Dollar’s 26-month high

THE Australian dollar surged to a 26-month high against the US dollar in Asian trade yesterday.

The currency wasboosted by increasing expectations of a rate rise by the Reserve Bank of Australia next week.

Helping the Australian dollar, and weighing on bonds since Friday’s close in Asia, was a signal about further economic concerns from Federal Reserve chairman Ben Bernanke in his Friday speech. Those concerns reinvigorate some market participants’ belief that further quantitative easing may be necessary.

“QE still dominates markets and if we get more hints that is coming in the US, the UK and Japan, that caps bond yields everywhere, notwithstanding what the RBA may or may not to,” said Westpac global head of fixed income strategy Russell Jones.

Still, locally, the recent talk has been all about growing rate rise expectations from the RBA and a surging dollar. Since the start of the month, the Australian dollar is up 9 per cent, while 30-day interbank futures are now pricing in a more than 50 per cent chance of a rate hike from the RBA when it meets again next week. Only a month and a half ago, market pricing had the central bank more likely to cut rates than raise them.

As both the Australian dollar and rate hike expectations continue to grow, there remains a concern the market has overdone it with the recent surge, with Mr Jones saying “there is a tendency for the mood swings to be particularly violent here and we’ve had a remarkable change in opinion over the last month or so”.

Even so, several Sydney-based foreign exchange trading desks said on Friday the Australian dollar remained firmly in “buy on the dips” territory.

“Buy (Australian dollar) on dips so long as $US0.9380/90 holds,” said NAB strategists, although the firm added that to hit parity some help would be needed. “Parity will likely also require the US Fed to restart quantitative easing, which remains uncertain.”

At the close, the Australian dollar was at US95.88c, up US0.94c from Friday, after earlier tapping a new two-year high of US96.23c. Against the Japanese yen, the Australian dollar was at Y=80.775, from Y=80.605.

For the bond market, both ends of the curve were particularly weak.

DOW JONES NEWSWIRES

Company cash pile hits 58-year high

US companies are holding more cash in the bank than at any point in the past 58 years, underscoring persistent worries about the sustainability of the economic recovery and the potential for a renewed financial crisis.

The Federal Reserve reported yesterday that non-financial companies had socked away $US1.84 trillion ($2.12 trillion) in cash and other liquid assets as of the end of March, up 26 per cent from a year earlier and the largest increase on records going back to 1952.

Cash made up about 7 per cent of all company assets including factories and financial investments, the highest level since 1963.

While renewed confidence in corporate-bond markets has allowed big companies to raise a record amount of money, many are still hesitant to spend the money on hiring and expansion amid doubts about the strength of the recovery.

They’re also anxious to keep cash on hand in case Europe’s debt troubles lead to a new market freeze.

“Cash is still king,” says Jeff Hand, chief operating officer at Ross Controls, a Troy, Michigan, maker of pneumatic valves and other products that is holding more cash as it struggles to recover from a sharp drop in business last year.

“We’re coming out of that, but the uncertainty is still there.”

Ross cut its US staff by about a third last year, and has hired back only a small fraction, he says.

The rising cash balances could represent a longer-term shift in corporate behaviour in the wake of the worst financial crisis in decades.

In the darkest days of late 2008, even large companies faced the threat that they wouldn’t be able to do the everyday short-term borrowing needed to make payrolls and purchase inventory.

“We just went through this liquidity crunch that’s made them realise the value of a dollar in hand,” says Duke Fuqua School of Business economist John Graham.
Even now, banks are pulling back: The Fed reported yesterday that net lending by the financial sector fell at a seasonally adjusted annual rate of $US1 trillion in the first quarter from fourth quarter, the fifth straight quarterly decline.

Still, the comfort of having cash on hand comes at a high price.

Companies are earning almost no interest on their holdings of cash. That will put pressure on companies to pare down the cash holdings eventually.

“Stockholders don’t want them to keep sitting on cash at a zero return,” says Paul Kasriel, an economist at Northern Trust.

“They’re going to use it”, either to increase hiring and investment or to make payouts to shareholders in the form of dividends or share buybacks, he says.

In a recent survey of company chief financial officers that Mr Graham conducted with CFO Magazine, he found that companies expect capital spending to increase by 9 per cent over the next year, compared to 1.5 per cent when he asked the question in December.

They expect employment to grow by a meagre 0.7 per cent, compared to a 1.4 per cent drop they expected six months ago.

Cash has piled up at Hooker Furniture, based in Martinsville, Virginia.

The company has seen increasing demand for the upholstered furniture it makes in the US, which usually leads demand for the other furniture it imports from China, but it’s being cautious nonetheless.

When it reported results Monday, the company said it had $US38.7m in cash and other highly liquid assets on its balance sheet in its fiscal quarter ended May 2, up from $US26.2m a year earlier.

“We’re a fairly conservative company, and keeping our powder dry makes sense to use,” says chief financial officer E Larry Ryder.

Mr Ryder says he sees the cash as a sort of insurance fund to make sure he can buy the raw materials and other inventory he’ll need to meet demand if business picks up.

The company has cut its inventories to $US38.5m from $US47.1m over the past year.

“We don’t want to tie our cash up to the point that we don’t have the liquidity we need to accumulate inventory when we need it,” says Mr Ryder.

Meanwhile, US household debt fell for the seventh straight quarter in the first three months of 2010 as Americans continued to respond to the recession’s fallout.

Household debt fell at a 2.5 per cent annual rate to $US13.54 trillion in the first quarter.

The household sector’s debt level, which includes both consumer credit and mortgage loans, remained at about 20 per cent of total assets in the first quarter.

The ratio is down from a peak of around 22.5 per cent in the first quarter of 2009, but still well above a ratio of about 15 per cent in the mid-1990s.

Excessive debt-financed spending was one of the causes of the recent recession.

After living beyond their means, Americans were stung and are paring back their debt.

While that may be good for the long-term health of the economy, it has kept a lid on consumer spending, a key engine for economic growth.

The Fed report showed that US households’ total net worth, meantime, climbed 2 per cent, to $US54.57 trillion.

Household net worth is assets, such as home equity, minus liabilities, such as mortgage debt.

The gain in wealth came as holdings in corporate equities and mutual funds picked up.

Additional reporting: Jeff Bater and Luca Di Leo

High-flyers get the chance to create

BUILDING an investment bank — rather than running a well-established one — has proved a refreshing change for Moelis high-flyers Andrew Pridham and John Steinthal.

The pair have already worked for large global operations and are tired of the “bureaucracy” that comes with them.

“There’s this constant battle,” says Steinthal, who recently joined US investment bank Moelis & Co’s Australian operations as head of equities.

“(You’re) always sort of wondering what’s going to be next and how does it affect my business? How does this affect our revenues? How does this affect my compensation? How does this affect my clients? There’s no doubt that employees at investment banks are sort of tiring of what are quite bureaucratic global organisations.”

Pridham, who also started at Moelis in March as head of investment banking, says the pair joined after convincing ex-UBS global investment banking head Ken Moelis to relinquish 50 per cent of the equity in the new outfit to senior executives.

“It’s quite liberating. I actually do enjoy getting up and coming in,” he says. “Every day it’s something positive rather than the drudgery you tend to get when you’re running an investment banking business . . . It wears you down — having the day-to-day grind of keeping a business going opposed to building it.”

Moelis’s impressive offices in Sydney’s Governor Phillip Tower, a stone’s throw from Pridham’s and Steinthal’s respective former employers, JPMorgan and UBS, clearly show they are in the building phase.

Along with the standard investment bank harbour views, there are rows of empty desks and vacant offices. But they won’t stay empty for long, with a swag of top-rated bankers now on gardening leave due to start in coming months.

“What Moelis can offer you, you can’t get at UBS, you can’t get at Credit Suisse, you can’t get at Deutsche Bank,” Steinthal says.

Ken Moelis himself is expected to return to Australia to officially open the firm’s doors when the equities business kicks off, as early as next month.

In the meantime, Pridham has been busy building the firm’s investment banking side, mainly advising independent directors, companies pondering IPOs and offshore clients coming in through Moelis’s global network.

“I think a lot of people like the fact that we’re small — they get to deal with senior people and we’ve got bits they think they need,” Pridham says.

Moelis has targeted experienced bankers at the managing director level with well-established relationships. The firm has no intention of embracing electronic trading tools, preferring to leave that to others, such as fellow local US start-up Instinet.

“There’s been a real shift away from investment banks that actually put lines of stock together and cross them, which is clearly what the institutions want because they use dark pools, they use Chi-X, they use liquidnet — they’re looking for the ability to move lines,” says Steinthal.

Pridham puts it more simply with the investment banker adage: “Clients don’t deal with companies; they deal with the bankers.”

The bankers cherry-picked so far include Royal Bank of Scotland’s David Iron and Credit Suisse’s Robert Farrington, with more likely to follow.

“A lot of people have approached us wanting to come here because they don’t like the big bureaucracy of the big banks,” Pridham says.

“They want to work in an environment where they can work with good people and help their clients, can be paid well, paid in cash, have equity in it, build a business — and that’s where we see our position in the market.”

That market is getting particularly crowded, with Nomura and Barclays Capital also building their equities businesses, and fellow US investment bank Greenhill’s move on the advisory market through the purchase of Caliburn.

“I’ve been working in large investment banks for over 20 years, and I don’t remember a time when it wasn’t highly competitive,” says Pridham, adding that Caliburn doesn’t have Moelis’s equities capabilities.

Moelis plans to differentiate itself not only by execution, but by having no proprietary trading and through research with “edge”.

“We don’t intend to be like a UBS in terms of having 50 analysts, but by the same token, we don’t intend to be seen as being boutique,” says Steinthal.

“It’s not often that people get an opportunity to start an investment bank from scratch.”

Goldman’s high-flyers feel the pinch

THE 100 most senior employees at Goldman Sachs in London will have their total pay capped at pound stg. 1 million ($1.78m) when the Wall Street bank reveals its 2009 bonuses this week, in a nod to the government's calls for cutbacks in bankers' pay.

Less senior British employees who are awarded more than pound stg. 1m for their work last year will have 60 per cent of any amount over pound stg. 1m paid in deferred stock, in line with Financial Services Authority guidelines.

Goldman Sachs’s 32,500 workers worldwide will share the burden of Britain’s one-off 50 per cent tax on bonuses above pound stg. 25,000, which is likely to reduce the bank’s compensation pool by hundreds of millions of dollars.

Analysts estimated that the tax sliced about pound stg. 300m from the pay pool of JPMorgan, a rival bank, which was pound stg. 9.3 billion for 2009.

Wall Street’s most successful bank, which employs about 5500 people in London, said last Thursday that it had set aside $US16.2bn ($17.9bn) for bonuses for 2009, well below the $US20.2bn record pay pool of 2007.

Announcing a $US13.4bn net profit for last year on net revenues of $US45bn, only 2 per cent lower than 2007, David Viniar, Goldman Sachs’s finance director, said the bank had shown “restraint” in awarding pay. “We’re not blind to the pain and suffering still going on around the world and we’re not deaf to the calls for restraint. We heard them,” he said.

Goldman Sachs’s partners will wear a disproportionate amount of the cuts to the reduced pay pool, in the same way that they are paid the most generously in bumper years.

There are about 100 partners in London, all of whom will be paid no more than $US1m for last year. All Goldman Sachs partners around the world will receive 60 per cent of their bonuses in stock that will vest over the next three years but cannot be sold for five years.

Goldman Sachs had already said that its 30-member management committee would receive their entire 2009 bonuses in stock.

The partners’ compensation shrank in the fourth quarter when the bank allocated $US519m out of its pay pool to Goldman Sachs Gives, its charity. Of the $US519m, $US500m was cash that had been allocated for partners’ pay.

Goldman Sachs and other banks also face a US tax designed to raise as much as $US117bn to cover the cost of the Obama administration’s bailout.

Eurozone bank stability risks high

THE European Central Bank believes eurozone banks will need to write down another $US283 billion ($357bn) by the end of next year and sees the bloc’s total crisis-related losses at $US649bn, far below the $US904bn the International Monetary Fund forecast in April.

Stability risks: The euro sign sculpture outside the European Central Bank headquarters in Frankfurt, Germany. Picture: Bloomberg

theaustralian.news.com.au

Shares hit seven-month high

THE Australian share market rose through the 4000 level yesterday to close at a seven-month high, led by property stocks as data showed the economy had avoided a recession.

The benchmark S&P/ASX200 increased 61.9 points, or 1.56 per cent, to 4017.2, while the broader All Ordinaries gained 61.2 points, or 1.55 per cent, to 4009.3, the highest close since November 10.

On the Sydney Futures Exchange, the June share price index contract closed 63 points higher at 4023 on a volume of 29,885 contracts.

“Everything has improved markedly and the data is giving us the right direction,” Macquarie Equities associate director Lucinda Chan said.

Gross domestic product (GDP) rose 0.4 per cent in the March quarter, following a 0.6 per cent fall in December, according to the Australian Bureau of Statistics.

Australia avoided a recession, defined as two consecutive quarters of negative growth.

Ms Chan said other local data, including export and retail figures as well as overseas data, were showing that the global economy was starting to improve. “There’s a real feeling that if you don’t buy now you’ll miss out,” she said.

Leading the index higher were property stocks, led by GPT Group’s 6c, or 12.5 per cent, jump to 54c.

GPT — the most traded by volume, with 222 million securities worth $114.6 million changing hands — announced the sale of almost $560 million of assets as it seeks to restructure its business model.

Westfield, Australia’s biggest property company, gained 71c, or 6.1 per cent, to $12.35 and Lend Lease rose 45c, or 6.25 per cent, to $7.65.

Property companies, which were among the hardest hit during the downturn, were attracting money now as many had recapitalised through equity raisings, Ms Chan said.

Adding to the market’s gains, mining giant Rio Tinto rose $2.60, or 3.77 per cent, to $71.60, while rival and Australia’s biggest company, BHP Billiton, added 33c to $37.03.

The major banks rose. Commonwealth Bank climbed 47c to $36.80, Westpac rose 41c, or 2.19 per cent, to $19.17 and National Australia Bank increased 31c to $23.11.

ANZ gained 38c, or 2.38 per cent, to $16.36 after saying it would open a branch in Guangzhou, China, following approval from the regulator.

Stocks that bucked the trend included Wesfarmers, owner of Coles and Bunnings, down 51c, or 2.18 per cent, to $22.86, and insurer QBE, down 28c, or 1.44 per cent, to $19.14.

Shares in Beaconsfield Gold fell 1.5c to 15c after the miner said it was seeking to raise $5 million, partly to expand outside Tasmania.

Cash-poor uranium explorer Uranio is planning a scrip-based merger with a private company headed by uranium industry stalwart Alan Eggers, and has tipped further corporate deals.

Uranio shares skyrocketed 10.5c, or 53.85 per cent, to 30c.

OZ Minerals fell 4c, or 4.26 per cent, to 90c after getting all Chinese government approvals required to sell most of its assets for $US1.2 billion ($1.46 billion) to a Chinese state-owned company.

theaustralian.news.com.au

KPMG tells high-flyer to fly home

ONCE an international high-flyer, Carolyn Van Hecke is part of an emerging new aspect of the global financial crisis.

Mrs Van Hecke, 40, her husband Wayne, 35, and two children Thomas, 10, and Emily, 9, came to Australia from Britain after being lured by a two-year contract with accounting firm KPMG and the promise of a bright future.

But after four months, without warning, she was marched from the Adelaide office by the company’s security guards after her position was made redundant as a result of the economic slowdown.

She was advised that under the terms of her business-sponsored visa, she and her family had 28 days to leave the country. Mrs Van Hecke, like thousands of accountants and auditors brought to Australia from financial centres in London, New York and Singapore under the Skilled Migrant Program, has been hit hard by the financial crisis and a subsequent sharp fall in demand for her skills.

After being hired by KPMG through an international recruitment firm, Mrs Van Hecke, a consumption tax specialist for a British accounting firm, and her husband, a firefighter, quit their jobs, sold their house in Bolton, a town in Greater Manchester, and relocated to South Australia.

They enrolled their children in school and bought a house in southern Adelaide.

Mrs Van Hecke took up her new $115,000-a-year role as head of KPMG’s GST unit in Adelaide on August 4, and after being made redundant on December 4 she said the company “tried to bully us into moving on to a tourist visa, presumably to wash their hands of us and get out of their repatriation obligations”.

“Obviously business is business … but I am upset that we have been treated this way; the financial and emotional cost to my family is breaking my heart,” Ms Van Hecke said.

She said KPMG had wanted her to help develop its GST business unit, which she had been told had lacked direction for many years.

“KPMG had jumped at the chance to talk with me because they had struggled for years and years to fill the post,” she said.

“We had a couple of video conferences and they offered me the job. Things are not good in the UK, and I really do not want to go back. We thought Australia would provide a good life for the children, and the opportunity presented itself as a new challenge.”

Although her husband and daughter have since returned to Britain, Ms Van Hecke had been given an extension by the Immigration Department to stay on with her son until June 23, as she tries to sell the family’s Adelaide house, which remains on the market. She estimates she is $50,000 out of pocket, and is still seeking promised relocation costs from KPMG. Ms Van Hecke said she had received an $8000 redundancy payment in December.

“I am an absolute wreck; it is just not what we imagined it would be like,” she said.

“You just want to cry. But we have no choice. We can’t stay. I would love to come back one day, despite all that has happened, because Australia feels right for us.”

KPMG’s corporate communications co-ordinator, Claire Fitzsimons, said in an emailed statement that the company “does not discuss its employment arrangements in relation to any particular employee”.

theaustralian.news.com.au

AIG high-flyers to return bonuses

SOME top employees of AIG’s disgraced financial products group have agreed to return hefty retention bonuses.

Their decisions today came after mounting public outrage over $US165 million ($243.6 million) in payouts to a unit that brought the insurer to its knees.

Among them was Douglas Poling, who received the richest payment of more than $US6.4 million, according to a person familiar with the matter.

Mr Poling, the 48-year-old son of a former chief executive of Ford Motor, is an executive vice-president with responsibility for energy and infrastructure investments. He is one of the 418 current and former employees from AIG’s financial-products unit who received bonus payments.

Mr Poling declined to comment.

The promise of forfeitures did little to quell the groundswell of public anger yesterday. That collective ire was apparent during a daylong US House committee meeting, where AIG’s government-installed chief executive, Edward Liddy, testified into the early evening. US representatives excoriated Mr Liddy and the giant insurer for the bonus awards, and vowed to extract the payments.

AIG, said Congressman Paul Hodes, stood for “arrogance, incompetence and greed”.
Mr Liddy conceded in testimony that the AIG name had been so damaged and “disgraced” that the company would probably phase it out over time.

The CEO further tried to parry the public’s disgust, acknowledging Americans were “mad as a hornet” that employees would collect the bonuses.

He said he had asked those who received $US100,000 or more to forfeit at least half the amount. Some bonus recipients had already agreed to return the payments in full, he said, although he didn’t provide details about how much had been repaid, or by how many employees.

The testimony also revealed a culture of compensation that was highly favourable to AIG’s financial-products employees – regardless of performance. For instance, the employees were paid bonuses in 2007, whether the unit turned a profit or not. The 2008 bonus plan was also designed to kick in without regard to paper losses. In all, the unit reported losses of more than $US40 billion last year.

AIG also disclosed in its 2007 annual report that the year’s compensation for the financial-products employees – which totalled $US423 million – “was not affected” by gains or losses on derivatives. For 2007, those derivatives, related to toxic real-estate assets, produced a paper loss of $US11.5 billion. Paper losses on such contracts snowballed to $US28.6 billion for 2008.

Spurred by the anti-AIG anger, congressional Democrats, moving swiftly, unveiled legislation yesterday to put new taxes on executives working at any firm receiving at least $US5 billion in federal assistance. The legislation would impose a 90 per cent surtax on payments made to executives and high-earning employees, effective retroactively to bonuses paid after December 31, 2008.

With Liam Pleven, Liz Rappaport and Greg Hitt

theaustralian.news.com.au