Fortune Watch

France’s banking regulator yesterday fined Societe Generale four million euros ($6.3m) over “grave deficiencies” in its internal controls that enabled a massive rogue trade scandal at the bank, that led to nearly $7.8 billion in trading losses announced earlier this year.

In a decision e-mailed to Reuters, the Banking Commission also reprimanded France’s second-biggest listed bank for poor supervision that led to the unauthorized trades by Jerome Kerviel, the former SocGen trader blamed for the losses earlier this year. This 31-year-old trader made his fraud by investing several billion in Futures.

The banking commission said it had also issued a formal warning to Societe Generale for failing to prevent the staggering losses of 4.9 billion euros, which it has blamed on 31-year-old trader Jerome Kerviel.

After interviewing representatives of the bank on June 20, the commission said it detected “grave deficiencies in the internal control system” that “made possible the development of the fraud and its serious financial consequences.”

“The weaknesses brought to light, in particular the deficiencies in hierarchical controls, carried on over a long period, throughout 2007, without being detected or rectified by the internal control systems,” it said.

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Soaring petrol prices helped drive up US consumer prices last month at the fastest rate in six months, the government said yesterday, but core prices remained tame, easing inflation fears in financial markets.

A separate report showed US consumer sentiment tumbling to a 28-year low this month, with some lessening of expectations on inflation one year out and a steady reading on long-term inflation expectations, which held at a 13-year high.

The Commerce Department said the Consumer Price Index rose a steep 0.6 per cent last month, a touch more than Wall Street had expected, after a modest 0.2pc gain in April.

However, so-called core prices, which exclude volatile food and energy cost, edged up just 0.2pc. Surging petrol prices and soft labour market conditions have depressed consumer spirits.

The Reuters/University of Michigan sentiment index for this month dropped to 56.7 from 59.8 last month. Wall Street economists had expected a decline to only 59.5.

“Today’s inflation numbers do not put any additional pressure on the Fed to hike interest rates,” said Mark Vitner, senior economist at Wachovia in Charlotte, North Carolina. “The Fed is not nearly as behind the curve as some people currently believe.”

The reassuring data followed a series of inflation warnings from central bankers around the globe, and capped off a week in which expectations of higher US rates had climbed sharply.

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The region has been hit by concerns over a US slowdown and rising risk aversion in the wake of the US sub prime mortgage crisis, with many investors seeing Asian markets as a high beta play on US Growth. Foreign investors have consequently sold down Asia aggressively as a way to reduce risk in their portfolios.

Rising inflation has also negatively affected Asian equity markets. Inflation, especially food inflation, is now at multi-year highs in most Asian countries, with inflation numbers in China, India and Indonesia particularly high. The possibility of further monetary tightening around the region and the impact of rising input prices on corporate profitability have to be monitored closely.

Finally, valuations had begun to look stretched, sparking some profit taking. After a 40% run in 2007, Asia ex Japan started 2008 with a PE (price-to-earnings) of 16x, the first year since the start of the decade where Asia entered the New Year trading at a premium to most other global equity markets. It is therefore perhaps not a surprise that Asia, particularly China and India, experienced the most profit-taking/foreign-led selling in the first quarter of 2008.

The global economy is weakening and inflation in China remains a threat. Therefore, Asian markets are likely to remain volatile over the next couple of months. Several Asian markets, especially the Indian equity market, also remain vulnerable to changes in global risk appetite as foreign inflows have been the major driver of these markets. We therefore continue to monitor fund flows and global risk sentiment closely, while cash levels in our portfolios have also risen marginally.

However, Asia should be supported by still strong corporate earnings growth, as there is no sign of any immediate impact from the US subprime crisis on Asian earnings. In fact earnings growth in Asia remains strong, led by China and India, which are forecasted to grow earnings by around 20%2 in 2008 according to our estimates.

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Oil, Coal, Natural Gas, Nuclear, Wind, Solar Energy? The world’s energy appetite will at least double by the end of this century (some claim it will triple). If we attempt to meet this burgeoning global demand exclusively with fossil fuels, the environmental consequences are difficult to predict. We are products of a world where energy was long assumed to be cheap, unlimited and readily available. Today, all three assumptions are in question.

In a few short years, the problem of energy has emerged as one of the defining—and most difficult—challenges of the 21st century.

Economic activity is clearly the single most important driver of the energy demand of a country. This demand does change as countries gradually shift from more energy-intense manufacturing industries to service activities or when technological advances make energy use more efficient – but these processes take time and with oil reaching all time highs the effects are already being felt.

Oil; Countries with a high dependency on oil are already suffering higher relative inflation against their peers which will subsequently damage their exports. Spain, Greece or Belgium are already suffering from inflation above the average Euro zone inflation of 3.3%, already way above the 2% untries nuclear and alternatives seem to be the most viable energy sources in the not so distant targeted by the ECB. What alternatives do we have in Europe other than oil?

Coal, the main source of energy in both China and India, is cheaper to extract compared to oil and gas but is highly polluting. Although, vast reserves are still available, rail and harbour bottlenecks, as well as a sharp increase in demand is making supply fall behind.

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Some say no. They say unlike the tech and real estate bubbles, there’s no overabundance of supply. Others say these high prices are not sustainable.

Oil prices have doubled in the past 12 months, surging nearly $8 a barrel in the past four days alone.

Big investment funds are putting money into oil futures as if Saudi Arabia’s spigots will run dry tomorrow. At the same time, the supply of oil and the demand for it hasn’t changed much in the last year.

So it raises the question: Is $135 oil nothing more than one big bubble? Some say no. They say unlike the tech and real estate bubbles, there’s no overabundance of supply. Others say these high prices are not sustainable.

The answer depends on who you ask.

A bubble is where supply overwhelms demand, pointing to previous bubbles – like the tech bubble in the late 1990s where companies with zero earnings issued massive amounts of stock, and the real estate market a decade later where home builders went on a frenzy, overshooting the number of homes the market could absorb.

“But unless I’m missing something here, I don’t see any massive increase in the supply of oil”.

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Crude oil futures pass $130 a barrel for the first time on supply concerns, weak dollar.

Crude oil prices are shooting further into record territory, breaking above $130 a barrel for the first time on persistent supply concerns and a weaker dollar and heading for $180 a barrel.

The July contract for light, sweet crude rose as high as $130.30 in electronic trade on the New York Mercantile Exchange late afternoon Wednesday in Singapore.

Concerns that OPEC won’t increase its crude production before September fed some of the buying. Also, the dollar has been weakening against the euro and yen the last two days after appearing to be on a recovery track.

Oil futures are now selling for about twice what they were just a year ago.

In the short term — say, the next two years or so — we’re looking at bad news about global oil supply that could take the price of a barrel of crude to $180.

Needless to say, today’s $3.50-a-gallon gasoline would look cheap if oil prices hit $180 a barrel. At that price for a barrel of oil, gasoline would cost somewhere north of $5.50 a gallon.

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Billionaire investor Carl Icahn reportedly has decided to lead a mutiny against Yahoo Inc.’s board in an attempt to pressure the directors into reviving negotiations to sell Yahoo to Microsoft Corp.

To turn up the heat on Yahoo’s board, Icahn has lined up a slate of 10 directors to nominate as replacements, The Wall Street Journal reported on its Web site Wednesday, citing an unnamed person close to the matter.

Icahn hadn’t returned phone messages from The Associated Press as of late Wednesday. His intentions should become clear soon, however, because Yahoo has set a Thursday deadline for submitting candidates to oppose its board at the company’s July 3 annual meeting.

A representative of Sunnyvale-based Yahoo declined to comment.

Yahoo’s board is on the hot seat for rejecting Microsoft’s initial bid of $44.6 billion, or $31 per share, and taking measures that finally drove away the software maker.

Microsoft Chief Executive Steve Ballmer orally offered to raise the offer to $47.5 billion, or $33 per share, earlier this month. He withdrew the bid May 3 after Yahoo CEO Jerry Yang, acting on behalf of the board, held out for $37 per share — a price that Yahoo’s stock hasn’t reached in more than two years.
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An online advertising partnership between Yahoo and Google is facing opposition from consumer and civic groups that did not wait for an official deal announcement to voice their discontent.

Top Google executives said they were interested in a partnership with their closest rival but didn’t indicate how close they were to an agreement. A coalition of 16 civil rights and rural advocacy groups, including the Black Leadership Forum and the League of Rural Voters, urged federal regulators to investigate the potential combination.

The Black Leadership Forum is an umbrella group of 36 civil rights organizations, including the NAACP and the National Urban League.

The groups argued in a letter to Assistant Attorney General Thomas Barnett, head of the Justice Department’s anti-trust division, that the deal would give Google almost 90 per cent of the search advertising market and strengthen its influence over Internet users’ access to information.

Separately, the Centre for Digital Democracy (CDD), a consumer advocacy group, said it will push US regulators to block any deal and is already urging European consumer groups to raise concerns with European Union officials.

The EU generally takes a tougher approach on anti-trust, fining Microsoft $1.3 billion for anti-competitive conduct earlier this year.

“You can’t allow Google to operate a portion of its leading competitor out of its back pocket,” said CDD executive director Jeffrey Chester.

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Microsoft Corporation will focus on growing its own advertising and Internet search business after it withdrew its takeover offer for Yahoo, chairman Bill Gates said yesterday.

Microsoft has not presented an alternative strategy to compete with its dominant rival in the Internet business, Google, since withdrawing a $47.5 billion bid for Yahoo last weekend.

Analysts have been left wondering how the world’s largest software maker will increase its share of that multibillion dollar market without a major tie-up.

“We have always felt we could do very well on our own and now that’s the path we are focused on,” Gates said.

“The standard strategy for us is to just hire great engineers and surprise people at how well we can compete, even with a company that’s got a strong lead,” he said.

Gates says Microsoft remained open to making acquisitions, but declined to comment on possible candidates, such as networking sites like Facebook in which Microsoft already holds a 1.6 per cent stake. “You never know if there’s going to be a deal that makes sense,” he said.

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A chronology of events leading to Microsoft Corp.’s decision to abandon its offer for Web search and advertising competitor Yahoo Inc.:

Feb. 1, 2008: After two years of talks and speculation, Microsoft makes unsolicited offer to buy Yahoo for $31 per share, or $44.6 billion.

Feb 3: Google Inc.’s top lawyer says the buyout could hurt Web innovation.

Feb. 4: Yahoo CEO Jerry Yang tells employees that selling to Microsoft is an option.

Feb. 11: Yahoo rejects Microsoft’s offer, saying it “substantially undervalues” the company’s brand and worldwide assets.

Feb. 19: Microsoft Chairman Bill Gates tells The Associated Press the software maker isn’t in talks with Yahoo about raising its offer. Yahoo releases details of severance plans that would take effect after a buyout, which could make the deal more expensive for Microsoft.

March 5: Yahoo extends a deadline for nominating candidates to its board, buying time to strike an alternative deal. Yahoo is said to be in talks with Google Inc., News Corp.’s MySpace.com and Time Warner Inc.’s AOL.

March 10: Senior executives meet near Yahoo’s Sunnyvale, Calif., headquarters.

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