(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)

Listening to the Australians, you could be forgiven for thinking their economy is dead in the water – or about to be. The land Down Under has its problems, including a China-driven commodities downturn and an A$18 billion deficit ($17.9 billion) in this week’s budget announcement from Treasurer Wayne Swan, months after he projected a surplus. But the economy, now in its 22nd year of unbroken economic growth, still boasts the stability other countries only dream of.

Granted, it’s worrying that the country has been in the red since 2009 despite a giant commodities-driven trade boost. But politics drove that. The current Labor government – as well as the Liberal administration before 2007 – used the boom to finance pet projects and spent money to keep the country out of recession after the financial crisis.

The cost of all of this has hardly been severe. Swan’s deficit prediction for this year equates to just 1.1 percent of GDP, compared with around 4 percent in the United States and 6 percent in the United Kingdom.

On top of that, the jobless rate is just 5.5 percent, close to what many western economies consider to be full employment. The currency is falling: the Aussie dollar fell below parity against the U.S. dollar this week for the first time in almost a year, days after the Reserve Bank of Australia cut interest rates by 0.25 percent. But many have complained for years that it is overvalued. And a weaker currency will make exports cheaper, or more profitable.

China remains the big worry. Mining investment is peaking at 8 to 9 percent of the economy, according to the RBA. Housing construction seems to be the one industry that could fill the gap. Judging by the phalanxes of cranes active in Sydney and Melbourne, the industry is trying to oblige. But already-high house prices and high loan-to-deposit ratios at banks may make it hard to transform the enthusiasm into financial reality without stoking a bubble.

In any event, the next government – likely to be the Liberal Party after September elections – has more than enough wiggle room to cut cost or even raise taxes if needed. The rest of the world should be so lucky.

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Tesla’s shareholders seem to be assuming Chief Executive Elon Musk is infallible. The $10 billion U.S. electric carmaker is on a roll, last week recording its first quarterly profit and receiving the best score the Consumer Reports publication has bestowed on a car for six years. The company’s stock has since surged as much as 70 percent, leaving Tesla worth more than Fiat and Peugeot combined and trading at a whopping 27 times estimates for earnings in 2016.

Both top and bottom lines look set for rapid expansion now that production of the award-winning Model S is in full swing. Tesla’s revenue for the first three months of the year jumped 83 percent from the previous quarter as sales hit 400 vehicles a week. Consensus estimates for 2014 put sales at $2.5 billion, six times last year’s showing. By 2016, that’s expected to almost double again to $4.3 billion.

And Tesla’s gross margin is improving, reaching 17 percent in the three months to March. Musk predicts it will reach 25 percent in the fourth quarter. This measure does not, however, take research and development or general and administrative costs into account. Factor those in and Tesla’s pre-tax margin in 2016 is estimated at 12 percent.

That’s impressive for a car company – Ford’s North America division, for example, tops out at 11 percent in a good quarter. But it’s hardly in the same league as Silicon Valley fellows like Google, whose pre-tax margin was 28 percent last quarter.

To justify Tesla’s high 2016 valuation multiple, revenue would need to keep growing at a fast clip. Musk has plans to launch a crossover SUV followed by cars that may sell for around $45,000 – not far off half the price of some versions of the Model S. He may even develop vehicles in the $30,000 price range to attract more buyers. But that will take time and shift the company into a more cut-throat market segment where margins could suffer.

Musk has battled everything from skepticism about a manufacturing startup to tight cash flow and, most recently, attempts by traditional car dealers in Texas and Virginia to stop him selling vehicles directly to the public. His record so far is impressive. But Tesla’s stock price suggests investors are pulling ahead of themselves.

(The author is a Reuters Breakingviews columnist. The opinions
expressed are his own.)

By Antony Currie

NEW YORK, May 8 (Reuters Breakingviews) – Shareholders in
the Brazilian version of Goldman Sachs (GS.N: Quote, Profile, Research) appear to be
getting wise to its lumpy earnings. BTG Pactual (BBTG11.SA: Quote, Profile, Research), run
by Andre Esteves, missed estimates in the first quarter and
posted one of its lowest returns on equity since going public in
Sao Paulo. It’s still a decent performer. But as Pactual’s
American rival discovered in years past, investing its own money
isn’t always all it’s cracked up to be.

The firm’s proprietary trading desks (no Volcker Rule on
Faria Lima) brought in half as much revenue in the first quarter
as they did in the same period last year. The bank’s real estate
investments also bled 190 million reais. Combined, that caused a
two-thirds drop in revenue from principal investments, which
accounted for a third of the bank’s top line in 2012. Asset
management also slumped – though that was more of a seasonal
issue as the bank books most performance fees at the end of the
year.

Even so, Pactual sports an enviable business by Wall Street
standards. Its return on equity for the quarter might not be in
the 25 percent range investors have grown accustomed to. But it
is still better than the likes of Goldman, which has only
recently bested 10 percent. And the Brazilian firm has a better
handle on costs. Compensation came in at 23 percent of
first-quarter revenue compared with 43 percent at Goldman.

But having a large chunk of business tied up in risky prop
trading and unpredictable investments eventually makes investors
more nervous. That was not so evident when Pactual went public
in April last year in a better economy and after several
quarters of stellar returns – and helped the bank secure a
valuation of three times book value.

That has since fallen to a multiple of just over two times
book as the economy, and Pactual’s investments arm, has
faltered. That’s stellar by the standards of Wall Street, where
even the mighty Goldman trades just a squeak above the value of
its assets minus liabilities. But unless Pactual can reduce the
share of its earnings that come from riskier endeavors, it’s a
valuation that has nowhere to go but down.

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CONTEXT NEWS

– Reuters: Brazil’s BTG Pactual misses profit estimates as
expenses soar [ID:nL2N0DO2U9]

– For previous columns by the author, Reuters customers can
click on [CURRIE/]

(Editing by Rob Cox and Martin Langfield)

((antony.currie@thomsonreuters.com)(Reuters messaging
antony.currie.thomsonreuters.com@reuters.net))
Keywords: BREAKINGVIEWS BTGPACTUAL/

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the Reuters group of companies around the world.

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)

The weakening yen is good news for Japan’s automakers. The more than 20 percent drop in the currency’s value against the dollar since early October will boost profit from overseas sales – and probably market share, too. A return to the glory days of 2006, though, is likely to prove elusive.

Back then, Toyota’s market value was greater than the combined worth of its eight major western rivals – Ford, General Motors, Fiat, Renault, Peugeot, BMW, Daimler and Volkswagen. Though the yen may be heading back towards 115 to the dollar, as it was then, virtually everything else has changed.

Seven years ago, Chrysler, GM and Ford were a mess. Now all three companies are back on the road, the first two with the help of a government bailout. They are earning decent money after slashing costs and cranking out better vehicles.

The strong yen of recent years also prompted Japan’s big three automakers to shift more production overseas. Some two thirds of the cars that Nissan and Toyota sell in North America are now made there, while for Honda the ratio is 90 percent. That reduces the benefit of being able to export Japanese-made cars at a lower exchange rate.

The weakening currency still provides some fillip. At 100 yen to the dollar, Japanese automakers’ top lines will receive a $2,000 boost for each car they sell in the United States, according to Morgan Stanley. How the manufacturers use this benefit will be crucial. Simply allowing it to accrue to the bottom line would flatter earnings, but may tempt executives to put efforts to cut costs on hold.

Offering discounts to U.S. buyers would risk starting a price war which would hurt American carmakers’ bottom lines, but carry no guarantee of a market-share shift. Using some of the currency benefit to add more features to cars could be more effective, though it may take several years for the effects to show in market share and profit.

The final option is to boost dividends or investment. Expectations of increased largesse have already sent Japanese auto stocks up some 70 percent since October. Absent another big drop in the yen, though, there doesn’t seem to be enough horsepower left to take Toyota up by another third to its 2006 high.

(The author is a Reuters Breakingviews columnist. The opinions
expressed are his own.)

By Antony Currie

NEW YORK, April 2 (Reuters Breakingviews) – Nasdaq OMX
(NDAQ.O: Quote, Profile, Research) may be paying the price of dealmaking gone wrong.
Nearly two years after failing to supersize itself by acquiring
NYSE Euronext’s (NYX.N: Quote, Profile, Research) equities business, the bourse is aiming
smaller with a $750 million plan to buy eSpeed, an electronic
bond-trading operation. Investors erased 90 percent of the price
tag from Nasdaq’s market value. The excessive skepticism ignores
the target’s income and the buyer’s cost discipline.

It’s an expensive deal, for sure, at almost 11 times last
year’s EBITDA. True, it’s less than the 13.3 times of trailing
revenue Thomson Reuters (TRI.TO: Quote, Profile, Research)(TRI.N: Quote, Profile, Research) – the parent company of
Breakingviews – paid for FXall, an electronic foreign exchange
service. And corporate bond electronic trader MarketAxess
(MKTX.O: Quote, Profile, Research) is trading at almost 15 times. For Nasdaq, however,
which is valued by the market at just six times EBITDA, it’s a
pricey acquisition.

Moreover, the real prize of owning eSpeed will come from
expanding into other fixed-income products like corporate bonds.
There is a lot of pressure for these markets to go electronic.
Wall Street needs to cut costs. And new capital charges have
prompted banks to create markets in fewer products, making it
harder for investors to trade.

Competition is of course rife. Aside from MarketAxess, most
banks are trying to push electronic bond trading, the NYSE is
rolling out products and bondholders like BlackRock (BLK.N: Quote, Profile, Research) are
developing platforms. So, too, are non-bank and non-asset
management players like TradingScreen.

The crowded marketplace makes shareholder wariness
understandable, though they could be overlooking some important
aspects. While eSpeed’s top line last year, at $99 million, will
fluctuate with investor appetite, it shouldn’t suddenly dry up.
Nor is the company baking new revenue into its assumptions:
Nasdaq reckons current volume will be enough to boost its
earnings within 12 months.

More importantly, Robert Greifeld’s trouble with big deals –
in addition to regulators torpedoing the NYSE transaction, he
failed in a 2006 bid to buy the London Stock Exchange (LSE.L: Quote, Profile, Research) –
he has proven more adept at smaller ones. The Nasdaq boss also
has shown remarkable discipline at keeping costs under control.
His 20 percent net margin last year, for example, exceeded the
NYSE’s 16 percent. Buying eSpeed may not be a game-changer for
Nasdaq, but neither is it the disaster investors fear.

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CONTEXT NEWS

– Nasdaq OMX agreed on April 1 to buy electronic Treasuries
trading platform eSpeed for $750 million in cash and an earn-out
of up to $484 million in stock. The latter portion is to cover
tax benefits from the deal that will accrue to Nasdaq and will
be paid to the seller, BGC Partners (BGCP.O: Quote, Profile, Research), over 15 years.

– Nasdaq expects the deal to enhance its earnings within 12
months. Revenue for eSpeed in 2012 was $99 million with EBITDA
of $69 million.

– Nasdaq press release: link.reuters.com/sus96t

– BGC Partners press release: link.reuters.com/tus96t

– Reuters: Nasdaq to buy eSpeed platform for $750 mln
[ID:nL3N0CO2FE]

RELATED COLUMN

Taking public market private [ID:nL1N0BC88Q]

– For previous columns by the author, Reuters customers can
click on [CURRIE/]

(Editing by Jeffrey Goldfarb and Martin Langfield)

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Goldman Sachs and Warren Buffett have found a way to scratch each other’s backs – again. The mutual assistance started during the crisis when the Sage of Omaha stepped in with a $5 billion rescue investment in 2008 that provided him with a healthy 10 percent yield on Goldman preferred shares. Now, they’re amending terms of warrants granted to Buffett in the same deal that also works well both ways.

The new agreement simplifies one entitling Buffett’s Berkshire Hathaway to buy 43.5 million Goldman shares for $115 apiece. Based on the current share price of about $146, that would have left the conglomerate $1.4 billion in the money and as Goldman’s biggest shareholder with about a 9 percent stake.

The revised structure keeps Buffett in the black, assuming the stock doesn’t tank between now and October. Now, however, he isn’t obligated to shell out $5 billion to buy the stock. Instead, Berkshire will simply receive enough shares to cover the profit.

Without any outlay, Buffett can brag of an infinite return on the warrants. More practically, by not tying up the cash in Goldman, he can keep it in reserve for another Heinz-like elephantine acquisition target. Following the co-purchase of the ketchup maker, his reserves will dip by almost a third to about $30 billion.

Goldman, meanwhile, escapes some irritating side effects of the investment. It will no longer dilute shareholders as much. Instead of issuing 9 percent of new stock, based on Tuesday’s price it should only need to issue about 2 percent.

It also means Goldman will suffer a lesser hit to its rate of return. The 43.5 million shares Buffett was due would have increased the bank’s common equity by 9.3 percent. Applied to expected 2013 earnings, as tallied by Thomson Reuters, the bank’s return on equity would have been primed to drop from 9.4 percent to an even more disappointing 8.6 percent.

There’s one more benefit for the bank led by Lloyd Blankfein. It will now have 34 million fewer shares to worry about negotiating with the Federal Reserve for permission to buy back. For Goldman, Buffett’s aid keeps on giving.

(The author is a Reuters Breakingviews columnist. The opinions
expressed are his own.) (Refiles to fix formatting.)

By Antony Currie

NEW YORK, March 15 (Reuters Breakingviews) – Hitting up a
roomful of the best U.S. mutual fund managers for market
predictions after a couple of hours of cocktails seems to have
some merit. Attendees at last year’s Lipper Fund Awards ceremony
did pretty well in an after-dinner survey conducted by
Breakingviews. This year, the 247 industry champs and their
cohorts will be hoping to follow suit.

For one, they’re more optimistic about the stock market.
Last year, three-fifths nearly pegged where the Dow Jones
industrial average would end 2012 – around 13,000, roughly where
it was when they voted. This time, a similar amount – 63 percent
- is convinced the S&P 500 Index will close above 1,750, about
13 percent higher than where it is today after a 10 percent jump
already this year.

Rather surprisingly, 65 percent reckon the 10-year U.S.
Treasury yield will tumble back below 2 percent. That’s despite
growing market skepticism the Federal Reserve’s policy of buying
government and mortgage agency bonds is having much effect on
interest rates and may also be scaled back. Given their correct
call last year, though, it’s hard to discount the money
managers.

The gathered investors sound bearish on Apple (AAPL.O: Quote, Profile, Research).
Nearly three out of five expect Google (GOOG.O: Quote, Profile, Research) to be worth more
at the end of 2013. The market value of the iPhone maker is $147
billion bigger, so unless the internet search giant’s stock can
muster at least a 55 percent gain, the prognosis includes a
further dip for Apple.

On a relative basis, they’re also concerned about the fate
of Morgan Stanley (MS.N: Quote, Profile, Research) Chief Executive James Gorman. Almost
half picked him as the bank boss most likely not to succeed.
Come December, they reckon he’s more apt to be out of a job than
Bank of America’s (BAC.N: Quote, Profile, Research) Brian Moynihan or JPMorgan’s (JPM.N: Quote, Profile, Research)
Jamie Dimon.

Corporate governance activists can take some comfort from
the poll results, too. A strong 72 percent of the crowd favored
companies splitting the roles of chairman and chief executive
between two people. If only they could muster the same numbers
on proxy votes as straw polls.

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CONTEXT NEWS

– The following are the results of a Breakingviews straw
poll of 247 U.S. stock and bond mutual fund managers at the
Lipper Fund Awards on March 14 in New York. Both Breakingviews
and Lipper are owned by Thomson Reuters (TRI.TO: Quote, Profile, Research)(TRI.N: Quote, Profile, Research).

– Which company will be worth more at the end of the year?

Apple – 43 percent

Google – 57 percent

– What will 10-year Treasuries yield at the end of the year?

Above 3 percent – 35 percent

Below 2 percent – 65 percent

– Where will the S&P 500 close at the end of the year?

Below 1,450 – 37 percent

Above 1,750 – 63 percent

– Will Washington reach a long-term agreement on budgets?

Yes – 16 percent

No – 84 percent

– Who is more likely to be CEO no more by the end of
December?

Bank of America’s Brian Moynihan – 34 percent

Morgan Stanley’s James Gorman – 48 percent

JPMorgan’s Jamie Dimon – 18 percent

– Should the roles of chairman and chief executive be held
by two different people?

Yes – 72 percent

No – 28 percent

– Will Angela Merkel be re-elected as Germany’s chancellor?

Yes – 84 percent

No – 16 percent

RELATED COLUMNS

Survey says [ID:nL2E8E9AHB]

– For previous columns by the author, Reuters customers can
click on [CURRIE/]

(Editing by Jeffrey Goldfarb and Martin Langfield)

((antony.currie@thomsonreuters.com)(Reuters messaging
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Keywords: BREAKINGVIEWS FUNDS/SURVEY

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(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)

It’s harder to grade the Federal Reserve over its handling of the stress tests than it is the 18 banks which take them. On the face of it, the regulator has devised a rigorous but fair system. This year, it rapped Goldman Sachs and JPMorgan over the knuckles for their flawed models, though still approved their plans to return capital to shareholders. It vetoed proposals by Ally and BB&T, and gave its blessing to former dunce Bank of America. But the Fed’s math and much of the results remain a secret. That makes some of the toughness seem more for show.

There’s much to be said for the Fed’s approach. By keeping most of its methodology under wraps, the Fed makes it harder for banks to find ways to game the system. This year executives again wondered out loud what other metrics the watchdog is using to come up with its results. That’s a good thing: regulators don’t want to become so dependent on their charges’ data and models that they cannot spot trouble themselves.

The approach has its drawbacks, though. First, it makes errors all the more embarrassing. For example, the Fed had to restate Goldman’s possible capital cushion in a stressed scenario after spotting a flaw in the analysis it published last week. But the opaque nature of the tests means it’s not clear what the flaw was.

Second, the secrecy leaves the Fed open to criticism that it is simply devising ways to keep or put some banks in the penalty box. Last year, its assumptions about Citi’s potential losses looked out of whack with peers, as if designed to ensure the bank would not be allowed to return any capital.

Moreover, while the type and amount of stress-test data the Fed releases improves every year, it still keeps much to itself – not least, this time round, how bank balance sheets would look of interest rates spiked.

All in, the tests seem to be sending the message to banks that they should take nothing for granted. That, perhaps, is one of their greatest strengths. But a bit more sunlight would not be a bad thing.

(The author is a Reuters Breakingviews columnist. The opinions
expressed are his own.)

By Antony Currie

NEW YORK, March 6 (Reuters Breakingviews) – What’s one of
the biggest threats to the American economy? “Misguided
regulatory chemotherapy,” is the pull-no-punches answer from Bob
Wilmers, the boss of Buffalo, New York-based M&T (MTB.N: Quote, Profile, Research). That
is risqué language coming from the chief at a bank that received
money from the U.S. government’s financial industry bailout -
and only paid them back last year.

But Wilmers’ track record makes him one of the few industry
veterans whose opinion merits a listen from investors. The bank
treated them kindly by never cutting the dividend. And it used
the downturn to buy struggling rivals. The strategy paid off as
M&T last year earned a return on tangible equity of almost 20
percent.

Colorful metaphors aside, his point on regulation is a
simple one – unlike some of the more arcane discussions Wall
Street executives have had in Washington. Wilmers is arguing
that the welter of new rules is piling on so many extra costs,
time and complexity that it risks undermining the basic function
of lending. Granted, after the mistakes many banks made
extending credit in the last boom, change is needed. Wilmers’
call for rules based on “clarity and simplicity,” though, is
hard to reject.

He applies the same logic to his swipe at the Financial
Accounting Standards Board. The result of spending $164 million
over five years to come up with 94 new rules, he argues, is
confusion, pages of disclosure no one reads and delays in
building up loan-loss reserves. In Wilmers’ eyes the only
beneficiaries are accounting firms.

Both arguments carry merit, as does his broadside on the
nation’s top six bank bosses being paid 264 times the national
average – though at $3 million for his services in 2011, Wilmers
is no pauper either.

As with some of his previous letters, this one does at times
come across as little more than a list of gripes. But he makes a
good, common-man stab at outlining his vision of how banks
should function. All in, his 26-page missive remains a
must-read. JPMorgan’s (JPM.N: Quote, Profile, Research) Jamie Dimon, another CEO whose
shareholder letter functions as bully pulpit, will have to
polish his prose to compete.

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CONTEXT NEWS

– M&T Bank, a top 20 U.S. bank by assets with a $14 billion
market value, published its annual report on March 6. In his
letter to shareholders, Bob Wilmers, its 77-year-old chairman
and chief executive, referred to excessive oversight as
“misguided regulatory chemotherapy – where the treatment meant
to eliminate cancer cells damages healthy ones in the process.”
The analogy is designed to draw attention to his belief that too
much regulation crimps banks’ ability to lend and help the
economy grow.

– He also attacked the complexity added to reporting
financial statements by the Federal Accounting Standards Board,
arguing that only accounting firms benefit – especially the big
four. And he argued that compensation at larger firms is still
far too high, with the average pay of CEOs at the nation’s top
six banks equating to 234 times the national average for
employees.

– M&T annual report: link.reuters.com/rec56t

RELATED COLUMN

New kid on the block [ID:nN1E83400Q]

– For previous columns by the author, Reuters customers can
click on [CURRIE/]

(Editing by Rob Cox and Martin Langfield)

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Forget Europe’s bonus caps for bankers. It might make for good publicity for the politicians, but wags in the City are already joking about ways to get around it. So why not, for example, put a ceiling on salaries and let clients reward good service, just as they do in restaurants? That could allow banker pay to shrink to a more realistic level.

The U.S. restaurant business even provides a model of sorts. The Fair Labor Standards Act lets an employer pay waiters below minimum wage as long as they earn a certain amount a month in tips. If the combined total remains below the minimum wage, the restaurant has to make up the difference.

Regulators could easily adapt that for the banking industry, setting a reasonable amount that bankers should be able to earn in a given year. There would need to be rigorous procedures for clients to claw back tips in the event of malfeasance – the banking world’s equivalent of getting food poisoning.

But clients would be empowered to pay what they really feel a banker or trader is worth. Long-standing M&A and underwriting fee structures could be overhauled, while trading would probably become more efficient more quickly, as all sides would have a greater incentive to switch more deals to electronic platforms.

Sure, there’s a chance it could turn into a boondoggle for some. A client might decide to hire a friend, want to curry favor or return past help. But companies looking to raise capital or get involved in M&A and investors wanting to trade are as cost conscious as any. They’d probably welcome the chance to pay the bank enough to cover its expenses, including base salaries, and then determine for themselves how much extra their middlemen warrant on top of that.

Banks boast so often about serving customers that it would mean they really have to practice what they preach – or expect a welter of forlorn-looking bankers following clients out of offices asking what they did wrong. The chance of seeing that alone surely makes paying bankers in tips worthy of consideration.