Wednesday, April 29, 2015

Arbitrage 2 : Black market and official patronage nullifies arbitrage in Nigerian foreign exchange market

Price inefficiency or mispricing in the foreign exchange market in Nigeria is fueled by the existence of two markets for the same product: the official rates market and the black market. This is taking a toll on Nigerian economy.

The reasons for its continued existence include one or more of the following:Price inefficiency or mispricing in the foreign exchange market in Nigeria is fueled by the existence of two markets for the same product: the official rates market and the black market. This is taking a toll on Nigerian economy.

The reasons for its continued existence include one or more of the following:

  1. It is being supported by stakeholders in the financial industry and politicians. As was mentioned in the first article, mispricing is a form of price discrimination and creates opportunities for monopolies or oligopolies to exist. Nigerian banks are attracted to such market opportunities and would rather make maximum profits unless the government steps in to curb the markets. The government does have the necessary powers because politicians who buy and sell foreign exchange in high volume use the mispricing premium to make huge amounts of money for their personal gain. So, a powerful lobby makes it possible for such an inefficient setup to exist. If arbitrageurs were allowed in the market, the price difference in the two markets for foreign exchange would disappear, thereby converging prices.
  2. Arbitrage cannot exist alongside black markets.

  3. There is no risk involved in selling in the foreign exchange market. Both educated and non-educated people participate in the foreign exchange markets. Sources of foreign exchange are cheaply gotten from tourists and people coming from abroad. Nigerian import regulations state that non-residents can bring in the local currency, the Naira, up to the amount of N5,000 and foreign currencies of an unlimited amount, provided both are declared on arrival.
  4. The black market premium is high. It is about 20 naira above the official rates when exchanging dollars for naira. When transactions run into the millions of dollars or pounds, the black markets are more attractive than the official rates market. Speculative losses that could be incurred by buyers and sellers in the market are made up for by the high market premium. That makes the market more riskless.
  5. There is economies of scale. The value of transactions are very large and huge. When the quantity of transactions run into the millions and the premium or mispricing gap is high, then the market is tempting for banks and politicians not to participate.

Hence, no one expects the price differential in such a market to disappear because corruption and entrenched lobbies would fight with all they have to squash any legislature that is raised. Now, back to the question that is the thrust of this blog article: would allowing ATM Naira-denominated debit cardholders to withdraw in foreign currencies from abroad and bring the amount into the currency encourage arbitrage and is it harmful to the economy?

Before the recent slash of the annual amount ATM Naira-denominated cardholders can withdraw from $150,000 to $50,000, it was business as usual. Foreign currency from abroad fueled the black market and was welcome in unrestricted amounts. But, Nigeria has been bedeviled by two evils: falling oil prices and a reduction in its output or income. The projected growth rate for Nigeria has been reduced by the IMF from 6.3% in 2014 to 4.75%. The economic front is not too sound. Foreign exchange reserves is a major concern of the Finance Ministry and the Central Bank of Nigeria in stabilizing the local currency, the Naira. Debt servicing is also another problem they have to deal with.

The naira is depreciating daily. Hence, foreign currency withdrawn from abroad is cheaper especially since there is a time lag between the withdrawal and when the banks settle card companies like MasterCard and Visa. Banks end up paying higher. The country is then losing important foreign reserves due to speculation.

Arbitrage is supposed to exist in this practice but the existence of a black market nullifies arbitrage. Foreign currency bought cheaper from abroad are sold at a higher premium than even the banks that buy at the official rate. This is then a slowly developing lucrative business. If this trend is not curtailed, it will create a market. It is very easy for a black market trader to make use of a network of nuclear and extended family members to procure maximal gains from the deficiencies of the market using a Naira-denominated card.

So, Nigeria is losing foreign exchange reserves at a sensitive point in its monetary history.

Curtailing these cardholders though is repressive. They are reacting to market forces created since the Naira was devalued in 2014 and has continued to depreciate as oil prices remain low.

The problem lies at the hands of the Ministry of Finance and the Central Bank of Nigeria. As I wrote earlier, arbitrageurs react to price differences like high pressure flows to areas of low pressure. The high premium created by mispricing in the foreign exchange market in Nigeria has created this trend and it cannot be stopped. It could only become more treacherous by official fiat by existing in the underground economy. Where conscious barriers to efficient functioning of the markets are created by government agencies that are supposed to ensure market inefficiencies are curtailed, there is nothing any stakeholder in the industry can do.

The black market has been a tool of the system to make quick money on the side while the books are made to look good. This practice has been going on for years. It cannot be stopped. Reducing the yearly amounts Naira-denominated cardholders are allowed to withdraw overseas will push the market into the underground.

By cutting usage, the CBN will have the opportunity to track regular users of these cards; maybe even label them saboteurs of the Nigerian economy. The effectiveness is what one is doubtful of. The banks are complaining because these cardholders are making much premium than they are; which should be worrisome. One expects that they also play to the market and make use of the opportunity proffered.

It seems that when pushed to the wall, the Ministry of Finance and the Central Bank of Nigeria set up barriers to trade that could create more problems in the future especially in the banking industry.

Previous post on arbitrage: An opportunity for price differentials to converge in financial markets

Arbitrage 1 - an opportunity for price differentials to converge in financial markets

If an iPad was 10% cheaper in a neighboring state, would you not seize the market opportunity for instant profits? After accounting for costs involved in transportation and other ancillaries, you’d want to grab as much as you can at such cheap prices. Eventually, you’re not the only one. So, demand rises in that cheap iPad state and the price catches up with the rest of the World. That is what economists call arbitrage.

According to, arbitrage can be defined as:
The simultaneous purchase and sale of an asset in order to profit from a difference in the price. It is a trade that profits by exploiting price differences of identical or similar financial instruments, on different markets or in different forms.

Arbitrage is synonymous with making a good buy. It exists due to inefficiencies in a market. Since that is the case, when an arbitrage opportunity is open, it does not last long before the market converges and it disappears.

In the market, prices are accessible in seconds.
Credit: Wikimedia Commons

Availability and access to digital information about markets, prices and supplies is at the fingertips. It is very difficult for the market to allow mispricing or price differences. It usually acts quickly upon pricing inefficiency, so that any opportunity for mispricing is eliminated in seconds.

Yet, some arbitrage does exist in the markets. Mispricing is one of the prerequisites for arbitrage to occur and the fact that prices are deliberately doctored not to converge as by government regulation or corruption. Cases of this arise often in developing economies. If there is a mispricing premium, lobby groups would be created to ensure the price difference is sustained in order to gain an economic advantage. An efficient market would not allow such pure cases of arbitrage to last. Any gain due to mispricing will have to be executed instantaneously by arbitrageurs who close up the gap.

Another prerequisite is for such arbitrage to exist at economies of scale. Given a price premium and trading in volumes that run into millions daily, it is not long before a shrewd company can take advantage of this inefficiency and create an oligopolistic market, if not a monopoly. That setup would be very difficult to dethrone when established. Such company would seek all it can to bar arbitrageurs from getting knowledge or doing business in that market.

In brief, arbitrage and arbitrageurs are good for the economy. They serve as a check against monopolists who would rather price discriminate in order to maximize prices. They ensure that prices converge or are harmonized in markets. They act like a natural law that moves market forces from areas of high prices to areas of low prices. Therefore, consumers and policy makers alike would welcome arbitrage and arbitrageurs.

Arbitrage exists mostly in markets that are speculative in nature, especially in foreign exchange and futures markets.

So, why am I concerned about arbitrage? I read this article on the mobile money Africa site that piqued my interest. The interesting lines are quoted below:
The Central Bank of Nigeria on Tuesday slashed the naira debit cardholders’ spending overseas from $150,000 to $50,000 per annum.

The Managing Director and Chief Executive Officer, Union Bank Plc, Mr. Emeka Emuwa, had after the Bankers’ Committee meeting at the CBN office in Lagos on Thursday, said the amount spent by naira debit cardholders overseas was rising fast and the banks were beginning to notice some arbitra[g]e in the segment.

Nigerian foreign exchange market is composed of two components: the official market that sells and buys at the official CBN rate and the parallel or often called “black” market that sells and buys at rates fixed by markets outside the official sources but whose source of foreign exchange is suspiciously being fueled by sources in the official market.

Why are Nigerians disturbed by arbitrage? That piqued my interest. I did some research in that area.

It is the subject of the second article: Black market and official patronage nullifies arbitrage in Nigerian foreign exchange markets.

Tuesday, April 28, 2015

Investors grim on Deutsche Bank's cutting costs strategy to retain global lender rating

Germany’s Deutsche Bank Monday unveiled plans to cuts costs by €3.5bn (£2.5bn) and sell off its Postbank business. This comes days after announcing it will post profit in the first quarter of this year despite litigation costs of €1.5bn ($1.61bn). Deutsche Bank, you will recall, is Germany’s largest lender and the seventh largest in the world. As part of its cutting costs strategy, it will close up to 200 High Street branches by 2017 and leave or reduce its presence in some countries. Postbank will be sold through a stock market listing by 2016.

But investors are not happy with the announcement. Even if the measures would involve savings of €3.5bn euros annually by 2020 and will drive a return on tangible equity of at least 10% during same period hence increasing its profitability, investors showed their displeasure with this latest plan by the Chief Executives of Deutsche Bank. Shares fell by 4.6% to €30.13 hours after the announcement.

Deutsche Bank: Administrative Headquarters.
Credit: Wikimedia Commons
Tough regulations, weak markets and mounting legal bills from misconduct settlements are pressures forcing Deutsche Bank to take moves to axe unprofitable lines in order to boost earnings and make its balance sheets look trim. Days before, Deutsche Bank was fined $2.5bn by U.S and British authorities for obstructing regulators. Twenty-one people also face criminal charges.

Despite the fine, its Q1 revenue reflects a “strong performance across business and a favourable impact of foreign exchange movements,” the bank said in a statement. Revenue at the bank's asset management division was up 30% at €1.4bn, while revenue at the corporate banking arm rose 15% to €4.7bn. The $2.5bn fine by US and UK regulators related to Deutsche's attempts to manipulate the Libor and Euribor rates. At the end of March, the bank had €4.8bn set aside in litigation reserves.

Deutsche Bank’s strength lies in the trading interest-rates and credit products worldwide, for which it was recently ranked second by Bloomberg.

Postbank on the other hand has not proven as profitable as Deutsche Bank would have hoped. By 2016, it would sale off Postbank, shedding off about some 10, 000 employees from its global employee numbers of some 98,000. Stiffer regulatory requirements and expectation that regulators would require increasing capital requirements made it imperative that Postbank be shed.

Investors worry though that 2020 is too far a time to wait; that is five years from now. Analysts believe those set targets are achievable. Deutsche Bank needs restructuring. What was left unsaid was how many jobs will be lost in that exercise or which countries it will exit.

Latest reports have it that the bank is more interested in emerging markets but would not leave off its strategy of being a global lender. Spending for digital technology though is expected to be about €1 billion. Asset and wealth management divisions will expand by 10% a year until 2020 and the number of relationship managers will increase by 15% in key markets.

Sunday, April 26, 2015

[Links] Readings - girl-child marriages, altruism, confidence fairy and secular stagnation.

The links below are some of the interesting materials I have been reading on the Project Syndicate page. I thought it would be lovely to share it with you.
  • Debating the Confidence Fairy

  • When an economy is in a slump, i.e spending is already low, is it the right time for austerity measures? In this well written and interesting article full of historical anecdotes, Professor Skidelsky argues no, rather it would be a reason for the economy to resort to other measures, like a stimulus program. But, in contrast, another school believes that the confidence that an austerity will work and being boisterous about that assertion, which Paul Krugman calls the "confidence fairy", was as much important than the workability of policy.

    Professor Skidelsky thinks otherwise. In brief, political rhetoric cannot make a bad policy work.

  • Effective Altruism

  • Gallup’s poll for 2014 showed that approximately 2.3 billion people, a third of the world’s population, perform at least one altruistic act per month. Some countries are notable in giving money to charity, about 91% in Myanmar, while others like the US outdo themselves in helping strangers and donating to charities. Nevertheless, not all altruism, or giving to help others, is altruistic. Even despite this, the author introduces us to an emerging movement, the Effect Altruism movement, whose aim is to give with the heart and the mind. Their happiness derives from helping others. Good read.

  • Girls, Not Brides

  • Contains the usual arguments for girls education: better society, more mature and adapted mothers, etc but further with the exhortation that the responsibility rests on you and I, all of us, to ensure that girls do not marry before 18, before they are ready for motherhood. As beneficiaries of our parents and societies wisdom, the two authors urges us all to give the girls of this generation and the next a chance to live to their potential.

    Mature marriages, better generations.
    Credit: Goria Agostina on Pixabay
  • The Problem With Secular Stagnation

  • How can the fact that the pre-2008 financial crisis was occasioned by positive global productivity growth, decline in inflation and a reduction in real (inflation adjusted) interest rates? Arvind Subramanian explains this three movements by stating that the answer lies not in aggregate demand but on the rise of emerging markets especially India and China. Positive productivity shocks from the emerging markets was followed by disinflationary pressures and also a savings glut that brought about a reduction in returns to capital. The savings glut, he explains, were a result of the productivity shocks being resource intensive and mercantilist in origin, while making already prudent Asians more prudent, and profitable companies more profitable.

Wednesday, April 22, 2015

EU antitrust vs Gazprom (2): Politics always interferes with the economics of pricing

If found guilty, Gazprom would be fined sums that could run up to 10 billion euros ($10.7 billion). But taking such an expedient decision takes time since Gazprom represents both economic and political concerns.

Russia is in the throes of an “economic war” with the West following its support of separatists fighting the government in Kiev, Ukraine. It has already been sanctioned for that. Gazprom’s revenue is significant to the Russian economy, not counting the politico-economic advantages of having an economic stranglehold on its little neighbors. The EU will not want to risk Putin hardening its stance on Ukraine; if Putin thinks escalating the fighting in Ukraine would be to his advantage, no doubt, he wouldn’t hesitate making such overtures.

Secondly, Gazprom’s gas monopoly is not easy to relinquish. If it made true its threat to stop supplying gas to Europe that move would create economic woes for European businesses. Gazprom will be strengthening that hold much further when it finally completes the South Stream, expectedly this year, and Turkish Stream pipeline projects. Those projects would decrease the cost of providing European gas and increase its margins in a region beset with uncertainty. It would give Gazprom a great jump over any potential rival such that it could not only fight back using prices, but using unilateral supply cuts and expansions.

Ms. Vestager, taking on formidable opponents.
But diversify gas supplies Europe must. Ukraine is even taking steps towards that area. It has cut its dependence on Russian gas from 100% to 75% of gas imports. Last month, the EU endorsed the European Commission’s proposal to create an European energy union. Such an arrangement will an energy secured and integrated Europe, as well as be able to directly influence commercial agreements on gas supplies, including Gazprom contracts. This union, it is believed, will create risks for Gazprom, not only to make its contracts transparent, but to establish a unitary price for all European gas.

Russia will not stand by and see its positions compromised. The market is lucrative. If it loses Europe, it might lose its power to fix prices and have to face other markets where it has to play on unfamiliar terrain. Politics aside, Gazprom is faced with the ever present threat of competition from lower global gas prices from new shale fields in the US and liquefied-gas export projects in Qatar. The EU has encouraged its members to implement diversification programs. Ukraine is already doing so. Ukraine’s gas supply is now coming from diverse sources like Slovakia, Poland and Hungary through reverse flows. Pipeline capacity expansion in Slovakia has made it possible for Ukraine to increase gas import volumes. Reverse flows from Europe is also winning in price competition over Gazprom. In February 2015, it was reported to have exceeded the direct flow from Russia for the first time in terms of monthly volumes.

Last week, Ms. Vestager, filed formal charges against Google, accusing it of abusing its dominance in the market for online search in Europe. Gazprom’s case is her second battle within the space of two weeks. The success of this latest initiative could determine future supply and pricing of European gas. Failing to mention, and also, the future of a regional monopoly like Gazprom. The pawns of history are in favour of Gazprom. What moves does Ms. Vestager have?

Previous: EU antitrust vs Gazprom (1): What a monopoly in gas supply and energy entails

EU antitrust vs Gazprom (1): What a monopoly in gas supply and energy entails

Gazprom’s monopoly position is worrisome to European Union member countries, especially to the six EU states that comprise Ukraine, Lithuania, Finland, Latvia, Estonia, Slovakia and Bulgaria. These have been dependent on Russian gas for their energy needs. That position might soon be threatened. This week, Ms. Margrethe Vestager, the EU antitrust chief reopened the case file on Gazprom that was established by her predecessor, Joaquin Almunia, in 2012.

The EU antitrust regulators are charging Russian’s energy giant, Gazprom, with abusing its dominance in the natural gas market. The EU’s move is concerted with its effort of encouraging member states that are dependent on Russian gas to seek a diversification of gas supplies. The EU depends on Russia for about one-third of its gas supply.

Gazprom Building in focus.
Credit: Thawt Hawthje on Flickr
Harmful pricing that harms rivals are one of the contentious issues Ms. Vestager is leveling against the company. It has the liberty of raising or lowering prices at will in exercise of its market position without any transparent economic motives. Such practice gives Russia a political leverage against European nations who are against its anti-Ukrainian policies. A notable case in point is Ukraine whose gas supply was blocked towards the better half of last year.

Gazprom is also being accused of linking the price of gas to that of oil which has fallen to record lows. By forcing other nations to commit to its oil prices rather than market rates, it is strangling and further tightening its grip on European consumers.

These and many other issues leveled against Gazprom, which also includes furthering the geopolitical ambitions of President Vladimir Putin, the Russian President, will have to be proved.

Gazprom though is not unrelenting. It hopes to complete the South Stream gas pipeline that runs from Russia to Bulgaria under the Black Sea so that it can be able to supply gas to countries in Southern Europe while undercutting Ukraine. Also on the pipeline is a Turkish Stream pipeline project which is being created for the same purpose. According to Gazprom, it wants to change its current model of dealing directly with European consumers. It is also reported that it has its eyes open for Asian markets if the price is favorable.

Next: EU antitrust vs Gazprom (2): Politics always interferes with the economics of pricing

Tuesday, April 21, 2015

Military cyber security firm, Raytheon, targets commercial Internet security

Raytheon (NYSE:RTN) has secured a $1.9 billion deal to acquire complementary network security company, Websense Inc (NASDAQ:WBSN), from private equity firm, Vista Equity Partners. Websense will be operated as a joint venture.

Digital attacks against devices and computers both for commercial and military purposes are increasing. Raytheon Corp., principally focused on the military and defense area hopes to become a gateway against any and all such attacks. By acquiring Websense, it is horizontally stamping its presence outside its traditional domain. Websense on the other hand has conventionally been a company focused on civilian and commercial security grade systems. Its products analyze corporate data for threats including for malicious emails, corrupted internet sites and breach of corporate firewalls.

It is believed in the corporate arena that this deal will accelerate Raytheon’s efforts to offer “defense-grade” cyber solutions to civil and commercial customers while generating growth rates and increasing profits that were accounted for by its military hardware markets.

David Wajsgras, the president of Raytheon’s intelligence, information and services business, is quoted as saying:
“Today’s enterprises are more vulnerable than ever due to the proliferation of cloud computing, mobile devices, and the Internet of things…
Our goal is to provide an integrated defense.”

Connected devices in the cloud.
Credit: Perspecsys Photos on Flickr.
In the “internet of things” devices like computers, smartphones, and sensors will be connected to each other in ways unimaginable before, without human-to-device or device-to-device interaction. A flaw in one area of the network can be exploited by cyber-spies and cyber-criminals.

By partnering with Websense, Raytheon is bringing its expertise in the military arena to the civil and commercial field. The cyber-security security industry is huge. In 2014, it was reported that cyber-crime costs the global economy about $445 billion every year, with the damage to business from intellectual property thefts exceeding $160 billion. Losses connected to personal information, such as stolen credit card data, was put at up to $150 billion.

Raytheon though is not the only company gearing itself in the cyber security market. Last month its rival company, Blue Coat Systems Inc., was acquired by Bain Capital LLC of Boston for $2.4 billion. Blue Coat Systems is known for transacting government contracts. Raytheon is famed for the Tomahawk, Patriot, and Sidewinder guided- missile systems and is a major maker of radar and electronic warfare gear.

Monday, April 20, 2015

Building green clean homes from an innovative UK university research on straw

Straw is cheap, good for the environment and an excellent insulator. Straw has so many uses such as building carbon-negative buildings. So, why has straw not caught on as an alternative to concrete, bricks or timber?

I had an interview session with Mr. Finlay White, Manager, Business Development and Marketing, at ModCel™, one of the new and innovative companies in the United Kingdom that constructs buildings using prefabricated straw panels.

What market need did ModCell serve on inception?

Finlay White: ModCell initially started selling into the educational market - building additional classrooms, University buildings etc.

That could have been possible due to your affiliation with the University of Bath?

Finlay White: The panel was invented by an architect (Craig White) and a structural engineer (Tim Mander). It was first used at the University of the West of England, Bristol. It was identified that the straw bale panel would always be a victim of people’s perceptions i.e. 'It’s straw, surely it’s a fire risk’ or/and ‘Straw will rot’ or and/and ‘What about vermin?’ etc. So it was decided at an early stage to be a researched based company to satisfy the preconceptions around using straw. We approached Professor Pete Walker of the University of Bath to see how we could gain funding for research (our MD, Craig White, had worked with Pete Walker on previous occasions due to both being involved as lecturers in the built environment). UK Government matched funding options were identified and a joint submission to the UK DBERR (Department for Business, Enterprise and Regulatory Reform). We were successful with this research application. A number of other research options have since been identified, with a number of these additional funding streams have also been won (including matched funding from the DTi - Department for Trade and Industry, TSB - Technology Strategy Board, Innovate UK, European Commission) The vast majority of these have been with the University of Bath. Our relationship with them is excellent and the research has had very positive outcomes, including UK and European certification being won as an outcome of the research. So far over £4 million of matched funding research has occurred and three research programmes are currently taking place.

Balehaus at Bath - Built by ModCell using straw technology.

Did your customers voice concerns about the sustainability of straw-built houses?

Finlay White: We tend to answer this question before we're ask[ed] it. When talking to people we inform [them] that in the UK there is currently over 3,000,000 tonnes of unallocated straw bale surplus in the UK every year. By unallocated, we mean what is left over after the 9,000,000 tonnes that is grown each year has been used for other purposes e.g. animal bedding, ploughed back into the field etc. This 3,000,000 tonnes equates to roughly 500,000 average sized (90m2) 3 bedroom homes…. In the UK, the target for new homes is 240,000 a year (less than half this number is actually being built at the moment). So, there is more than enough of this ANNUAL co-product to cope with ALL UK building being built each year. Also the production of straw, or should I say of wheat/Barley etc, is actually what is left in the field after the crop of wheat/barley have been harvested. We are not replacing a food crop for a non-food crop. As the straw grows it also sequesters CO2 from the atmosphere. It retains the Carbon atom, through photosynthesis, and releases two oxygen atoms back into the atmosphere. A 1m3 of straw has 211kg of CO2 sequestered. We offer a ‘Carbon negative’ building system. A 3 x 3.2 m2 panel has 1400kg of CO2 sequestered in it.
I’m pretty sure that we offer one of the most sustainable building solutions in the world.

Your product is new, innovative, methinks. How has UK regulations affected your business?

Finlay White: The UK building regulations and European low carbon goals have influenced us greatly. The need to meet these regulations has helped us gain greater market acceptance. This is as a result of achieving the required certification of our panels to meet these codes. We have a daily task of overcoming peoples preconceived ideas about using straw in buildings i.e. “fire’, ‘decay' and ‘vermin’. The certification we have for our panels allows us to illustrate that the preconceptions are incorrect.

Do you cover markets outside the UK?

Finlay White: Not at this moment but we are looking to expand to other countries through licensing of our system or joint ventures. We are happy to speak to business[es] about this opportunity.

This innovative offsite-manufactured straw panels can be easily supplied, installed and buildings created with specifications that meet building regulations.

As a business or homeowner, you can visit the ModCell website and ask for a quote.

Saturday, April 18, 2015

Nigerian economy to heave sighs of relief as oil rises beyond $60 dollars

Nigeria, one of the foremost exporters of petrol, Brent crude, in particular, should be heaving a sigh of relief that the price of oil is rising slowly.

The conflict in Yemen has been attributed to this development. On thursday, tribal forces took control of a major southern oil terminal and airport.

What has been worrisome about the Nigerian reaction is the news coming from the Central Bank of Nigeria, (CBN).

First, it's pushing a hasty capitalization policy on the banks, especially on the strategically important banks in order to meet capital adequacy requirements. Many of the banks have been carrying out dividend reinvestment plans for this purpose.

Secondly, if foreign exchange reserves was the reason behind the CBN's reduction of the annual amount holders of naira denominated ATM cards are allowed to spend to buy goods from overseas,(from $150,000 to $50,000 per year), then there are possibilities that it could go back to the days before the boom when the price of Brent Crude was above $105 per barrel by instituting financially repressive regimes that not only hurts the economy, but the "common man" who will always respond to the dictates of the market.

Brent Crude risen beyond $60
Smiley face
Credit: Brent Oil Streaming Chart

Some online news reports state that the CBN is afraid of creating arbitrage opportunities that could leak away badly needed foreign exchange reserves.

The 2015 budget presented by the Finance Minister, Ngozi Okonjo-Iweala, was placed at a benchmark price of $52 per barrel. So, this Thursday's record rise to $64 per barrel of Brent Crude will surely cause some nerves to ease off a little.

Nigeria has a duty to commit themselves to eradicating a thriving black market in the country. That is what created the arbitrage in the first place. One believes that is quite a herculean task, given the fact that the banks posting megaprofits and politicians profit from the black market trade in foreign exchange.

Time is ticking away. It is unwise for the Finance Ministry and CBN to keep putting all their eggs in one basket. The economy has to diversify and get it done fast by encouraging other sectors of the country to be more innovative and productive.

Barbie Doll maker, Mattel Inc., gets innovative as shares rise despite overseas market loss

Mattel Inc, (NASDAQ:MAT) the US producer of toys, notably the iconic Barbie doll, has reported a first quarter loss for 2015 due to a losing popularity of its toys. This is a sixth consecutive quarter sales drop from its overseas sales outlets. US sales showed an increase of 8% but overseas sales a decrease of 14%.

The loss though is a narrow gain over what was expected – 8 cents per share compared to 9 cents per share as was expected for the Fortune 500 company. This is better than expected.

At the end of business on Thursday, April 16, Mattel’s shares rose by 6.7% to $26.95 on moderate volume.

The waning popularity of Mattel’s toys and dolls is a sign of consumer shifting tastes. Substitutes for the toys include electronic toys, tablets and merchandise from popular films such as Disney's "Frozen", along with competition from rivals Hasbro and Denmark's Lego. To regain competitive advantage, Mattel is looking to improving its creativity, innovative capability and speed to market.

Barbie dolls, waning in popularity.
Credit: Freddycat1 on Flickr

According to Mattel Chairman and CEO, Christopher Sinclair:
We are already benefitting from better decision-making, alignment and enhanced accountability. And we’ve begun to refocus our culture on creativity, innovation and improving our speed to market. While we still have a lot of work to do, we’re starting to see progress with our core brands like Barbie and Fisher-Price, and I am confident we are making the changes necessary to perform better in the future.
Christopher Sinclair is replacement for the former CEO, Bryan Stockton, who was fired in January.

Mattel has also been in talks with Quirky, a company that turns ideas to business based on crowd sourcing. While the Quirky partnership could help give Mattel a fresh take on toys and possibly yield a hit or two, these partnerships often account for only a small part of the large companies’ overall businesses.

Friday, April 17, 2015

Exploitation and violence under the Mediterranean Sea enroute to Italy?

Policy makers face a dilemma when making decisions about smuggling. Policies that reduce the number and the ability of smugglers to cross illegal migrants over the border have been shown to increase the possibility that exploitative smugglers, who wreck violence and sexually assault their prey, illegal migrants, will thrive better. Migrants, whether financially well-to-do or not, seek greener pastures, no matter the risks involved to lives and freedom. To discourage human trafficking and exploitation, policy makers have to choose between improving the welfare of smuggled migrants or diminish the availability of smuggling services.

To date, it has been confirmed that 900 illegal migrants who attempted crossing the Mediterranean from Libya to Italy drowned in the high seas. One report has it that the boat capsized when the passengers were excited at the approach of a rescue boat. This is not the only incident of passengers attempting to cross the Mediterranean losing their lives. Every year, thousands die trying to reach Europe by sea although some do succeed.

It has also been confirmed that on that boat, there was a religious confrontation. 15 Muslims have been arrested by the police for throwing about 12 Christians into the water.

10,000 lives lost to the Mediterranean this year from illegal migration.
Why do many migrants chose to end their lives this way? Granted, the pull of wealth in developed countries can be irresistible, especially when you are a Somalian running away from a dictatorial regime or persecution; or a Nigerian fleeing from an impoverished system with no economic salvation in the horizon. Yet, many illegal migrants fail to realize that even if they make it to Italy or Greece without losing their lives, they might fall prey to unscrupulous exploitative smugglers who’d be ready to cross them for less than non-exploitative ones, and give up their freedom in order to fulfill a debt contract.

According to Italian law, illegal migrants found on the shores of Italian waters will be sent home. If they have already entered the country, they face detention and expulsion. Laws like these are no deterrent to determined migrants. Italy has had to ask for help from the European Union (EU) to stem the onslaught of these hordes. Last year a record 170,000 people fleeing poverty and conflict in Africa and the Middle East have made the perilous crossing to Italy. Since January this year, about 10,000 persons have been rescued from the Mediterranean Sea trying to cross illegally into Italy.

Italy is not the only country affected. USA, China, Greece, France, Germany and a host of other developed economies, including Canada, have devised various policies to curtail illegal migrants at their borders. When illegal migrants send remittances home, smuggling and exploitation thrives. Stories of quickly gotten wealth in African countries serves as a push. These businesses thrive on that success. But, behind the few success stories are those of sex slavery, exploitation, violence and criminality. How successful any policy against illegal migration will be depends on reducing the demand for smuggling services, whether exploitative or not.

Internet giant, Netflix, shares surge on 62 million subscriber base

Netflix Inc., a provider of on-demand internet streaming media has posted quarterly revenue of $1.47 billion. The income met forecast estimates but was disappointing when averaged against its shares.

Analysts had expected a profit of 69 cents per share on revenue of $1.57 billion. The disappointing profit statement was attributed to foreign exchange losses due to the strength of the American dollar in the first quarter of 2015.

Netflix also, on Thursday, announced a subscriber base of 62 million users worldwide for the quarter ended March. The market reacted, creating a surge of its shares by 11.6 percent to $530.90 dollars in after-hours trading. A positive 4.9 million new customers were added this quarter (2.6 million new subscribers from outside the US) in its nearly 50 international markets that include the United States, Europe, Australia and New Zealand.

The favorable market reception of its report and increased subscriber base, according to Chief Executive Officer Reed Hastings, is attributed to the streaming of fresh original content including the third season of "House of Cards" and new series "Unbreakable Kimmy Schmidt" and "Bloodline".

Chart. Netflix shares to date.
In a related development, FBR analysts Barton Crockett and Howard Ma, estimate that based on its demographic survey of streaming media in the US, the share price of Netflix is expected to go up to the $900 dollars mark with an increase in subscriber base to 180 million, with 60 million from the US alone.

Netflix is also seeking shareholder approval for an increase in authorized shares. In its report, the company said it will recommend a stock split to its Board pending shareholder approval. The company also announced that it will soon be using the HTTPS protocol to authenticate and encrypt customer streams in a move that will enhance customer privacy and security online, and as a means to thwart man-in-the-middle attacks that hijack a huge chunk of internet traffic.


Thursday, April 16, 2015

Nokia targeting wireless networking market share - To merge with Alcatel-Lucent

With market share on its mind and possibly to cut operating costs, 900 million euros worth of costs on an annual basis to 2019, Nokia (NYSE:NOK) is in advanced talks to buy the French telecoms giant, Alcatel-Lucent (NYSE:ALU). In a press release by Nokia, the deal is worth $16.6 billion.

By merging with Alcatel-Lucent, which proposal has met public approval by the French government, an unlikely quarter in lieu of its history of frowning on foreign acquisitions, Nokia aims to have access to North American market, notably Alcatel-Lucent's partnership with Verizon (NYSE:VZ) and AT&T (NYSE:T). Also, combining their strengths will make Nokia the second biggest router company in the market, 35% of market share, after Swedish Ericsson (NASDAQ:ERIC). Cisco (NASDAQ:CSCO) which is in second place would find itself in stiff competition with Nokia.

Revenue shares in wireless networking.
Credit: See chart on site.

In a similar report, Nokia is said to be interested in selling its maps business, HERE, in order to focus on its core strength – wireless networking. According to a report, the proceeds from the sale of HERE division would be used to buy Alcatel-Lucent. The HERE unit is valued at approximately $2.1 billion.

Meanwhile, Nokia’s stock price has jumped relatively to that of its competitors, Ericsson and Cisco.
Nokia shares jumped this afternoon. Nokia blue, Ericsson red and Cisco green.
Credit: Yahoo Finance. See chart on website.

Wednesday, April 15, 2015

[Links] Reading: Financial oppression, preferential treatment of gold imports by the RBI

The two links below are from some of the readings I do online which I believe you, my readers, will be interested in.

  • China's Financial Repression and Alibaba's Banking Arbitrage

  • Chinese financial repression is stark. It’s citizens save about 50% of GDP as a buoy against health and retirement uncertainties in a country where social security nets doesn’t exist. To harness these huge deposits from its people, the four big banks practice financial repression. They take deposits at ridiculously low rates and lend them to the government.

    Furthermore, in order to avoid having overly curious customers, they restrict investment options making them few and privileged. It is really a welcome sign that internet companies like Tencent and Alibaba are opening online banks. They intend capturing the undiscovered huge Chinese deposits, then investing them in higher yielding money market funds. Whether the Chinese government will allow this practice to last long can only be imagined.

    Bank of China Tower
    Credit: Wikimedia Commons

  • The FM’s gold schemes will not control gold imports. This simple measure will

  • .

    Gold imports made a significant 3% contribution to India’s 4.7% current account deficit (CAD) for financial year, FY, 2013. Troublesome at best, the current Finance Minister, has initiated two measures to stem these imports.

    1. Gold monetization scheme.
    2. Creating a Sovereign Gold Fund, whose assets would be more attractive than gold deposits in financial institutions.
    But, VK Sharma, Former Execuitive Director of the Reserve Bank of India, writes that in the Indian context, these two schemes will not work. What will is for the RBI to remove the preferential treatment and status gold imports enjoy with respect to non-gold imports. These significant, unwarranted and perverse incentive has made gold very attractive and free from price and currency risks.

    Practical steps to PIN security when ATM skimming threatens

    It’s called ATM skimming. Without realizing it, while you are cashing at an ATM, someone could be spying on you through several ways and hours later, your money will become his. It’s a low risk crime. It practically involves eavesdropping on people’s ATM transactions with intent to capture his/her PIN number in order to gain access to their accounts using a cloned ATM or debit card.

    The practice is not new but it keeps on evolving as security agents keep getting to tabs with the crime.

    Some of the ways ATM skimmers operate are:

    1. Using a surveillance camera.
    2. This is the usual practice because the cameras are cheap and easy to install. Without knowing it, while cashing, the cameras are filming your transaction and storing it in a memory or sending it through radio link to a car parked nearby.

    3.  Pin Pad Overlays.
    4. These are pads that resemble the ATM keyboard itself. They can be placed on top of the keys. While inserting your PIN details, the microchip on it will be recording your transaction. It’s the most efficient form of ATM skimming but the pads are very expensive.

      Pin pad overlays like this can fool any bank customer.

    5. Using audio recorders. This is rarely common but if there is an audiophile who can distinguish the different sounds of each key, then this mode of ATM skimming is practically a walk to the bank. 
    What is against ATM skimmers is that the devices used have low battery life, so they usually lurk around the ATM machine. This disadvantage makes ATM skimming practically more effective early in the morning hours or late in the day, when it is getting dark or night has approached so that when they are lurking, their presence will not easily be noticed by bank security officers.

    Bank security officers are no foolproof against determined skimmers, but better something than no assurance.

    If your PIN is compromised, your bank won't be responsible.

    There are several ways you can protect yourself. These measures are purely preventive in nature. Remember, when you signed the agreement with your banker for an ATM card, you indemnified him against any loss of your money in case someone gets hold of your PIN.

    Some precautions you can take against PIN theft is:

    • When making an ATM transaction, cover your hands with one hand. A camera may be nearby. Some persons have found this inconvenient but it is the safest measure if there is a camera recording your every keystrokes. It is doubly discomforting if someone is behind you who wants to use the ATM such that you have to be covering your keystrokes and shielding your actions from that persons view. This is a fact of life. 
    •  Don’t use ATMs that are placed in dark corners or where people do not usually frequent. If not skimmed, you could literally be robbed. 
    • If you think a machine has been tampered with, report to bank officials. Don’t even use it at all. 
    • Advise your banker to use an ATM machine with anti-skim features. They are now available. 
    • Some banks employ low paid workers and security men to patrol the grounds for signs of suspicious characters. A determined ATM skimmer though can evade the system.
    • As in life and everything else, change is inevitable. Try to change your PIN on a regular basis.

    Tuesday, April 14, 2015

    [Photos] The impact of water on human living

    Kofi Annan is quoted for the statement:
    Access to a secure, safe and sufficient source of fresh water is a fundamental requirement for the survival, well-being and socioeconomic development of all humanity. Yet, we continue to act as if fresh water were a perpetually abundant resource. It is not.

    Recent events are putting those statements into light.

    The impact of water on our lives cannot be categorized fully. At least, we can start somewhere. The 12 photos below are beginning paces.

    Impact of water on our lives

       The diamonds-water paradox has it that water, a resource so vital to life, is very cheap because of its over-abundance while diamond, a luxury, is expensive because of its scarcity. That paradox is being overturned. Water has become scarce and will soon have a high price tag.
       This month the State of California in the United States of America imposed mandatory restrictions on water use. A recent World Bank report estimates private water consumption at $1 tn. Clean drinking water is becoming a scarce commodity.
       It is worthwhile then that we analyze the impact of water on our lives.

    Friday, April 10, 2015

    US-China Relationship: Crafting future of global war or peaceful prosperity? Time will tell!

    It’s not often a diplomat helps you make a connection between global economic events and how they relate to your lifestyle, your choices and expectations.

    This talk by an Australian diplomat, Kevin Rudd, “Are China and the US doomed to conflict?” does.

    For the first time since George III and Napoleon Bonaparte, a non-western country, non-English speaking and non-liberal democratic country, will become the largest economy in the world, by whatever index you are looking at, in a decades time.

    History is against a future of peaceful coexistence. For those who will object to history and say that globalization and economic integration would annul the prospect of an international conflict being the outcome of the US-China disputes, then they are wrong. Before 1914, before the First World War, the world was going through a great period of integration and globalization and then…there was a war on its doorstep.

    No country wants to go to war. As thinking humans, we want a future of US-China cooperation. Will our hearts speak to our heads?

    China feels humiliated for years by Western powers while the US accuses China of gross atrocities against humanity and seeking to exert changes on the rules of the present global order. Both sides will never agree on these issues. Will this dispute suck the world into a spiraling black hole?

    The talk lasts for 15 minutes. I think it is a must watch if you want to understand the forces that are shaping global events like the war in Ukraine, the conflicts in the Middle East, the AIIB and events in North Korea. I took the pleasure of providing the video.

    Thursday, April 9, 2015

    Shares of renewable energy companies are still steady one year after oil price plunge

    When the price of oil started to fall or plunge in June 2014, it was not long before the market for renewable energy started feeling the pinch.

    Although not a substitute for oil, renewable energy would rather that the price of oil be sustained on the high side. For one, a low price for oil would result in reduced demand for renewable energy particularly where oil has much more uses and is more versatile. By the way, the technology and use of oil and oil derivatives is incorporated in nearly every industrial sector of a modern economy.

    This brings up the question: how have the stocks of renewable energy companies fared since oil started to plunge in 2014? A cursory look at three alternative energy companies with very high market capitalization could tell a good picture.

    1. Green Plains Inc. (NASDAQ:GPRE)

    2. Green Plains Renewable Energy produces Ethanol fuel. It ships about 1 billion gallons of ethanol per year.

    3. JA Solar Holdings. (NASDAQ:JASO)

    4. This is the world's largest solar cell producer. The company is based in the People's Republic of China. JA Solar employs more than 1, 400 people around the world.

    5. Ballard Power Systems. (NASDAQ:BLDP)

    6. Ballard Power Systems, Inc. is a global leader in PEM (proton exchange membrane) fuel cell technology. Ballard has designed and shipped close to 150 MW of hydrogen fuel cell technology to date.

    The graph below shows that on a one-year trend, the stocks of these three global renewable companies on the NASDAQ have recently been holding steady. The graph shows the rate of change of the share prices. Market enthusiasm for these stocks have not dipped very much.

    Shares of major renewable energy companies are still steady.
    Source: Google Finance.

    Except for Ballard Power Systems, whose price has fallen sharply by about 50% since April 2014, possibly due to the high price of producing fuel cells or constrained demand now that low oil prices might make its major customers, the automobile and fleet services companies, be thinking of sticking to cheap oil, one can say that the market is still hopeful that low oil prices will not last.

    Wednesday, April 8, 2015

    Bill Gates: Using military and world medicine to fight germs and epidemics like Ebola

    Are we ready for the next epidemic? Bill Gates says No!

    In a recently recorded TED talk, Bill Gates makes an argument for a global investment for fighting epidemics that would involve R&D, medical personnel and the military.

    Citing the Ebola virus that killed more than 10, 000 in about 430 days and the Spanish flu that claimed the lives of more than 25 million in about 160 days of its spread, he stated that the likelihood exists that an epidemic worse than Ebola is at the horizon, especially from bio-terrorism.

    Some suggestions for a global response readiness which were forwarded are:

    1. Strong health systems in poor countries.

    2. The world should be able to be alerted and react quickly to outbreaks that occur in these outlying areas of the world.
    3. A medical reserve corp.

    4. These should be medical experts, kept in readiness, and on short notice for an outbreak of the likelihood or greater than Ebola.
    5. Use of military logistics for medical purposes.

    6. There will be a need to pair these medical reserve corps with the logistics, speed and security the military already possesses.
    7. Germ games simulations.

    8. Germs are winning the battle against humans. A good working germ games simulation facility will up the ante in favor of mankind.
    9. Advanced R&D.

    10. In the areas of vaccines and diagnostics, advanced research and development efforts will have to be funded for the benefit of the world.

    Hopefully, Bill Gates opines, if we start now, we could be ready for the next epidemic.

    You can watch the video on this page.

    Eurozone confidence rising as deflationary fears eases

    While searching on the eurozone producer price index (PPI) data for this year, wanted a take on inflation between January and now, I saw this article on 3 numbers, eurozone confidence rising ... Reasons why eurozone confidence is on the upswing:
    1. Rebound in energy production in France might increase its GDP by 0.4%. 
    2. Forecasted rise in European quarter-over-quarter GDP growth for Q1 and Q2. 
    3. Investor confidence, as measured by the Sentix Investor Confidence Index is on the rise. 
    4. Eurozone composite Purchasing Managers' Index, also an indicator of manufacturing confidence, is on the rise. 

    Meanwhile deflationary fears have been eased. Eurozone CPI, a relative measure of inflation that indices the prices of goods purchased by consumers, inched upwards from -0.3% in February to -0.1% in March. 


    Macro reports are looking good for the Eurozone in the short term.

    Tuesday, April 7, 2015

    Samsung S6 Edge bend test latest - SquareTrade report misleading in normal conditions

    Samsung has replied to a recent report by gadget warranty company, SquareTrade, that the Samsung Galaxy S6 edge bends under pressure.
    I downloaded the SquareTrade video. SquareTrade reports that the S6 bends at the 110lbf (50kgf) mark.

    Samsung in another video is stating that the video might be misleading for two reasons:
    • It takes about 80lbf to break five 2B pencils at once. 
    •  8olbf was applied to the S6, both front and back. Galaxy S6 and Galaxy S6 edge did not show any sign of a bend. 
    • 80lbf is considered an extreme condition. More than most devices will ever encounter in normal everyday use.
    You can watch the video stating Samsung's position by clicking play:

    Bend tests for smartphones like the Apple iPhone 6 and Samsung Galaxy S6 Edge measure the durability of these phones and the results are important for customer buy and retention decisions.

    Friday, April 3, 2015

    Nigerian Stock Exchange All Share Index still upbeat

    Meanwhile, the Nigerian Stock Exchange All Share Index, is still on its upbeat path.

    At the end of the market yesterday, it gained 3.92% to close at 35,728.12.

    The ASI still engrossed with the success of March 28 polls.
    This new spurt of confidence is on the heels of the recent success at the polls where the incumbent, Goodluck Jonathan, conceded defeat to the opposition, Mohammadu Buhari.

    Oil prices plunge again as global Iranian oil expected

    Oil prices have started a plunge at the close of the markets yesterday.

    This is following the announcement of a framework reached between the United States and Iran on its nuclear program. As it is, it is certain an agreement has been reached and Iranian oil will fuel the glut that is already a custom of the market.

    Brent crude responding to the expected injection of Iranian oil
    Source: Brent crude data
    The fighting in Yemen had pushed up oil prices at the start of this week. It seems expectations of reviving oil prices will have to be for the future time. Too bad for oil.

    Thursday, April 2, 2015

    Will I help you marry a wife and take her to bed?

    There is an African proverb that states that you cannot marry a wife for your son and teach him how to take her to bed. Poignant when I was reading an article on remittances and their contribution to economic growth.
    Adultery could be forgiven when you're the piper.
    Credit: 10 Gebot (Lucas Cranach d A) by Lucas Cranach the Elder via Wikimedia Commons
    A lot of persons will tell you that remittances from overseas can lead to economic growth for their country. But, research has found that it is not true. Rather than remittances fueling economic growth, they’d rather reduce it by creating a dependence on remittances which occasions the recipients being less obliged to look for work. When the remittances fail to come, the government feels the pinch of the lost foreign exchange.

    Creating an avenue for money from abroad to enter the country is fine and good, especially for poor families who have relatives abroad. What the study found was that these money were most times sent to fuel consumption, such as importing goods from abroad or buying land for living, and not to be invested in any project that could significantly improve the human or technological capital of the receiving countries.

    If I help you to marry, don’t expect me to teach you how to take her to bed.

    You can read the article yourself on the world economic forum.

    Referencing the CBN's "judge and juror" dilemma on nigerian banks

    I read the news concerning the disagreement between the Nigerian Deposit Insurance Corporation (NDIC) and the Central Bank of Nigeria, (CBN) from several online channels but was delighted with the reporting by Vanguard online.

    Judge on right, juror on left!
    Credit: Plum on flickr
    I believe the two heads of those institutions, Godwin Emefiele, the CBN Governor, and the NDIC Managing Director and Chief Executive Officer, Alhaji Umaru Ibrahim, assuaged many consciences when they kept making reference to the depositors interest and the interest of the banking industry. I also believe the case in point, whether NDIC was seeking “judge and juror” powers (methinks he meant “jury’?), was a dilemma – none of the offered possibilities which are the points in contention are practically acceptable.

    I’ll reference two points outlined in innocence in the Vanguard article.

    One wonders what a bank would think if accused to have “grievously violated its obligations under the NDIC Act?” That accusation rests with the CBN to decide when and how. If the NDIC and CBN do not agree on how grievous a violation is, a bank would always resort to CBN’s definition as its only protection.

    Secondly, a bank that is contesting its proscription in court has not been found guilty. It has a duty to its depositors and would fight with its teeth to keep those depositors. But, when the NDIC has decided that the depositors would have to be protected and advise them to go for their deposits, then, she has decided the bank was guilty as charged when the court has not rendered a verdict. By the way, the NDIC issuing such a prescription to depositors and the bank winning in court would be a tragic case for the shareholders and investors concerned, not to talk of the health of the banking industry. Whatever way you look at it, the bank's losing at court or the depositors asking for their deposits would mean the bank was insolvent. But what if the bank won? That would be jungle justice.

    The NDIC should not play “judge and/or [sic] jury”; which should it play?

    It’s a question of the CBN and the NDIC needing a consensus on "powers of oversight over banks." I really do applaud the attempt being made by Alhaji Umaru Ibrahim to rope in banking subsidiaries into the NDIC net. It’s a loophole that’s been gaping for a long time.

    Talking of dilemmas and choices, which ironically was the subject of my cartoon the day after, the depositors and banks fall into this situation. Depositors would be said to be facing a “double bind” dilemma, while banks would be placed in a “Morton’s Fork” by the NDIC when considering a litigation.