FinanceLab Magazine - #6 - February - 2012

SIXTH EDITION

FEBRUARY 2012

MAGAZINE

FinanceLab beat

the market INVESTMENT

PANEL

ANALYSIS

OF THE MONTH

DEbating

“HOLD”

Just blame capitalism!

€ureogeddon

STUNNING

Photo ComPilation

ART, ANTICAPITALISM

PROPAGANDA

“

Since we at FinanceLab and most of you readers very well could become one of the 99%’s scapegoats in the near future, we have decided to enter the debate in this issue of FinanceLab Magazine.”

A WORLD BETWEEN THEORY AND PRACTICE

CONTENT M&A in 2011 Global Stock Markets suffered in 2011 Volatile currencies €ureogeddon FinanceLab beats the market IP-Case of the month: Coca-Cola Dubai Inc. Qatar

EDITORS

T

Kim Jong-Il Occupy W all Street

NOTE

his issue of FinanceLab Magazine is looking back at the year 2011 by looking at the highlights of the M&A market and trends in the global and local stock and FX markets. So, if you did not follow the market news intensely during the entire year, this is your chance to get a recap. In addition to this we take a look at the year to come, as we draw attention to the implications of a potential Euro-zone break up.

In a recent investment case FinanceLab Investment Panel – a group of much dedicated investment geeks – analyzed one of Warren Buffet’s all time favourites, namely The Coca-Cola Company.

The conclusion was a hold recommendation, to find out why, read this issue’s contribution from the Investment Panel.

Moreover, this issue of FinanceLab Magazine explores the Middle East by analyzing the rising and shooting stars at the Persian Gulf – Qatar and Dubai.

Moving further east, we do a profile on Kim Jong-il, dictator (or spiritual leader) of North Korea, who passed away on December 17th

Experts Corner A note on Occupy Private vs Public ownership Why you shouldn’t buy presents...

aged 69 (or 70?!).

A lot has happened since the first protesters in the Occupy Wall Street movement entered Wall Street. Questions about what their goal is, how they plan to obtain them and whether capitalism is to blame have been subject to an ongoing debate across all medias from local news to globally expanding marketing channels such as Youtube, Twitter and Facebook.

Since we at FinanceLab and most of you readers very well could become one of the 99%’s scapegoats in the near future, we have decided to enter the debate in this issue of FinanceLab Magazine.

Heading back to a much older debate, namely the debate about whether private equity (PE) firms create or destroy value, we compare the performance of public and privately held companies in an attempt to clarify whether the criticism of PE firms is justified.

Lastly, if you are the type of person who makes a personal budget in the beginning of every year, you might want to consider reading the last article before deciding how much money you want to save up for the 2012 Christmas shopping.

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Preparing Young Talents for a New Era in Financial Markets Silvio

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ABOUT EDITORS

FinanceLab is a network and interest organisation aiming to improve financial competences among students through networking, education and hands-on experience.

Rune Randrup-Thomsen Sarah Louise Hansen

FinanceLab is represented at several universites in Denmark such as Aarhus School of Business, Copenhagen Business School, Aarhus University, University of Copenhagen, Technical University of Denmark, Aalborg University and Niels Brock.

LAYOUT

Frederik Ploug Søgaard

CONTRIBUTORS

Visit FinanceLab.dk

Investment Panel: Klaus Bender Marc Rasmussen

Sarah Louise Hansen Thomas Joel Frivold Mathias Barfoed Martin Ågerup Ole Bjerg Rune Thomsen Mathias Barfoed Francesco Stasi

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JUST A BRILLIANT THOUGHT

INVESTMENT BANKING

M&A The big the bold the beautiful

O

n December 28th 2010 Forbes argued that 2011 would be the year of M&A transactions. With companies piling up cash they were all ready to gain an advantage over their competitors through strategic acquisitions.

Only a few days into 2012, one can conclude, that they were right. This came as a surprise to many since medias started to postulate that 2011 was going to be yet another disappointment in mid-December. But by the end of 2011 we were pleasantly surprised to realize that 2011 was in fact the year where the M&A market stepped up the pace and size of deal making; Global M&A in 2011 totaled $2.18 trillion, up 2.5% from the same period in 2010 ($2.13 trillion) - the busiest year since 2008 ($ 2.40 trillion). Looking back at 2011, we take a look at some of the M&A transactions that have occurred during 2011.

The Big For $21.9bn in cash and stock Kinder Morgan, an American energy company, acquired El Paso, also an American energy company, making Kinder Morgan the biggest of North America’s midstream energy companies. The transaction was noted to be one of the big-

gest transactions in history the energy sector and the largest energy deal since Exxon Mobil bought XTO Energy for $40.8 billion late 2009. “This makes Kinder Morgan the dominant pipeline company in the country,” Chip Johnson, the chief executive of Carrizo Oil and Gas, a midsize driller in the shale fields, said prior to the acquisition.

“They are everywhere now. They can deliver gas all over the country.” This market position did however not come cheap; Kinder Morgan paid a big premium for El Paso. For each share of El Paso, Kinder paid $14.65 in cash, 0.4187 of a Kinder share and 0.640 of a warrant. The total value of this offer was about $26.87, corresponding to a 37 percent premium (relative to the closing price the day before the agreement).

and reportedly Alex Gorsky, vice chairman of J&J’s executive committee, noted that the acquisition would lead to increased competition, which will benefit doctors, customers and patients.

Although the merger was not all glitter an glamour; after the merger Moody’s Investors Service, the New York-based credit-rating company, announced that even though they planned on maintaining its AAA rating on J&J’s bonds, they were downgrading its outlook on the drug maker to negative because of the deal’s “substantial use of equity”; “Despite the benefits of acquiring Synthes, J&J is incurring new debt during a period of increased operating challenges including product recalls” said Michael Levesque, Moody’s senior vice president stated on the day of the transaction.

On April 27th 2011 a de- deal-size: finitive agreement whereby Johnson & Johnson acquired Synthes, a multinational medical device manufacturer based in Switzerland, at CHF159 per share. The total size of the transaction was $21.3 billion and thereby the biggest purchase in deal-size: Johnson & Johnson’s 125-year history. Johnson & Johnson’s plan is to gain market majority in the trauma market

In Japan on September 22nd 2011, the biggest steelmaker in Japan, Nippon Steel, and thirdranked rival Sumitomo Metal announced that they would merge and thereby become

$21.3b

$40.8b

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deal-size:

$22.5b

the world’s second largest steel firm.

In the merger, stakeholders of Sumitomo got 0.735 Nippon Steel share for each Sumitomo share, the two firms said when announcing the merger. The firm will be operating under the name Nippon Steel & Sumitomo Metal Corp and according to Sumitomo’s press release the aim of the integration of the two businesses is to become “The Best Steelmaker with World-Leading Capabilities.” The total value of the transaction was $22.5bn.

general public.

However bold the decision was, it was also necessary; Terra Firma initially bought EMI for $6.6bn in 2007, but had been struggling under the debt used to back the deal.

Terra Firma founder Guy Hands had sought compensation from Citigroup, the main lenders, arguing that they had misled him over the acquisition. However, the case was dismissed by a US jury in 2010, and earlier this year Citigroup took full ownership of EMI, triggering a $2.7bn loss of the equity of Terra Firma and its backers, the highest-ever loss on a single private equity deal in Europe.

Another bold pro- deal-proposal: posed deal, which was subject to a lot of attention in the media was AT&T’s proposal on a $39 billion takeover of mobile company T-Mobile USA. The deal never got the chance to see daylight, since it was blocked by authorities. It would have been the biggest corporate deal of the year, and the word ‘big’ was in fact the major concern for the Federal Communications Commission (FCC) and the Department of The current economic environment Justice – because when you are regustresses the importance of “bold and lating the M&A market size does matter! transformational moves” Blair Effron, A senior FCC official said the commisco-founder of Centerview Partners stat- sions had “never seen anything like the ed. “Organic growth is hard to come by. deal described in this record.” It would Seems as if beauty has its price and by So if you are a company that is good create “unprecedented concentration acquiring Pacific Bioscience Laboraat making acquisitions, if you can inte- in the wireless industry.” AT&T did had tories Inc., the market leader in sonic grate well and if you can convince the their arguments in place; by acquiring skin care technology, L’Oréal proved market that you can get shortT-mobile they would be that they were willing to pay that price. term strong financial return and able to make one giant “Clarisonic is a strategic acquisition for long-term strategic return, you’ll entity that could serve L’Oréal,” said Nicolas Hiéronimus, Presget the support”. the masses with more ident L’Oréal Luxe, much thrilled over deal-size: One of these bold transachandset choices, bet- gaining access to Clarisonic, the patenttions was the Express Scripts’ ter 3G and, eventually, ed sonic skin care technology; “Devices – the largest U.S. managers more 4G coverage. In are emerging globally as an important of prescription drug benefits addition to this, the ma- new skin care category. Clarisonic is – $29.1bn acquisition agreejor would set ground for the most successful and fast growing ment for its rival Medco Health domestic job creation. premium brand in this category and we Solutions, which was the largest acqui- FCC shun of all of these profound argu- will roll it out internationally as well as sition ranked by deal value in 2011. Ac- ments, arguing that the transaction was enhance our service experience in our cording to the terms of transaction the not in the public’s interest and that the luxury counters”. David Giuliani, CEO merger aims at combining the expertise effects on the development of the 4G and co-founder of Pacific Bioscience of two complementary pharmacy ben- network were marginal.

Laboratories appeared to efit managers (PBMs) to accelerate efbe equally content with forts to lower the cost of prescription On November 11th Britain the transaction; “L’Oreal’s drugs and improve the quality of care lost their last major record powerful marketing, distrideal-sizes: for Americans. The transaction was car- label EMI, which was tembution and R&D resources ried out in July 2011 and Medco share- porarily held by Citigroup. will help Clarisonic develop holders received $28.80bn in cash The label was split into two internationally and achieve and $0.81bn in shares, corresponding parts; Universal Music took our global mission - emto $71.36 for each Medco share they over the recording unit for powering people to change owned upon closing of the transaction. $1.9bn and a Sony-led conthe future of their skin.”

The transaction was subject to a great sortium bidding $2.2bn won the pubdeal of attention in the market since lishing business. The move was bold In March 2011 the deal value was considerably higher in the sense that it threatens Britain’s Louis Vuitton than the stock market value. The more position as large net exporter of pop Moet Hennesy deal-size: optimistic argument for this was syn- songs, along with America and Sweden. (LVMH) Group ergy opportunities – an argument that Moreover, as the costs of producing expanded their was much applauded by the sharehold- music decreases, the purpose of having portfolio of luxury ers of Express Scripts. Meanwhile, less record companies gradually decreases. goods by agreeoptimistic investors pointed towards Meanwhile, independent record com- ing to pay $5.2 antitrust issues; concerns were raised panies are gaining market advantage. billion for Bulgari, about whether the transaction, which Thus, the splitting up of EMI might very the Rome-based enables Express Scripts to control 30% well be the beginning of a new era in watch and jewelry maker, in its biggest of the prescription drug market, would the music industry and EMI’s competi- takeover in at least a decade. Since give Express Scripts a superior market tors could be next in line.

LVMH was founded in 1987 from the advantage and eventually harm the merger of Moet Hennessy and Louis

$39b

The Bold

The Beautiful

$29.1b

$1.9b and $2.2B

$5.2b

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Vuitton, the investment group has completed more than two dozen acquisitions in the past decade and now sells everything from Louis Vuitton bags to Dom Perignon champagne and Royal Van Lent yachts. Only six weeks before the transaction was announced, LVMH had stated that they were not willing to overpay for acquisitions. The transaction therefore came as a bit of a sur-

prise to many, since Chief Executive Officer Bernard Arnault, paid the biggest premium in 10 years to gain control of the world’s third-largest jeweler from Bulgari’s founding family. In spite of the fact that Bulgari’s earnings had fallen 67 percent in the past three years prior to the take-over and the company is less profitable, measured by their operating margin, than any of its largest

rivals, Arnault is betting he can boost profitability as Bulgari’s sales reach a record this year. However, to those who are known with LVMH’s repertoire, the acquisition of Bulgari smells more like empire building than any thing else.

Key Trends in the 2011 M&A market

deal making across the “Energy, Mining & Utilities” sector saw the highest total value of M&A deals in 2011. The group of corporations accounted for 25.6% of global M&A deals announced, totaling $557.7 billion. Distributed among countries, American companies ac-

counted $820.6 billion in deals across 2011, the highest annual total deal value since 2007’s $ 1.33 trillion. The total was also up 14.4% from 2010 ($717.2 billion). In the emerging markets, however merger and acquisition activity decreased 11.7% from the same period in 2010.

On the downside each successive quarter in 2011 saw less activity in the M&A market than the last. The worst move down came in the fourth quarter of 2011, with $432 billion in deals conducted, down 22.5% from the third quarter of 2011.

Once again Goldman Sachs topped the global M&A financial advisory tables by total deal value for 2011, having advised on 309 deals worth US$ 593.4 billion. According to Mergermarkets

What is in store for 2012?

Current consensus is that 2012 will outdo 2011. Cheap financing and the large amounts of cash on corporate balance sheets are the two main arguments for believing that 2012 will show a boost in the M&A market. In addition to this, experts argue that companies that have already cut costs may decide that they need to make acquisitions to

Topping deal-value:

$593.4b drive growth in the face of a tepid economy. However, the picture is not all rosy and red. Back in 2010 concerns over foreign takeovers emerged and this has been a matter of increasing concern for regulators, shareholders and companies throughout 2011. With cash-rich corporations in markets like Brazil and China bargain-hunting for established brands in developed markets; “Many companies in China and Brazil see this as a once-in-a-lifetime opportunity to acquire world-scale brands at pretty attractive prices,” David A. DeNunzio, vice chairman of Credit Suisse as he argues that the number of cross-border

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transactions will increase in 2012. Rising concerns over whether the financial system in Europe will remain stable also leaves companies in the European market in despair. On one hand the current situation serves as a hindrance for companies in the M&A market, since there is too much uncertainty about the sovereign debt crisis. On the other hand, the uncertainty and cheap financing could attract bargain hunters, leading to an increasing activity in the European M&A market.

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Imagine Denmark building 24 towers identical to the famous Burj Khalifa, the world’ tallest building. Then imagine Sweden, Norway, Germany and actually every other country in the entire world did just the same. Now imagine that all the towers were torn down. This is virtually what happened on the global stock markets during 2011; global stock market capitalisation dropped 12.1% to $45.7tn according to Bloomberg data. Almost $6.3tn was erased from global stock markets as the euro-zone debt crisis spread across the world in the latter half of 2011, calling into question the future of the world’s largest currency block.

By: Rune Thomsen

A

lmost all countries in the world experienced a bearish year on their stock markets, Iceland and Ireland being the exceptions. Iceland was 2011s stock market winner with a tedious 2.0% return, this, however, is probably more a reflection of the hard hits the Icelandic stock market received amid the financial crisis rather than a sign of Iceland being a wonder land for investors once again.

Global stoc suffered in 2.0

Stock markets in the euro-zone countries where hit the hardest in 2011; even when leaving the collapse on the marginal Athen’s stock exchange out of the equation, the euro-zone stock exchanges dropped by 23.9% on a value weighted average during 2011. Concerns over the survival of the euro and forecasted recession in Europa were some of the main drivers of this bearish movement. The non-euro European countries also experienced drops during 2011, but led by the UK and Icelandic stock markets they were the second best performing region in the world only ousted by Northern America.

-12.9

-33

0.0

Strong growth in the US stock markets in October kept investors in US equity papers from losing.

That’s right by investing in the lumbering, deficit ridden, and low-growth giant you would actually have avoided the huge drops in stock value. This would off course require that you avoided to panic amid the 7.4% drop in September. The Japanese stock market took a though hit when the tsunami hit Japan dropping 9.0%, but the following replenishment and an increased home bias due to concerns about the growth prospect of the world led to a decent year for Japanese stocks, at least compared to the rest of the world.

-12.1

-16.5

Looking at emerging market economies, which were by many said to have the best fundamentals for future growth, the outcome for 2011 was a surprise to many; on a value weighted average, emerging stock markets dropped by 18.1%, even the Brazilian stock market, often mentioned as a good place to invest, dropped by 12.1% during 2011. However, as Torsten Sløk, chief international economist at Deutsche Bank, puts it: “It does not matter how well you perform as long as others are doing worse” and the Brazilian stock market actually was the 9th best performing during 2011.

India, often put on the same footing as Brazil, on the other hand did not perform well and Indian stocks lost more than 30% of their value during the recent year. Newly listed companies are historically known to increase in value during the first period of trading, but even though China headed the list of IPOs last year their overall stock market value dropped to three quarters of their value in the beginning of the year – looks as if the biggest of the four Asian Tigers has been defeated.

-35.1

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ck markets 2011 -16.6 -18.3 -36.3 0.6

3.1

-2.7

-14.5

-20.0

-24.9

-16.7 -25.0 -19.7 -8.7 -30.2 -28.1 -90.2 -25.8

“

By investing in the lumbering, deficit ridden, and low-growth giant you would actually have avoided the huge drops in stock value

“

-30.2

-30.2

-13.6

-17.0

-25.0 -22.7

-1.7

-0.6 -16.0

Developed countries Australia -16,0% Canada -12,9% Isreal -30,2% Japan -17,0% New Zealand -2,0% US 0,0%

Euro countries Finland -36,3% France -19,7% Germany -16,7% Greece -90,2% Ireland 0,6% Italy -28,1% Portugal -33,1% Spain -14,5%

Non-euro european Czech Republic -30,2% Denmark -20,0% Iceland 2,0% Norway -16,6% Source: Reuters Poland -25,0% Sweden -18,3% Switzerland -8,7% UK -2,7%

-2.0

Emerging market countries Argentina -35,1% Brazil -12,1% Chile -16,5% China -25,0% Hong Kong -22,7% India -30,2% Russia -24,9% South Africa -0,6% South Korea -13,6% Thailand -1,7% Turkey -25,8%

Source: Reuters

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Volatility currencies JPMorgan G7 and EM Volatility Indices (Fact box)

- The indices are tracking the level of implied currency volatility in G7 and emerging market economies.

- The VXY and EM-VXY indices follow aggregate volatility in currencies through a turnover-weighted index of G7 and emerging market volatility, based on three-month at-the-money forward options.

- The turnover weights for the indices are based on the Bank for International Settlements' triennial central bank survey of foreign exchange and derivatives markets.

- Turnover weights were chosen over trade weights, as they capture demand for various currencies as a function of both commercial and financial demand.

- The indicees are designed to allow investors to measure aggregate risk premiums in currency markets, calibrate trading strategies and express views on volatility as an asset class.

Source: JPMorgan

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Foreign exchange markets have experienced rapid trend changes and increased volatility during 2011. Amid the market concerns over the survival of the euro, investors have fled to safety, supporting the US dollar and provided additional impetus to the Japanese yen. Even though much of the trend changes steam from uncertainty regarding the euro, the euro have not yet fallen as much as one might expect. Emerging market currencies have not stayed anonymous and most have fallen as a result of their exposure to a cross-border financing sources. With concerns about euro leaders’ ability to save the euro, foreign exchange markets face a turbulent future.

By: Rune Thomsen As risk aversion has intensified in response to sovereign debt and bank funding strains in the euro zone, and to concerns about slowing global growth, foreign-exchange markets have generally followed a predictable course; investors have fled to the US dollar, the world’ leading currency, and as a result, it has appreciated against almost every other currency, the Japanese Yen, Swiss Franc and Chinese Renminbi being the exceptions.

The flight to the dollar seems odd when consider-

“ The Japanese yen is likely to grind higher in the future “ ing its unholy trinity of record low yields, disorderly public finances and large external financing needs. Yet one must remember that US Treasuries remain one of the deepest and widest markets in the world and therefore remains a favorite among investors in uncertain times. As a result, demand for US dollars continues to be high.

Many commentators expect the euro crisis to continue in 2012 and hence, a continuation of the current strengthening of the US dollar against the euro seems to be the most likely scenario in 2012.

Underpinned by Japan’s current-account surplus and strong external balance sheet, the yen has continued to strengthen, even against the dollar.

JPMorgan G7 and EM Volatility Indices

This appreciation has been strengthened by the increased risk aversion among Japanese investors, as the fear for further foreign loses has led to an increased home bias, i.e. an increased preference for domestic assets. Although Japanese policymakers have tried to intervene in the foreign exchange market in order to curb the loss in competitiveness, the effects have only been very short lived and unless they invariably implement measures to defend currency appreciations by imposing a ceiling, like the Swiss central bank, the Japanese yen is likely to grind higher in the future.

nated assets. A new global credit crunch is not the only risk associated with deleveraging; the reductions of holdings in foreign assets could ultimately cause increased volatility in illiquid emerging market currencies.

The euro zone is the epicenter

Are emerging markets in problems?

The strong anti-inflationary stance ECB held in the beginning of 2011 increased the interest differential between the euro zone and the US. This supported the appreciation of the euro we saw in the first part of 2011. But the impact of the interest rate differential has diminished as the debt crisis escalated. Furthermore, ECB have cut rates in both November and December, narrowing interest rate differentials. As the crisis escalated it engulfed countries like Spain and Italy, and at certain times even threatened to include France, questioning the very survival of the euro is no longer just a joke. Also, keeping in mind the steep decline of the euro in the beginning of 2010, when the concerns were solely about Greece and given that the funding pressures on sovereigns and banks are so much more intense now, why is the euro then not worse off?

To give an answer for this we should probably turn to the European banking sector. As with Japanese investors, the risk appetite of European banks has been declining. Furthermore, national regulations and preparations for the upcoming Basel III rules have led the highly geared European banks to scrutinize their balance sheets. According to the Economist Intelligence Unit deleveraging by euro zone banks will lead to an estimated reduction in their holdings of foreign assets of as much as 2 trillion euro. The impact of such a deleveraging depends on the extent to which inflows in the single currency are offset by sales of euro denomi-

Not only the euro declined against the dollar, almost all floating emerging market currencies were hit by the resurgence of risk aversion. Both the South African Rand and the Indian Rupee have lost more than 10% of their value against the dollar during 2011. In Brazil and South Korea the central banks have tried to smoothen volatility, but in general emerging market economies will welcome a depreciation of their currency since their economy still are very dependent on exports.

The fall in emerging market currencies have escalated amid the strengthening of the euro crisis.

This is both due to an increased home bias for the developed countries among investors as well as the deleveraging of European banks, which are the primary source of cross-border credit to emerging markets. The emerging market currencies will thus remain under pressure as long as risk appetite is low. This might cause problems in countries with large unhedged FX exposure, like Hungary, Mexico, Poland and Turkey. However, Hungary has already applied for precautionary financial assistance from the IMF and Mexico and Poland have engaged in flexible credit lines with IMF. South Korea and China have increased their swap arrangements in an attempt to shield themselves. Nevertheless, FX holdings in many emerging markets are at record high levels and will thus be able to bring down some of their reserves in order to support their currencies.

Emerging market foreign exchange reserves

(Daily USD closing prices)

USD EM currency cross

(Trillion USDs)

20

“ The highly geared European banks scrutinize their balance sheets “

(Jan 2011=100, inverted axis)

8

85

7

18

95

6 16

5

14

105

4 115

3

12

2 10

125

1

JPMVXYG7 Source: Reuters

Source: IMF

Source: Oande.com

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USD/CNY USD/RUB

dec-2011

okt-2011

nov-2011

sep-2011

jul-2011

aug-2011

jun-2011

apr-2011

USD/BRL USD/ZAR

JPMVXYEM

maj-2011

mar-2011

jan-2011

feb-2011

Jan-2011

Jan-2010

Jan-2009

Jan-2008

Jan-2007

Jan-2006

Jan-2005

Jan-2004

Jan-2003

135 Jan-2002

dec-2011

okt-2011

nov-2011

sep-2011

jul-2011

aug-2011

jun-2011

apr-2011

maj-2011

mar-2011

jan-2011

0 feb-2011

8

USD/INR

€urogeddon By: Rune Thomsen

On January 1st 1999 Europe’s common currency saw the light. Now, thirteen years later the currency is in a crisis, which threatens to eliminate it. A restructuring of Greece’ debt was inevitable and concerns now focus on the contagion among the larger euro zone countries. The fear of a cascade of disorderly sovereign defaults chills

investors risk appetite and the departure of certain euro members from the common currency is now a serious topic instead of a joke. With the increasing focus on a Euro break-up, one main question is raised; will the break-up cause a new financial catastrophe, a €urogeddon?

“The strong northern “core” is less exposed to leaving the euro compared to their peripheral friends”

“A euro break-up would result in a flight to safe heavens in a potentially epic scale”

“In the long run the euro would regain much of its strength at the expense of the US dollar”

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A

Euro break-up can take many forms and there are too many unknowns to make confident predictions about the trajectory of the crisis or the extent and speed of any break-up. The effects of a breakup are thus uncertain, but it would undoubtedly have negative effects on stock markets and other risky assets on a local and global scale. The uncertainty caused by a euro break-up would result in a flight to safe heavens in a potentially epic scale. Even though investors already have priced in substantial negative expectations a euro break-up would have severe negative impacts on investors’ confidence. Sovereign bond markets will be split into an A-team and a B-team. Safe heaven countries like Norway, and to a certain extend the United States, would experience significant drops in yields. The movement of German bunds depends highly on market perceptions of Germany’s success in isolating itself from weaker euro members. Short term market dislocations, like the ones experienced after the collapse of Lehman Brothers, would probably also emerge.

uous and it might even be amplified if the European Central Bank mimics the Federal Reserve’s quantitative ease in an attempt to restrain the crisis. Money would flood into the dollar and other safe-haven currencies, like the Swiss franc. However, when the initial stages are survived, the remaining euro countries would be the healthiest countries, thereby causing stronger fundamentals.

Thus, the euro would eventually regain much of its strength at the expense of the US dollar, which fundamentals have been masked by other factors.

port and this export would suffer heavily from a recession in the euro zone.

Furthermore, there would be a negative effect on US consumer wealth and confidence about the future. Stock prices would drop leading to a cut in consumer spending and consumer worries over the US government deficit and debt level might regain strength if European countries starts to default. Emerging market countries, like China, are still highly dependent on exports and would thus suffer severely from the decreased import from euro zone countries. The more countries leaving the euro, the more severe would the spread effects would be.

Would a global Triggering a recession be inevitable if the euro break-up euro collapsed?

A break-up would cause a deep recession throughout what is now the euro zone. Demand would weaken because of a combination of consumer retrenchment, higher unemployment, reduced spendWhen evaluating ing power in countries “The only way to the economic efthat suffered sharp currestart the economy rency depreciation and fects of a euro break-up, banks would be the weaker exports. At the play a key role and introduction of a new same time, the need for in case of a colausterities would make national currency” lapse of the euro. much needed fiscal Banks in exiting stimulus unaffordable in countries would experience widespread most west European countries. insolvencies. With increasing credibility of a euro exit, depositors would transfer A recession in the current euro zone their euros to banks in other countries would have negative effects on the since a devaluation of a new national rest of the world. Europe is, even givcurrency is almost inevitable. Once ing the recent financial and economic a country definitively leaves the euro crisis, rich and thus imports many domestic loans and deposits would be goods. US exports to the current euro redenominated in the new weaker na- zone amounts to 14% of total US extional currency. Banks would probably default on most, if not all, external debt that remained denominated in euros, dollars or other strong currencies. Furthermore, banks holding large amounts of sovereign debt, would further weaken their balance sheets and, ultimately, saddling sovereigns with the cost of recapitalisation, which would, in turn, hasten defaults on government debt.

Throughout the initial stages of a break-up the downward pressure on the euro would be stren15/64

Given the negative outlook a euro break-up causes, focusing on potential triggers of a euro break-up is essential.

For a country to leave the euro the most likely initial trigger is a disorderly sovereign default. If a country refuses to accept strong financial austerity or if the “troika” (ECB, IMF and the European Commission) refuses to intervene further due to a country’s lacking ability to implement effective deficit measures a disorderly default could occur. As mentioned above a default would wreak havoc in the domestic banking system leading to a point where the only way to restart the economy would be the introduction of a new national currency.

However, a default would, not automatically imply an exit from the euro. The

“The most likely initial trigger is a disorderly sovereign default”

strongest determinant is most definitely whether the “troika” believes in the political will inside the country in question.

A country could stay within the euro if sufficient institutional support and external financing for its banks were forthcoming. Furthermore, the integration between the euro countries is large and the non-defaulted countries would fear a contagion, thereby forcing them to help their member country.

Keeping in mind that a sovereign default is most likely trigger of a euro exit it should be no surprise that the strong northern “core” is less exposed to the risk of leaving than their peripheral friends. Once one peripheral country (say, Greece) left, all other vulnerable countries would probably follow as a

consequence of the overwhelming pressure sovereign debt markets would undergo. Portugal, Ireland, Italy and Spain would leave the euro, although not necessarily immediately or in the given sequence. Malta would probably leave, and Cyprus would have little choice but to exit as its banking system would be nearly wiped out by a Greek collapse.

Hence, up to ten of the current seventeen countries could remain members of the euro: Germany, France, Austria, Belgium, Finland, Luxembourg, the Netherlands, Slovakia, Slovenia and Estonia.

For the survival of the euro as a common European currency France’s status is key. A slimmed-down northern core would cause dramatic currency appre-

Next members night:

1st of March

STORM OVER

EUROPE Steen Jakobsen Chief Economist Saxo Bank

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ciation that would make it difficult for France, with its external deficit rising as a result, to remain viable in the euro.

Nevertheless, the political bands between Sarkozy and Merkel are so strong and a monetary union with Germany is so fundamental to France, politically as well as economically, that they would be determined to stay. Germany would probably be willing to provide extensive financial support to enable France to do so. This way the euro remains a common European currency rather than an expanded D-mark zone.

Explore THE financial Capital

of Europe with FinanceLab In September 2012, 20 young students with an interest in finance takes the journey to meet the most prominent players in the global financial industry.

Once again we take off to London!

Experiences from previous study trips proofs this to be a stepping-stone for a new career path.

The diversified group will leave the airport as strangers and return home as finance partners for life.

There will also be time for study sessions as some of us are preparing for exams during the trip. Remember it’s a study trip as well as a motivation trip.

Join FinanceLab for a great and educational trip!

Learn directly from numoures investment bankers Improve your international network Socialize with kind and dedicated students

Pre-party for the team Flight transfer Hostel stay Full week city transportation

Said about the study trip “Apart from gifting me with great future friends, the Financelab Studytrip ensured that I met great corporate contacts which in fact played a key role in my employment at Deloitte, Corporate Finance.”

Only

- Jonas Chelbat, BSc Economics & Business Administration (Class of 2011) 17/64

4500 DKK,-

Update from the FinanceLab porfolio manager:

FinanceLab beats

the market in 2011

By Marc Rasmussen

A time to look back We hope all is well into the New Year, and you are all ready for a new year with many more investment, analysis, and what that entails.

When a new year begins, a usual tradition is to take stock of the year that has just passed, and thus follows an update on the FinanceLab portfolio for the past year 2011 and the start of the year 2012. In this article, you will gain a detailed insight into the FinanceLab portfolio where you can see trends in our custody over the past year versus OMXC20, our current portfolio of shares, and much more.

FinanceLab beats the OMXC20 index As shown in the graph here in the article, FinanceLab (red graph) fared significantly better than for example the OMXC20 index (the yellow graph) from early 2011 and here to the end of January 2012. Overall, the FinanceLab portfolio from the beginning of 2011 until today lies in index 104.5, while OMXC20 lies in index 87.5, a gap of 17 points or 19.4 percent.

The FinanceLab portfolio compared with OMXC20 index, from January 1.

2011 until January 27.

2012.

While 2011 has generally been a bad year for stock market, where OMXC20 fell by more than 15 percent, FinanceLab for comparison has thus been able to hold its stand, and the portfolio made it through 2011 without any loss, and now sits at the end of January 2012, with a gain of approx. 4.4 percent.

Conservative investment strategy has been the way forward 18/64

As seen in the report we have had an overall fluctuation in the FinanceLab portfolio at max 8 percent in 2011, which is not much when you look at the market in general, where large indexes as DAX30 and the SP500, has experienced fluctuations of 35 and 20 percent over the past year.

The lack of large fluctuations in our portfolio can be caused by several things.

But the most important parameter here

is probably that we have had invested only about 25-35 per cent of our available capital over the year, which has done that we have been more or less spared from unpredictable market fluctuations.

A strong start for the FinanceLab portfolio in 2012 As at the start of 2012 FinanceLab is invested in Israeli Teva Pharmaceutical Industries Limited (registered in the U.S.) and the B & O share.

The start of 2012 has been beneficial for all shareholders around the world, not least for the FinanceLab portfolio that has risen about 7 percent during the month of January. That is primarily attributable to an impressive rise in the B & O share, which in 2012 so far has risen 26.8 percent! After a less glorious development in 2011, the B & O share is in late January 2012 back at a price of 70kr.

Israeli Teva Pharmaceutical, has also been performing well in early 2012 and has risen 11.3 percent to a price of $ 44.91. Despite the impressive rise, it is still below our entry at $ 46.89.

Although Teva Pharmaceutical has experienced a negative price development, we have still achieved a positive return on our investment in Teva at 5.25 percent. This is because we have bought dollars, equivalent to the amount of our investment in Teva, and USD has risen around 10.8 per cent compared to DKK during the period we have been invested in Teva. So despite a fall in Teva Pharmaceutical of 4.2 percent in relation to our entry, we have gained a plus in the investment as the USD has increased approx. 10.8 per cent in the interim.

Extension of the FinanceLab portfolio We are in the process of moving our holdings of shares and cash for a new account with our broker Nordnet. We expect that the transfer will be done within the next month, after which we

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will invest in bonds, so we can earn interest on our cash. As it stands, Nordnet gives no interest on deposits.

Additionally FinanceLab portfolio is to be expanded with more cash. FinanceLab holds cash that the association will add the FinanceLab portfolio so we can expand our investments. There will thus be opportunity to invest in several stocks at one moment and with larger amounts. There will also be opportunity to invest in other than shares, for example bonds, currencies and commodities. All this will help to get the Investment Panel to lie as close as possible to the professional investment banks- and funds and the opportunities they have with respect to investments.

INVESTMENT

“HOLD”

ANALYSIS

This investment analysis did not result in a position in the Coca Cola Company stocks.

Read why.

PANEL OF THE MONTH

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INVESTMENT PANEL ANALYSIS - COCA COLA COMPANY

PANEL WORK FLOW

HOW TO JOIN THE INVESTMENT PANEL:

1

Write your IP application

2

Share your market views in the online community

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3

Be qualified as an Investment Panel member

INVESTMENT PANEL ANALYSIS - COCA COLA COMPANY

Macro analysis ”To measure our growth potential, we look to our per capita consumption – the average number of 8-ounce servings of our beverages consumed each year in a given market”. According to this measure Coca-Cola’s five largest markets are Mexico, Malta, Chile, United Stated and Australia. Coca-Cola Company’s general philosophy is that demand for their products is closely tied to the purchasing power of their consumers, which ultimately depends on GDP growth. Among the primary markets Australia, Chile and Mexico have been projected to experience the highest growth rates according to IMF. Argentina, Panama and South Africa will similarly have moderate to high GDP growth. Although this serves as an argument for increasing sales according to Coca-Cola Company, soft drink sales are generally not very exposed to fluctuations in output. The aggregate soft drink sale in Europe has been steadily growing throughout the years preceding, during and after the crisis. This is despite of the fact that Europe is arguably one of the markets that has been mostly affected by the financial crisis.

This underlines the fact that demand is not very sensitive to cyclical movements.

The biggest potential for Coca-Cola Company is unambiguously in emerging markets, where their presence is limited; as low-income households experience an increase in their disposable income they will gradually increase their demand for branded goods, this being both designer bags and expensive nonalcoholic beverages.

70 per cent of the net operating revenues are generated from operations outside the US and Coca-Cola Company is exposed to 75 currencies. As a result, weakness in specific regional

currencies is usually offset by strength in others. In order to minimize currency risk, Coca-Cola uses derivative financial instruments to further reduce the net exposure to currency fluctuations.

Within commodities, Coco-Cola Company’s primary exposure is towards aluminium, plastic (PET), energy and of course sugar. The aluminium is projected to experience a supply deficit during the next year, causing an upward pressure on prices. Plastic supply is characterized by adopting rather fast to demand fluctuations for which reason prices are somewhat stable. Sugar demand is forecasted to increase during the next years meanwhile growth in supply is forecasted to outpace demand, resulting in an excess supply, which will induce a downward pressure on prices.

Coca-Cola Company is aware of the importance of hedging against commodity risk. ”Whenever possible, we manage our exposure to commodity risks primarily through the use of supplier pricing 22/64

agreements that enable us to establish the purchase prices for certain inputs that are used in our manufacturing and distribution business.”

Another potential threat to Coca-Cola Company within the commodity market is availability of water; ”Coca-Cola Company recognizes water availability, quality and the sustainability of that natural resource for both our operations and also the communities where we operate as one of the key challenges facing our business.”

The relatively stable demand serves as an advantage for Coca-Cola Company, since they only have to be concerned with their macroeconomic environment to a limited extent. Conversely it also sets an upper limit to how much they can boost their sales. For this reason the macroeconomic part of this analysis concludes that Coca-Colas Company’s macroeconomic environment is stable.

INVESTMENT PANEL ANALYSIS - COCA COLA COMPANY

Strategic analysis With Coca-Cola owning four out the five largest soft drink brands – Cola, Diet Coke, Fanta and Sprite – Coca-Cola Company has a superior position in the soft drink market. Their customer base is characterized by being loyal to the brand, which make Coca-Cola Company less exposed to subsidies in form of other soft drinks. Coca-Cola Company is not exposed to demographic challenges, since consumption is somewhat stable across age groups.

Coca-Cola Company has well-established marketing channels and they have always been good at exploiting these; as most people already know, they sponsor some of the world’s greatest sporting events, such as FIFA World Cup and The Winter Olympics.

It is, however, not all sweet and dandy for Coca-Cola Company; the health issues concerning products which are rich in sugar are a rising concern for politicians. In order to respond to this, more and more countries are taxing products that contain sugar. I addition to this, authorities are forcing companies to state the amount of calories in their products and with sugar being the main ingredient in most of their products, this is not at all good news for Coca-Cola Company. Consumers are similarly becoming more focused on obtaining a healthy lifestyle, which make Coca-Cola Company’s products less appealing to their customers.

The limited availability of artificial sweeteners used to make their low calorie products (e.g. Diet Coke) is also becoming a concern for Coca-Cola Company.

As for growth opportunities, Coca-Cola Company can seek growth opportunities by diversifying their product line through the acquisition of other soft drink producers.

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INVESTMENT PANEL ANALYSIS - COCA COLA

Valuation When considering an investment case it should be stressed that one is predicting the future cash flows of the firm and these are inevitable tied to great uncertainties. This is no exception when considering one of the world’s largest consumer goods companies, the Coca-Cola Company. Therefore, based on a DCF approach, three scenarios have been computed, a bear, a base and a bull, to which individual weights have been applied according to the estimated probability of each. By doing this the fair value of the Coca-Cola Company is estimated to be USD 60, which notably turns out be below the current share price (USD 65) effectively seen from the potential.

Scenario Bear

Target price 46

Weight 20%

Contributes 9

Potential -29,2%

Base Bull

61 80

70% 10%

43 8

-6,1% 23,7%

Fair value

60

100%

60

-7,7%

The scenarios are mainly driven by the fundamentals sales growth and EBITmargin, whereas the EBIT-margins for the bear, base and bull are a constant 22%, 25% and 27,5% for the 5 year forecast-period - the compounded annual growth rate (CAGR) is 4,73%, 5,12% and 6,41% respectively. The CAGR is in all three scenarios set to be slightly increasing. The WACC is set to be 6,89% and the terminal perpetuity

growth rate is set to 3% in all three scenarios.

The base case is our most likely scenario given the 70% weight, and gives a target price of USD 61. This is below the current share price why it is not recommendable to buy the stock at this time, which the fair value also supports due to a downside being the most likely scenario.

WACC Share price sensitivity analysis, Beta = 0,69, Risk free = 4,7%, Premium = 4,8%, ACOD = 1,7%

Growth rate, perpetuity

WACC

As noted earlier the WACC used for discounting the future free cash flows is set to 6,89%, which is highlighted in the table. The computing of the WACC includes the current risk free interest rate, thus this at time being is held artificially low by the central banks, it has been reasoned that a more normative risk free rate of 4,7% should be used.

The beta is an adjusted beta held against the S&P500 index, which is the most commonly used index to benchmark against.

The share price sensitivity to the WACC and the perpetuity growth rate on the estimated share price can be reviewed at the next table. It should be noticed

5,00% 5,50% 6,00% 6,50% 6,89% 7,50% 8,00% 8,50% 9,00%

2,00% 87 73 62 53 48 41 36 32 29

2,50% 105 85 71 60 54 45 40 35 31

that the share price is relative sensitive to positive movements in the growth rate but negative movements lags a similar effect. This implies the importance of making a highly considered estimation of this parameter in the analysis. The 24/64

3% 133 103 84 69 61 51 44 39 34

3,50% 178 130 101 82 71 58 50 43 38

4% 270 175 127 99 84 66 56 48 42

scenarios could quickly change with a revised growth outlook for the Coca-Cola Company, why this parameter should be monitored closely in this investment case.

INVESTMENT PANEL ANALYSIS - COCA COLA

relative valuation When doing a relative valuation (a multiple based valuation) it is important to find comparable companies. This being companies that operate within the same sector, have the same debt/equity ratio, the same growth expectations, reporting standards and size.

Coca-Cola Nestle * Pepsico Inc Unilever * ABInbev * Dr. Pepper Snapple Group Hansen Natural Mean

It is hard finding a company that matches all these criteria so we have looked at the general overview.

Coca-Cola is trading on a premium on all key multiples, which indicates that it is a relatively expensive stock. The high price for the stock is due to a high level

of intangible assets – the Coca-Cola brand. Since these intangible assets are hard to value it is difficult to say whether or not the Coca-Cola Company is a good buy or not solely based on the multiple valuation. However, this in some way supports out earlier claim that this is not a great buy opportunity.

EV/Sales 3,62

EV/EBITDA 16,49

EV/EBIT 17,09

P/E 16,91

ROE 32,27%

Debt/Equity 87,13%

1,99 1,91 1,60 3,64 1,75 4,30 2,53

11,36 11,51 9,54 9,81 7,73 11,27 10,20

14,34 12,56 12,02 11,56 9,22 15,49 12,53

16,57 14,19 15,46 15,37 12,83 27,51 16,99

31,28% 36,51% 37,79% 13,55% N/A 39,62% 31,75%

40,92% 111,87% 69,41% 111,84% 115,74% 0,11% 89,96% **

* Uses International Financial Reporting Standards (IFRS) ** Hansen Natural has been excluded as an outlier

NExt investment case

BULLISH OR BEARISH?

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Exploring MENA:

Dubai Inc. Dubai is the next biggest emirate out of the seven emirates constituting The United Arab Emirates (UAE). UAE was established in 1971 in order to protect the Arab countries from the Islamic revolution in Iran. Originally, Bahrain and Qatar where supposed to join, but withdrew in the last minute. In less than half a decade, Dubai has

The Business Model

N

o matter how new and upcoming the economy seems it actually already started back in 1970s, where the government decided to invest in infrastructure. Thereby they ensured that transportation to and from Dubai would be running smoothly where ever you were travelling from. Throughout the past decades the investments have continued and the newest addition to their infrastructure is their airport, Dubai International Airport, from where you can fly to anywhere in the world with Emirates. This makes it easy and convenient to travel to Dubai, whether it is for business or pleasure. Moreover, Dubai is planning on becoming a transportation hub for the rest of the World.

In 2000 Dubai followed the rest of the world and focused their attention on IT and technology. Then, after recovering from the IT-bubble burst, Dubai decided to become the leading financial centre in the Middle East. The main rea-

undergone an amazing evolution.

Little less than 60 years ago, the emirates in Dubai earned a humble living through pearl exports. Now, Dubai is one of the most rapidly growing economies. In this article we explore how Dubai has gone from Bedouin camp to financial centre in the Middle East.

soning behind establishing a financial centre was that there were no financial centres between the East and Europe.

Moreover, the terrorist attacks in 2001 made it difficult – if not even impossible – for Arabic investors to invest in the West. Moreover, Dubai is investing heavily in the tourism sector as they are aiming at becoming the number one tourist destination.

In order to encounter the future development towards green energy, the government are planning to launch projects within biotech and alternative energy resources. Having the sun shine

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over the UAE practically every day of the year, solar energy is the obvious choice of alternative energy source, and engineers and researches are travelling to Dubai from all over the world to endorse the government supported research in solar energy.

Doing business in Dubai In spite of the reputation as a land with large oil reserves, oil reserves have almost been exhausted and estimated to be eroded within 20 years. In fact, oil revenues actually only account for around 5% of GDP and Dubai is a net importer of oil. Dubai as an economy is therefore much reliant on tourism, whether it is for pleasure or business.

Therefore, Dubai has spent a substantial amount of money in making Dubai an attractive destination for tourists; indoor skiing, the tallest building in the world (Burj Khalifa), the world’s largest shopping centre (Mall of Dubai) are some of the few initiatives that has been

taken over the past few decades. As for business people, they have developed a “centrally-planned free-market capitalism” ideology in order to attract foreign investors and boost private sector activity. There are two ways you can do business in Dubai, on-shore or off-shore.

Doing business on-shore requires you to have a local partner who has a minimum of 51% shares in the business.

The partner serves as a passive partner and does not have any decision power in the firm. The advantage of this model is that the partner can help you establish the business by giving you access to his network. Moreover, by establishing your business on-shore you can trade freely with the members of Gulf Cooperation Council (GCC), a free trade agreement between Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates. The disadvantage is that your business has to undergo different procedures in order to ensure that it meet the requirement enforced by the local government.

Alternatively, you can do business in Dubai by establishing an off-shore business in one of the many free zones in Dubai. The free-zones are established as areas of Dubai and divided by sector, e.g. Dubai International Healthcare Center (DIHC) and Dubai International Financial Center (DIFC). The main idea of the free zones is to provide foreign companies unrestricted import of labour and export capital. Unlike the on-shore business all companies in the free zone have to pay 5% customs when exporting from Dubai.

In general, business is relationship build to a much greater extent than in the Western countries and network is key when establishing a business in Dubai.

Relationships takes time to build and anyone interested in doing business in Dubai should provide himself with a lot of patience – or a local partner if you want to speed things up a little.

There are no taxes in Dubai and the government budget is primarily financed through fees and oil. The economy relies on a very liberal approach to doing business, reducing as much red tape as possible.

The sponsorship programme With the Emirates representing only 10% of the population, there are only approximately 200,000 emirates in the able-bodied age. The emirates are typically employed in the government or acting as a partner for foreign businesses. This creates a huge demand for workers in the service sector, construction, industrials etc. So, how do you find workers if you wish to establish your business in Dubai? Well, the government have developed a very structured clear-cut model in terms of importing workers from other countries. Basically, you invite a worker to come and work for you through a hiring agency. You carry all expenses in terms of flying him to Dubai, providing him with a working visa, covering health insurance and similar costs. If you do your business on-shore your immigrant is hired according to the labour market regulation of Dubai. The worker you employ is typically Indian – Indians account for 72% of the population in Dubai – and he typically supports his whole family back home (it is not uncommon for a working immigrant to transfer 95% his earnings back to his family in his home country).

This all sounds like a sweet and dandy win-win situation. However, the deal is very rigid and is completely oblivious to the term “social responsibility”. First, if your worker is unable to work due to illness for a longer period of time or you choose to fire him, he has 30 days – no more, no less – to get packing and leave the country! Second, the programme leaves no room for failure; f your worker commits a crime, he his sent back to his home country. Third, all workers are tested for HIV before obtaining there working visa. If they are HIV posi27/64

tive, they are not allowed to enter the country. Similarly, if they are tested HIV positive while working in Dubai, their working permit is cancelled and they are sent out of the country. Fourth, the children of the workers are welcome to live in Dubai. However, once they turn 18 years they are obligated to leave the country unless they have a job in Dubai.

You, on the other hand, are responsible for your immigrant and his whereabouts while he is staying in Dubai. The very strict rules are imposed in order to minimize crime. The rationale behind this is the following. First, unemployment is considered a burden to society not only due to the direct costs – i.e. unemployment benefits – associated with unemployment but also due to the derived consequences of unemployment; whenever people are unemployed they will be prone to committing crime due to lack of money or simply anything better to do. Second, since it is not only the faith of the workers but their family that relies on their good behaviour, they have very little incentive to do anything that can put their employment at stake.

Keeping their foreign workers in such short leash in order to minimize crime is partly due to the fact that Dubai as an economy is much dependent on tourism. Thus, in order for the destination to be attractive to foreigners it is highly important that tourists feel safe in Dubai.

The Real Estate Model and the crash of 2008 During the mid-2000 the government adopted a real estate model to boost the economy. The idea was simple and maybe a little naive: if they invested in housing, people would come live in them and as a result, demand would be

boosted. At first, this model worked out great and you might recall one or two stories about the astonishing lifestyles of the newly rich in Dubai. The investors rushed to the city eager to make a profit. This created excess demand for real estate and one skyscraper was built after another – each more ravishing than the other. Then the inevitable – namely the bubble burst – happened.

People were incapable of paying their housing expenses and keeping up with their rent. This economic downturn continued until the same newly rich who had flaunted their fortune around the streets of Dubai had no other option than to drop the keys for their Ferrari 458 in the airport and leave the country.

Construction is not dead!

The bubble burst leaves a very important question in terms of the future of the real estate market and the economy as a whole. In order to address this question, we need to look a bit further back in the past than the years preceding the bubble burst. The answer traits back to the 1970’s, where most Arabic countries where experiencing a substantial lift in the level of welfare. So what do you do when you are a newly rich Arabic man? You get a wife and then a wife

20% in 2011 compared to previous year.

Merely the beginning So, it seems as if Dubai still have a few tricks up their sleeves, and with a government determined to ensure sustainability of the economy, we surely have not seen the last of the commercial Emirate. Moreover, as Dubai is becoming the commercial emirate of UAE, all emirates as a whole has a common stake in Dubai; many people falsely be-

Big Brother Abu D comes to the rescue Abu Dhabi has often been referred to as the big brother of Dubai. Comparing the two countries in terms of their evolutions brings some justification to this title. Young gun Dubai is much like the typical little brother who jumps into things without hesitating, whereas big brother Abu Dhabi is the less outgoing older brother who thinks before he speaks. Like any other family relation, the relation between Abu Dhabi and Dubai is somewhat complicated. The two countries have spent a lot of time competing rather than complementing each other. An example hereof is their competition for the tourism. Another thing worth noting is that there currently is no public transportation available between the two emirates – this in spite of the fact that there is only a two our hour drive between them. However, when Abu Dhabi came to the rescue in 2008 and bailed baby Dhabi out, the relationship became even more complicated.

All of a sudden Abu Dhabi had a personal stake of no less than $35 million in Dubai. Competing with Dubai would therefore not only be counterproductive but self-eroding at the same time. This is why the two emirates have been focusing on complementing each other.

and then yet another wife. At that point in time, it was not uncommon for a man in the Middle East to have three or four wives, with whom he had between four and five children each. It does not take long to figure out how this boosted the population level. The baby boomers are now all grown up and having children and in spite of the fact that the fertility rate has been decreasing gradually, it will still result in a substantial lift in the population level.

Their children will have to go to school, the doctor, hang out in the malls and eventually find a place of their own. This will inevitably create a boost in demand for new housing and help boost the economy.

Moreover, back in 2008 where the real estate market crashed, the government decided to support all building projects initiated before the collapse. Moreover, newly released figures reveals that real estate transactions in Dubai soared 28/64

lieve that Dubai is the capital of UAE. Thus, whatever happens to Dubai will be reflected on the rest of the emirates.

This gives solid grounds for believing that big brother Abu D will dig into his oil reserves again, if his younger brother was to go on another reckless shopping spree.

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Qatar more than just a world cup host?

Established in 1971, Qatar is a rather new economy. The Arabic country is located at the Persian Gulf and measures a mere 11,437 km2. However, the size of the country does far from justify its merits; with a growth rate in real GDP of 16.6% in 2010, which is projected to increase even further in 2011 by 18.7%.

Qatar is by far the fastest growing economy in the world. of 15% in 2008, consumer price index

The Economy

Q

atar is one of the richest natural resource countries in the world and the World’s largest supplier of Liquid Natural Gas (LNG). The combined revenue from oil and gas accounts for more than 50% of GDP, roughly 85% of export earnings, and 70% of government revenues. According to IMF growth in oil-exporting economies is forecast to reach 5 percent in 2011 and about 4 percent in 2012.

Qatar was relatively unharmed by the direct effects of the financial crisis; throughout Qatari authorities the crisis sought to protect the local banking sector with direct investments into domestic banks. However, the indirect effects were inevitable even for Qatar. Global demand plummeted which effected demand for natural resources. In 2010 the economy rebounded in part due to increasing oil prices.

After a substantial increase in inflation

fell 4.9 and 2.4 per cent in 2009 and 2010, respectively. The main reason why Qatar experienced deflation in spite of their rapid growth was the declining housing sector. According to IMF, the consumer prices are projected to increase by 2.3% in 2011.

With GPD pr. capita well above $80,000 in 2011 the 1,696,563 citizens of Qatar has gone from being one of the World’s poorest countries to the richest country in the world in little less than 40 years.

As if that was not enough, with an unemployment rate literately non-existing, Qatar has one of the lowest unemployment rates in the world. However, Qatar is also apparent on a less appealing score lists; with a Gini Index of 44.1, Qatar has the fifth highest inequality in the world – the richest Qataris receive over 13 times as much as the poorest.

The global shopping spree Qatar surely has the means to do just about anything. And with Qatar winning the bid to host the 2022 World Cup it appears as if Qatar is making a statement to the outside world, namely that 30/64

there are no limits to what they are capable of; according to Eminent German legal and financial adviser Dr Nicola Ritter, Qatar’s spending on World Cup 2022 is forecasted to reach a staggering $170bn, which is well above the $4.7bn that South Africa spent on staging the World Cup in 2010. Out of the forecasted $170bn, $48bn will be used to build air-conditioned stadiums (!!), while $77bn will be channeled into making facilities to accommodate the flooding crowds of soccer fans and players from all over the world.

The 2022 World Cup is not the only occasion where Qatar is boasting its wealth to the outside world. Investors from Qatar hold stakes in a number of Chinese refineries; for example, in 2008 Qatar Petroleum International and Shell each acquired a 24.5 percent stake in a Chinese refinery in which PetroChina has the majority of the shares. The aim of the refinery project is to use imported condensate oil to produce such petrochemical products as ethylene. In France, the French fashion house Lanvin sold a portion of the brand to an investment vehicle linked to Qatar’s ruling family.

Last but surely not least, Qatar investors have been building up stakes in European football since 2010 and now have a major interest three leading football clubs, one in France and two Spain. In June 2010 a member of the Qatari royal family, Sheikh Abdullah Bin Nassar AlThani, agreed to buy Malaga football

club for $47.0 million, becoming president of the club on July 28th that year.

The financial benefits were soon visible as the club began to compete with Real Madrid and Barcelona in the Spanish transfer market. In the summer of 2011, Spanish international Santi Cazorla joined the club for a record fee of $27.4 million. In June 2011 the Qatari Investment Authority bought a 70 per cent controlling interest in French Ligue 1 club Paris Saint-Germain. And if they are not buying it, they are sponsoring it; in December 2010 – soon after Qatar was awarded the rights to host the 2022 World Cup by FIFA – it was announced that the Qatar Foundation, a charity, had reached a five-year, $195.7 million deal to join Unicef as the official shirt sponsor of Spanish and European champions, FC Barcelona. And the shopping spree does not end here; Qatari investors own – either entirely or partially – companies across Western countries, such as J. Sainsbury (a British-based supermarket group), Harrods (a London department store), Fairmont Raffles (a hotel chain), banks such as Credit Suisse, Barclays and Santander as well as Miramax (a Hollywood filmproduction company).

The future of Qatar These off-scale investments in Qatar will boost the economy. This, along with the ongoing economic activity in the country in general has not gone unnoticed by credit rating agencies; in December 2011 Moody upgraded Qatar’s foreign and local currency government bond ratings to Aa2 with a stable outlook.

Along with its AA/A-1 rating from Standard & Poor’s, Qatar’s sovereign ratings are the highest in the Middle East region along with those of Kuwait and the United Arab Emirates.

As for their position as the richest country in the World, Qatar is not likely to give this up any time soon; with China, India, and other emerging (maturing) markets being the ones to pull the world out of its current economic malaise, these markets will push up the demand side of raw materials. This will inevitably affect the price of energy, leaving Qatar and other energy rich countries in the Middle East even wealthier. And by having China committed to buy five million tones LNG pr. year for the next 25 years, Qatar has made sure that they will have their share of the cake.

Moreover, this underlines Chinas intention to develop close ties with natural resource-rich countries. In addition to this, Qatar has invested a substantial amount of resources in ensuring that the LNG shipping industry is capable of meeting the demand of emerging as well as developed markets.

Knowing that there are limits to everything, even natural resources in the Middle East, Qatar has furthermore decided to induce economic policies that will ensure the sustainability of the economy by investing in $17bn through 2014 in making Qatar an attractive destination for tourists. The funds will be used to improve infrastructure, exhibition space and increase hotel capacity, which government hopes to increase by 400% from 2008 to 2012. A key aspect to this plan is the expansion of the New Doha International Airport (NDIA), which will have the capacity to handle

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up to 24m passengers upon the completion of the first phase in 2012. One of their main focuses is niche tourism, especially the business segment, where the government is easing regulations in order to make Qatar more attractive to the private sector. Other initiatives are aiming at the sports tourism and cultural tourism.

Similar to the UAE dirham, Qatar has chosen to peg its Qatar Riyal at 3.64 riyal to the US dollar. However, pegging their currency to the US dollar has the limitation of increasing the flexibility of their monetary policy considerably.

Qatar’s government is an absolute monarchy, ruled by the Al Thani family since the mid-19th century. Inevitably, the Arab spring gives rise to the question of whether the civil unrest will spread to Qatar. Most people claim that this is highly unlikely. The argument why is simple: citizens of Qatar have everything to loose and nothing to gain! The government are very focused on keeping their citizens content thereby giving them very little if no incentive to rebel.

Sources: Arab Business, The Economist, Wall Street Journal, Wikipedia, The World Fact Book, IMF

Below: Doha Port Stadium. One of several stadium koncepts. The shape is inspired by a marine animal.

Kim Jong-il “The spiritual”

leader

Life of Kim Jong-il

K

im Jong-il is the son of Kim Jong-sung, the “great leader”, and Kim Jong-suk – Kim Jongsung’s first wife. There has always been a great amount of secrecy about Kim Jong Il and his whereabouts, and his birth is no exemption; according to Soviet records, he was born in the village of Vyatskoye, near Khabarovsk, in 1941. In Kim Jong-il’s official biography his birth is much more glamorous and fairy-tale like; he was born in a secret military camp on Baekdu Mountain in Japanese-occupied Korea on 16th of February 1942. His birth at Baekdu Mountain was foretold by a swallow and heralded by the appearance of a double rainbow across the sky over the mountain and a new star in the heavens. After only three weeks he could walk and eight weeks after he could talk.

According to his official biography, KJI

completed the course of general education between September 1950 and August 1960. He attended Primary School No. 4 and Middle School No. 1 (Namsan Higher Middle School) in Pyongyang. Foreign academics however, believe he is more likely to have received his early education in the People’s Republic of China as a precaution to ensure his safety during the Korean War. At a very young age, Kim Jong-il developed an interest in politics; he was active in the Children’s Union and the Democratic Youth League (DYL), taking part in study groups of Marxist political theory and other literature. In September 1957 he became vice-chairman of his middle school’s DYL branch.

Being the son of Kim Il-sung, Kim Jong-il was born into dictatorship. Had he been able to choose differently, he might have been a filmmaker; Kim 32/64

Jong-il was obsessed with films and his collection held more than 20,000 films.

Dear Leader At age 38 (according to his official birth date) KJI was given senior posts in the Politburo (executive committee for a number of communist political parties), the Military Commission and the party Secretariat. Media praised him as a “fearless leader” and “the great successor to the revolutionary cause”.

On December 24th 1991, KJI was also named supreme commander of the North Korean armed forces. Since the army is the real foundation of power in North Korea, this was a vital step. Only one year after 1992, Kim Il-sung publicly stated that his son was in charge of all internal affairs in the Democratic

People’s Republic.

On 8 July 1994, Kim Jong-il’s father, Kim Il-sung died, at the age of 82 from a heart attack. Three years after KJI consolidated his power. As a leader KJI was oblivious to the misery of his people; after losing its Soviet subsidies in 1991 the economy was on the brink of economic collapse and in the subsequent famine approximately 1m – corresponding to 5% of the population – North Koreans died from starvation.

Meanwhile, their great leader was busy eating shark’s-fin soup, gulped sashimi cut from living fish and thin-crust pizza for which he had sent his chefs to Naples to learn how to make. KJI was much feared by his surroundings; whoever dared to spite the cold-hearted leader ended in prison camps, subject to forced labour and starvation. Moreover, KJI took advice from nobody and he was notoriously known for his temper.

During his leadership North Korea was a source of international concern because of its nuclear and missiles programmes. Knowing that it would be the end of the Kim dynasty, KJI was reluctant to endorse any political led along economic reform.

Despite his cynical leadership style, people in the streets of Pyongyang burst into tears as they learnt of KJI’s death on December 17th 2011.

Maybe the tears reflected true grief, maybe it was all just an act fuelled by their deep-rooted fear of their passed away leader or maybe the tears reflected fears of the uncertain, namely what is to happen next. Although they are all equally likely, the ladder seems

The many women in Kim Jong-il’s life KJI’s official wife, Kim Young-sook, was the daughter of a high-ranking military official. His father Kim Il-sung handpicked her to marry his son. The two have been estranged for some years.

Kim has a daughter from this marriage, Kim Sul-song, who was born 1974.

KJI’s first mistress, Song Hye-rim, was a star of North Korean films. She was already married to another man and

to be most justified. Some analysts argue, that the collapse of the regime and reunification with South Korea is more likely now that Kim Jung-il has passed away. This could be brought about either by a coup or by a failed attempt to reform the political and/or economic system. Ultimately this could lead to the outbreak of a civil war. If this was to happen the last few decades of starvation and suppression would seem like a walk in the park for the citizens of North Korea.

The rise of a new Kimdom KJIs successor will be his third and youngest son, 28-year old Kim Jongun, who has often been referred to as the ‘great successor’. The greatness of young Kim Jong-un has, however, been doubted by many and most people believe that he is incapable of leading the Communist dynasty. Aiden FosterCarter, a British expert on North Korea says: “Kim Jong-un is completely untried. Indeed he has been plunged into this, with only two years to prepare. So far we have no reason to think he has the abilities to exercise power in his own right. The military may look at this callow youth and say ok we can use him as a figurehead or it may go the other way and we get a full military regime, a ruling council. The party had rather atrophied under Kim Jong-il until it came together to back Kim Jong-un for the leadership.” Moreover, some analysts suggest that the weak leadership of Kim Jongwith a child when they met. Reportedly, KJI forced her husband to divorce her.

Together they had one son, Kim Jongnam (born 1971) who is Kim Jong-il’s eldest son. This relationship, started in 1970, was not officially recognized and KJI kept both the relationship and the child a secret (even from his father Kim Il Sung) until Kim ascended to power in 1994. After years of estrangement, Song is believed to have died in Moscow in the Central Clinical Hospital in 2002.

His second mistress, Ko Young-hee, was a Japanese-born ethnic Korean and a dancer. She had taken over the role of First Lady until her death – reportedly of cancer – in 2004. They had 33/64

un will make it even more difficult for North Korea to make key decisions on its relations with South Korea or the US, or on its nuclear weapons programme in the context of the Six-Party talks.

Although market has very little – if any – trust in his leadership abilities, there were temporarily sell-offs in the South Korean markets after the passing away of KJI. In South Korea the benchmark Kospi stock index shed as much as 4.9%, and eventually closed down 3.4%. The currency, the won, fell 1.6% against the dollar. The major sell-off reflected concerns both about the uncertainty over the transition and the possibility that the new leader, Kim Jong-un, will want to assert his authority with some fresh act of provocation against the South.

Other Asian markets were also down with Japan’s main Nikkei 225 stock index losing 1.3%, while Hong Kong’s Hang Seng slipping 1.2%. The sell-off in Japan and China was in part due to the fears that the death of Kim Jong-il would eventually lead to unification of North and South Korea. The effect on the Asian markets was not long-lived as markets quickly picked up again. This reflects that the market reactions were due to uncertainty and herd behaviour rather than fundamental. So for now we will have to wait and see whether the citizens of North Korea will truly have a reason to feel sorry for the loss of Kim Jong-il.

two sons, Kim Jong-chul, in 1981, and Kim Jong-un, in 1983.

After Ko’s death, Kim lived with Kim Ok, his third mistress, who had served as his personal secretary since the 1980s. She “virtually acts as North Korea’s first lady” and frequently accompanied Kim on his visits to military bases and in meetings with visiting foreign dignitaries. She travelled with Kim Jong-il on a secretive trip to China in January 2006, where she was received

by Chinese officials as Kim’s wife.

Sources: The Economist, Wall Street Journal, Wikipedia

DEBATING OCCUPY WALL STREET

an answer from FinanceLab to:

ANTICAPITALISM

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DEBATING OCCUPY WALL STREET

Will YOUR FINANCIAL CAREER

MAKE YOU EVIL?

Just blame capitalism!

I

n over 900 cities in 80-plus countries the man-on-the street and the average Joes have taken the streets of their cities to protest against social and economic inequality, high unemployment, greed, as well as corruption, and the undue influence of corporations.

People are feeling deprived and neglected by the government in favor of the banks. But, what are they really protesting about? Or put differently, do they really know, what they are protesting about?

Be-fore addressing this issue, it is important to stress that FinanceLab is not a political organization as such. However, the Occupy Wall Streets does raise some important questions about the (mis) perceptions of capitalism.

The populist up rise

The movement, which was initiated by a Canadian activist group called Adbusters, began on September 17th 2011 as a protest against the way

government has handled the financial breakdown in 2008 and the subsequent consequences.

Government has poured billions of dollars into the financial system while leaving the rest of the economy in despair. As a result, people are forced into foreclosure and loosing their jobs (if they were lucky enough to have one in the first place).

Read more

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DEBATING OCCUPY WALL STREET Moreover, people are cut of social benefits and unable to further edu-cate themselves in an attempt to acquire the skills demanded by employers, who outsource all unskilled jobs to the emerging markets. In short, every body is pissed! The young unemployed graduates, the war veterans who feel that the system has turned its back

on them, the middle-aged facing falling real wages and diminished pension rights and the elderly, who are seeing inflation eat away the value of their savings. So, what do you do, when you are discontent with the state of the economy and the society as a whole? You find a scapegoat! One you can all point your fingers at and blame for whatever mis-

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fortune has come your way. One who has a (better) job, drives a bigger car and last, but maybe most importantly, one who is a minority. And so they did and with the infamous slogan “We are the 99%� they marched to Wall Street, giving birth to the Occupy Wall Street movement (OWS).

Read more

DEBATING OCCUPY WALL STREET

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DEBATING OCCUPY WALL STREET People are angry that the government use the tax-payers’ money to bail out banks while leav-ing the rest of the citizens struggling to make ends meet.

“They are taking from the poor and giving to the rich – it makes no sense!” says a nine-year-old protester as he refers to the stimulus packages as “Re-

verse Robinhood”. Meanwhile, when addressed with the protesters accusations, Ben Bernanke stated “What we were doing was trying to protect the financial system in order to prevent a serious collapse of the financial system and the economy”. Bernanke is however not completely oblivious. He does acknowl-

edge the protesters’ discon-tent with the performance of the economy and admit that the high unemployment rate causes greater inequality. However, at this point in time, talk is cheap and the movement has been spreading steadily and everywhere people are marching the streets, expressing their dissatisRead more

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DEBATING OCCUPY WALL STREET faction. The overall message differs between countries and even amongst the protesters in the respective countries – well, even cities. Nevertheless, the word “Capitalism” seems to reap-pear everywhere. But is capitalism really the root of this? Even though there is no clearcut definition of capitalism, consensus is that the key elements in capitalism is private ownership, competitive markets for goods and services as well as labour and profits as the primary mo-tive for creation of goods and services. Keeping this in mind, the question that remains to be answered is whether the dissatisfaction of the Occupy Wall Street movement is in fact due to capitalism.

Misperceptions At the very heart of the movement’s discontent is the government bail out of the banks that where “too big to fail” during the financial crisis. However, the bail out is not in consensus capitalism since capitalism favours private gains and private losses rather than private gains and social losses. In other words, true capitalism would have let the market forces rule even if the consequence would be that the banks would eventually default.

Another issue concerns the student loans that many students are now struggling to pay back. From an economic point of view it makes perfect sense to smooth your income by borrowing during your time of studying. However, due to unfavourable market conditions, the students have engaged in a little too hefty, government subsidized borrowing from what they thought would be their richer future. The unemployed graduates argue that these loans were a neces-sity to pay sky-high tuition fees.

However, they are forgetting that the laws of supply and de-mand apply for tuition fees as well; had the government not subsidized the students loans, universities would have to lower their fees, otherwise there simply would not be any appli-cants. Thus, the indebtedness of the newly graduates is not the result of capitalism, but subsi-dies from the government.

Similarly, with the housing market; in the years preceding the burst of the housing bubble, interest rates were

kept artificially low. Meanwhile the government supported entities Fred-die Mac and Fannie Mae (two mortgage providers) took the risk out of mortgage lending and provided housing loans to low-income households. Had government kept their sticky fingers out of the mortgage market and let market forces rule just like capitalism advocates, these households would not be forced into foreclosure, simply because they would not have been granted the loans in the first place.

Outsourcing to China and other countries, where salaries are considerably lower than in the Western world, leaving workers in the West unemployed, is supposedly also the result of greedy capitalism. Wages are higher in the West because the labour market is regulated and wages are set according to collective agreements. The East on the other hand has an unregu-lated labour market where wages are set according to supply and demand and of course mar-ginal productivity (a bit ideological, I acknowledge). As a result, the wage gap between un-skilled workers in the West and the East is as much as 800%.

It does not take a genius at in math to figure out, what that kind of difference in labour costs does to your balance sheet. Moreover, having to pay 35% in corporate taxes increases the incentive for the corporations to save wherever they can. But is this the devious work of capitalism? No. Another accusation is that the corporations on Wall Street lobby in Washington in order to get the government to enact policies that they favour. This too, is not the result of capitalism. If government did not have the power to enact these policies this issue would not exist in the fist place, since the government would not be allowed to give bailouts and insure losses. This would induce companies to act responsibly and put an end to the much-scrutinized moral hazard.

So, do the protesters have the right to be discontent? Definitely. Are the lobbyists from the financial sector and the people in Washington to blame? Partly.

Is capitalism to blame? Hard-ly. In fact to blame capitalism is not only wrong, it is ignorant and the very root of this is exact-ly what they are advocates of, namely socialism.

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What is our Demand?

One thing is certain, the Occupy Wall Street movement is a desperate call for action and more importantly, change.

However, the activists are currently obstructing themselves by not hav-ing a clear-cut message and letting the little vision and common grounds they have be drowned in ridiculous statements like “Throw me a bone, pay my tuition”, “Why we’re here? We are here for the people, man!” and “That is a good question. I wish I had a personal opinion on that particular subject, but right now I just want awareness” and people looking for an excuse to be naked in public.

The lack of common grounds and purpose is also reflected in the OWS’s use of propaganda, which has been used extensively since the rise of the movement. Who is to blame for all of this misery and how to put an end to it is differs from add to add. Some state, that the Government is to blame, others have set the 1% as their primary target. And of course, some stress that the greedy corporations are to blame. One thing if for certain, people want to be heard, they just don’t know what to say.

Ironically enough, one of the most wellknown campaign ads have the title “What is our de-mand?” and that is in fact a very good question…

DEBATING OCCUPY WALL STREET

Experts Corner T he rise of the Occupy Wall Street movement has been much debated by experts as well as everyone else. Throughout most debates some questions seem to reappear: What caused the movement to emerge? And why

CEPOS:

Martin Ågerup I see this movement as an extension of the traditional utopian criticism of capitalism. But it also emerges from a deep-rooted disappointment over Barack Obama being just a politician rather than the savior utopians often yearn after. I believe that this plays a much more crucial role than the anger over bail-outs etc., which could have emerged one or two years ago. This part of the critics is definitely justifiable and understandable. But the solution is less intervention in the economy while Occupy Wall Street seems to demand the exact opposite.

In principle the movement has a chance to go global just like the At-

now? Equally important: What are they really protesting about?

And how are they to succeed in reaching their goal(s)? In this article, two experts give their view on the Occupy Wall Street movement as they try to answer some of these questions.

tac movement did – which the recent demonstrations underpin. This is in a sense the movements weakness; its global appeal is largely due to the fact that it has not based its critics on a rational analysis of what is wrong and it does not have any concrete solutions and hence it is equally relevant in every country – which at the same time means it is not relevant anywhere.

The Tea-party movement on the other hand, has some intellectual heroes, whose ideas and analyses they use as a starting point combined with some concrete political ideas. These concrete political ideas entrench them in the US, making them less relevant on the other side of the Atlantic. I do not think the Occupy movement will get any noteworthy success in Denmark.

The Attac movement also never got its foot down in Denmark.

Martin Ågerup M.A. in Economic History, CEO “Martin Ågerup has contributed to a number of books and authored and published several bestsellers in Danish. Martin is an Economist and Economic Historian, and graduated from the Universities in Bristol and Exeter, England. He is a former member of the Danish European Movement’s Executive Committee and is a member of the Danish European Movement’s think tank “Yes to Europe”.

In addition to this Martin is a Fellow of the International Policy Network in London.”

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DEBATING OCCUPY WALL STREET

“While the ultimate weapon of the working class traditionally has been the collective strike, the borrower class’ ultimate weapon is the collective negligence of debt payments”

Democratizing money The global finance and bank elite can comfortably lean back and ignore all sorts of protest expressed using signs, banners, speeches, blogs, songs, Facebook, Youtube videos, Tweets etc.

But if significant parts of the under and middle class in America, Europe and other places in the world finally got enough of sitting around waiting

to get ruined and instead collectively decided to quit paying their liabilities, it would have a quite different effect, which even the most cynical hedge fund manager would have problems ignoring. Then it would suddenly be the people and not the financial markets deciding the value of money.

Ole Bjerg Associate professor , Cand.scient. soc, PhD Department of Management, Politics and Philosophy

Who should we blame?

I think it is difficult to turn the crisis into a question of who is to blame (morally). First, “the banks” is a vague term and there are different ways to run a bank. Second, it is true that many people have lived beyond their means and financed it through lending. Rather than pointing fingers, I prefer focussing on how we move forwards. On one hand money is a way to record how much the individual has earned and used. But on

the other hand, the money system is a common good much like the language. That is why the money system should be designed so it does not systematically favour one class of society over another. For this reason I do not think that the problems can be solved by telling people that they should stop spending too much money on consumption. It is crucial to make fundamental changes in the existing banking and money system.

Ole Bjerg’s research interests circle around a diagnosis of contemporary capitalism. He is currently interested in the simple question: What is money?

The assumption is that money is not a given and constant phenomenon.

Money changes as the structure of capitalism changes. In his current research Ole Bjerg explores how the radical transformations of financial markets over the last 30-40 years is related to transformations in the very ontology of money. In order to investigate this philosophically, we need to ask, with Heidegger: How is money?

DEBATING OCCUPY WALL STREET

A note on Occupy - Beyond The Financial System

By Thomas Frivold

L

ooking beyond the woes the Occupy Wallstreet movement has with the financial system and the investment bankers, one finds a trending issue sociologists call social stratification. And it isn’t the financial market nor investment bankers fault that this is happening.

It is related to which societal strata each individuals in society finds themselves in. As social stratification increases it becomes impossible for the lower levels of the societal strata to take part in the world of the 1%. The notion of social classes is nothing new, but it seems like the general public’s understanding of inequality as a function of social stratification is. Inequality is basically that the old adage “the rich is getting richer, and the poor is getting poorer”. An efficient capitalist system let’s poor businesses fail and go bankrupt. That is one of the basic tenets of capitalism.

When the too-big-to-fail banks are never exposed to that reality and get bailed out, how can they then claim to be part of pure-play capitalism. The problem was that they were indeed too big to fail and society would have paid a big price if the entire system collapsed into a black hole. This is arguably a valid point yet it had to happen this way or the repercussions would have been far worse.

The immense structural inequalities of the global political economy can no longer be contained through consensual mechanisms of social control. The ruling classes have lost legitimacy; we are witnessing a breakdown of ruling-class hegemony on a world scale.”

Prof. William I. Robinson University of California I therefore believe that continuing to point the anger at the financial system is therefore misguided energy. The real problem lies in the fact that inequality grows, social stratification happens and class mobility becomes limited. As this happens society becomes less and less egalitarian. Occupy is a reaction to this detrimental societal force, and it wants to restore “Liberté, égalité, fraternité”.

The second issue is that the 99% people are fed up with the representative democracy. People contend that the governing institutions have lost their legitimacy. Many are not satisfied with the policies that these “4 year scammers” produce and want a participatory democracy much in the fashion of ancient Greece. They argue that the Occupy movement is the modern version of direct democracy happening and argue it must to be included in daily politics as the current system is not efficient at representing the people.

DEBATING OCCUPY WALL STREET The 99% is a catchy phrase and it might be correct politically, yet remembering that all the fervour in the streets is also about economic income inequality. If one looks at

the Gini Coefficient which is a measure of economic income inequality.

The OECD’s three worst countries in terms of economic inequality is Turkey, Mexico and United States. That

Â

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might be a good reason to take to the streets for a little longer and speak up.

DEBATING OCCUPY WALL STREET

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DEBATING OCCUPY WALL STREET

experiment

(DON’T TRY AT HOME) This thought experiment may provide you with a basic and dramatic understanding of one of the ugliest faces behind capitalism.

Introducing capitalism

to a newBie

1

Make it a special night for your girlfriend. Turn on candle lights and make her a nice dinner.

Expected outcome:

2

After a few glasses of wine, you ask her how much money she’s willing to give to protect your relationship? Just for fun of course.

Expected outcome:

3

She will propably ask you to elaborate on the same question. Now try to be hounest and evaluate openly the exact amount of compensation you would need to give her away. “Would I lose you for 1 billion, 1 million or 500.000 kr.?”. Is their an equilibrium between love and money?

Expected outcome:

Happy girlfriend

“You are priceless babe”

Unhappy girlfriend

Conclusion: Capitalism is a great tool for capitalising and pricing all kinds of things. But be careful where you put the price-lable.

ARE OWS-ARTISTS DRIVEN BY UNFAIR MARKET COMPETITion?

Free markets allow competition. This may explain why so many artists from the Occupy Wall Street-movement turn their creativity against the free markets. Markets for music, painting, design etc. is highly competetive. Artists live a tough lifestyle where free markets seem to work unfairly against them due to the high competition and low rate of compensation for their efforts. Consequently many of them tend be attracted by the idea of a world without the 1%, who won the competition.

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HEroes Police men Protecting the symbol of 50/64

free markets

inve

INVESMENT CAMP 2012 Goldman Sachs Nykredit Asset Management J.P. Morgan BlackRock SEB Enskilda Wimmer Financials Barclays Capital FinanceLab and more...

S INTENTION Y M T B U O WHO D TO THOSE IGHT BACK F T O N L IL IW RISE BUT I WILL TOP QUER THE N O C L RISIS IL IW ANCIAL C IN F N W O PD CE PEOPLE M N A TA S IN L F IL T U W I ABO E HISTORY H T ...

E IT R W E E I SET OFF R O F I WILL R E B T S AND JU T AT WE’LL MEE T INVESTMEN

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2

CAMP 201

Private VS public ownership By: Rune Thomsen

Many people have criticized Private Equity (PE) firms of being corporate raiders and a source of economic instability, due to their extensive use of leverage. Are PE portfolio companies less stable and does the profit PE firms earn stem from a starvation of their portfolio companies? If the active ownership of a PE firm improves the profitability without starving the company, by for instance staff reductions and lacking investment plans, they cannot be corporate raiders. Moreover, if this performance is better during an economic downturn the PE ownership additionally improve stability.

I

nstead of judging the PE industry the assumption that leverage is bad, let us take a look at the performance of companies owned by PE firms and compare this performance to the performance of publicly or family owned companies. This article is based on an empirical analysis of 28 Danish companies under PE ownership from 2006 till 2009.

PE owned companies have performed better both during the “good” times, i.e. 2007 and during the “bad” times, 2008 and 2009. This can be seen from the fact that the difference in EBITDA/ assets and ROIC between the PE portfo-

lio companies and comparable publicly held companies are positive for all variables in all years. From 2007 to 2008 both groups are affected in almost the same manor, but where the profitability of publicly owned companies continues to fall in 2009 the PE owned companies reverts back against towards the right track.

Did this superior performance come from a starvation of the companies? I.e. did the high EBITDA to asset ratio arise just because the asset base declined?

And was the high ROIC created because of an erosion of investments? Investigating the development in some of the underlying factors clearly shows that the superior performance, of the PE portfolio companies, is not due to a starvation of the companies. The asset base was larger every year compared to 2006, whereas the asset base in 2009 was actually smaller for their public peers.

This increased amount of assets was probably caused by the larger investments initiated by the portfolio companies. Looking at the median company it, however, seems like the portfolio companies were investing less than their public peer. This could suggest that the finding might be due to few portfolio companies with a high level of investment or few public companies with a very low level of investment activity. As both the denominators on average have increased during the economic downturn, EBITDA must have risen and indeed this is the case. Since the turnover of the portfolio companies were larger than in 2006 this increase in EBITDA does not seem to stem solely from cost 52/64

reductions. Looking at the mean growth in turnover, however, turnover growth in public companies has been almost as large as privately held companies. In addition to this, turnover growth in the median companies was actually larger for publically held companies. Altogether these findings imply that the superior performance have been influenced by changes in the cost base.

Why do PE firms present superior profitability?

During economic downturns adaptability, cost focus and effective use of capital are essential as the demand for companies’ products most often falls.

It seems like the PE firms understands this, but why are they generally better at adapting to the new market conditions?

An explanation for the quick reactions of the portfolio companies could be better management. The type of management needed during an economic downturn is different from the one needed when the economy moves upward. Some managers are good at creating a business by being creative, expansionary and enthusiastic, whereas other are better at maintaining and driving fourth a stable business. PE firms usually keep their investments, and ultimately their management, in much shorter leash, than investors in stock markets. This makes

the PE firms able to observe and react quicker to changes. PE portfolio companies experienced a higher number of changes in management during the period examined. This could be because the funds wanted another type of management to implement the changed strategies needed to get through the crisis. It thus seems like PE firms respond quicker than their public peers.

It is a classic critique of PE takeovers that the first thing they do is to sack staff, but in to the Danish portfolio companies the average change in number of employees are in fact positive and higher than for their public peers. This indicates that the portfolio companies have not reduced cost by sacking staff; they have actually increased the number of employees. In an analysis of 122 UK companies taken over by PE firms, academics have found that the profit per employee increases but that a substantial amount of this increase is due to the sacking of employees, primarily the first year. Even though PE firms in Denmark do not seem to exhibit such behavior, employment drops by more than 10% in 2009, this drop is, however, on average smaller than their public peers.

Is high gearing a problem?

PE firms often increase the amount of debt in companies they acquire, but during a downturn a high level of gearing can be problematic. The Danish portfolio companies indeed had a higher gearing than their industry peers.

Portfolio companies had a lower current ratio, indicating that their liquidity risk was greater than their public peers.

Another measure of the bankruptcy risk is Altman’s Z-score: the lower the value the larger is the risk of bankruptcy.

According to this measure, the risk of bankruptcy increased during the downturn for both groups and the portfolio companies experienced the largest risk of bankruptcy.

On that note it is important to stress that the PE firm typically have easier access to capital, even during an economic downturn, compared to publicly owned companies. Publicly owned companies will have problems raising equity capital during a downturn as their share price most likely has dropped. Raising debt capital might also prove difficult as banks probably have had to write down some of their book value and to avoid this they will require tougher covenants on new debt issues. From 2007 to 2009 on average only 2.9% of the reference companies got additional equity capital,

whereas 25.0% of the portfolio companies got additional equity capital. Clearly, the PE firms like their investments to survive the downturn such that they can sell them when markets begin to move upwards again. Thus, the high gearing of the portfolio companies does not seem to be a major problem with respect to the risk of bankruptcy. The only reason I can see for the PE firms to let a portfolio company file for bankruptcy is if the PE firm have emptied the portfolio company through large dividend withdrawals, which is highly unlikely to happen. Indeed, the portfolio companies paid out large dividends in 2007 but as the downturn begun in 2008 the dividend payments dropped from 83.9% of yearly earnings to around 58%. For the reference companies the opposite was actually true, they on average increased their dividend payments from 58.4% in 2007 to a staggering 112.2% in 2009.

To make matters even worse, 49.2% of the reference companies took out dividends, while only 19.1% of the portfolio companies did so. There can off course be a good reason for this; public owned companies needed to keep investors interested and thus they paid out larger dividends in order to compensate their investors for the drop in share prices.

Portfolio companies on the other hand, do not have to think about how to keep investors interested as they already have very active owners.

The PE model

About the study

A PE fund is managed by the General Partners (GP) and the investors in the fund, both institutional and high wealth individuals, have limited liabilities and hence they are called Limited Partners (LP). The LPs commit capital to the fund for a limited period, typically between 5 and 10 years. Once the funds are raised the private equity firm seek to create value by directing capital toward situations where investment, strategic insight and operational support can foster transformational changes that maximize the potential of a business. After the acquisition the GPs have a limited period to create value through changes in capital structure, organizational- and operational improvements. When the period ends the fund will sell the company either through a trade sale, through an IPO or to another PE firm.

The data used consists of financial statements from 2006 to 2009 for 34 companies owned by PE firms and 46 reference companies.

The reference companies have been selected from the same sector and such that their asset value was close to that of the PE owned company.

The financial statements have been adjusted for operational leasing, sale-and-leaseback, good-will depreciations, revenue from associated companies and extra ordinary posts (except the posts that relates to restructuring).

First the values were converted to index values, using 2006 as basis year. Then these were adjusted for positive and negative outliers using +300 and -200 as thresholds. If the yearly change exceeded these the change was replaced by the threshold value.

In the situations where 2 reference companies were found the average of their adjusted index value was used when comparing.

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Søgaard er formand for Financelab og er en af initiativtagerne til konkurrencen. Han byder velkommen til deltagerne og giver dem en kort ”market briefing”. Det vil sige en orientering om begivenheder, der kan få betydning for udviklingen på dagens marked. ”Konkurrencen er dog bevidst lagt på en dag uden de helt store begivenheder i finansmarkedet. Det er gjort, så det er de deltagere, der er bedst til at bruge de analytiske redskaber, der vinder”, fortæller Frederik. ”Release the bulls” råber han ud til forsamlingen. Konkurrencen er nu i gang. Deltagerne i dag har alle deltaget i de tradingkur-

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Another Christmas season is well behind us and as you are taking a glance at last years harvest while checking your banking account you might feel somewhat empty inside. Turns out there might be an economic explanation to this feeling that might just make you reconsider buying Christmas gifts next Christmas.

By: Sarah-Louise Hansen To those of us, who are not really in touch with our inner child, Christmas means embarking on the shopping spree of the year in an attempt to meet – if not outdo – the expectations of our loved ones.

But, is all the queuing in the packed malls, the headaches arising from hours spent on trying to come up with the perfect present and the resulting exchanges of gifts make sense from an economical point of view? Joel Waldfogel argues no.

The main problem with Christmas shopping is that the buyers are not the end consumers. In the months preceding Christmas, we shop for ourselves in accordance with our preferences, spending the time and resources necessary to obtain and process all relevant information in order optimize the utility we derive from our purchase.

This all makes sense and defines how a rational consumer maximizes his utility under a given budget constraint. During Christmas however, we loose all economic rationality and let someone else – one of our nearest and dearest – choose a present based on his (or her) perception of your preferences. This in spite of the fact that you are much better informed about your preferences.

The result is, that we give and receive presents that on average are valued less than the purchase price. In fact, people are on average willing to pay twenty-five cents to the dollar price of the gifts they receive. This means, that 75% of value is destroyed during the merry days of Christmas.

Moreover, whereas our grandparents were sensible enough to save up for the holidays, we’ve chosen to finance our outrages shopping sprees by borrowing from our “not-so-richer” future instead. So, we spend money we don’t have to buy our closest relatives and friends gifts that they do not want.

Besides failing to match people with stuff, Christmas has the very unfortunate consequence of letting an industry, which produces useless products that bring next to no value to the receiver – the socalled Crap Industry – emerge. We have all tried it. Some poor relative fails to acknowledge that he or she has no idea about what you want. Instead he or she chooses to buy you some useless item – a singing fish (who doesn’t love those?), a tie that can play Christmas tunes, a giant golf ball candle. Each useless present comes with the same ol’ “I thought it was sooo funny”, “I couldn’t help buying it” or “It reminded me of you”. The expression “Aww… You shouldn’t have!” all of a sudden has an entirely different ring to it. So it is not only present you do not value, it is a product that would not even exist if it was not for Christmas, simply because the demand would not be there. The reason why the product exists is due to the fact that Christmas forms a wedge between the demand of the consumer and the supplier and ruins the laws of supply and demand. These resources should arguably have been spent on inventing, producing and selling other things that actually brings value to the end-consumer.

There is another important aspect to this subject, namely the economy as a whole. First, most stores have the largest share of sales in December. Without Christmas to boost demand, sales as a whole would be considerably smaller. In addition to this, spending creates jobs, and jobs give means of resources to the employed for well… more spending! But is increased spending unambiguously a good thing?

Why you shouldn’t buy presents for the holiday “

The expression “You shouldn’t have” all of a sudden has an entirely different ring to it.

“

“ 75% of value is destroyed during the merry days of Christmas

“ We spend money we do not have to buy our closest relatives and friends gifts that they do not want

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“

“

Preparing Young Talents for a New Era in Financial Markets Mathias Barfoed

T

he financial sector is one of the most wealth generating industries for an economy to have. In our view, the financial sector – as a source of providing liquidity to markets - is the single most essential criteria for creating economic growth. We believe that finance and investments provide a vibrant mechanism for supplying capital to where it is needed and economic history books present convincing evidence that open markets allow more people to live more comfortable, more rewarding and healthier lives. It is not for nothing that pro-market thinkers sometimes call finance ‘the brain of the economy’ and believe the brain works best when it is given plenty of freedom.

centives are great, and the process of creating these decent conditions is remarkably simple. If an open economy (such as Denmark) decided to pursue such success, it would obviously have to re-structure its entire fiscal arrangements. However, it would ensure a reliable competitive edge in terms of the economy’s future growth rates.

However, despite of the Western world’s grand macroeconomic challenges (which partly was generated by the West’s back-turning to the capitalistic principles that created prosperity in the first place), there is a lack of focus on attracting the financial sector.

Instead, they are blamed for the crisis.

Nevertheless, it must be about time for politicians to face the realities of market mechanisms, instead of dreaming about “how it should be”.

Positive examples are to be seen in Hong Kong, Singapore and Switzerland – who all have enjoyed rising living standards by creating lucrative frameworks for the financial sector. The in-

We, at Finansdebat.dk, have taken the initiative to create a website which develops the intellect of finance-savvy individuals, and furthermore creating a meeting platform – wherein they may meet other likeminded people. On the website, we provide articles (taken from the best finance sources), videos (interviews, reportages, etc.), and essays, in order to stimulate the knowledge and inspiration for the interested audience.

In contrast to most mainstream media, we also emphasise to focus on the positive sides of the financial industries.

Through events (e.g. in cooperation with FinanceLab), we aspire to create the best conditions for you to engage in

a constructive and learning full environment.

Of course, there are opportunities in Denmark for working at Danske Markets or Nordea’s trading floor. But if you have high ambitions within investment banking, hedge funds or fund of funds; we may be your help to gain the relevant knowledge.

Only the future will show which direction the European nations will take. But how do we develop young talents who are passionate for the financial sector, in an economy that does not attract many specialised investment funds?

And how can we improve the meeting platforms for finance-savvy individuals?

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Finansdebat.dk is a new website which covers in-depth material related to financial markets and the industries associated. It was founded by Mathias Barfoed and Nicholas Weiling. The aim is to provide quality orientated material and creating a meeting platform where students – with a common passion for financial markets - can meet. They are currently looking for CBS students to get involved.

SILVIO

by Francesco Stasi

B

erlusconi led three governments, founded two parties, invented three coalitions, lost two election rounds and won three, picked up millions of votes.

He had always put himself at the center of everything, even at the center of some legislative initiatives. He tried twice, whether in charge of power or not, to do the constitutional reform.

He promised several times the fiscal reform, but never proposed it. In the meantime, before and after his political experience, he won 27 trophies with the football club A.C. Milan, had two wives, five children, has been a tycoon and had numerous private and public troubles. During the last 17 years, his life is also part of the Italian life.

At the end of his political experience, Berlusconi leaves a country with many unsolved problems, that dreams about a better future and that has to face a critical economical situations.

This long season deeply influenced Italy’s activities, almost 18 years during I QUALI?? Berlusconi always affected

political affairs even when he was not leading the country, even during his dimming moments.

It is always complicated to discuss on Berlusconi, but here I try to analyze some aspects that can help us understanding the man and the politician.

Domestic policy In 1992, a judicial enquiry called Tangentopoli and led by the “Many Pulite” pool completely shattered Italian’s political system: the judges accused the parties to be corrupted by private companies in return of political favors. Most of the parties were destroyed except the PCI (Italian Communist Party).

It follows a wholly new scenario, with the center-left parties damaged and a right left not strong enough but still the only one opposition. In 1994, before the political elections, a successful entrepreneur decided to enter politics and founded a new right-wing party and the rest of the right parties converged into 58/64

it. His name is Silvio Berlusconi and his party was Forza Italia (FI). Instantaneously Berlusconi managed to convey to the citizens the “Italian Dream” and this allowed him to become immediately the Prime Minister. His first government started on May 10th 1994 but failed in less then 7 months, after Bossi’s (his alley from Lega Nord) decision not to support Berlusconi anymore. Thus brought to intense debates and, on December 22nd Berlusconi resigned and a technocratic government led by Lamberto Dini took his place.

In 1996, Berlusconi lost the political elections against Romano Prodi, leader of the left-wing party, but after 5 years, in 2001, he won becoming Prime Minister. For this election round, Berlusconi invented a coalition with a center party and two from the right-wing, and one of them was Bossi’s Lega Nord.

His new government – the most durable in Italian history, 1.409 days – lasted 5 years but then, in 2006, he lost again and always against Romano Prodi.

Back again in 2008, with the strongest majority ever, one could have assumed that after the long break-in period 2001-2006, he could have been able to help the country to grow and become a powerful country. Nevertheless, this did not happen.

During these years, indeed, even with a strong majority in the Parliament, he has not been able to change the country and find solutions to the several problems that afflict Italy.

Berlusconi’s political programs always focused on the necessity to change the laws concerning taxation, justice and bureaucracy, which are the most important problems that affect Italy. Unfortunately, he has never been able to translate these good ideas into real actions, due to the resistance of his alleys which did not allow him to change the country - the lobbies and the financial establishments. However, maybe he never really wanted to be a reformist, giving more attention to his personal interests and troubles.

Thus has been the biggest accusation flung to Berlusconi and the reason behind the deep division between who support him and who does not.

Nowadays, on balance, there is no visible sign of any improvement in people’s standard of life; bureaucracy is rampant and corruption is above reasonable limits; politics often legislates regardless of the difficulties of the country but with great attention to the interests of parliamentarians themselves; justice still does not ensure quick trials and this keeps away investors from Italy.

The public debt, the true and only sandstone of this nation, has not decreased but reached the peak of 120% of GDP. The fiscal revolution, proposed several times since 1994, would have provided for only two tax rates - 23 and 33% - but everything remained inexorably in the drawer and, actually, things went in the opposite direction.

These failures are at the base of the problematic economical crisis that Italy is facing right now.

One of the historical roles of Silvio Berlusconi was to have unified the Italian’s right parties, and this has been the key of his success.

In the 90s, after the scandal of Tangentopoli, Berlusconi has been able to update the political situation creating a democracy of the alternation, with the right alignments opposed to the left ones, as in the biggest democracies,.

He managed to do so with great political skills and thanks to the power he alone possessed: the unification of the right wing was, indeed, a sort of miracle. How else can we define a project in which the party of secession (Lega Nord) and the party for national unity (Alleanza Nazionale) are under the same roof?

One could argue that the creation of coalitions with parties that have different principles has the only purpose to get the power. It could be true, but this discussion would require books and books.

However, which have been the results of this new coalition in terms of economic growth?

Before modest, then very modest, finally so under every expectations that Berlusconi had to resign, between commitments and reforms gradually disregarded and missed.

Rough as it is, the GDP-indicator actually explains a lot: the period 2000-2010 has passed without growth. Italian’s GDP, indeed, has risen of only 2.5% against the 45.2% of the 70s, 26.9% of the 80s and 17% of the 90s.

Of course, one must consider the weight of exceptional events like the collapse of the Twin Towers, the wars in Afghanistan and Iraq, the American subprime mortgage crisis that opened the way for a emergency worse than the one of 1929 and that ended up endangering Europe and its currency.

In this regard, Berlusconi, who is used to present himself as “the man of doing”, smiling and optimistic, has been everything except lucky. Nevertheless, it is a fact that the theme of the economic growth, in which he was supposed to be 59/64

strong, has been the weakest of his political actions and some other data can prove this. For instance, after the beginning of the economical crisis, the fall of the Italian GDP was the deepest among the major European countries (-6.9% between the first quarter of 2008 and the second of 2009) and usually, in periods of economical growth, Italy grows less than the other big countries.

Foreign Policy For Berlusconi, diplomacy is the art to relate sympathetically to other leaders, please them, joke with them, but without deciding anything.

The good manners, even in politics, are not necessary because “if you are not yourself, you are not true”: “I wanted to create real relationships” because “as in life, even in diplomacy, everything becomes easier”, he said.

No one brought so much irony in politics as he did; the Telegraph, CNN and Time, for example, have published their top tens of his gaffes and Tony Blair has admitted that “Berlusconi has entertained our meetings”.

However, as an Italian commentator of foreign policies argues, “the only way to appear a man of spirit is to be serious”.

Especially in 2002, when Berlusconi has been Minister of Foreign Affairs ad interim (because of the resignation of Ruggiero), he tried to maintain relations of respect and friendship with the various Prime Ministers.

Sometimes, conversely, these relationships have created embarrassment and put him at the center of various controversies: the various Putin, Bush, Gheddafi, and Mubarak – even if, behind them, there are always political and economical agreements.

Nevertheless, during the past two years, the “international” Berlusconi has been overwhelmed by an endless series of sex scandals which, although they have not seen him guilty (yet, trials are still on), have dramatically lower his credibility and bargaining power in the eyes of partners worldwide.

Controversial aspects of his political adventure One of the most complex aspects of his political life is certainly the so-called “conflict of interests”.

According to many, he should never have entered politics because - being an editor, owner of a television and many other business interests - he could have easily influenced the public opinion or legislate only in regard of his own advantage.

Since 1994, any law has never been approved to rule this conflict. However, it is very important to remember that during the last 18 years many different governments from left and right had the chance to do something concerning the subject, but never really changed.

Another controversial aspect is the one of the so-called laws “ad personam”, laws designed with the simple purpose of defending more or less hidden interests.

Berlusconi’s detractors count at least 19 laws ad personam during his stay at Palazzo Chigi, the office of the Prime Minister. Actually, some of these seem to be created to protect of his person and his business, as may be the “legitimate impediment” (which allowed Berlusconi not to show up in some trials while he was in charge of power) or decriminalization (or elimination) of crimes in the Criminal Code (accounting fraud, for instance).

Some of these laws caused uproar even if his parliamentarians, his alleys and his supporters always defend this rules in name of a judicial obstinacy that, objectively, has no equal in the world.

In fact, Berlusconi uses to define himself as “the person with more trials in the Universe”: he had faced 20 different processes, and some of them are still in progress.

Many of these cases, however, only rose after his entrance into politics and this leads his supporters to shout at a judi60/64

cial persecution put in place in order to remove him from the political scene.

Some procedures have concluded with his full acquittal, while others gave birth to heavy discussions, due to their ending after prescription or decriminalization of the offenses charged.

In addition, Silvio (as his supporters call him) has been the center of fierce debates about some sex scandals: maybe they are not relevant on the penal side, but on the other hand, they are not politically and morally correct.

He loves to be surrounded by good-looking women (and who doesn’t like…?) and the fact could remain in the sphere of his private life, but not when some of those girls are then brought into the Parliament without having the required skills and experience.

In addition, a Prime Minister (like all the parliamentarians) should always behave in a proper way and be a good example for his citizens: when this does not happen, private life becomes public life.

Nevertheless, it seems clear the Berlusconi, 75 years old, went too far with his behaviors.

Berlusconi and A.C. Milan This is not a simple relationship between an owner and a football team, but one the pillars of the successful man, tycoon and politician Silvio Berlusconi.

A.C Milan plays an important role in Silvio’s life, given that it is perfectly associated with the idea he wants to give about himself: a winner.

In fact, the trophies obtained in 25 years leave speechless: 8 Scudetti, 5 Champions Leagues, 3 Intercontinental Cups and 5 UEFA Supercups, 1 Italian cup, 5 Italian Supercups.

As he loves to say, “Milan is the most successful team in the world and any President won as I did in my life”.

Several top player played in the team during these years: from the trio Van Basten-Rijkaard-Gullit to Savicevic and Boban, from George Weah to Shevchenko and Kaka, without forgetting “The Invincibles” led by Arrigo Sacchi and Fabio Capello.

A team that has always filled with pride the President and someone also define Milan as an important source of political support.

You know, in Italy football is more than a simple sport…

The End The end of Berlusconi as a politician was probably written one year ago, when 45 parliamentarians left the majority and stopped supporting him. From that moment on Berlusconi’s government has always done a lot of effort to pursue its action, remained paralyzed and blackmailed from the little parties that, in return of their votes, asked personal favors.

Finally, in November 2011 Silvio decided to take a step back (or one forward?) trying to give Italy a new and stronger government able to lead the country out

of this deep economical crisis, and also able to keep the promises made with the EU. The new government, led by Prof. Doctor Mario Monti, has the arduous task of restoring Italy, giving us the prospect of a brighter future by betting on growth and innovation.

Nevertheless, to give the best in the hardest moments is in Italians’ DNA, so we are all certain to overcome this challenge and get back to be a great country.

Berlusconi as a businessman, instead, is everything except finished: now, free of institutional obligations, he can run again his financial-economical empire where his sons work with great profit.

It is always difficult to discuss about Silvio Berlusconi in Italy because

Ciao e Viva l’Italia!

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it seems that a truth about him does not exist.

He has been the man who divided the country the most, but also the only one who managed to make us dream a glorious future.

His charisma has no equal and this surely helped him to be what he has been until now.

Nevertheless, he could have changed Italy and make it a great place where to live, study and do business, but so many promises have been betrayed and, after almost 18 years, Italy still faces the same issues, sign that nothing is changed.

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