Selected excerpts from US Dollar to Remain Undisputed Global Reserve Currency for Foreseeable Future (Premium)

Recent speculation about the future of the dollar as the world’s reserve currency is, in Moody’s view, unfounded. Despite the US’s external deficits and dollar depreciation, we believe that the likelihood of the dollar losing its prominent role as a reserve currency remains very low for at least the next three to five years:

• Regardless of the current state of US public finances, the economic and political factors underpinning the dollar’s reserve currency status are still aligned in favour of the dollar and are likely to remain so for some time.
• There are no plausible alternative currencies that are ready to take the US dollar’s place as the global reserve currency. We do not consider the Chinese renminbi and the IMF’s Special Drawing Right (SDR) to be credible alternatives.
• Inertia and the interconnectedness of financial markets, not to mention the size of the global market for dollar denominated debt, highlight the difficulties of a global switch from the dollar to another currency – and thus help to preserve the dollar’s status.

Our view that the dollar is unlikely to lose its role as the reserve currency represents an important element of the debt metrics that support the US’s Aaa rating.

However, despite Moody’s views about the dollar’s undisputed status, this report nevertheless considers the unlikely scenario of the dollar declining in importance or even losing its reserve currency status.

The main impact of such a loss is likely to be felt through an increase in yields as the market for US paper diminishes – a reduced degree of “debt finance-ability”. Estimates of the likely increase vary widely depending on circumstances and are by their nature highly speculative, but we estimate that yields would rise by 120bps on average.

From a ratings perspective, such a (hypothetical) increase would have its main impact on the US’s debt affordability, i.e. the ratio of interest payments to general government revenues and one of the key metrics that determines the boundary between Aaa and Aa sovereigns.

Technorati Tags: dollar, reserve currency, US sovereign debt

Highlights:

It should be noted that there is no agreement among economists that China’s manipulation of its exchange rate is fully to blame for unemployment in the US …  But even were China to allow its currency to rise, there is a strong likelihood that China would remain a competitive producer of a large range of goods–and richer, higher-wage economies such as the US are unlikely to suddenly become competitive following a minor revaluation of the renminbi.

As long as China is seen to be a free rider in the global economy and refuses to engage in meaningful co-operation on economic issues, pressure will continue to build for a US response. It is unlikely that a small move in the renminbi exchange rate would have much of an impact on the Chinese economy, and the refusal of the Chinese government to allow even a token, say 2%, revaluation of the renminbi so far reflects a determination not to be seen to be yielding to overseas pressure on its economic policy. … The perception is that a more assertive China is refusing to be helpful to the US where it could be.

The destructive potential of a US-China trade war is the key reason for believing that both countries will avoid ratcheting up tensions too far. However, China’s penchant for believing that every attempt to engage China in international co-operation is part of a plot to constrain its emergence as a great power represents something of a wild card.

At the moment, the most likely scenario is that trade sanctions will broaden out to a few more products, but that self-interest and mutual interdependence will play a role in keeping the situation within rational bounds. However, as long as China’s export growth and foreign-exchange accumulation remain high, unemployment in the US remains high, and the final fully sustainable recovery from the recent global downturn remains elusive, pressure will be build on the US administration to take action to bring China into line.

For details see: World risk: Alert – China’s assertiveness could lead to a trade war (Premium)

Technorati Tags: china, PulseCheck, renminbi, trade, US, US-China

China has witnessed tremendous growth in science and technology (S&T) inputs in terms of university students, research and development (R&D) investments and S&T workforce, but this has not resulted in greater innovation.

University students. On the input side, investment by the state in higher education led to an approximate ten-fold increase from 2 million in 1991 to 19 million by 2007. Gross enrollment rates of 18-22 year-olds rose within around 15 years from 3.5% early in the 1990s to 22%. The 15-year (2006-2020) Medium-to-Long-term Plan for the Development of S&T (MLP) aims to increase gross enrollment rates to 25% by 2020. Half of China’s university students major in science and engineering subjects.

R&D expenditures and personnel. As a percentage of China’s fast growing GDP, research and development (R&D) expenditures have gone from under 0.7% of GDP in 1991 to 1.5% by 2007. At purchasing power parity, China’s gross R&D expenditures have reached 100 billion dollars and rank third behind the United States and Japan. The number of scientists and engineers involved in S&T activities has doubled and the number of R&D personnel has tripled over the last two decades.

Quality concerns. Each of the inputs comes with serious quality concerns:

• In university education, only slightly over 10% of faculty members have PhDs and only 40% have any post-graduate degree.
• R&D expenditures are inefficiently used as shown by the meager output of internationally valuable patents.
• In respect of R&D personnel, McKinsey Global Institute has found that only 10% of China’s young white-collar workers are fit for employment at multinational corporations (MNCs). Of total R&D personnel, less than 4% have PhDs and only 10% have master’s degrees.

Patents. China uses its large R&D expenditures inefficiently. With the third highest R&D expenditures in the world, it generates relatively few internationally valuable patents, such as United States Patent Office (USPTO) utility patents. China’s USPTO patents have increased twenty-fold over the last 15 years from a very low base, but China still only ranked 12th in USPTO patents received in 2008. Domestic firms do not seem to be leading this innovation activity. Instead, foreign firms are in the driver’s seat. From 2003 to 2007, MNCs generated 1,125 USPTO utility patents where the lead inventor on the patent was located in China. In contrast, Chinese firms and institutes only created 244 such lead inventor patents.

Although China’s rapid growth in technology inputs over the past decade is remarkable, there are serious institutional problems impairing efficient and effective use of these inputs.

• Ineffective public funding. Ministry of Science and Technology (MoST) and other public sources of R&D funds have traditionally done a poor job of distributing these resources to those who might best realize innovation returns. Peer review panels can incline to favoritism, collusion or even incompetence. MoST’s brief move towards blind review panels to address issues of collusion and favoritism has been reversed.
• Public procurement. The procurement process favors firms with strong government connections and thereby hinders efficient allocation of public resources to support domestic innovation.
• Financial system. The financial system is still heavily biased towards state-owned firms. State-run venture capital firms have done little to rectify this as they generally do not invest in entrepreneurial start-ups.

Outlook. All three institutional problems will only be solved over the medium-term, at best. More likely they will continue to act as a drag on China’s development of innovative capabilities for the next decade.

Technorati Tags: china, innovation, R&D, research & development

Comparative Effectiveness Research Could Pose Barriers to Medical Development (Stanford)

Free white paper from Catherine Sherwood on FINRA Guidance on Use of Social Media by Financial Services

Revealing chart of the makeup of US federal spending in David Leonhardt’s Economic Scene column (NYTimes)

EU fails to agree on fresh restrictions on American hedge funds doing business in Europe (Washington Post)

Private credit demands are poised to rebound (Morgan Stanley)

Technorati Tags: financial-regulation, government spending, Hedge-Funds, medical research, pharma, private-equity, social-media

Morgan Stanley resumed coverage of Kraft Foods Inc. (KFT) with an overweight rating on Mar. 15  Analyst Vincent Andrews said the firm had a $32 price target on the shares. (Business Week)

Analysts at Citigroup reiterated their “buy” rating on Mar 9 and raised the target price for KFT $33 to $36. The acquisition of Cadbury would prove favorable for Kraft Foods. KFT’s stock is attractively valued at the current levels, the analysts wrote. (Benzinga)

Credit Suisse analyst Robert Moskow resumed coverage of the company with an “Outperform” rating on Feb 15 and a $35 price target, arguing the price is reasonable given the potential for operating margins to improve over the coming 12 months.(Barrons)

However, Zacks noted Mar 5 that Kraft earnings estimates were declining and rated the company Neutral.

Investor Nelson Peltz has reduced his holdings(Telegraph), but Berkshire Hathaway still has it as a core holding despite Warren Buffett’s earlier misgivings about the Cadbury deal (Business Insider).

For previous posts on this topic click here.

For latest analyst comment on comment on Kraft see Alacra Pulse.

Technorati Tags: (KFT), food, Kraft, PulseCheck

In its Quarterly Report on China the World Bank projects 9.5% GDP growth for this year and worries about  a housing fueled bubble.

The World Bank’s policy recommendations for China:

The monetary policy stance needs to be tighter than last year and the case for exchange rate flexibility and more monetary independence from the US is strengthening.

• Ensuring financial stability includes mitigating the risk of a property price bubble and ensuring the sustainability of local government finances.
• Sustained, sustainable growth requires structural reforms.
• The fiscal plans for 2010 rightly imply a broadly neutral fiscal stance.
• Given the remaining uncertainty with respect to global growth, additional fiscal flexibility in implementation would be good.
• Inflation expectations and pressure can be contained by tightening the monetary stance and allowing the exchange rate to strengthen.
• Further on inflation, it would be useful to increase the tolerance for modest inflation to allow useful relative price adjustment.
• In addition to containing inflation expectations, monetary policy has a key role to play in containing risks of asset price bubbles.
• The case for a larger role of interest rates in monetary policy is strong.
• If policymakers remain concerned about interest rate sensitive capital flows, more exchange rate flexibility would help.
• Ensuring financial stability calls for mitigating the risk of a property bubble and avoiding strains on local government finances.

Meanwhile, in a speech to the European Parliament, IMF Managing Director Dominique Strauss-Kahn said  for China’s currency must appreciate to help balance trade imbalances.:

“In economies that have been running persistent current account deficits—such as the U.S., but also several European countries—domestic saving must increase. And to support demand, exports will need to contribute more to growth.”

In economies with persistent current account surpluses—such as China, Germany, and many oil-producing countries—domestic demand must go up. Broadly speaking, this means boosting growth in consumption; in some cases, exchange rate appreciation will also play an important role.

And Market News reported that the clash over the value of the yuan heated up again this week with a move by the U.S. Congress that would force the U.S. Treasury to increase the pressure on China to reform its exchange rate policy, even while some economists dispute the charge that Beijing has manipulated its currency.

Technorati Tags: china, exchange rates, fiscal-policy, housing bubble, monetary-policy, renminbi

As McDonald’s Corporation (MCD)continues to deliver impressive results in a difficult economy we are pleased to offer a complimentary download of relevant excerpts from Plunkett Research’s Food Industry Almanac. The Almanac also features a spotlight on Wal-Mart (WMT) and covers topics such as organic and “functional” foods, ethanol and the growing use of RFID technology.

The Almanac includes a spotlight on McDonald’s, highlighting the company’s impressive resurgence after posting losses for 13 consecutive months in 2002-2003.

Selected Excerpts:

Growth continues, with $2.1 billion invested in 2009 to further remodel existing locations and build approximately 1,000 new restaurants around the world. 240 of those were in Europe, 165 in the U.S. and 600 in Asia. This is while most restaurant chains are fighting to keep the doors of their existing locations open. McDonald’s has opened large numbers of locations in China’s major cities with good success, but it has not caught up with China’s fast food leader, KFC.

Perhaps the most lucrative focus adopted by McDonald’s is the extension of operating hours, in many cases staying open around-the-clock. Breakfast has become the biggest moneymaker, comprising 30% of a typical day’s sales.

The market for fast food breakfast in the U.S. reached $25 billion in 2008 annual sales, of which McDonald’s claims one-fourth. The company hopes to expand on its breakfast bonanza by extending hours in which breakfast items are available from seven hours in most all-night locations to 24/7.

The 39-page report has been made available free of charge to Research Recap users for 30 days by special arrangement with Plunkett Research, an Alacra content partner.  After 30 days, the report will revert to its regular Alacra Store price of $149.99)

For additional free research reports from the Alacra Store click here

Related Research on McDonald’s from Alacra:

Zacks ( Mar 9 ) “We think McDonald’s provides relative safety for the investor, with moderate growth prospects, being exposed to faster-growing international markets. However, the economic headwind, which has affected consumers’ disposable income, is impeding growth”

David Palmer, UBS ( Mar 8 ) “We view McDonald’s results as one of the most impressive we have seen in a while.” Buy, target $72.

Joseph T. Buckley, BofA Merrill Lynch ( Mar 8 ) “We continue to rate MCD shares Buy as a Sales Leader.” Target $71.

Paul Westra, Cowen & Co (Mar 8 ) We continue to believe shares of MCD will outperform the market by over +15% over the next 12 months.”

Jeffrey A. Bernstein, Barclays Capital ( Mar 8 ) “Our price target for McDonald’s remains $71, or ~16x our calendar 2010 EPS estimate of $4.40.” Overweight.

John Glass, Morgan Stanley ( Mar 8 ) “While MCD faces more difficult compares in the months ahead, we remain confident the company will continue to gain share in the US as the McCafé program expands with frappes hitting mid-to-late Spring & smoothies due out this summer. ” Base Case $67.

Gregory R Badishkanian,  Citigroup ( Mar 8 ) “We rate McDonald’s Hold/Low Risk (2L), with a target price of $67.”

Matthew DiFrisco, Oppenheimer ( Mar 8 ) “…we maintain our Perform rating and would become more constructive on the shares below $60.”

John Ivankoe, JP Morgan ( Mar 8 ) “We maintain our Dec 2010 price target of $68 with our target reflecting a 15.5x multiple on our C10 estimates.” Overweight.

Fitch Ratings ( Feb 25  US Restaurant/Foodservice Outlook )  “McDonald’s Corporation Ratings (A/Stable)  reflect the company’s geographically diverse revenue base, substantial cash flow generation, and stable royalty stream. Industry leading margins and SSS performance further strengthen the company’s credit profile. Fitch believes operating performance will continue to guide the company’s financial strategy. McDonald’s credit statistics are projected to remain relatively stable in 2010.”

Technorati Tags: (MCD), complimentary, ethanol, food industry, mcdonald's, organic food, Plunkett, PulseCheck, restaurants, RFID

The negative outlook reflects Fitch’s expectation that rating downgrades will exceed upgrades in the coming year, with affirmations remaining the most frequent rating action in the sector.

For 2010, Fitch expects the following:

• Cash flow should remain stable.
• Occupancy will remain stable as the financial markets continue to stabilize and potential buyers remain convinced that a bottom has been reached in the real estate market.
• The use of incentive programs will decline, which should lead to modestly improved cash flows as the discounting of entrance fees decreases and the timing of entrance fee collections improves.

“The case of Erickson Retirement Communities provides a good example of the sector’s bifurcation between start-up and mature communities. During 2009, Erickson, one of the pioneers in the development and management of nonprofit continuing care retirement communities (CCRCs), filed for bankruptcy protection due to slower than anticipated sales and occupancies at several start-up communities under development and a very tight credit environment. Within the same period, Fitch affirmed ratings on three mature communities that Erickson had fully developed and continues to manage under management contracts; most recently, in early 2010, Fitch placed one on Positive Rating Outlook. For 2009, each of these facilities maintained high levels of occupancy while reporting solid operating performance. With the very tentative return of start-up new issuance in late 2009, 2010 could prove to be a critical year for the re-emergence of start-up CCRCs.”

For details, see 2010 Senior Living Outlook (Premium)

Technorati Tags: retirement, senior living

US Bank Failures Threaten Small-Business Lending (WSJ)

Global harmony on financial regulation a distant prospect despite Lehman outrage( FT’s Gillian Tett) Sad but true

Junk Bond Avalanche Looms for Credit Markets (NY Times)

Traders Tapping Social Media to Gauge Market Sentiment using Alacra Pulse (WSJ)

Technorati Tags: bank lending, china, financial-regulation, junk bond, small business, Twitter

Business Insider has details of the company’s 10-K filing. A few excerpts:

• It is possible that a successful and efficient implementation of an exchange or any of the other strategies we are pursuing will require us to make a pre-packaged, pre-arranged or other type of filing for protection under Chapter 11 of the U.S. Bankruptcy Code.
• If we are unable to successfully implement our operational and business strategies, if we are unable to reach agreements with our debt holders to restructure a sufficient portion of our debt, or if the major studios tighten or eliminate credit terms, we may voluntarily seek relief under the U.S. Bankruptcy Code.
• We are currently experiencing significant liquidity constraints and have sizable amortization and other debt service requirements. Should we not be able to generate sufficient cash from operations and should the studios tighten or eliminate credit terms, we may determine that it is in the Company’s best interests to voluntarily seek relief through a pre-packaged, pre-arranged or other type of filing under Chapter 11 of the U.S. Bankruptcy Code, including prior to the time we would otherwise be required to do so in an acceleration event.

In related news, AP reports that Kiosk operator NCR Corp.(NCR) said Monday it would place Blockbuster Express-branded DVD rental kiosks at nearly all 365 Sheetz convenience stores in North Carolina, Ohio, Pennsylvania, Maryland, Virginia and West Virginia by the end of March.

Blockbuster has put its European arm up for sale, according to the Sunday Times of London.The paper said the indebted U.S. company wanted to sell its European division, which it values at about 50 million pounds, to raise cash.

See also Research Update: Analysts Divided on Video Rental Business

Technorati Tags: (BBI), (CSTR), (NFLX), Blockbuster, Coinstar, DVD, Netflix, PulseCheck, streaming media, Tivo, video