Minister Paul Keating also reacted angrily, saying: “When the U.S. secretary of state-designate threatens to involve Australia in war with China, the Australian people need to take note. That is the only way Rex Tillerson’s testimony that a ‘signal’ should be sent to China that ‘access to these islands is not going to be allowed’ and that U.S. allies in the region should be there ‘to show backup’ can be read.”
From Beijing to Sydney, a consensus formed — Tillerson’s position has no basis in international law, is tantamount to an act of war, and does not make strategic sense. In short, opponents argue, the posture the new U.S. secretary of state proposed is legally baseless, politically dangerous, and practically ineffectual.
This consensus rests on the belief that China is both willing and able to go to war over serious provocation. But this misreads Tillerson’s proposal and misunderstands the complex realities of the South China Sea. A naval blockade is not the only way to achieve Tillerson’s objectives, and China has a large stake in avoiding war with the United States in the region.
To see this, we need to use a “whole of capabilities” lens that is less U.S.-centric. From this perspective, Tillerson’s suggestion would not boil down to a military blockade as most commentators assume. Instead, the United States and its partners potentially have at their disposal a full spectrum of actions including diplomatic negotiations and economic sanctions and kinetic constraints that, directly or indirectly, can prevent further island building and Chinese militarization of those islands.
One such action is targeted sanctions against individuals and companies that support, facilitate, or participate in Beijing’s illegitimate operations in the South China Sea. The bill introduced by Sen. Marco Rubio last December exemplifies this approach. It would impose asset freezes and travel bans on people and entities who “contribute to construction or development projects” in the contested areas and those who “threaten the peace, security or stability” of the South China Sea or East China Sea.
south china seaSand can be seen spilling from a newly dredged channel in this view of Vietnamese-held Ladd Reef, in the Spratly Island group in the South China Sea, November 30, 2016, in this Planet Labs handout photo received by Reuters on December 6, 2016. Trevor Hammond/Planet Labs/Handout via Reuters
It would also prohibit actions that may imply American recognition of Chinese sovereignty over the contested areas in these seas and restrict foreign assistance to countries that recognize China’s sovereignty there. These primary sanctions could be augmented by secondary sanctions against those who do business with the offenders. The Rubio bill may or may not be adopted, but targeted sanctions remain an important tool to indirectly cause changes in China’s behavior.
A more direct option would be for the United States and its partners to borrow a page from China’s own playbook and emulate its “cabbage” tactic in denying Beijing’s access to the South China Sea islands. The cabbage tactic consists of wrapping contested islands in multiple layers of Chinese military and paramilitary power.
Like the Chinese cabbage, the anti-China cabbage would also have three layers, surrounding the targeted islands with private civilian boats in the inner circle, followed by law enforcement vessels in the outer circle, all protected by warships over the horizon.
The anti-China coalition couldn’t match China’s use of paramilitary maritime militias in such operations. But it could invite civilian volunteers to man the first line of defense. Rather than shooting down Chinese aircraft and mining Chinese ports, the coalition can use drones — both unmanned aerial and underwater vehicles — launched from civilian and coast guard ships to seal off the entry to China’s airstrips and harbors on the fake islands.
Contrary to common belief, these actions can be fully consistent with international law. If China does not recognize your rights to freedom of the seas, you have the right to restrict China’s freedom in return. The Permanent Court of Arbitration award from last July, which is now an integral part of international law despite Chinese rejection, has ruled as illegitimate China’s “nine-dash line” claims in the South China Sea, its occupation of Mischief Reef, its denial of access to Scarborough Shoal, its island building in the Spratlys, and its harassment of others in the Philippine exclusive economic zone (EEZ).
Rex TillersonSecretary of State Rex Tillerson smiles while greeting the media, accompanied by Japan's Foreign Minister Fumio Kishida, Friday, Feb. 10, 2017, at the State Department in Washington. AP Photo/Molly Riley
But the court does not possess the tools to enforce its rulings, so it’s up to the members of the international community to act on behalf of the common interest and to induce China to comply with its obligations. Fortunately, international law allows countries to conduct countermeasures against wrongful acts.
As James Kraska, a professor of international law at the U.S. Naval War College, has argued, challenging China’s rights to access its artificial islands is consistent with international law. After all, it’s fair game to do to China what China has done to others.
Many are concerned that regardless of its legality, blocking China’s access to its occupied islands would amount to an act of war and risk armed conflict as a response. This fear is overblown, however. When China blocked others’ access to the disputed Scarborough Shoal and Second Thomas Shoal, nobody called it an act of war and no armed conflict ensued. Taking a leaf from China’s own book, the cabbage tactic of access denial would mute the casus belliand discourage Beijing from going to war.
Still, there is concern that, driven by the pressure of nationalist public opinion and in an effort to maintain national image and domestic legitimacy, Chinese leaders may escalate the conflict and engage in war with the United States.
But as Jessica Weiss, a leading expert of Chinese nationalism, found in her study of China’s nationalist protests, nationalist public opinion is more of a tool in the government’s hands to signal resolve than a driving force of Beijing’s assertive foreign policy. A more recent analysisby Alastair Iain Johnston, a professor of Chinese foreign policy at Harvard University, also comes to a similar conclusion, showing a decline of nationalism among ordinary citizens since 2009.
As the weaker party and the party that depends far more on traffic in the South China Sea, China actually has a larger stake in avoiding war in this region than the United States does. Indeed, avoiding large-scale conflict is one of the imperatives of China’s long-term strategy in the South China Sea.
rex tillerson donald trumpPresident Donald Trump smiles at Secretary of State Rex Tillerson after he was sworn in in the Oval Office of the White House in Washington, Wednesday, Feb. 1, 2017. Associated Perss/Carolyn Kaster
China has become more aggressive in recent years because of a U.S. deterrence deficit in the gray areas between war and peace. Beijing’s preference for gray-zone activities is also a testament to the working of nuclear and conventional deterrence. The trick of avoiding war while getting China to comply with international law lies in a two-pronged approach that skillfully combines the strengths of sticks with those of carrots while neutralizing their weaknesses.
In considering conflict over the islands, we don’t have to imagine China and the U.S. military as the only parties involved; a full range of actions and players exists, including sanctions, negotiations, regional countries, and international civil society.
It might be tricky in the current diplomatic climate, but in the best possible world, the combined effect of actions on this full spectrum has a good chance of persuading China to comply with international law, especially if it involves a concerted effort of the United States, major powers such as Japan and India, and regional states such as the Philippines and Vietnam.
Commenting on Tillerson’s remarks, Philippine Foreign Secretary Perfecto Yasay said: “If [the United States] wants to do that, they have the force to do so, let them do it.” A cabbage approach to deny China’s access to Scarborough Shoal or Mischief Reef would be more legitimate and effective if it involved the Philippine Coast Guard and civilian volunteers from the Philippines and other countries.
Southeast Asian states often hedge between America and China with a tilt toward the one that is more powerful and more committed to them. If the Trump administration increases U.S. presence in the South China Sea, is committed to defending the Philippines as much as Japan and South Korea, and refrains from criticizing Manila’s domestic agenda, it could sway the pragmatic President Rodrigo Duterte to back the United States.
Rodrigo Duterte Philippines public popularityPresident Rodrigo Duterte shakes hands with supporters as he leads the death anniversary celebration of Filipino national hero Dr. Jose Rizal in Manila, Philippines, December 30, 2016. REUTERS/Czar Dancel
Targeted sanctions against Chinese persons and companies involved in projects in the South China Sea would also be much more effective if they were supported not only by the United States but also by other major economies and regional states. With its large state sector, China is particularly vulnerable to targeted sanctions. Its construction and development projects in the South China Sea have involved several large state-owned companies that are eager to make profit abroad.
If designed cleverly, sanctions could hit hard big companies such as China National Offshore Oil Corporation, which moved a giant oil rig to drill in the Vietnamese EEZ in 2014; China Southern and Hainan airlines, which fly planes to the artificial islands; China Mobile, China Telecom, and China United Telecom, which operate communication networks on the disputed islands; and China Communications Construction Company, which dredged sand to build artificial islands in the Spratlys — thereby creating an incentive inside China to drop its illegitimate claims in the South China Sea.
Signaling a readiness to prevent Chinese island building and restrict China’s access to the fake islands is the logical response if the United States really wants to restore deterrence in the South China Sea. Part of the failure to put a limit on China’s expansion lies in the myth of an ever-looming war with China, which makes the use of logical deterrents unthinkable. This creates a self-restraint that is not only unnecessary but also strategically disastrous.
Read the original article on Foreign Policy. "Real World. Real Time." Follow Foreign Policy on Facebook. Subscribe to Foreign Policy here. Copyright 2017. Follow Foreign Policy on Twitter.

In uncertain times, keep your eye on cashflows: James Saft


In uncertain times, keep your eye on cashflows: James Saft


By James Saft
In an era in which facts themselves are increasingly under attack, investors should value what they can count over what they are told.
With that in mind we should remember that earnings can be faked and valuation is a matter of opinion but the old truth still holds: cash flows never lie.
We’ve long known that earnings, as reported by companies on a generally accepted accounting principles (GAAP) basis, can be deceiving. Not only are these numbers susceptible to the occasional spectacular fraud - think Enron - but the wide degree of latitude around exceptional items and different methods of presentation can make securities analysis more of an art than a science.
Given the current political climate under President Donald Trump there are, perhaps, reasons for investors to take a heightened interest in making sure they know what it is they are getting when they buy a share. Though Trump hasn’t announced any specific accounting related initiatives his administration favors a “streamlined” approach to regulation, saying it will repeal two regulations for every new one and conducting a review widely viewed as the death of Dodd-Frank financial regulation.
An attack on regulation, after all, may be good for corporate profits but could well make them harder for investors to trust.
This makes a new paper published in the Financial Analysts Journal especially timely, as it presents a method to better measure corporate cash flows, the life blood of any business and, it seems, perhaps the best barometer of future value. (here)
“We believe that the lack of uniformity among reported statements and their disjointed presentations make it extremely difficult for investors to test the quality of a corporation’s historical earnings and compare the results within and across industries,” Stephen Foerster of Western University, and John Tsagarelis and Grant Wang of Highstreet Asset Management write.
“Our study shows that by using a standardized 'direct cash flow' template, investors can better understand a company’s historical, contemporaneous, and forecasted return potential.”
Most companies use an indirect method of reporting cashflow, including non-cash operating items they include in net income rather than simply operating cash receipts and payments.
The authors found their direct cashflow measure not only was better at predicting future stock returns than indirect cashflow but also than common profitability measures that use gross profits, operating profits or net income.
THE BASIC BENCHMARK
This predictive power of direct cashflow held across various investment horizons and worked after adjusting for the usual risk factors and sector characteristics. Stock of companies whose cashflow ranks in the highest 10 percent outperforms those in the bottom 10 percent by 10 percentage points annually on a risk-adjusted basis.
The study looked at U.S. stocks, measuring cashflow and stock performance for S&P 1500 index shares from 1994 to 2013.
While you could not use cashflow as a single criterion for measuring every company, getting to grips with it is essential, no matter what a company does or where it is in its evolution from a start-up to a mature firm.
“No matter whether a company makes telecom equipment, cars, or candy, it's still the same question: How much cash do we get and when?” Warren Buffett and Charlie Munger of Berkshire Hathaway once wrote.
If you’ve not got a read on how much cash is flowing through a company’s coffers now, your ability to make good predictions about how investments or future business conditions will impact the cash available down the road to enrich shareholders will be impaired.
Remember too that the latitude allowed in how companies report all too often leads to them presenting an unrealistically good view of the current trading, and by extension, their future prospects.
A 2015 survey of almost 400 chief financial officers and finance executives found they themselves believe that a whopping 20 percent of firms “intentionally distort earnings, even though they are adhering (to GAAP principles).” (here)
More than a third of the CFOs said that earnings which don’t correlate with cash flow from operations, or strong earnings despite falling cash flows, were significant red flags.
As it is now quite difficult to even discern cash flows, much less to correlate them with earnings, the typical investor is left in the dark. Perhaps the direct cashflow presentation method should be mandatory.
Given that we are facing a period of deregulation and potentially growing corporate chicanery, investors shouldn’t wait for companies to do this themselves.
(Editing by James Dalgleish)

Elon Musk doubles down on universal basic income: 'It's going to be necessary'

Elon Musk doubles down on universal basic income: 'It's going to be necessary'

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elon muskAsa Mathat | D: All Things Digital
In an interview with CNBC in November, Tesla CEO Elon Musk joined a growing list of tech executives who support universal basic income as a possible solution to the widespread unemployment that automation will likely cause.
Universal basic income is a system in which all citizens receive a standard amount of money each month to cover basic expenses like food, rent, and clothes.
On Monday, Musk doubled down on his initial support for the concept.
"I think we'll end up doing universal basic income," Musk told the crowd at the World Government Summit in Dubai, according to Fast Company. "It's going to be necessary."
The economic forecasts for the next several decades don't bode well for the American worker. In March, President Barack Obama warned Congress about the looming threat of job loss, based on several reports that found that as much as 50% of jobs could be replaced by robots by 2030.
The downside of that projection is that millions of people would wind up out of a job — a possibility Musk discussed at the summit.
"There will be fewer and fewer jobs that a robot cannot do better," he said. "I want to be clear. These are not things I wish will happen; these are things I think probably will happen."
Executives who have endorsed UBI — a group that includes Y Combinator President Sam Altman and Facebook cofounder Chris Hughes — also say automation would dramatically increase a society's wealth.
"With automation, there will come abundance," Musk said. "Almost everything will get very cheap."
That money theoretically could be redistributed to give people financial security even if they didn't work. UBI advocates often point to reduced costs as a reason the system could be cheaper to implement than most might assume.
"Because a very small amount of people have an almost unimaginable amount of money at the very top, a basic income could actually decrease almost everyone else's income tax burdens except for theirs," Scott Santens, a UBI advocate, wrote for The Huffington Post.
Musk retains some skepticism about the effects of UBI. He has voiced concerns about what would happen to people's sense of purpose if they had less of a need — or no need — to work.
"If there's no need for your labor, what's your meaning?" Musk said. "Do you feel useless? That's a much harder problem to deal with."

Friday, February 17, 2017

Americans have $12.58 trillion of debt — here's what it looks like

Americans have $12.58 trillion of debt — here's what it looks like

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Americans' debt balances rose "substantially" in the final quarter of 2016, according to the Federal Reserve Bank of New York. 
Household debt totaled $12.58 trillion as of December 31, 2016, according to the New York Fed's latest quarterly report on credit.
Total debt increased by 1.8%, or $226 billion, in Q4. That lifted household debt just 0.8% below the peak reached in the third quarter of 2008 as the US economy was mired in recession. 
According to the report, Americans borrowed the most money since the recession to pay for new houses or to refinance their mortgages. Mortgage originations in the fourth quarter totaled $617 billion. 
Last year saw a sharp rise in new auto loans, helping carmakers post a record period of sales. In the fourth quarter, auto loan originations — appearances of new auto balances on consumer credit reports — increased by a record $142 billion.
A greater share of mortgages and auto loans was granted to higher-quality borrowers. About 58% of all new mortgages in 2016 were approved for people with credit scores above 760. That was up from an average of 54% in 2015. 
"The question from a macro perspective then becomes if the low-quality borrowers as a group are big enough to slow down the overall economic expansion," said Torsten Slok, Deutsche Bank's chief international economist, in a note on Friday. "So far banks have responded with a tightening in lending standards."
Outstanding student loans — the largest source of debt besides mortgages — increased by $31 billion to $1.31 trillion.
Delinquency rates were "roughly stable" in Q4, the New York Fed said, although late payments on car loans rose to a post-recession high. 

Samsung's billionaire chief is now in a jail cell with a mattress on the floor and no shower

Samsung's billionaire chief is now in a jail cell with a mattress on the floor and no shower

Samsung COO Jay Y. LeeSamsung leader Jay Y. Lee. Reuters
SEOUL, South Korea — For Jay Y. Lee, the third-generation leader of South Korea's massive Samsung Group and scion of the country's wealthiest family, home is now a 71-square-foot detention cell with a toilet in the corner behind a partition.
He has no shower, only a washstand. His bed is a mattress on the floor.
The 48-year-old Lee was arrested early Friday in connection with a corruption scandal that led to the impeachment of President Park Geun-hye, a decision that is being reviewed by the country's Constitutional Court.
He has denied any wrongdoing.
Lee is being held in a single cell and will not be allowed contact with other inmates, said an official at the Seoul Detention Centre, a facility on the outskirts of the city where arrested politicians and corporate chieftains are usually held, along with other detainees.
"This is a highly public case, and as you know many involved in the case were already here," the official told Reuters.
Prison officials don't want Lee discussing the case with others involved in the case, the official said, explaining why the Samsung scion was being held in a single cell. Also, there may be safety issues.
"There are concerns about destroying evidence," the official said, adding that Lee was not being given special treatment.
Lee's lawyers declined to comment.
Lee, who is divorced with two children, has a net worth of $6.2 billion and ordinarily lives in a $4 million Seoul mansion. The Samsung Group he heads is the world's biggest manufacturer of smartphones, flat-screen televisions, and memory chips, and Lee is accustomed to rubbing elbows with Silicon Valley titans such as Facebook's Mark Zuckerberg and Apple's Tim Cook.
st. andrews scotlandSt Andrews Golf Club in Scotland. AdamEdwards / Shutterstock
An accomplished equestrian, Lee is also a lifetime member of the Royal and Ancient Golf Club of St. Andrews in Scotland.
At the detention center, Lee will be allowed visitors, but they can speak only through a glass partition, for up to 30 minutes at a time. Inmates are, however, allowed unlimited meeting time with their lawyers.
He can exercise, but on his own, for 30 minutes a day.
Before Lee entered his cell, prison officials subjected him to an identification check and physical examination, according to the detention center official, who declined to be identified given the sensitivity of the matter. He showered and was issued an inmate uniform and boxes with toiletries and bedding.
Prosecutors have up to 10 days to indict Lee, though they can seek an extension. After indictment, a court would be required to make a ruling within three months.
Lee will be given simple 1,443 won ($1.26) meals, usually rice with side dishes. Anything additional must be bought at the center's commissary.
Meals will be served on plastic trays slid through a small square window in the cell door. Lee is required to wash his own tray. Inside the cell, he can watch TV from 8 a.m. to 6 p.m., but only a single channel with recorded programs broadcast by the justice ministry.
Fellow inmates include Choi Soon-sil, a friend of President Park Geun-hye who is at the center of the scandal and whom Lee is accused of bribing, as well as the country's former culture minister and former presidential chief of staff.
The cell has a small study table to one side.
"Inmates can receive eyeglasses and books from outside but should buy other things at the commissary inside, such as snacks, coffee, instant noodles, detergent, razors, and towels," said a man surnamed Sohn who runs a private errand service for detainees at the center and requested that his full name not be used because of the sensitivity of the matter.
(Reporting by Ju-min Park; Editing by Tony Munroe and Raju Gopalakrishnan)
Read the original article on Reuters. Copyright 2017. Follow Reuters on Twitter.

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