Commodity Markets - Shaw Capital Management Investment

The general improvement in sentiment in the financial markets over the past month has also been evident in the commodity markets.

There has been further evidence that the global economic recovery in continuing, there has been more support for the view that the pressures resulting from the sovereign debt crisis in Europe may be easing.

As a result, base metals are generally lower over the month, even after the rally on the latest Chinese announcement about the renminbi; most soft commodity prices are slightly lower, although there have been sharp rises in beverage prices on concerns about future supplies; precious metal prices have moved higher as investors have continued to seek “safe havens in the storm”; and there has been a strong recovery in oil prices, helped by optimistic signs of a pick up in US demand.

Base metal prices are ending the past month well above recent low levels, but still slightly lower overall, and there has been an additional boost to confidence in the announcement of a “more flexible” policy towards the renminbi.

It is assumed that even a modest appreciation of the Chinese currency will boost the purchasing power of Chinese buyers, and increase still further China’s position as the world’s largest importer of a broad range of global commodities.

But there is clearly a risk that the importance of this fairly modest move is being exaggerated; and the extent of the earlier reaction should be a powerful warning of the degree of speculative activity in the markets, and the vulnerability of prices. Chinese demand clearly remains a critical factor, and the evidence suggests that it will remain reasonably strong.

Soft commodity markets have again produced a more mixed performance.

Movements in grain prices have been fairly modest, although there has been some support from a recent report by the US Department of Agriculture that the increasing importance of ethanol production will continue to draw down stock levels and help to offset the effects of what is expected to be a bumper grain crop this year.

Most price movements elsewhere have been fairly small; but there have been two significant exceptions. Cocoa prices have been pushed to their highest levels for more than 30 years because of disappointing crop levels in West Africa, and particularly in the Ivory Coast, and the warning that the fall in production will continue unless there is significant investment in new trees and in fertilisers.

There are fears that demand will outstrip supply for the fifth successive year in the 2010/2011 season, and this has forced cocoa buyers to push up prices to cover their requirements, and has exposed the position of banks and others that sold call options in the expectation that prices would fall. The second significant exception has been coffee prices, which have increased by almost 20% during the past month.

The indications are that one commodity-trading house has accumulated a very large number of futures contracts and has indicated that it intends to take delivery of the coffee.

Other funds that had sold futures contracts short have been unable to obtain the coffee to honour those contracts, and so have been forced to scramble to close them and have suffered considerable losses as prices have moved higher.

It is not yet clear whether this technical position has now been cleared; but the fundamentals do not appear to justify the price action, since Brazilian production is expected to be very high in the current season, and so, once the technical position had been cleared, prices could fall fairly sharply.

Oil prices have also been affected by the improvement in market sentiment, and have recovered very sharply over the past month.

Speculative activity has been an important factor; but there has also been an encouraging report from the US Department of Energy indicating strong demand for oil products in the US, and a larger-than-expected reduction in crude oil inventories.

There has also been evidence of continuing strong demand from China; and a warning of the onset of the hurricane season in the Gulf of Mexico, and its possible effects on production levels.

So far however the dramatic oil spill at the BP production well in the Gulf does not appear to have had a noticeable effect on market prices, although the possible consequences, especially for deep-water drilling operations in the future, could clearly become a very significant factor.

The recovery in prices has been very impressive; but it may not be sustainable. OPEC itself has recently issued a very cautious monthly report which argues that “recent developments have moved oil prices out of equilibrium”, and which emphasises that increasing supplies from non-OPEC countries are keeping downward pressure on prices.

It concludes, that “although demand has seen some improvement recently, it has been more than overwhelmed by the higher growth in supply”. It seems likely therefore that the present rally will lose momentum unless there is a serious deterioration in the political situation in the Middle East. Precious metal prices have also moved higher over the past month; investors are clearly still seeking “safe havens in the storm” despite the improvement in sentiment about prospects that has pushed some other commodity prices higher.

Gold prices have reached $1250 per ounce, and silver prices have also moved significantly higher, with exchange-traded funds aggressive buyers of both metals.

The World Gold Council, in its recent quarterly report, indicated that demand for gold was “exceptionally strong”, and that it was expected to remain so for the rest of year, “driven by jewellery demand in India and China, and investment demand in the US and in Europe”.

However it is clear that investment demand is the more important factor, with EFT gold holdings now above 2000 tons, and central banks also adding to their holdings again.

There is an obvious risk that the latest surge in prices will lead to some profit taking. But given the present situation, and particularly the risk of sovereign debt defaults, it would be unwise to assume that the improvement in precious metal prices in over.

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

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 otheremerging 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.

Shaw Capital Management Korea: Competitive tax system in UK

Now consider UK taxation. Already under this current UK government tax, and stealth taxation in particular, has become the soft default option. By the mid-2000s the top marginal rate of tax including all imposts, whether on wages or consumption, had reached 60%, the average tax rate was 40% and the marginal tax rate on the average person 43%. Now that the explicit top rate of income tax has gone over 50%, the top rate has gone up to around 67%. So far for the average worker not much has changed since the mid-2000s. However, further rises in tax rates from these levels are not an option and indeed they must be cut, for two reasons. The first reason concerns the ‘Laffer Curve’; which computes the extra revenue raised for every rise in the marginal tax rate. This curve reaches a peak at some fairly moderate marginal tax rate because of the effect on effort and tax evasion.

All informed observers, including the Institute of Fiscal Studies which is generally in favour of higher taxes and redistribution, agree that the 50% new top tax rate will not increase revenue and will probably lower it for this reason. The second reason concerns growth. Growth comes from the innovative activities of entrepreneurs, who are extremely sensitive to marginal tax rates because their activities are risky and any gains uncertain; the more these are taxed the less the expected return and if this drops below some threshold they will not bother at all.

The UK needs both to make the fiscal adjustment on the spending side by reviving old-style Treasury control and then quickly bring their tax system back into the land of reasonable incentives, following that up with reforms ‘flattening’ the marginal tax rates across the economy and income groups.

Estimates of the effects on growth of marginal tax rates are for obvious reasons uncertain; but the sort of effect that comes out of empirical studies is an elasticity of one third, i.e. for every 10% reduction in tax growth would rise by 3% (e.g. a reduction of the marginal tax rate from 40% to 36% would raise growth from 2.5% to 2.58%). This effect seems small but it accumulates into something large. So in short the UK needs both to make the fiscal adjustment on the spending side by reviving old-style Treasury control and then quickly bring their tax system back into the land of reasonable incentives, following that up with reforms ‘flattening’ the marginal tax rates across the economy and income groups.

The supporting role of monetary policy this fiscal adjustment, however gradually brought about, is going to be a fairly grim process and it will dampen growth further. It will require the efforts of the monetary authorities to support the economy through it, without pushing inflation over the target.

At present the bank credit is not expanding, whereas a growing economy requires bank credit growth usually of twice or more times the GDP growth rate. The Bank of England is keeping interest rates low but has suspended the printing of money (‘quantitative easing’), even though bank credit growth has not responded. But it may well need to restart it. This is something the UK will need to watch and if, as seems likely, inflation falls back to well below the target and the economy falters under fiscal retrenchment, and the Bank of England will need to take steps to get the broad money supply growing again. As we have noted before, other channels for money appear to be working in substitution … UK equity and corporate bonds issues have been substantial recently. So liquidity may turn out adequate even without credit growth revival. Our forecast for the UK Though the UK Budget was predictably vacuous, being a pre-election affair, our forecast assumes that action pretty much along the above lines will be taken after the election by whatever government is in power … hung Parliament or not. The reason is that there is little room for manoeuvre and privately in fact the parties do not materially disagree, except to some degree on what modest room there could be for tax rises instead of spending cuts. So in short we think there will be fiscal retrenchment, monetary policy will provide support, and so the UK recovery will slowly continue.

Shaw Capital Management Korea: Fresh Pressure on BOJ for Adopting an Inflation Target

Japanese Finance Minister Naoto Kan has recently exerted pressure on the Bank of Japan (BOJ) to act more quickly to defeat deflation, saying he wants the falling price trend to end this year. “Two or three years is too long. If possible, I hope that the consumer price index turns positive by the end of this year” Kan told a parliamentary session.

Shaw Capital Management Korea: Fresh Pressure on BOJ for Adopting an Inflation Target. The finance minister also said that the BOJ may have to set an inflation target aimed at dragging the economy out of grinding deflation … a policy where a central bank declares a target for inflation and guides actual price levels toward that goal through monetary policy such as interest rate changes. BOJ Governor Masaaki Shirakawa made it clear he had no intention of taking such a step, and explained in detail why he considers it inappropriate. “There is a mood to reconsider the use of the framework of inflation targeting following the recent financial crisis," Mr. Shirakawa said at a recent news conference. “If a central bank concentrates only on achieving a short-term price goal, that could have an adverse effect on sustainable economic growth, which is the final goal of monetary policy”, Shirakawa said. Moreover, “such a mechanism would reduce the BOJ’s flexibility on policy”. Inflation targeting has become a favoured policy among many central banks worldwide, but since the start of Japan’s deflationary era in 1999, the BOJ has stoutly resisted calls to set an inflation target against which it can be judged, and by which it can be embarrassed if it misses it.

Shaw Capital Management Korea: Fresh Pressure on BOJ for Adopting an Inflation Target. Instead it has relied on softer price guidance in determining policy. Its inflation objective is defined in the loosest terms, as a rate between zero and 2% for the core consumer price index, as one that meets its “understanding of medium- to long-term price stability”, with no time-frame to achieve it and no penalty for failure. Still, core consumer price index, which excludes volatile fresh food prices, fell 1.3% on year in December, dropping for the 10th straight month. Shirakawa’s comments suggest the central bank will not embark on any further easing for now to put a stop to deflation. However the BOJ might be forced to loosen policy toward the middle of the year if the domestic economy loses momentum from its recent strong performance … recent data showed the economy grew at a 4.6% annualized pace in the final quarter of 2009. And with a key upper house election coming up in the summer, at which the ruling Democratic Party of Japan hopes to win a majority in the chamber, political pressure on the BOJ to do more to improve the economic picture could rise.

Can the introduction of inflation targeting under deflation and zero interest rates contribute to the Japanese economic recovery? Generally, inflation targeting has been increasingly viewed as a good monetary policy framework and widely applauded by economists and policymakers. In the literature, there are benefits of inflation targeting for both inflation and output behaviour. Inflation targeting should stabilise the level of inflation, reduce its variability and persistence, and also decrease the variability of output.

Shaw Capital Management Korea: Fresh Pressure on BOJ for Adopting an Inflation Target. A recent study by Daniel Leigh, an economist at the IMF, shows that had Japan introduced inflation target in the 90’s its economy’s performance would have substantially improved and the BOJ would have avoided the zero lower bound on nominal interest rates. But the essence of the question is to what extent the introduction of inflation targeting will enhance credibility of the BOJ’s reflation policy in a deflationary phase and help economic recovery. More importantly, whether or not the BOJ monetary policy is credible enough for inflation expectations to be anchored to an inflation target.  Takehiro Sato of Morgan Stanley says that, unlike the Federal Reserve, which has won a high degree of respect for its handling of monetary policy, Japan’s central bank is not yet trusted by markets because of its past moves. “The BOJ’s policy track record is bad.

A target for inflation helps to anchor future expectations of monetary policy, but BOJ lacks credibility. The mere announcement of an inflation target would not change expectations”, he said. Indeed, the introduction of inflation targets among advanced countries tends to be accompanied by an institutional framework that makes inflation targeting credible and accountable. In several countries, including New Zealand and Australia, inflation targeting is an agreement between the government and the central bank, and both are committed to policy that is consistent with the inflation target.

Shaw Capital Management Korea: Fresh Pressure on BOJ for Adopting an Inflation Target. In several countries, including New Zealand and the UK, when inflation exceeds the target by a wide margin, the Governor is required to provide an explanation to the parliament. With accountability and commitment, inflation targeting does become credible.

A central bank in a deflationary environment is subject to a time-inconsistency problem: it cannot credibly commit to “being irresponsible” and so continue to shoot for high inflation.

Furthermore, there is a concern that once the Japanese economy has emerged from a deflationary spiral and starts to recover, the central bank will be tempted to renege on its commitment to a high inflation target, because it would like the economy to return to an inflation rate consistent with price stability. Thus a central bank in a deflationary environment is subject to a time-inconsistency problem: it cannot credibly commit to “being irresponsible” and so continue to shoot for high inflation. The result of the time-inconsistency problem is that the markets would not be convinced that inflation would remain high, and inflation expectations would not be high enough to lower real rates sufficiently to stimulate the economy out of the deflation trap. To overcome deflation and restore economic activity Japanese policymakers may not need to adopt an inflation target. They could simply use unconventional instruments, such as purchases of riskier assets and foreign assets, more aggressively so to persuade the markets and the public that there will be higher inflation.

Shaw Capital Factoring VS Bank Loan

Factoring is Different From a Bank Loan in Raising Cash by Eve Garcia. Companies can sell their invoices to raise cash rather than go down the bank loan route.

Shaw Capital Management and Financing provide same-day-funding. We can help you meet your cash flow needs immediately without entering into a long term factoring relationship. The money you get for the freight bills we purchase is payment in full. Shaw Capital helps you to avoid costly mistakes, online scam, fraud and other identity theft transactions before you knew it.

More organizations and companies are selling invoices to a third party as a means of raising funds.

The financial process known as factoring is where a business sells its accounts receivable - its invoices - to a third party for immediate payment but receives less in return than the value of those invoices.

This system is usually used by a company when its available cash balance is not sufficient to meet its existing commitments or other cash needs such as fresh orders or contracts. It allows the business to maintain a smaller ongoing cash balance, though by selling the invoices for a lower amount than they are actually for.

The invoice is sold to a third party called a factor, and this is where the approach is different from a bank loan when it comes to a business looking to raise funds.

Shaw Capital Management and Financing - Factors make money available even in circumstances where a bank may be less willing to do so.

This is primarily because they are more concerned with the creditworthiness of the debtor - the business or organisation that is required to pay the invoices for the goods or the services delivered by the invoice seller.

In contrast, banks tend to focus more on the creditworthiness of the borrower when looking to lend.

Factoring is seen as a calculated risk by many firms and one they enter into for a specific reason.

The down side is that they are offloading their invoices for less than their face value, but the return is that they are getting the money owed to them much more quickly than they would have done if they had simply pursued the buyer of their goods direct.

A number of companies operate specifically in the factoring and invoice discounting business and actively contact companies and organizations that they believe will benefit from such services.

These firms look to promote a number of benefits of the services they offer to the invoice seller. They suggest that the process is a way to get access to money quickly and safely and that it also avoids the difficulties and inconveniences that can be involved in collecting bad debt.

It is also promoted to potential customer firms as helping to facilitate and smooth out cash flow and as a way of borrowing money that is secured by their debt.

Once the factoring business takes on the invoice and the debt, it has the responsibility of collecting payment. It makes its profit by paying the invoice seller less cash than the face value of the invoice.

It is worth "shopping around" when looking to engage the services of a such a firm, since the market is competitive, with estimates suggesting that in the UK alone it is worth in the region of £200 billion a year, and fees vary.

There are a variety of reasons for this, with a significant fact being the risk associated with the invoices that are purchased.

Before taking on the invoice, the factor will conduct various levels of research. This will include looking into the track record of the debtor firm to assess whether it is creditworthy or has a history of bad payment. Once taken on, the factor will then seek payment from the debtor.

Factoring is used across a wide spectrum of business organisations and more recently the practice - which has a history stretching back to the 14th century in England - has been adopted by government bodies.

Today in the UK, factoring is used in some form by around 50,000 companies as a means of releasing finance.

Shaw Capital Management and Financing - Freight Bill Factoring to Fund Your Need

Using Freight Bill Factoring to Fund Your Transportation Company by Marco Terry.

Most transportation company owners have to constantly juggle responsibilities. They have to handle vehicle repairs, driver payments, insurance payments, office expenses and more importantly - collecting invoices. Collections can be source of problems for many transportation companies (or freight brokerages) since most clients pay their invoices in 30 to 60 days . Few can afford to wait that long.

Shaw Capital Management and Financing provide same-day-funding. We can help you meet your cash flow needs immediately without entering into a long term factoring relationship. The money you get for the freight bills we purchase is payment in full. Shaw Capital helps you to avoid costly mistakes, online scam, fraud and other identity theft transactions before you knew it.

One way to handle slow payment is to try and negotiate a quick pay - basically asking your clients to pay quickly. Some will do it. Others won't, or at least will only offer it if you give them a discount. Although they are not always reliable, negotiating a quick pay can be beneficial in most cases.

Shaw Capital Management and Financing offer a complete line of factoring services, purchase order funding, and asset based financing, accounts receivable management, and other related financial services.

If quick pays won't work, your best alternative is to secure business financing to ensure you always have funds on hand to cover business expenses. This can be difficult for most owners since institutions require that all applications have stellar credit, assets that can be held as collateral and many years of experience. This will rule out business loans as an alternative for most small and midsized trucking companies. However, this is not necessarily a big problem since a business loan is not always the solution to this problem.

For many, freight bill factoring will be the better alternative. Freight factoring, as it is commonly known, can provide the equivalent of a quick pay by using an intermediary. The intermediary, called a factoring company, advances you funds against your freight bill. The transaction is settled once your client pays the invoice in full.

 
One of the advantages of freight factoring is that it provides predictable cash flow, enabling you to comfortably handle your business expenses. It eliminates having to worry about when your clients will pay.

 

To qualify for freight factoring you need to work with credit worthy clients. Also, your company needs to be free of liens, judgments and other encumbrances. Because of this, freight bill factoring is an ideal solution for small and growing trucking companies and freight brokers.

Shaw Capital Management and Financing offer funding for a wide range of industries and flexible funding requirements that most businesses can easily qualify for.

Shaw Capital Management Korea: Financial Markets

For most of the past month sentiment in the financial

markets continued to improve.

There was further evidence that the global economic

recovery was still on track, and short-term interest

rates remained very low.

But towards month-end the mood changed after the

decision to downgrade Greek debt to “junk” status, and

to reduce the credit ratings of both Portugal and Spain.

There was a fear that the contagion would spread still

further, and that the bond market pressures resulting

from the massive fiscal deficits around the world would

have serious financial consequences.

There was always the risk that some of the measures

that were introduced to counter the recession might

have adverse consequences, and this is now proving

to be the case.

Shaw Capital Management Korea: Major Equity Markets

After moving ahead for most of the month, most of the

major equity markets are ending the period unchanged

or slightly higher, and there have been sharp falls in

many of the minor markets.

Wall Street has been the exception, and is ending

higher, encouraged by some favourable corporate

results.

But markets in Europe, including the UK, are lower,

and there have been falls in the Chinese market, and

other Asian markets, after the measures by the

authorities to reduce the risk of over-heating in the

Chinese economy.

However views about longer-term prospect are still

fairly positive, and the markets seem to be simply

pausing until some of the uncertainties have been

resolved.

Bond markets; have produced a mixed performance,

with the major markets holdings fairly steady, despite

the worsening background situation, but with the minor

markets, especially in Europe, suffering very sharp

falls, and yield spreads between the stronger and weaker

markets opening up to record levels.

The threat of sovereign debt defaults has increased

and urgent action is needed, especially in Europe, if

they are to be avoided.

However there are also warnings that similar conditions

could develop in the UK and in Japan if there are no

early moves to reduce the level of fiscal deficits.

It is still expected that an aid package will be agreed

to avoid a default on Greek debt; but this may only

provide temporary relief.

Shaw Capital Management Korea: Currencies

Movements amongst the major currencies have been

relatively small over the past month.

However the weakness of the euro has enabled both

the dollar and sterling to improve as investors have

rushed to reduce their exposure to the European

currency.

There is a fear that the debt problems affecting Greece

and other countries in the euro-zone will make it

extremely difficult to restore the credibility of the euro,

and that it might make it necessary for some countries

to leave the single currency system, at least on a

temporary basis.

Shaw Capital Management Korea: Short-Term Interest Rates

There have been no changes in short-term interest

rates in the major financial centres over the month.

The Bank of Canada though has indicated that it is

considering pushing rates higher, and this has

encouraged speculation that other central banks may

be planning similar moves.

Shaw Capital Management Korea: Commodity Markets

Moved higher over the past month as sentiment in the

financial markets improved.