Dai-ichi Life Acquires Tower Australia

This acquisition will help Australia boost Dai-ichi's net income attributable to overseas businesses from 3% to 9%. As Japan's market has mostly stagnated, Dai-ichi has chosen to expand in Australia where the market in Australia is growing by about 10% per annum. The company aims to use the Australian group's management experience in developing its own overseas businesses. The return on equity from Tower Australia is 11.4%, which is higher than Dai-ichi Life's return on equity of 7.8%.

Dai-ichi has been targeting overseas life assurance businesses and individual savings product businesses as the most promising growth areas.

Liquidity vs Solvency

Current market conditions have shown that the euphoria following formation of the Eurozone led some lenders to believe that there was no greater sovereign risk in Greece than in Germany. This led to a significant rise in exposure to weaker economies. The credit bubble has now led to where we us today.

History holds some lessons for the present.

The conditions of Latin America in the 1980s were pretty similar to what the peripheral economies in the Eurozone are now currently facing. Mexico was the first country to default on its debt. During that time, IMF and the US Treasury came in to defuse the situation by imposing austerity measures and adding to the countries debt. This only served to prolong the solvency issues of the country.

It was not until a plan was devised in 1989 for creditors to accept "haircuts" either through a principal reduction or a lowering of the interest rates that the situation began to improve.

Backwardation to commodity futures

Backwardation describes a market in which the price of a near term contract is higher than the price for later deliveries. It is usually an indication of tight physical supplies. The opposite is referred to as contango, which produces a negative roll yield. Over the long run, the low inventory commodities tend to outperform high inventory commodities. Although this is usually the case, retail investors show a knack for buying into futures indices at times of steep contango. This is in contrary to what they should be doing.

Economists raise forecasts for 2011 growth

The proposed fiscal deal between Republicans and Democrats will provide a big boost to growth in 2011. The result is an extra fiscal stimulus of $1,000bn during the next two years. The extension of the Bush-era tax cuts will help to boost consumption:

• Extension of unemployment insurance throughout 2011 (highly effective to stimulate spending as the jobless tend to spend almost everything)
  
• Tax cuts for all income groups
  

The Fed is forecasting a more optimistic growth than many market forecasters due to this announcement.

Material difference: Consumer products

With prices of food and clothing staples rising due to lower production yields and unprecedented demand in Asia, the industry has a cost conundrum. Either companies find ways to reduce costs or pass the increase in costs over to consumers to protect profit margins. Many companies are trying out different ways and means to solve the riddle. They are hedging or forward buying, shaving costs, reformulating products, substituting lower priced commodities and passing prices on to their customers. Listed below are some examples:

• Unilever has made the processes of producing goods more flexible to enable ingredient substitution. They have managed to reduce the oil quotient in its mayonnaise with lemon peel to reduce costs. More importantly, the taste stays the same.
  
• Some grocers are keeping prices such as breakfast cereal constant but reducing the amount packed in a box.
  
• Clothing suppliers are increasing the use of cheaper synthetic fibers in lower priced garments.
  
• Other retailing brands are adding new designs and features to their clothes in the hope that consumers will pay more for them.
  

Traders believe that even a bumper crop will not cut prices significantly as inventories are currently low.

Design Flaw: European Union

The design of the current European Union's system is overwhelming with plenty of flaws in need of rectification. The author of this article has identified six.

1. Repeated attempts to address solvency problems through liquidity policies. With the high interest rates that countries have to pay, providing a no-default guarantee to bank bondholders still makes the countries insolvent.
   
2. Lack of political coordination. This is especially the case when everyone in the system is ultimately just trying to optimize their own corner of the system.
   
3. Breakdown of communication. Details are usually lacking whenever any of EU's member countries announce a new policy.
   
4. Tendency of governments to blame investors. The EU always likes to blame investors for speculating in the market causing busts in the market when the truth is that confidence in eurozone's crisis management has been lost.
   
5. Tendency of EU members to blame one another. This is especially so when the crisis develops and the Germans had a go at the Greeks. Now, the Spanish and Irish blame the Germans.
   
6. Tendency to appeal to the ECB when all else fails. However, the ECB is not able to solve the ongoing crisis alone.

Euro-wide bonds would help end the crisis

The launching of E-bonds, or European sovereign bonds by a European Debt Agency (EDA) would help to send a clear message to global markets and European citizens of political commitment to economic and monetary union, and the irreversibility of the euro. To create a sufficiently large market for the E-bonds, the EDA should finance up to 50% of issuances by EU members. EDA should also offer a switch between E-bonds and existing national bonds. The conversion rate would be at par, but the switch should be discounted at a rate dependent on the bond's current market stress. This would help to create a strong incentive to reduce their deficits.

With a liquid global European bond market, nations will be insulated from speculation and more capital flows would be attracted to Europe. This would be the best response to the ongoing sovereign debt crisis.