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ROB Insight

Fresh, focused analysis of today's business news
available exclusively to subscribers of Globe Unlimited

Entry archive:

German bid for U.S. auto parts maker would face potholes

Olaf Storbeck and Antony Currie

ZF Friedrichshafen may have just revved up long-idling deal making in the auto parts business. The German supplier is mulling an offer of around $11-billion (U.S.) for U.S. peer TRW, Bloomberg reports. That would make it the world’s third-largest automotive supplier by revenue, according to Berylls Strategy Advisors. It would also mark the largest tie-up in the sector since 2007. ZF, though, may lack the financial gas to get the deal done.

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Why investors were taken in by Gowex

Fiona Maharg-Bravo

It’s easy to be wise with hindsight. Take the collapsed Spanish free WiFi provider Gowex. The company raised several large red flags that domestic regulators and investors should have noticed. It took a foreign investor, specialist short-seller Gotham City Research, to uncover the fraud by Gowex’s chief executive officer.

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‘Squishy-soft’ Canada left out of U.S. jobs party

IAN McGUGAN

Canada’s jobs numbers for June were “shocking,” “awful any way you cut it,” or “squishy soft,” according to economists. More worrisome yet, they raise the possibility that the domestic economy can’t count on the U.S. recovery to help drive job growth.

The two countries have travelled opposing trajectories in recent months, with the U.S. economy spitting out new jobs at a robust pace while Canada has struggled to generate any momentum at all.

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The single hot spot skewing Canada’s housing picture

DAVID PARKINSON

The problem with trying to gauge the heat of Canada’s housing market is that it depends on where you insert the thermometer. Over all, the market still looks unsustainably warm, but the nationwide numbers are being skewed big-time by scorchingly hot Calgary. If we remove this one city from the equation, the national housing landscape actually looks quite refreshingly cool.

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Behind the facade of Canadian housing

Every day ROB Insight delivers exclusive analysis on breaking business news and market-moving events. Streetwise offers news and analysis on Bay Street and the world of finance. Inside the Market delivers up-to-the-minute insights on market news as it develops.

Here are our editors’ picks of some of the best reads available to Globe Unlimited subscribers this week.

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Guns, bling, and networking: Earnings season trends to watch

IAN McGUGAN

Ultra-trendy Tesla Motors Inc. has grabbed all the headlines over the past few months, but an investor would have done even better by loading up on boring old Alcoa Inc.

The aluminum giant jumped in trading Wednesday after reporting better-than-expected earnings. Its stock price has now nearly doubled over the past 12 months, which puts it solidly ahead of Tesla’s mere 81-per-cent gain.

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How Wells Fargo could put $90-billion in the bank

Daniel Indiviglio and Antony Currie

Wells Fargo may be leaving as much as $90-billion (U.S.) in shareholder value on the table. At some $270-billion, it’s already America’s largest bank by market capitalization. Wells has the best-performing stock among major banks so far this year, up 14 per cent before it announced second-quarter results on Friday. Yet although the lender’s overall performance bests most of its rivals, there’s one exception that suggests Wells could do better.

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It’s time to rein in governments’ stealthy taxation by regulation

BRIAN LEE CROWLEY

One day a man walked into the café that my wife and I owned in Halifax and asked my wife if she “lived on the premises.” After some preliminary skirmishing, she discovered that this man was on Her Majesty’s Service and he was there to determine if we were entitled to write on the café window that our baked goods were “homemade.”

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There’s little to celebrate in Canada’s economic performance

ANDREW JACKSON

For all of the self-congratulatory rhetoric of the Harper government, the fact remains that Canada’s economic recovery has been built on a very fragile foundations. Growth has been fuelled by the growth of household and foreign debt rather than by business investment, and we have become dangerously reliant on the resource sector.

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Boeing can weather the loss of U.S. lender

Kevin Allison

Boeing should be able to weather the loss of the U.S. Export-Import Bank. The agency helped finance about 18 per cent of the aerospace giant’s deliveries last year, or roughly $8-billion (U.S.) worth of planes. If Congress fails to renew the lender’s charter before October, however, Boeing might have to extend more credit to maintain sales. That could cloud the company’s performance but shouldn’t ruin the overall forecast.

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The two big barriers to a national securities regulator

DAVID PARKINSON

If, as Canada’s Finance Minister Joe Oliver says, the addition of Saskatchewan and New Brunswick to the Co-operative Capital Markets Regulatory System is a “major step” toward the federal Conservative government’s dream of a national securities regulator, then clearly “major” has become a relative term on this file. While Ottawa has added two tiny provinces (in financial market terms) to the agreement-in-principle, the four biggest players remain stubbornly reluctant to co-operate – including two who have already signed on to the plan.

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Farewell, Fannie? So long, Freddie?

Daniel Indiviglio

It has been a long time coming, but the United States may finally have a mortgage reform blueprint. A bill introduced on Thursday would wind down Fannie Mae and Freddie Mac over five years and use a different vehicle and market-based pricing for Washington’s home loan guarantees.

The challenge is finding a plan that both Democrats and Republicans can stomach. The first attempt, from the House GOP, was a non-starter with Democrats. It largely privatized mortgage risk and, although that has proven workable elsewhere in the world, critics feared it would threaten home affordability in America.

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China’s capital flight crackdown would ripple around the world

Peter Thal Larsen

A Chinese crackdown on capital flight would be felt around the world. The government has long tolerated some cash finding its way around the country’s financial border controls. If Beijing decides to plug the leaks then banks, casinos and overseas property markets would suffer.

Many Chinese citizens have found ways to circumvent rules that prevent them from taking more than $50,000 (U.S.) out of the country each year without regulatory approval. Now there are signs the authorities are fighting back. State broadcaster CCTV on July 9 accused Bank of China (BOC) of helping clients launder money using a pilot program designed to facilitate cross-border transfers of Chinese currency.

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Australia’s foreign-fuelled deal frenzy shows no signs of slowing

Una Galani

Australian deal makers have sprung back to life. Merger activity Down Under is on course for its busiest year since 2011. Foreign buyers are leading the charge while a flurry of asset sales by cash-constrained local governments has helped to prop up volumes. As corporate confidence picks up, the recovery should continue.

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Why euro zone resolve is cracking under a strong currency

CARL MORTISHED

The dollar is too powerful; the dollar is too weak. You can’t have it both ways but the contradictory complaints about the greenback are coming from two pillars of the French establishment. French Finance Minister Michel Sapin this week called for and end to the dominance of the U.S. dollar in global trade while the chief executive officer of Airbus’s civil aircraft business, Fabrice Brégier said the euro-dollar exchange rate was “crazy” and urged the European Central Bank to take action to weaken the euro.

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In a bubble market, what's a new investor to do?

IAN McGUGAN

My 25-year-old nephew just landed his first full-time job and wants to start investing. But in what?

The answer would once have been simple. A well diversified portfolio of domestic and international stocks, with a reasonable helping of bonds on the side, could have been counted on to produce decent returns for him in just about any economic environment.

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Economy in a healthy transition to an investment-fuelled turnaround

CLÉMENT GIGNAC

Is the long-awaited rotation from debt-fuelled consumption to exports and investment starting to take shape in Canada? While we are not there yet in exports and investment, some interesting signs are percolating that, to quote the Bank of Canada, “constructive evolution” is under way regarding household balance sheets.

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Betting against Canadian banks is always a bad idea

BRIAN MILNER

Are the world’s bank watchers re-evaluating their long love affair with Canadian financial institutions?

It certainly appears that way, if the latest downbeat assessment from Moody’s Investors Service is anything go by.

The big bond-rating agency has changed its outlook on Canada’s banking system to negative from stable on the grounds Ottawa has no appetite to bail out too-big-to-fail institutions using taxpayers’ money in the event of a crisis. Instead, the government is proceeding with a so-called bail-in strategy that could force bondholders to shoulder part of the burden of any future restructuring.

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This dollar bull rally has no horns

DAVID PARKINSON

A bullish reversal in the Canadian dollar certainly has important implications for Canada’s exports, for inflation and for the Bank of Canada’s policy path. If, of course, we had such a bullish turn.

We haven’t. Not yet, anyway.

The Canadian currency raised these concerns after topping 94 cents (U.S.) last week for the first time in six months, up more than 2.5 cents in a month and more than five cents since mid-March. This week, news that speculative traders in the currency futures market had moved to a (small) net long position in the loonie for the first time since early 2013 – that is, more speculators hold futures contracts predicting that the dollar will go up than those with contracts betting it will go down – has raised talk that market sentiment has turned, signalling the beginning of a march upward in the currency.

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Pope Francis shows Wall Street how to clean house

Edward Hadas

Confessing one’s sins is relatively easy. Penance can be painful, but usually ends fast. Leading a better life, though, is a lot more difficult. Pope Francis is ensuring that the Vatican’s financial system is well on the way. And by doing so he is also schooling Wall Street on how to clean house.

God’s and mankind’s bankers share a patchy history. The financial sins of both stretch back decades, at least – as do efforts to overcome them. Every few years, there’s remorse. The headlines about corruption at the Vatican kept coming, though, while Wall Street hopped from one scandal to the next.

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Lufthansa departs on ill-fated no-frills journey

Olaf Storbeck

Lufthansa’s dash for no-frills flights on long-haul routes is bound to become a costly mistake. It relies on an unproven business model and suffers from strategic inconsistencies. Four weeks after abandoning former ambitious profit targets, new chief executive officer Carsten Spohr is taking another false start.

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SEC enforcers may hit a wall in Congress

Reynolds Holding

Wall Street watchdogs have picked a bad time to lose a case. Rengan Rajaratnam, brother of convicted Galleon Group founder Raj, was acquitted on Tuesday of insider trading. U.S. lawmakers, meanwhile, have been thumbing their noses at a Securities and Exchange Commission probe of their stock trades. The cases are unrelated, but appearances matter on Capitol Hill. If enforcers look like they’re overreaching, they can expect even more push-back from Congress.

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Why you should thank a short seller

IAN McGUGAN

The spectacular demise of Let’s Gowex SA is evidence that the world needs more short sellers – especially now, as stock markets reach new heights.

The failure of the award-winning Spanish WiFi provider followed the publication last week of a report by Gotham City Research, which alleged that more than 90 per cent of its revenues were pure fiction. Over the weekend, the company declared bankruptcy and said its founder had been falsifying accounts for at least four years.

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Corporate Canada offers central bank a little vindication

DAVID PARKINSON

The numbers have been saying that inflation has become a fast-growing concern for Canada. But the people who actually set the prices say differently – and they just gave the Bank of Canada about all the ammunition it will need to stick to its low-inflation guns.

The central bank’s quarterly Business Outlook Survey, released Monday, showed that despite the rapid acceleration in consumer prices over the spring, Canadian companies actually reported a weakening in price pressures on both their inputs and their outputs. Over all, the business sector still sees inflation in the bottom half of the Bank of Canada’s 1-to-3-per-cent target range over the next two years – this despite the inflation rate having surged to 2.3 per cent in May, from 1.1 per cent when the previous survey was taken.

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Shareholder meeting in the boondocks? Head for the hills

Reynolds Holding

Investors summoned by a company to the boondocks may want to head for the hills. U.S. shareholder gatherings moved far from corporate headquarters often portend trouble, new research suggests. Ensuing results and stock performance tend to disappoint. Owners could save the trip and vote with their feet. Burying bad news is almost a tradition. Slipping it out late on a Friday or the eve of a holiday weekend is popular. Obscuring financial performance with quirky metrics is another favourite ploy. Hiding fees or dangerous side effects in fine print is also a time-honoured practice.

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Greenback will reign supreme despite foreign grumblings

Swaha Pattanaik

America no longer overtly uses its currency as a trade weapon, but it is happy to deploy dollar diplomacy. While others may moan, the world’s sole superpower can still freely exploit its currency’s clout to enforce its political will.

The stiff punishment of BNP Paribas created some hostility. While the French bank admitted it had broken U.S. law and agreed to pay $8.9-billion (U.S.) in fines, some Europeans privately expressed resentment about rules which in practise compel foreign institutions to enforce U.S. government sanctions.

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Carney to find buyout barons a much trickier target than banks

Neil Unmack

Buyout barons may prove a tricky target for Mark Carney. The Bank of England Governor could follow U.S. authorities in tightening lending rules for loans backing leveraged buyouts by private equity firms. The sentiment is noble, and the U.S. model could be improved. But taming animal spirits is hard when markets are global and the banks’ influence is waning.

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Mega-fine against Commerzbank would test U.S.-German relations

Olaf Storbeck

U.S. regulatory scrutiny on Commerzbank’s dealings with blacklisted countries could turn into a financial and diplomatic stress test. Germany’s second-largest lender is still reeling from the fallout of the banking crisis and would be hit hard by a mega-fine of BNP Paribas-style proportions.

As the German government is the bank’s single-largest shareholder, any kind of punishment that looks arbitrary would bring Chancellor Angela Merkel to the scene. A banking brawl could stretch U.S.-German relations already strained by repeated spying scandals.

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Gloomy watchdog given a reality check

BRIAN MILNER

A week after the Bank for International Settlements fired its latest annual broadside against ultra-easy monetary policies, it’s plain that the people actually responsible for navigating a course through treacherous economic straits are not on the same page. In fact, they aren’t even reading the same book.

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KKR’s best odds on First Data bet are in doubling down

JEFFREY GOLDFARB AND RICHARD BEALES

Doubling down on First Data may have been KKR’s best bet. The extra cash just injected into the payment processor means the $29-billion (U.S.) acquisition has now absorbed over $10-billion of equity, one of the highest sums ever for a leveraged buyout. A Breakingviews analysis, however, suggests that a return finally beckons.

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ADM investors will find Wild Flavors has a bland taste

KEVIN ALLISON

Archer-Daniels-Midland is going merger wild – sort of. The $30-billion (U.S.) grain processor will pay about $3-billion for Wild Flavors, a Switzerland-based natural food flavouring and colouring specialist. Illinois-based ADM’s biggest-ever deal is a departure from its core milling and trading operation. Picking up a small add-on business with similar customers in a sexier part of the food chain makes sense, but it’s unlikely to change how investors see the firm any time soon.

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Five years of $100 oil – and the sky still hasn’t fallen

Kevin Allison

The five-year average oil price has entered triple digits for the first time. The occasion didn’t receive as much publicity as crude’s first trade above $100 (U.S.) a barrel in early 2008. But the rise in the long-term price of Brent, the main world benchmark, is arguably a more significant milestone for the global economy.

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U.S. inflation poses threat to the market calm

Ian Campbell

Perhaps Janet Yellen should think again. The Federal Reserve chair said on July 2 that monetary policy faces “significant limitations” as a tool to counter financial-stability risks. But thanks to the world’s big central banks, the markets’ fearlessness is uncomfortably reminiscent of the unhealthy calm of 2007.

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Chinese Internet stocks carry discount for good reason

Robyn Mak

China’s Internet stocks are red hot but investors would rather pay more for their U.S. counterparts. Shares of Chinese companies including gaming and social media giant Tencent and search engine Baidu trade at lower multiples than those of Facebook, Google and other American dot-coms when expected earnings growth is taken into account. The discount is deserved.

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The earnings numbers no one talks about

IAN McGUGAN

The latest deluge of U.S. corporate earnings reports begins next week, which means that investors will soon be subjected to an endless stream of commentary about what all those hundreds of profit results mean for the broad economic outlook.

Here’s a simpler alternative: Ignore the reported figures.

Look instead at the aggregate figure for corporate earnings calculated by the U.S. Bureau of Economic Analysis.

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Why we should cheer Canada’s new debt surge

DAVID PARKINSON

Canada’s credit situation has assumed a split personality – the debt loads of consumers and businesses are headed in opposite directions. But as households slow their debt accumulation while businesses ramp up their borrowing, this is a divergence that might suit Canada’s current economic needs just fine.

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Can activist investor Jana make PetSmart roll over?

BRIAN MILNER

It was inevitable that an activist hedge fund would be sniffing around PetSmart Inc.’s doggie door. The growing band of shakeup artists are constantly on the prowl for underachievers with strong brand names but lacklustre performance and languishing stock prices. And the largest U.S. retail pet products peddler certainly fits the bill after its latest difficult quarter and subdued guidance for the rest of the year.

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What the incredible shrinking trade deficit means for Canada

DAVID PARKINSON

Canada’s May trade numbers aren’t enough to declare that a trade boom has begun. But they certainly take the sting out of April’s stunning slump, which now seems to have been more an anomaly than an alarm bell.

Statistics Canada reported Thursday that the country’s trade deficit shrank to $152-million in May, from April’s $961-million shortfall. Yes, it’s still a deficit – and a far cry from the surplus of nearly $1-billion posted as recently as March – but it was better than the $300-million shortfall that economists had expected. And after April’s scare (which, after a revision, now looks even worse than the originally reported $638-million deficit that stunned the market last month), it certainly comes as a relief to observers, especially those at the Bank of Canada, who are counting on a trade revival to light a sustainable fire under Canada’s lukewarm economic recovery.

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What’s French for ‘car pooling’?

Every day ROB Insight delivers exclusive analysis on breaking business news and market-moving events. Streetwise offers news and analysis on Bay Street and the world of finance. Inside the Market delivers up-to-the-minute insights on market news as it develops.

Here are our editors’ picks of some of the best reads available to Globe Unlimited subscribers this week.

More »

Why investors may not want to hitch a ride with BlaBlaCar

IAN McGUGAN

Nothing gets a capitalist heart beating faster than the thought of cashing in on socialism – at least, when socialism takes the form of the new “sharing” economy.

The latest beneficiary of the sudden passion for sharing goods and services among complete strangers is the wonderfully named BlaBlaCar, a French Web app that connects travellers looking for cheap transportation with drivers who have empty seats. It raised $100-million (U.S.) from venture investors on Wednesday, a huge amount for what amounts to an automated hitchhiking service.

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Europe’s big problem: Private investment has gone AWOL

OLAF STORBECK

Worries about government underinvestment in the euro zone may be misplaced. While many of the member states should probably put more money into infrastructure, a new study by Berlin-based economic think tank DIW shows that a protracted dearth in private-sector investment threatens the continent’s long-term economic potential.

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Sweden plays lab rat in the battle against deflation

Swaha Pattanaik

The Swedish central bank surprised the markets with a half percentage-point cut in its key interest rate on Thursday. Now the Riksbank will try to surprise the world with a successful campaign against possible deflation.

Stockholm is catching up with its central bank peers, which have already pushed their rates down to the new Swedish level of 0.25 per cent, or lower. They are all fighting the same fight, against an inflation rate which remains stubbornly low despite an economic recovery. They are also all happy to see weak currencies, although that is a game which is impossible for everyone to win.

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Robust U.S. jobs growth is more than a rebound

Daniel Indiviglio

Robust U.S. job creation in the second quarter confirms a bounce after a weak opening to 2014. But Thursday’s report, showing 288,000 new non-farm jobs in June, fuels a more promising outlook as well. With other data also positive, growth is finally building.

Hiring dipped in the bitter winter. The weather probably had a lot to do with America’s GDP shrinking at a nearly 3 per cent annual rate in the first quarter. But employment has roared back from April to June, averaging 272,000 new jobs monthly – nearly double the pitiful average for December to February. Fittingly, perhaps, the cheerful news was released a day earlier than the usual “Jobs Friday” because of the Independence Day holiday on July 4.

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China’s energy patent boom a bust for output

Christopher Swann

China’s energy patent boom is making output look like a bust. The Middle Kingdom topped the world in filings for oil and gas inventions last year, but that hasn’t translated into surging production. Many of the applications cover dodgy ideas fuelled by government incentives. It will take more than paperwork to speed the flow of crude.

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For Macau’s casinos, all bets are off

Ethan Bilby

Even Macau isn’t immune to China’s e-commerce boom. Online betting on soccer’s World Cup may have contributed to the first year-on-year drop in the enclave’s gambling revenue since 2010. That’s okay as long as tourist numbers keep rising.

For the past few years, investors in Macau only worried about the rate at which gambling revenue was growing: the upward trajectory was a given. That streak ended in June, as monthly gambling revenue fell 3.7 per cent year on year to $3.4-billion (U.S.) – the first drop since Macau started publishing the data in 2010.

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Blockbuster hunt leads Big Pharma to door of little pharma

Robert Cyran

Roche has delivered a biotech founder a double-dip bonus. The company is snapping up Seragon Pharmaceuticals for at least $725 million (U.S.) – and the possibility of another $1-billion if certain milestones are hit. Chief executive officer Richard Heyman only set up the one-drug biotech firm a year ago, spinning it out before getting $650-million for its parent company from Johnson & Johnson. With pharma giants desperate for new products, such deal making is likely to be replicated.

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How merger momentum could explode past $4-trillion

Quentin Webb

The merger boom could really explode. With about $1.8-trillion (U.S.) of M&A so far this year, 2014 is shaping up to be the biggest year since 2007. Looked at through the prism of history, though, it may only be the start.

Standard measures of M&A activity can be misleading. For one thing, they tend to ignore inflation. A dollar – or several billion of them – used to buy far more. The value of assets fluctuates, meaning in some years companies are far cheaper than others. Globalization also plays a big part these days. There were no merger surges in the USSR.

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Uncle Sam saves harshest punishment for foreign firms

Reynolds Holding

Uncle Sam is cooking up penalties with an anti-foreign flavour. New research suggests that overseas firms like BNP Paribas do in fact pay bigger fines and plead guilty more often than U.S. companies. One reason may be that prosecutors target only the most serious cases abroad. But the differences feed suspicions that America is playing favourites.

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Wall Street a target for Twitter’s headhunters

ROBERT CYRAN

Twitter Inc. is taking the Wall Street brain drain to new level. On Tuesday the microblogging site announced that Anthony Noto, a former high-ranking banker at Goldman Sachs, is to be its next finance chief. As enticement, the company offered a sign-on bonus worth more than $60-million (U.S.). That’s more than enough to price most of high finance out of the battle for talent.

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How tax-shopping M&A deals can destroy value

Robert Cyran

Tax-arbitrage M&A requires a deep discount. U.S. companies seeking to relocate by mergers in a bid to slash how much they remit to Uncle Sam were a big part of the $1.8-trillion (U.S.) first-half deal boom. The benefits of such ill-conceived combinations will be fleeting, though. The more so-called inversions there are, the more likely the law is to change.

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Time is running out for a Canadian energy delivery strategy

GLEN HODGSON

It’s fair to say that many Canadian policy makers and business leaders are transfixed by the status of the Keystone XL pipeline. The U.S. government’s approval of the Keystone project would add 20 per cent more pipeline capacity and greatly improve Canada’s ability to supply the U.S. oil market in the near term. However, Keystone is only part of a bigger energy issue: rapidly rising U.S. oil and gas production and the threat it poses to exporters, Canada included.

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Business uncertainty a roadblock on the path to economic recovery

CHRISTOPHER RAGAN

The Canadian economy is still mired in a tepid recovery, with real output growing at a rate well below what we saw before the recession. Canadian investment and exports are lagging far below normal levels, partly because the U.S. economy, although showing intermittent signs of life, continues to face its own recovery challenges. One crucial factor affecting both economies is widespread economic uncertainty.

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Canada taken to task as BIS ratchets up warnings

BRIAN MILNER

The Bank for International Settlements is stepping up its assault on ultra-easy monetary policies at a time when central banks in Europe and Japan are pressing down on the monetary gas pedal and others remain reluctant to step on the brakes.

More than half a dozen years of unprecedented loose fiscal and monetary policies have resulted in “extraordinarily buoyant” financial markets, with rising asset values and unsustainable debt levels that are out of touch with the reality of a slow, grinding global economic recovery, the BIS says in its annual report.

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The glimmers of growth emerging from winter chill

DAVID PARKINSON

The Canadian economy can’t hide behind the weather any more. Now that we’ve started to move past the distortions of a harsh winter, the realities of the country’s slow-growth trajectory are beginning to emerge from the latest gross domestic product (GDP) numbers.

The April report, released by Statistics Canada Monday morning, showed growth of a thin 0.1 per cent over March, and 2.1 per cent compared with 12 months ago. Both the monthly and annual growth paces matched March’s numbers, and both were short of economists’ expectations (0.2 per cent and 2.3 per cent, respectively).

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Why Canada needs to push for a truly multilateral financial system

Kevin English and Brett House

On the 70th anniversary of the July 1, 1944 Bretton Woods conference – the landmark gathering that created the International Monetary Fund (IMF), the World Bank and later the World Trade Organization (WTO) – it’s hard to know whether it’s the best or worst of times for multilateralism.

On one hand, as American political scientist Daniel Drezner details in his recent book, The System Worked, international co-operation trumped fear, nationalism and protectionism in response to the 2008 financial crisis and rescued the world from a 1930s-style economic death spiral.

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Emerging market equities back in the bargain bin

Robert Cole

It is best to buy investment assets when they are cheap. What sounds like a truism can be a helpful guide for emerging markets. Shares in the MSCI basket of companies in the developing world trade at just under 11 times forecast earnings. That’s a 28-per-cent discount to equities listed in places such as London, New York and Tokyo.

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Linn pumps more risk into energy partnerships

Christopher Swann

Linn Energy is pumping more risk into master limited partnerships (MLPs). The largest driller structured as an MLP said on Monday that it would spend $2.3-billion (U.S.) to buy gas wells from Devon Energy, in the latest example of how a sector once dominated by ultra-safe pipeline owners is becoming increasingly adventurous. Exposure to volatile U.S. gas prices puts the stable cash flow desired by investors in danger.

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Philips lighting spinoff is a bright idea

Dominic Elliott

A lighting split at Philips is a bright idea. The Dutch electronics group, which makes everything from defibrillators to air purifiers, has already spent years restructuring, pulling back from areas like televisions and home audio. Now Philips is moving its high-powered LED and car lights components operations into a standalone unit. Stepping out of their parent’s shadow should help the fast-growing businesses attract outside capital.

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Why U.K. is feeling heat to move first on rate hikes

Ian Campbell

A too-buoyant housing market could justify a rate increase from the Bank of England. So could falling unemployment and fast GDP growth and a few early signs of wage inflation. But when it comes to rates, the members of the monetary policy committee are well aware that a British increase would be utterly out of step with the rest of the developed world.

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Is George Soros dipping his toe into shareholder activism?

Christopher Swann

Is George Soros turning activist? His $29-billion (U.S.) hedge fund has famously confronted governments. But facing off with a $1-billion U.S. oil and gas company is novel. The move gives underperforming corporate bosses another scourge to fear.

A bellicose letter from Soros Fund Management to Penn Virginia Corp. on Wednesday could easily have come from an established activist like Carl Icahn. Scott Bessent, the chief investment officer at Mr. Soros’s firm, wrote that chief executive officer Edward Cloues has presided over “investor relations disasters” and is responsible for “egregious” strategic choices.

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A hot housing market that almost makes Canada’s look tepid

BRIAN MILNER

A host of concerned regulators, finance officials and debt monitors are raising so many alarms about overheated real estate markets in Canada, Asia and Europe that you have to wonder if their main motive is to atone for missing such signals in the months leading up to the Great Financial Crisis.

Then comes the question of whether they can steer helium-filled housing balloons to a gentle landing. And the track record doesn’t look promising.

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Corporate cash may not be dead, but it sure is resting

DAVID PARKINSON

The unprecedented pile of cash on North America’s corporate balance sheets might finally be set to shrink. But while the so-called “dead money” is showing signs of life, it would be a big stretch to call it lively, at least from a broader economic perspective.

Independent financial market research firm FactSet reported this week that cash holdings at S&P 500 companies were $1.34-trillion (U.S.) in the first quarter, down 4.7 per cent from the prior quarter. That’s the first decline since 2012, snapping a string of six consecutive quarterly increases that had added nearly $200-billion to the U.S. stash.

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Think there’s a skills shortage now? Just wait till the boomers bow out

BRIAN LEE CROWLEY

The future is an uncertain place. That’s why plans that depend on the future being like the present, despite signs of incipient change, are usually doomed to disappoint. Accepting an appointment to the French aristocracy in 1788 probably seemed like a good idea at the time. Then came 1789. Oops.

This idea that the forces shaping the future are never far beneath the surface of the present seemed particularly pertinent this week as federal Human Resources Minister Jason Kenney was in Toronto hosting a conference on whether skills shortages exist in the Canadian economy. The government and many business groups maintain they do, while others, including the Parliamentary Budget Officer (PBO), say they can only find localized examples.

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No stiffer Russian sanctions: Corporate America has spoken

BRIAN MILNER

Chalk up another tactical victory for Russian President Vladimir Putin.

While the Obama administration contemplates ratcheting up sanctions against Russia to a level that might actually inflict real economic pain by targeting specific sectors, leading U.S. business lobbies are loudly proclaiming that their members will be the ones that suffer the most.

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Time to flee that haven

Every day ROB Insight delivers exclusive analysis on breaking business news and market-moving events. Streetwise offers news and analysis on Bay Street and the world of finance. Inside the Market delivers up-to-the-minute insights on market news as it develops.

Here are our editors’ picks of some of the best reads available to Globe Unlimited subscribers this week.

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Inflation gets some new fuel in the tank

DAVID PARKINSON

The doubters who dismiss Canada’s recent inflation surge as a short-term blip have insisted that one of the key missing ingredients is accelerating wage growth. Well, don’t look now, but it’s accelerating.

Most observers looking at Statscan’s monthly Survey of Employment, Payrolls and Hours (SEPH), released Thursday morning, will focus on the lack of job creation that has become a pervasive theme in Canada’s labour market: The survey – which relies on data from actual employer withholdings from paycheques, and is widely considered more accurate than Statscan’s more widely publicized Labour Force Survey of households – indicated an 18,500-job decline in non-farm payroll employment in April, consistent with the 28,900 decline that the earlier Labour Force Survey had reported for the same month.

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Canada needs an action plan to fight long-term youth unemployment

ANDREW JACKSON

Young people lag behind in Canada’s economic recovery, with rates of unemployment and underemployment still significantly above pre-recession levels. The danger is that this will have a permanent scarring effect on many youth, with long-term negative implications for both our economy and our society.

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Why U.S. banks are taking on riskier business again

CARL MORTISHED

The Office of the Comptroller of the Currency (OCC), the U.S. regulator that oversees national banks, gave warning today about risky lending. American banks are loosening underwriting standards and taking on extra risk, it seems, extending maturities and offering easier credit terms in the automotive and wider commercial lending markets.

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U.S. recovery will just have to wait a little longer

DAVID PARKINSON

There’s no way around it: The U.S. first-quarter gross domestic product numbers were deplorable. But they’re already ancient history.

The U.S. Commerce Department’s final estimate of first-quarter GDP, released Wednesday morning, reported that the economy shrank at a 2.9-per-cent annualized rate in the quarter. Not only was that much worse than economists had anticipated (and a massive revision, even by Commerce’s notoriously revision-happy standards, from its previous estimate of a 1-per-cent decline), it was also the worst economic performance since the 2009 first quarter – when the Great Recession still had the global economy by the throat. That’s not a comparison anyone wants to see – least of all Canadians, whose own economic recovery is deeply dependent on an acceleration in U.S. demand for its exports.

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Look out, that haven may not be so safe

BRIAN MILNER

In the years since the global financial crisis, institutional investors have flocked to a handful of havens where they could wait out the storms with their capital more or less intact. But it is these hiding places – including U.S. Treasuries, corporate debt, German bonds and the must-own emerging markets like Mexico – that now pose some the biggest risks.

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Alcoa tries flying over Chinese aluminum glut

ROBERT CYRAN

Alcoa is trying to fly over the aluminum glut. The manufacturer is paying some $3-billion (U.S.) to buy private equity-owned Firth Rixson and expand its aerospace parts business. It’s a pricey deal, but it does jet in cost savings and, potentially, fast growth in a high-margin business not plagued by irrational Chinese competition.

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Shell should travel farther down the carve-up road

Christopher Swann

Royal Dutch Shell’s pipeline sale is a good start to what should be a bigger carve-up. The Anglo-Dutch oil company plans to spin off its small U.S. midstream business into a tax-advantaged master limited partnership in an initial public offering. It should fetch a valuation multiple four times what Shell itself gets. Separating refining from exploration would bring far bigger rewards.

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Barclays’ latest fraud charges suggest little has changed

Antony Currie

New York Attorney-General Eric Schneiderman’s lawsuit against Barclays reads like something from another era. The Empire State’s top lawyer has accused the U.K. bank of fraud, claiming its equity e-traders misled clients about the safety of its dark pool in order to boost revenue, status and bonuses. It’s as if the hubris and poor ethics behind the 2008 financial crisis – and the ensuing backlash – never happened.

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The Canadian model: How euro zone can find more economic stability

CLÉMENT GIGNAC

Europe has been going through a few rough years recently, with a double-dip recession and an unemployment rate that seems to be sticking at a record high of about 12 per cent. Of course, the recession lingering since 2008 has many causes and dimensions, but now that the dust has (mostly) settled, it is becoming evident that the European economic and monetary union has a fundamental design flaw that most likely made the pain much worse than anywhere else in the developed world: A monetary union should be accompanied by a fiscal union.

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What lurks behind Oliver’s risk-taking fears

DAVID PARKINSON

Joe Oliver’s concern about investors’ excessive risk-taking is, ultimately, all about inflation. The world’s fears of deflation spurred the extended easy monetary policies that have driven investors to risky assets – and complacency about inflation’s burgeoning return poses a simmering threat to financial market stability.

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The quiet revolution that's shaping China’s future

SCOTT BARLOW

Peking University Finance professor Michael Pettis’ brilliant essay “The four stages of Chinese growth” not only details the current state of the country’s economic miracle, but also provides a blueprint for the future.

It appears China’s leadership is, if not listening, then following Mr. Pettis’ game plan of their own volition. In a far more ethically palatable homage to Mao Zedong’s Cultural Revolution, current President Xi Jinping’s pervasive corruption crackdown is paving the way for a new stage of economic growth.

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Monsanto drops out of the tax inversion parade

KEVIN ALLISON

Monsanto has wisely picked introspection over inversion. The $67-billion (U.S.) seed and weedkiller company plans to boost investment and R&D, double earnings by 2019, and borrow money to buy back $10-billion in stock. It comes just days after Reuters and others reported that the agribusiness giant had considered and dismissed a potential takeover of Swiss rival Syngenta.

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U.S. Supreme Court gets message on smartphone privacy

REYNOLDS HOLDING

The U.S. Supreme Court has gotten the message on smartphone privacy. The tribunal ruled unanimously on Wednesday that the devices contain so much personal data that police can’t search them without a warrant. It’s a huge victory for individual rights in an era of ubiquitous snooping.

Smartphones are so common that “the proverbial visitor from Mars might conclude they were an important feature of human anatomy,” Chief Justice John Roberts noted in his opinion. There are almost seven billion mobile cellular subscriptions worldwide, according to United Nations data, and more than 90 per cent of American adults own cellphones.

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Overturning U.S. oil export ban would be economic boon

CHRISTOPHER SWANN

America’s oil export boost barely scratches the surface. The administration of President Barack Obama is relaxing a decades-long ban on selling black gold abroad. But the move only affects ultra-light crude, which accounts for just a sliver of U.S. output. Allowing sales overseas of all types of oil would narrow the trade deficit and foster jobs. That, though, requires Congress to act.

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Aereo is dead, but TV disruption lives

REYNOLDS HOLDING

Aereo is dead, long live television disruption. The U.S. Supreme Court ruled on Wednesday that the streaming startup backed by entertainment mogul Barry Diller violates copyright law. Legal loopholes abound, however, and investors and viewers will still reward those who find ways to exploit them. The likes of broadcasters CBS and Disney-owned ABC can’t afford to waste time celebrating.

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Markets can’t look to Carney for certainty in an uncertain world

SWAHA PATTANAIK

If recent swings in the pound’s exchange rate are anything to go by, traders are struggling with Mark Carney. Many think the Bank of England Governor is unreliable. But they are looking for the wrong thing: certainty from a central bank which must deal with a highly uncertain world.

The pound fell on Tuesday after Mr. Carney testified to a parliamentary committee. His latest message was that there was still slack in the economy and that markets were underestimating economic uncertainty. Traders, and some politicians, viewed this as a retreat from the position he had staked out less than two weeks earlier in his Mansion House speech. His statement then that rates could rise sooner than markets anticipated had sent the pound surging.

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Germany’s economic engine finally revving up at home

OLAF STORBECK

Shiny luxury cars, sophisticated engineering goods, but penny-pinching consumers hoarding their meagre income – this cliché of the German economy looks increasingly off the mark. Europe’s largest economy is changing gears. Slowly but surely, Germany is weaning itself off its overdependence on exports. Its current economic upswing is driven by domestic forces.

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How cold weather heats up stock buying

BRIAN MILNER

Mention risk-taking in the depths of winter, and Canadians might turn their thoughts to dangerous road conditions, snowmobiling on thin ice or skiing off-piste in avalanche country. What seems less likely is that they would be more inclined to take stock market risks – and reap higher returns –when temperatures plunge.

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Wilson’s going-private idea may be Lululemon’s best option

DAVID PARKINSON

Let’s be clear: Chip Wilson has become a nuisance. He’s a major distraction for the management of the company he founded, but no longer runs. He’s a risky wild card for the future of the yoga-wear retailer, where he’s still the biggest shareholder and is very publicly displeased. He’s an albatross around the neck of a stock that has enough problems without him.

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Hollywood’s hopes in China rest on Youku

ROB COX

Look around the subway in Beijing or Shanghai and maybe nine of 10 passengers are watching videos on their mobile devices. Chances are most of them are watching content delivered to them by Youku Tudou. The country’s leading Internet television operator streams 400 million videos a day. In that sense, Youku is Netflix and YouTube – plus Comcast and Liberty Media – stuffed into one dumpling. It is also the nexus for Hollywood’s high hopes in the Middle Kingdom.

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Vertex offers rivals a template for pharma profit

Robert Cyran

Vertex Pharmaceuticals is offering rivals a niche prescription for profit. The biotech firm on Tuesday announced that a new drug cocktail can help thousands more cystic fibrosis patients. The unexpectedly good news boosted the company’s valuation by more than $6-billion (U.S.). And since no real alternative treatment exists, insurers will probably pay up. It’s a reminder that pharma’s future is in pricey medicines for rare diseases.

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Syngenta put on notice after reported play by Monsanto

NEIL UNMACK

Tax-driven M&A keeps blossoming. Shares in Syngenta, the $34-billion (U.S.) Swiss agrochemical firm, jumped on a report of an abortive approach from Monsanto. That follows similar U.S. tilts at overseas targets offering tax advantages, in sectors as diverse as health care, semiconductors, advertising and bananas. Even if no deal emerges, the bid interest will pressure Syngenta to better tend to its own garden.

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Russian rally masks much gloomier outlook

PIERRE BRIANÇON

The Russian stock market has erased all of this year’s losses. From an investor’s viewpoint, it is as if the Ukrainian crisis never happened. This is not the first time in the last four months that markets have seemed to favour hope over experience. Every vaguely conciliatory statement by Russian President Vladimir Putin since he threatened to send his troops into Ukraine was greeted by market enthusiasm, and yet was often followed a few days later by renewed threats that prompted a return of investor gloom.

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Why gold's rise is getting ahead of inflation

IAN McGUGAN

Gold is – finally – showing some signs of life. Despite a modest decline on Friday, the metal that feasts on bad news has enjoyed one of its best weeks in months, courtesy of turmoil in Iraq and Ukraine and early signs of a pick-up in inflation in the U.S. and Canada.

It’s almost enough to make gold bugs think back to the glory days of 2011, when the yellow metal roared to record highs amid inflation worries and fears of a euro zone break-up.

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Poloz can no longer play down inflation fears

DAVID PARKINSON

Canada’s latest surprise inflation surge is surely a wake-up call to the Bank of Canada. Governor Stephen Poloz’s nagging concerns about the risk of disinflation are now stretching the bounds of plausibility; his message on the inflation front will surely have to change, lest the bank strain its credibility with an increasingly skeptical financial market.

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AbbVie needs to do more to breach Shire’s defences

NEIL UNMACK

Shire can thank AstraZeneca for showing it how a big pharmaceuticals group defends itself against an unsolicited takeover approach. Copying Astra, the Dublin-based, U.K.-listed drug maker is rushing out a punchy long-term sales forecast after AbbVie of the United States revealed a recent $46-billion (U.S.) takeover proposal. Unlike Astra’s projections, Shire’s need to be taken with only a standard-sized pinch of salt.

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Oracle deal does little to get its feet in the cloud

Kevin Allison

Oracle’s $5.3-billion (U.S.) deal for Micros Systems provides a cloudy forecast for shareholders in the database giant. Even if it’s the start of a new deal binge by chief executive officer Larry Ellison – which is possible – it’s not at a crazy valuation. But long-time partner Micros is more of an add-on than a way to supercharge Oracle’s effort in the cloud.

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A fickle Hollande unsteadies French investing climate

PIERRE BRIANÇON

The French government didn’t have to buy a 20-per-cent stake in Alstom. It could have smugly observed that its intervention in the acquisition of the French engineer’s energy assets by General Electric had yielded some success. Pressure from Paris forced GE to rework its offer, giving France a decisive say in the future of Alstom’s nuclear business. With that concession secured, there was no good reason to buy out Alstom’s main shareholder, construction-to-telecom conglomerate Bouygues.

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Party is over for EU periphery bonds

Swaha Pattanaik

The market sometimes sends little signals that investors are losing faith. For example, the recent widening in the spread between bid and ask prices for Southern European government debt suggests the end of the era of easy gains.

On the surface, the periphery party is just taking a breather. Ten-year Spanish and Italian yields aren’t far from record lows of 2.55 per cent and 2.70 per cent, respectively, set earlier in June after the European Central Bank did everything short of quantitative easing to loosen policy. Very loose monetary policy could allow the yield gap between these bonds and those of Germany to continue to narrow.

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A Spanish lesson in economics

TODD HIRSCH

Economic principles are at work everywhere you look. This month, I had the chance to visit Spain, a country that’s been the focus of much unwanted attention about the abysmal state of its economy. During my trip, two examples of economic principles were highlighted – one hilarious, the other quite tragic.

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The lesson of Argentina’s bond fiasco

BRIAN MILNER

Argentina appears willing to negotiate its way out of a bitter, long-running dispute with bond investors, now that it has run out of legal options to avoid paying them off.

That would be the smart move, because the alternative to a negotiated settlement would be a fresh debt crisis – and an almost certain default – for the beleaguered government. Argentina, which already ranks among the world leaders when it comes to sovereign deadbeats, could say goodbye to its efforts to regain access to capital markets.

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Tide is turning in Canadians’ big debt runup

DAVID PARKINSON

Canadians’ high debt levels have long loomed as perhaps the biggest risk to the country’s economic health. But the latest data from Statistics Canada show that those ominous storm clouds, while not entirely blowing over, are certainly parting.

Statscan’s National Balance Sheet and Financial Flow Accounts report for the first quarter, released Thursday, shows that total household debt rose just 0.4 per cent in the quarter, its slowest pace in four years. On a year-over-year basis, household debt grew 4.2 per cent – its slowest pace in more than 12 years.

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As China flexes its muscle, foreign companies quiver

BRIAN MILNER

When the world’s three biggest container shipping companies decided to pool their capacity, it seemed like a sensible solution to a vexing problem.

A weakened global economy had reduced shipping volumes just as an influx of massive new container vessels started plying the busy Asia-Europe routes. The resulting excess capacity and lower prices left profits adrift in the doldrums and companies with a pressing need to reduce costs.

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The new housing tax on the young

Every day ROB Insight delivers exclusive analysis on breaking business news and market-moving events. Streetwise offers news and analysis on Bay Street and the world of finance. Inside the Market delivers up-to-the-minute insights on market news as it develops.

Here are our editors’ picks of some of the best reads available to Globe Unlimited subscribers this week.

More »

The surprising downside of secure jobs

IAN McGUGAN

Here’s the good news: Canadians love their jobs.

Here’s the bad news: Canadians love their jobs.

Benjamin Tal and Nick Exarhos of CIBC World Markets argue in a new report that the Canadian labour market has defied the expectations of a few years ago. Back then, many prognosticators saw us moving toward a new economy in which workers would become free agents, moving fluidly between employers as demand dictated.

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Contributors

Scott Barlow

Scott Barlow is The Globe's in-house market strategist. He is a 20-year veteran of Canadian investment banks, including Merrill Lynch Canada, CIBC Wood Gundy and Macquarie Private Wealth (MPW).

Brian Milner

Brian Milner is a senior economics writer and global markets columnist. In a long career at The Globe and Mail, he has covered diverse business beats, including international trade, the automotive industry, media, debt markets, banking and the business side of sports.

Follow Brian on Twitter @bmilnerglobe

Dave Morris

Dave Morris joined the Globe and Mail in 2010 as Associate Editor of Report on Business Magazine.

Carl Mortished

Carl Mortished is a Canadian financial journalist and freelance consultant based in the U.K.

David Parkinson

David Parkinson has been covering business and financial markets since 1990, and has been with The Globe and Mail since 2000.

Sean Silcoff

Sean Silcoff joined The Globe and Mail in January, 2012, following an 18-year-career in journalism and communications. He previously worked as a columnist and Montreal correspondent for the National Post and as a staff writer at Canadian Business Magazine.

Follow Sean on Twitter @SeanSilcoff

About ROB Insight


Presenting a selection of exclusive analysis from Report on Business and Reuters Breakingviews.


Reuters Breakingviews delivers agenda-setting financial insight. Every day, a global team of 30 correspondents comments on the big financial stories as they break.

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