Archive for the ‘Emerging Markets’ Category
Tuesday, May 21st, 2013
Emerging Markets Radar (May 21, 2013)
- Dividends paid by Latin American equities have been crucial in cushioning the 14.9 percent fall in the MSCI Latin America index over the past five years. Earnings weakness, multiple contraction, and foreign exchange losses have weighed heavily on the region’s equities. However, the reliability of dividend payments by local companies has returned a cumulative 18.3 percent since 2007, effectively easing the region’s recent weakness.
- Moody’s upgraded Turkey’s credit rating from Baa3 to Ba1 with a stable outlook. The move brings about the long awaited second investment grade rating, following Fitch’s upgrade in November 2012. The agency highlighted the recent and expected improvements in finance metrics, as well as noticeable progress on structural and institutional reforms. In addition, Turkey’s central bank cut rates by 50 basis points, exceeding analyst expectations as it seeks to contain currency appreciation. The lira has been strengthening as capital inflows seeking to benefit from the country’s promising economic growth remain strong.
- Indian inflation declined to a 41-month low in April. The wholesale-price index rose by 4.98 percent year-over-year, compared to initial analyst estimates for a 5.45 percent increase. The measure gives the central bank room to extend its monetary easing program and support growth in Asia’s third largest economy. The news was welcome by foreign investors who were net buyers of Indian equities.
- China April power consumption was up 6.8 percent versus 1.9 percent in March, indicating better economic activities and contributing to a stable Li Keqiang Index. April power generation was up 6.2 percent versus 2.1 percent in March.
- April data were roughly in line with market expectations, and showed only modest improvement from March. Industrial production improved rising 9.3 percent from 8.9 percent in March. April retail sales growth recovered modestly to 12.8 percent from 12.6 percent in March.
- April property investment in China was up 23.1 percent, which helped fixed asset investments increase by 20.6 percent.
- China smartphone volume grew 39 percent in the first quarter this year, showing strong domestic demand.
- Korea’s jobless rate declined further to 3.1 percent in April from 3.2 percent in March.
- Vice Premier Zhang Gaoli says China won’t approve new steel, cement, aluminum smelters, ship-building projects.
- Not only has the Peruvian stock market been held hostage to falling metals prices, due to its heavy weighting in mining stocks, the country’s economy has also suffered a blow to its exports that resulted in significantly slower than expected economic growth. In March, economic activity grew at a pace of 3 percent, a far cry from the 4.5 percent median forecast. In addition, the country’s stock market has lost nearly a fourth of its value year to date, significantly underperforming its emerging market peers. However, the domestic fundamentals remain strong and the central bank has room to cut rates if the export slowdown becomes broad based.
- Despite some analyst optimism with respect to the situation in the eurozone, new GDP growth estimates from Brussels continue to paint a gloomy picture for 2014. The chart below shows that, although all shown countries are expected to have positive GDP growth in 2014, the vast majority will grow at rates below 2 percent. Similarly, the eurozone is expected to grow only a meager 1.2 percent. However, it is worth noticing that the countries leading the return to growth and restarting the European Union are located in Eastern Europe.
- China April fixed asset investment growth was 20.6 percent versus market expectation 20.9 percent, with infrastructure and manufacturing investments slowing to 22.7 and 17.9 percent, respectively.
- Investment banks are revising down China GDP forecast for 2013 after April economic data release. Bank of America Merrill Lynch downgraded China 2013 GDP to 7.6 percent from 8 percent previously, while JP Morgan cut to 7.6 percent from 7.8 percent.
- China April FDI was up 0.4 percent for April versus consensus 6.2 percent.
- Malaysia first quarter GDP slowed to 4.1 percent, below consensus 5.5 percent. Exports were weak declining 0.6 percent, while domestic consumption was strong rising 8.2 percent.
- China Premier Li Keqiang indicated policy makers are reluctant to stimulate growth.
- The Beijing Daily reported that only 28.2 percent of the 229,000 college graduates in the Beijing area had secured a job this year. When meeting with college graduates and unemployed people in Tianjin this week, President Xi Jinping stressed the need for growth.
- Singapore retail sales declined 7.4 percent in April after declining 3 percent in March, worse than market expectation of -2.5 percent.
- Following this week’s widely publicized $11 billion debt offering by Petrobras, the largest ever for an emerging markets’ issuer, the Brazilian Development Bank, known as BNDES, announced it is ready to seek a bond sale to boost its lending program. For reference, BNDES lent or invested $77 billion last year; that is twice as much as the World Bank. The bank plays a vital role in stimulating economic expansion in the country through investments in companies of all sizes, which are focused on innovation, and sustainable development. The additional funds could be help Brazil break out of the slowing growth cycle of the last few years and keep pace with its Latin American and BRIC peers.
- The recent credit rating upgrade and central bank rate cuts in Turkey may have some investors thinking the milestones have been reached and it may be a good to time to sell Turkish equities. This is certainly not the case in our opinion. Turkey stands among the strongest countries to benefit from current global easing; internally, inflation is well under control, and domestic consumption is unabated. Furthermore, the country’s stock market continues to trade on a cheaper price to earnings valuation when compared to countries like Mexico, Malaysia, and Thailand. Lastly, HSBC published a Flashnote showing how credit rating upgrades do not limit future performance. To illustrate, the chart shows the performance of the Philippines’ equity market following recent credit upgrades; as is evident, the Philippines equity market returned 10.3 percent on average in the three months after its upgrade. Hence, there is ample reason to believe the Turkish equity market should continue to outperform.
- As shown in the graph below, an increasing number of mobile users also adopt mobile internet. This offers smartphone business opportunities for online shopping, online games, online search, online advertisements, and many other internet applications. The recent merger and acquisition activities and alliance in internet space indicates vast mobile internet opportunities and profits.
- Some delays and uncertainty are looming in the Mexican construction sector as firms await President Pena Nieto’s announcement of the infrastructure plans contained in the so-called National Development Plan. As with any new president, investors expect multiple ambitious projects to be announced, especially following the numerous campaign promises made by Pena Nieto. However, fear of a break up of the coalition in congress, which pushed back some of the important announcements, in addition to the apparent shift in housing policies to be pursued by the President, are destabilizing the already fragile homebuilders.
- Russia’s inability to cut benchmark interest rates as it tries to contain inflation led President Putin to announce last month that banks would have to bear the burden of rate cuts. As expected, Sberbank, Russia’s largest bank, announced reductions on the rates it charges on corporate loans by 0.4 to 1.4 percent, effective May 15. Analysts expect the bank to mitigate the squeeze in net interest margins by altering its asset mix.
- Indonesia current account deficits continued in the first quarter, though improved from prior quarter and better than the market consensus. Stubborn current account deficits may force the central bank to tighten demand to stabilize the currency rupiah. Otherwise, the Bank of Indonesia will continue to deploy foreign currency reserve to buy rupiah.
Saturday, March 30th, 2013
Emerging Markets Radar (April 1, 2013)
- Fitch upgraded the Philippines’ sovereign debt rating from below investment grade BB+ to investment grade BBB- due to a current account balance surplus and a lower debt-to-government-revenue ratio. Moody’s and S&P have yet to follow through with an upgrade.
- China’s industrial profit growth soared to 17.2 percent in the first two months of the year to 709.2 billion renminbi, suggesting a further recovery of corporate earnings growth year-to-date. Also, based on 84 percent of H-share companies that reported their 2012 earnings, there has been a remarkable sequential improvement in earnings growth to 8.5 percent in the second half from negative growth of 2.8 percent in the first half of 2012. Analysts believe earnings growth recovery will continue in 2013, which should support the market.
- China will cut retail gasoline prices by 310 yuan per ton and diesel by 300 yuan per ton. It also announced it will adjust prices of oil products every 10 working days from 22 days to better reflect changes in the global oil markets.
- Chilean companies continue to sell record amounts of corporate debt overseas as yields on existing securities continue to reach record lows. From investment grade to junk-rate, companies of all sizes are lining up to take advantage of the unsatisfied demand for higher yielding offerings in attractive jurisdictions. In the first quarter, Chilean-dollar-denominated offerings reached $3.8 billion, more than double the amount issued in the same period last year.
- S&P upgraded Turkey’s sovereign rate to BB+, one notch below investment grade, with a stable outlook. S&P has been the most intransigent of the three rating agencies, with Fitch having already given Turkey investment grade. Moody’s is one notch below and is expected to move next.
- China issued new regulations to limit credit securitization in wealth management products (WMP), capping it at 35 percent of total WMP assets and 4 percent of total bank assets. Bank industry analysts believe the regulations will not have a material impact on the earnings of large banks but may affect smaller banks. The market is concerned that this will in effect tighten liquidity for small business and property developers.
- Colombia reported official unemployment numbers for February this week. Urban unemployment came in at 12.3 percent, down 0.8 percent and in line with Bloomberg survey expectations. The rate is the largest among major Latin American economies and its inability to remain in the single digits shows signs of structural problems in the Colombian labor market. The Colombian central bank cut benchmark interest rates by 50 basis points last week to address its preoccupation with GDP expanding below potential.
- As shown in the graph above, China’s power generators still run much under their capacity. This chart from BCA is based on the historical pattern between the policy interest rate and power generation utilization level, which shows no policy tightening when the sector has been at under-utilization. This technical relationship can be explained by the fact that if power demand is low, the monetary policy should either stay neutral or be easing. Currently, power consumption growth is improving from the 2012 low but still below the historical average.
- The deadline for Argentina to present its final proposal to estranged creditors led by Paul Singer will be this Friday, March 29. Argentine newspapers are reporting the country is likely to offer par bonds for the notional claim, while offering discount bonds to cover the past interest. Deutsche Bank reports this type of settlement would imply a repetition of the settlement reached in the 2005-2010 restructuring, and consider it possible that the government will present a better proposal. We believe this is a great opportunity for Argentina to finally put to rest the ghosts of the 2002 default, but we are certainly not holding our breath.
- The benefits of joining the euro outweigh any costs, said finance ministers of the three Baltic countries, rejecting economist Paul Krugman’s view that Europe’s common currency is a “trap.” Austerity plans that Krugman opposed have helped the Baltic nations recover from the debt crisis in 2008 to become the 27-nation bloc’s fastest growing region.
- While relative underperformance of emerging market equities versus developed markets is likely to continue in 2013, according to Merrill Lynch, any signs of Chinese stability would likely cause a trading bounce in BRIC resource stocks, trading at a ten-year low price-to-book multiple.
- China’s new WMP regulation may curb financing for small- and medium-sized companies. Those are the companies that have benefited from WMP loans. Many banks have started to lend to small businesses since a year ago to look for loan growth, which might offset the WMP tightening impact.
- Brazilian fiscal spending jumped 13.9 percent in February compared to the prior month, while revenues jumped only 7.4 percent. The gap led the country to post about a $3.2 billion fiscal deficit for the month, reversing some of the January gains. The slower growth in government revenues is accounted for by several tax cuts implemented by the government to spur growth in the slowest-growing BRIC country. The considerable increase in government expenditures may threaten the central bank’s already poor control of the country’s high and unstable inflation.
- Amid Russian security forces shaking down non-governmental organizations, the Russian navy parading unannounced in Black Sea, and Pravda making a statement about Russian nuclear warheads being installed in Cuba, sentiment toward Russian equities is set to worsen.
Thursday, May 12th, 2011
Casey Research’s BIG GOLD newsletter recently published a great interview that I’d like to share with you. BIG GOLD editor Jeff Clark interviewed Shanta, the mother of U.S. Global consultant and longtime friend Jayant Bhandari, on how strong the cultural bond between gold and Indians is, especially women.
Take a look.
When a Gold Necklace Isn’t Jewelry
Jeff Clark, BIG GOLD
When it comes to supply and demand, what you’ve been told about gold jewelry is wrong. That’s a strong statement, but I’ve got a firsthand account to back it up.
Most industry organizations separate jewelry from investment when they tally the numbers on the uses for gold. This makes sense, of course, because one is a coin or bar purchased as a store of value and the other is something designed to be worn. But what if large populations around the world view them as serving the same purpose?
My friend Jayant Bhandari, who’s worked for Casey Research in the past and is now a consultant to an institutional investor, has told me for years that excluding gold jewelry from investment demand is inaccurate because there are many Asian cultures where a gold necklace is considered, in all practical uses of the word, an investment.
I’ve often wondered to what extent that’s true. Do Indians, for example, really see a gold necklace as a preserver of wealth? Gold adornments are so widespread in their society—it’s hard to find a picture of an Indian bride who’s not wearing numerous gold accessories—that it seems obvious the use is, in fact, primarily as jewelry. But is something else going on here that escapes our Western view of the precious metal?
I decided to go to the source. Jayant arranged an interview with me and his mother Shanta, who has lived in India her entire life. If anyone knows, it would be her. With Jayant translating, I learned some things I think you’ll find fascinating and perhaps make you reconsider how you view gold…
Jeff: Shanta, why do Indians buy a lot of gold?
Shanta: Indians feel deep in their hearts that gold is the best way to preserve and invest wealth. Indians have always felt that whenever they need money, they can sell their gold to generate cash. This is the way we have always done it.
Every mother wants to give her daughter gold because the wealth can be saved on her body. And the mother is secure in knowing the gold will stay with her. Even the mother-in-law thinks this way. That’s why it’s commonly given during weddings.
Jeff: I understand that gold is very important to Indian women.
Shanta: Gold is the wealth of the women and is extremely important to them. Men don’t give or receive much gold. It is transferred from woman to woman, from generation to generation. Men are usually not involved. Gold is preserved by the women so that if they have a crisis, they can use it.
Women consider gold to be their biggest security. Indian women have started working in the last decade, but the young working women are still passionate about gold.
Jeff: So gold jewelry is something more than just a pretty necklace?
Shanta: I do not think of gold as a necklace or a bracelet. Indian women think in terms of how much gold is to be given to their daughter or daughter-in-law. So it is not viewed as jewelry but as a basic store of value.
Every Indian likes to have gold. This is true whether they’re Muslim or Christian.
Jeff: How much gold do Indian families like to have?
Shanta: For the middle class, I would say roughly 20% of their total wealth is in gold. In the past it was more like half. Fifty years ago, they had no other option but to keep their wealth in gold. Now they can buy other things, too.
Jeff: Are some forms of gold more desirable than others?
Shanta: In the past women preferred to have jewelry, but there is a trend to keep some of it in brick form now. Some women reach the limit of jewelry they want to hold, so they buy coins or bricks. Even if the woman doesn’t wear the jewelry, she will still keep it.
Jeff: How do Indians acquire it?
Shanta: In the past you would take your gold to the jeweler, tell him what you wanted, and he would make it for you. The modern-day woman will pick something out from the jeweler.
Old jewelry keeps getting recycled. Every family has a lot of gold—four or five generations or more. Eventually you lose the emotional connection with certain pieces and will have them made into something else.
Jeff: Where do Indians typically keep their gold?
Shanta: Historically, Indians would hide their gold or bury it. These days they use bank lockers. But no one likes to talk about their gold.
Jeff: Would you and other Indians ever sell your gold jewelry?
Shanta: Gold is given as collateral, so you would only sell it if you had no other way to raise money. We prefer to keep it and won’t sell it unless there is a crisis.
Jeff: How is gold used as collateral?
Shanta: Gold is seen as a store of value and is only used when you really need money. So we would use it as collateral for a surgery or other emergency, a wedding, or maybe in an extreme case, a house. We would not use it for a TV or car or anything like that. We might sell some for education, so only for very important things.
Jeff: Might you sell some because the price is high?
Shanta: We typically would not sell gold just because the price is high. Gold is not an investment; it is a store of value.
Jeff: Is there much interest in buying silver?
Shanta: The key is gold. The rich and middle class normally buy gold, not silver. Silver is very common among the poor class, so if you are not rich, then you will buy silver. The poor people buy silver for the same reason the middle class buy gold.
Jeff: Do other factors affect why Indians buy gold?
Shanta: The stock market has recently fallen from a lot of corruption cases, so the people are increasingly interested in gold.
Jeff: Would it bother you if the price dropped?
Shanta: It would not bother me because I still have my gold. If gold makes a new high, I am not inclined to sell it, either. Of course, I would be happy if the price goes up.
Jeff: Thank you, Shanta.
Shanta: You are most welcome.
As Shanta makes clear, gold jewelry in India is more than a fancy adornment; it’s a store of value and preserver of wealth. It’s not even an investment; it’s more important than a rising brokerage statement.
In India and many other Asian countries, the form gold comes in is less important than how many ounces you own. If you lived in India, gold would represent about 20% of your assets.
So the next time you hear a report about gold jewelry in India, remember that Shanta and others aren’t wondering how good a gold bracelet will look on their wrist, but rather are seeing it as a vehicle for storing wealth.
I think there’s a lesson in this for us North Americans. How do you view the gold you own – is it a pretty coin, an investment, or a store of value? Given the obscene abuse most fiat currencies are undergoing, I think we’d be best served viewing it as not just a potential money maker but as protection against the rabid inflation that will damage our economy and dilute our pocketbooks.
Thanks to the people over at Casey Research for letting us republish this piece. You can learn more about BIG GOLD at the Casey Research website.
The preceding interview was republished with permission from Casey Research. By clicking the link above, you will be directed to a third-party website. U.S. Global Investors does not endorse all information supplied by this website and is not responsible for its content.
Tags: Asian Cultures, Bhandari, Casey, Global Consultant, Gold Accessories, Gold Adornments, Gold Editor, Gold Investment, Gold Jewelry, Gold Necklace, Gold Newsletter, Indian Bride, Indians, Industry Organizations, Institutional Investor, Investment Demand, Longtime Friend, Populations, Precious Metal, Preserver
Posted in Emerging Markets, Gold, India | Comments Off
Monday, May 9th, 2011
The Value of Losing Money?
by Leo Kolivakis, Pension Pulse
On Saturday morning, I caught a glimpse of CNN’s Dr. Sanjay Gupta interviewing Dr. Joseph Maroon, a neurosurgeon at the University of Pittsburgh Medical Center and a team physician for the Pittsburgh Steelers. Dr. Maroon is a member of the NFL’s concussion policy committee, which has recently been criticized by the House Judiciary Committee for inadequate research and ethics related to player concussions.
But I’m not covering any NFL controversy here. What caught my attention is that Dr. Maroon hit a brick wall years ago when he experienced the three D’s: death of his father, divorce, and a deep depression. He got on the treadmill one day and started running. He felt so good that he said it was the first night he slept well. And from then on, he was convinced that exercise was the key to maintaining his mental and physical health. He’s now a 70-year-old ironman competitor (unfortunately, controversy still hounds him).
What does this have to do with the value of losing money? Hold on, I’m getting there. I also remember an interview with George Soros (think it was with Charlie Rose) where he was discussing when he graduated from London School of Economics. He was sitting in some corner in London watching people go by and thinking that he’s broke and in debt but “there’s only one way to go, up”.
Some of life’s most valuable lessons are taught to us when we hit a brick wall. You don’t see it when you’re in your personal hell, but typically that’s when people find out what they’re made of. I remember when I lost my job back in 2006, then separated from my wife in 2007, and my health was deteriorating fast. I hit a major brick wall. Had it not been for the support of my family and close friends, I would have still been stuck in a rut.
I also remember what Tom Naylor, a professor of economics at McGill and close friend of mine, told me back then: “You lost you job, lost your wife, losing your health, the good news is you hit rock bottom”. Then he gave me some wise advice. “Take out a piece of white paper and start writing down all the worst possible things that come to your mind. Write everything down: you’ll become severely handicapped, you’ll never get another job because the pension pricks are blacklisting you and sending you nasty legal letters, the mob is looking for you, no woman will ever want you and you’ll never get laid again for the rest of your life. Write down every terrible thing that comes to your mind.”
So I did it. Then I asked him what am I suppose to do with this sheet containing all these terrible thoughts of mine? He told me to put it away and look at it after a year has gone by. I asked him “how’s that suppose to help me?” He replied: “Because when you look at it after a year, you’ll laugh at how silly your thoughts were.” And then he told me something else which I’ll never forget: “You don’t see it now, but with this blog, you have tremendous leverage and the pension pricks are scared of you. Use this leverage to your advantage and write your own ticket in life.”And that’s exactly what I’ve been doing ever since. I’ve toned it down, remaining as professional as possible, but I continue to blog on pensions and financial markets.
Now let me get to my topic, the value of losing money. During a recent lunch with my former boss at PSP, Pierre Malo, we talked about what we value most in life. In our previous lunch, Pierre and I discussed process over performance. In a nutshell, we believe that too much attention is being paid to performance and not enough to process. The way investment managers achieve their performance is a lot more important than overall performance and yet very few institutional investors pay close attention to process until it’s too late.
Pierre also talked about luck in investment management. I used to go into his office every morning and ask him “where is the US dollar going today? What about the euro or CAD?”. He would take out a coin from his pocket and say “you tell me”. He doesn’t believe in short-term market predictions. He told me over lunch, “Anyone can be lucky, even over a long period, but that doesn’t make them a good money manager. And the worst thing that can happen to anyone is start making a lot of money off the bat”.
I then shared a personal investing story with him. After I got fired from BCA Research (alas, I’ve been fired a few times but always managed to land on my feet!), I started day trading stocks, focusing on tech stocks (1999). I was also buying out-of-the-money call options on these tech stocks and making good money. I then joined the National Bank Financial as an economist but continued trading options. I wanted to get rich quick and retire early.
I then learned firsthand the value of losing money. I bought cheap out-of-the-money call options on Nortel’s stock the day they were reporting earnings. I laid down $10,000 of my money, which was a substantial amount of my portfolio back then, and waited for the earnings release after the closing bell, confidently predicting that Nortel was going to kill the estimates and the stock would fly higher. I was expecting windfall gains on those call options.
But that earnings release was a disaster and from there on, the rest is history. Nortel took me, and hundred of thousands of other small and large investors to the cleaners. I never forgot the pain of losing that money, essentially gambling it away. I had no clue whatsoever what I was doing. It took me years after that debacle to learn how to trade properly and I’m still learning every single day. I now avoid options preferring to buy and hold a concentrated portfolio of stocks. I prefer focus on a few eggs than a diversified portfolio of eggs (read my comment on the big secret).
In my follow-up comment, I will discuss how I invest my money, using publicly available information on what elite hedge funds are doing and other information. We are all in the information arbitrage business, and it’s how we use this information that will enable us to limit our losses and allow us to make money in these crazy markets dominated by macro events, high frequency trading and large hedge funds.
The point of this comment was to let you know that there is value in losing money. Even the best hedge funds lose money but the top funds will adjust and learn from their mistakes. That’s exactly what each and everyone of us should be doing. Finally, please note I corrected my donation button at the top right hand side of my blog, right under the pig, so it should be easier to donate via your bank or credit card. I appreciate all donations and plan on earning my money one donation at a time.
Tags: BRIC, Brick Wall, Charlie Rose, Cnn, Concussions, Dr Joseph, Dr Sanjay Gupta, George Soros, Hounds, House Judiciary Committee, Inadequate Research, London School Of Economics, Neurosurgeon, Personal Hell, Physical Health, Pittsburgh Medical Center, Pittsburgh Steelers, Policy Committee, Sanjay Gupta, Team Physician, University Of Pittsburgh Medical Center
Posted in Emerging Markets, Markets | Comments Off
Monday, May 9th, 2011
Jim “BRIC” O’Neill predicts the opposite of everything his other colleagues at Goldman anticipate. Indeed, in his latest note, the BRICster not only directly contradicts David Greely’s latest note that the long-term prospects for commodities are strong as ever by saying that “This suggests to me that commodity prices could weaken further.” (for what “this” is, read the note). As for Thomas Stolper’s soon to be stopped out prediction of a EURUSD hitting 1.50, O’Neill has some contrarian cold water for that too: “In my book, even with the likelihood that the Fed will remain friendly post QE2 termination, the Euro belongs in a 1.20-1.40 range.” So there you have it: one firm, an infinite number of outlooks.
From Jim O’Neill.
Can Equities Rally Without Commodities?
What a week! In last weekend’s Viewpoint, in addition to highlighting the historical tendencies of markets in May, I suggested that commodity price strength didn’t make much sense to me. One week later, after the stunning correction to many commodities, I am struggling to get my head around the question: why does commodity price weakness go hand in hand with equity weakness? Put another way, if equities are to develop another leg to the rally that has been taking place since 2009, it will probably have to be led by something other than commodities.
ECONOMICS, EQUITY AND COMMODITY MARKETS.
There was a day when commodities, as an asset class, were seen as an alternative to both fixed income and equities. I know that many of my colleagues from various parts of the GS family can statistically prove that this remains the case. However, at times during the past decade, it has seemed that commodity prices have been a “bellwether” about the world. Furthermore, strength in commodity prices has been related to strength in many equity markets (as well as a major influence on some other markets such as some currencies).
From an economic perspective, at its most basic level, the price of any commodity is determined by its supply and demand and expectations about both. An increase in the price of a commodity can happen because of a rise in demand relative to supply, or a decline in supply, or some combination of both. In the years before the global credit crunch, it was often perceived that commodity prices were rising because of very strong global growth and limited supplies. Post credit crunch, the same general mood has prevailed.
Linked to this thesis, application of the GS long term 2050 growth projections and the potential rise of the BRIC economies suggest a general environment of very strong demand for commodities relative to supply. The GS Economics, Commodities and Strategy (ECS) department have published a number of articles to show this. In particular, Global Paper Number 118, October 12th, 2004; Crude, Cars and Capital, authored by D. Wilson, R. Purushothaman and T. Fiotakis applied the original 2050 projections to the crude oil markets, and one of its conclusions was that there was likely to be a major supply and demand imbalance between 2005 and 2020.
Many market themes that have played out over recent years often relate to the basic tenet of this paper. Simply stated, Mr. Market seems to regard strength of commodity prices as a symbol of world economic strength, and weakness of commodity prices as a symbol of economic weakness.
THINGS ARE CHANGING?
Many market participants appear to have forgotten the days of the 1980’s and 1990’s where economic strength was not symbolized through rising commodity prices. During that time, we had two decades of declining commodity prices and, while there were periods of recession, we experienced two decades of global economic expansion. Could such days ever return?
Over the past 12 months, three different economic issues have developed in my mind that lead me to wonder whether things might be changing.
First, as commodity prices recovered sharply post the global credit crisis, headline inflation has, in turn, risen in many countries. And, in those less wealthy nations, including many of the Growth Market and emerging countries, rising commodity prices are a real challenge. In some developed economies that were most challenged after the credit crisis, rising commodity prices are quite a burden for those societies too. A feeling of unsustainability about this has been going through my mind for much of this year.
At a minimum, we are likely to encounter more mini periods of volatility, where rising commodity prices, food and energy in particular, choke off some economic activity as consumers and business adjust to the higher costs. In countries where overall inflation rises more because of these rising prices and central banks tighten monetary policy, subsequent tightening financial conditions will slow down growth and probably lessen their contribution to the demand for the commodities in the first place. It appears as though we might be going through such a period right now.
Suddenly, economic data in many economies has disappointed, and while there could be a number of explanations, it seems quite feasible that the degree of increase in energy and food prices might be a guilty culprit.
Second, and linked to the first point, as I mentioned last week, the role of China in particular is key. GS has a proprietary GDP indicator for China called the GSCA, the GS China Activity indicator. In recent years, it has had a very good relationship with commodity prices, presumably signaling the critical role that Chinese demand plays in the commodity markets. In recent months, the GSCA has slowed a lot, and yet, commodity prices – at least until the past week – hadn’t. This suggests to me that commodity prices could weaken further.
More broadly, softening in key global leading indicators following the release of many May PMI and ISM indices would suggest the same trend.
Third, bringing it back to China, and getting really specific to energy and oil in particular, China’s long term economic planning is increasingly based on a world different from the one modeled by ourselves in 2004. If you reanalyze global oil demand assuming that China will deliver on the energy consumption plans it has unveiled as part of its latest 5-year plan, their oil demand will not grow even close to the magnitude shown in Dominic and team’s 2004 paper. Indeed, Anna Stupnytska and I showed in another paper, Global Paper Number 192, The Long Term Outlook for the BRICs and N11 Post Crisis, December 2009, if you substitute the Chinese plans into the same equations as the 2004 paper, 2050 global oil demand would be 20 pct less.
If I think about all three of these things together, what happened in commodity markets last week was not surprising at all, and more weakness in the near term wouldn’t be that surprising either.
MARKETS NEED TO BEHAVE FOR THEIR OWN DETERMINANTS.
As this relates to other markets, it doesn’t necessarily follow that any additional weakness in commodity prices will translate into more equity market weakness, except in the obvious cases where commodity companies are a major market component. It certainly shouldn’t follow that correlated risk reduction on the back of commodity price declines should have lasting consequences for other market prices, for example additional Yen strength. This would seem somewhat ludicrous and, if needed, I suspect G7 policymakers may have to act again.
As it relates to the directional trend of equity markets, however, the last week’s events do draw me to a conclusion that if equities are to develop another leg into higher prices, it probably won’t be sustained if it is simply the result of commodity prices recovering. If commodity prices go straight back up, it will add renewed pressure to headline consumer prices in China and elsewhere, probably resulting in additional monetary tightening.
If commodity prices don’t move back up, one of the beneficial consequences is that it will make it probable that a number of central banks won’t need to tighten as much as otherwise, possibly not at all, including China and maybe also the ECB. It is interesting that ECB President Trichet didn’t utter the magical phrase “strong vigilance “at this week’s press conference.
Can equity markets rally without leadership of commodity companies and prices? Of course they can, but I shall leave the sectors most likely to all of you to ponder.
There is one other topic that I need to touch upon. After already showing a big response to Trichet’s less hawkish stance than expected, the Euro took another hit late Friday as rumours circulated of a special meeting to discuss Greece and a possible debt restructuring and even talk of them exiting the Euro. Not surprisingly, these rumours were denied but, despite this, the Euro ended close to its lows for the week, having given back 6 big figures of its latest strength. I am not overly surprised by this Euro decline either, as the case for the ECB tightening further has just been weakened. And, it continues to seem to me that some risk premia is warranted, as Europe’s leaders struggle to come to grips with the immense challenges of creating a more credible and successful European Monetary Union. In my book, even with the likelihood that the Fed will remain friendly post QE2 termination, the Euro belongs in a 1.20-1.40 range.
THE BEAUTIFUL GAME.
Actually there is one other topic too, my usual favourite. May 28th will now see arguably the two best European football clubs slugging it out again when Manchester United meets Barcelona at Wembley. What an evening in prospect and what a build-up the next 3 weeks will be. Will it attract as many viewers as the Royal Wedding? Apologies to all those of you asking me for help with tickets, it is exceptionally difficult.
Chairman, Goldman Sachs Asset Management
Tags: asset class, Bellwether, BRIC, Cold Water, Commodities, Commodity Markets, Commodity Price, Commodity Prices, Crude Oil, David Greely, Economic Perspective, Eurusd, Fixed Income, Gold, Goldman, Infinite Number, O Neill, Outlooks, Price Strength, Stolper, Term Prospects, Viewpoint
Posted in Emerging Markets, Markets, Oil and Gas | Comments Off
Tuesday, May 3rd, 2011
by Jeffrey Saut, Chief Investment Strategist, Raymond James
May 2, 2011
“Recently I came upon a fascinating study by Richard Wiseman, a psychologist at the University of Hertfordshire. Wiseman surveyed a number of people and, through a series of questionnaires and interviews, determined which of them considered themselves lucky – or unlucky. He then performed an intriguing experiment: He gave both the ‘lucky’ and the ‘unlucky’ people a newspaper and asked them to look through it and tell him how many photographs were inside. He found that on average the unlucky people took two minutes to count all the photographs, whereas the lucky ones determined the number in a few seconds. How could the ‘lucky’ people do this? Because they found a message on the second page that read, ‘Stop counting. There are 43 photographs in this newspaper.’ So why didn’t the unlucky people see it? Because they were so intent on counting all the photographs that they missed the message. Wiseman noted, ‘Unlucky people miss chance opportunities because they are too focused on looking for something else. They go to parties intent on finding their perfect partner, and so miss opportunities to make good friends. They look through the newspaper determined to find certain job advertisements and, as a result, miss other types of jobs. Lucky people are more relaxed and open, and therefore see what is there, rather than just what they are looking for.”
… Excerpted from Ten Steps Ahead by Erik Calonius
Yogi Berra once exclaimed, “You can observe a lot by just watching.” Said quote reminds me of a conversation with my son. I was sitting at my desk looking at a chart of the stock market and shaking my head while muttering, “I don’t understand if it’s going to go up, or going to go down?” Hearing the frustration my six-year old son wandered over, looked at the chart, and said, “It looks like it’s going up to me dad!” Out of the mouths of “babes,” for that was in January 1986 after the DJIA had nearly doubled from its August 1982 nadir of 770 to the then “high” price of 1515. Sure enough it was indeed “going up,” for over the next 19 months the Dow would nearly double again, peaking in August at 2728 and proceeding to churn into October, setting the stage for the 1987 Crash. Our son is now in his twenties and just graduated from the University of Michigan, yet the simple observation of an data-unencumbered six-year old is still relevant, “It looks like it’s going up to me dad!”
Fast forward, since last June my unencumbered observation has been, “You can get cautious from time to time, but don’t get bearish.” That mantra has served us well, especial since last September, because beginning on September 1, 2010 the senior index has not experienced anything more than a one- to three-session pause/pullback making today the 174th session in its upside skein. Such a stampede is unprecedented in my notes of over 40 years. Still, “It looks like it’s going up to me.” As scribed in last week’s report:
“The bad news is that the S&P 500’s (SPX/1363.61) rally from last Monday’s sovereign debt drubbing downgrade has used up some of the stock market’s short-term energy, implying another pause/pullback may be due. The good news is the market’s intermediate and long-term internal energy readings remain almost fully charged and hence any pullback should be contained in the 1315 – 1320 zone.”
I concluded by noting:
“To be sure I am bullish, and while I didn’t think the 7% decline from February into mid-March was ‘it’ at the time, I was indeed buying stocks and conceded two weeks after the March 16th ‘low’ that the intra-day ‘print’ of the S&P 500 at 1249 was likely ‘the low.’ Moreover, for the past few weeks I have suggested all the equity markets were doing was rebuilding their internal energy for another upside ‘leg’ that would break the SPX out above its February intra-day high of 1344.”
Bingo, for last week the SPX leaped above that previous reaction high (1344), leaving the index up ~2% for the week. Moreover, the D-J Industrial Average (INDU/12810.54) recorded yet another Dow Theory “buy signal” as the D-J Transportation Average (TRAN/5514.87) surged to new all-time “highs” confirmed by the Industrial’s rally to a new reaction high. It was the third Dow Theory “buy signal” of the past 10 months and reconfirms that the direction of the senior index is “up.” Nevertheless, certain negative nabobs are chanting that with the SPX up more than 100% in roughly two years it is defying all odds and is due for a crash. We don’t think so and would note the current “bull run” is actually pretty typical. As my friends at the invaluable Bespoke Investment Group write:
“In the chart (found here on p. 3) we compare the current bull market to the 25 prior S&P 500 bull markets since 1928. With a gain of about 101% in a little more than two years (781 days), the current bull market ranks right near the middle in terms of duration (11th) and performance (9th). Not including the current period, the average bull market has seen a gain of 101.6% over a period of 890 calendar days. You can’t get much more average than that.”
So what’s driving stocks higher? Well, for the last two years we have opined the economy was in a “profit recovery” whereby profits explode, which fosters an inventory rebuild and then a capital expenditure cycle. Once the capex cycle commences, companies begin to hire workers and consumption improves. That’s the way the world works and we don’t see why it doesn’t play that way this time provided crude oil behaves. Manifestly, profits have surged, and continue to do so, with 73.8% of the companies that have reported 1Q11 earnings beating analysts’ estimates while two-thirds (66.4%) have exceeded revenue estimates. And for those thinking the economic momentum is waning, consider that the inventory to sales ratio is below where it was at the depths of the recession and is therefore in position for another inventory rebuild. If so, the economic numbers going forward should strengthen.
As for the here and now, last week Buying Power strengthened and Selling Pressure contracted; and while the Buying Power Index has yet to tag a new reaction high, it is not far away. Accordingly, while the equity markets can certainly pause/pullback, our sense is any such counter-trend move should be brief and shallow as underinvested portfolio managers scramble to keep up with the Joneses . . . the Dow Joneses. In last week’s missive we questioned that if the University of Texas endowment fund’s 21.8% exposure to equities was anywhere close to being representative of all endowment funds, what would happen if there was shift in asset allocations towards more equity exposure? Asked and answered we reasoned, “To the moon in June!” And that is the way we are playing it as we expect on/off strength into June followed by the first potential downside vulnerability as participants worry about the end of Quantitative Easing.
Hence, our strategy is the same one we proffered last week. To wit, keep accumulating stocks with favorable risk versus reward metrics. In the past I have suggested names like The Williams Companies (WMB/$33.17/Outperform), EV Energy Partners L.P. (EVEP/$58.89/Outperform), LINN Energy (LINE/$40.38/Strong Buy), IBERIABANK Corporation (IBKC/$60.01/Strong Buy), Clayton Williams Energy (CWEI/$90.57/ Outperform), Hewlett Packard (HPQ/$40.37/Strong Buy), NII Holdings (NIHD/$41.61/Strong Buy), Teekay LNG Partners (TGP/$37.92/ Strong Buy), Stanley Furniture (STLY/$5.64/Strong Buy), and Peoples United Financial (PBCT/$13.70/Strong Buy), and Hospira (HSP/$56.73/Strong Buy), to name but a few of the companies rated positively by our fundamental analysts and mentioned in these letters recently.
The call for this week: Since February 18th most sectors have experienced decent gains with Healthcare showing the best at +7.8%. Only Technology and Financials have had negative returns, -2.0% and -4.6%, respectively. We think that if the rally extends these two sectors should play “catch up.” Despite the recent stock surge, however, investor sentiment remains putrid at 37.9% bulls, as can be seen in the second chart on page 3. This contrarian indicator, combined with the aforementioned underinvested portfolio managers, keeps us walking on the sunny side of the street. And as I said last week, for those timid souls afraid to buy stocks, I spent hours with the folks at Goldman Sachs a week ago and became extremely comfortable with Goldman Sachs’ Dynamic Allocation Fund (GDAFX/$11.23). The fund tends to smooth out the stock market’s volatility (by about half), yet delivers almost the same returns as its more volatile competitors. For further information, please contact our Mutual Fund Department. This morning, however, the S&P 500 futures are sharply higher as the “Wicked Witch of the East” literally had the house fall on him, so follow the yellow brick road …
P.S. – I am still traveling and will be speaking at Raymond James’ National Conference, so other than this missive these are the last comments for the week.
Copyright © Raymond James
Tags: Advertisements, BRIC, Chief Investment Strategist, Crude Oil, Dad, Desk, Frustration, Gold, Good Friends, jeffrey saut, Lucky Ones, Mouths Of Babes, People, Perfect Partner, Photographs, Psychologist, Questionnaires, Raymond James, Richard Wiseman, Stock Market, Two Minutes, Types Of Jobs, Yogi Berra
Posted in Emerging Markets, Markets, Oil and Gas | Comments Off
Sunday, April 24th, 2011
Emerging Markets Cheat Sheet (April 25, 2011)
- China has announced this week that it raised the minimum income tax threshold to Rmb 3000/month from Rmb 2002/month. This change is expected to help boost consumer spending. It will also help increase purchasing power in the wake of rising food prices.
- According to news website Hexun.com, Zhou Wangjun, a deputy director of NDRC’s pricing department, has said China’s average wages will grow 15 percent annually in the five years through 2015. Wage increases will help China to become a consumption country.
- The China State Council met on Wednesday to discuss fine points of reforms in relation to interest rate liberalization and a natural resources tax. Also in the meeting, China’s premier Wen Jiabao announced an additional $2.8 billion will be invested to improve shantytowns as part of a social housing program.
- China telecom carriers have increased their capital expenditures for 2011. Total capital expenditure budgets are Rmb 132.4 billion, 74.8 billion and 50 billion for China Mobile, China Unicom and China Telecom, respectively. We expect telecom, 3G and 4G equipment providers and installation service companies to greatly grow their revenue and profits again this year.
- Both Korea and Japan financial authorities stood up to support U.S. Treasuries after S&P placed a negative outlook on the U.S. debt rating.
- Argentina’s industrial production grew by 8.5 percent during March.
- The Polish zloty had its strongest gain in two months after the Polish government said it would use some 14 billion euros it expects to receive from the European Union this year to buy the currency in order to reduce the need for higher interest rates.
- Over the week, the People’s Bank of China (PBOC) has raised the bank’s required reserve rate (RRR) another 50 basis points. The RRR is now 20.5 percent for large banks in China. The RRR is not expected to impact the banks on the liquidity they need for lending since the hike is basically used to withhold the proceeds of matured PBOC notes in April. However, authorities in the PBOC have said China still has room to raise RRR further. The Asian stock markets have shrugged off the news.
- The Korean National Assembly has passed a bill to levy a capital tax on foreign currency liabilities on banks’ balance sheets at a rate of 0.2 percent.
- Shares of America Movil (AMX) have been under pressure following the telecom regulator’s ruling that the company had engaged in monopolistic practices and imposing a $1 billion fine on the company. Market participants expect AMX to challenge this ruling in courts and the issue may not be resolved for years to come.
- Real labor productivity in Eastern Europe still lags that of workers in Western Europe by a significant margin, according to a report from the World Bank.
- Xia Bin, a monetary advisor to the PBOC, has recently suggested that RMB could be revalued to its fair value by one move. Directionally, RMB has been appreciating faster recently.
- An appreciating RMB is a facilitator to Chinese outbound tourism. See the chart below showing increasing outbound spending by Chinese tourists. In 2010, Chinese tourists spent $55 billion overseas. This could rise to $190 billion by 2015. We have seen tourism-related companies perform well. Macau’s March visitor arrivals from China have increased 18 percent. We expect hotels and entertainment in Macau and Hong Kong to capture a large share of the booming outbound China tourism.
- Cuba has introduced a series of economic reforms that include elimination of various state subsidies and allowing citizens to buy and sell real estate. We believe it is likely that the country will gradually gravitate towards the Chinese economic model that will see the growth of private enterprises with a guiding hand of the state.
- The World Bank has predicted that Polish GDP will grow by 4 percent this year and by 4.2 percent next year, making it one of Europe’s growth engines. Romania is expected to lead the pack in 2012 with 4.4 percent growth. Slovakia is also expected to see strong growth at 4.3 percent in 2012. “The performance of Slovakia and Poland is set to remain solid thanks to low pre-crisis imbalances, deep integration into European production networks, EU funds, and, in the case of Poland, solid consumption,” according to the World Bank.
- Rumor has it that some hedge funds have gathered in Hong Kong ready to short China’s real estate bubble and inflationary asset price in general, expecting that China’s flying economy will experience a hard landing. However, China’s central bank governor Zhou Xiaochun, while giving a speech at Qinghua University this week, said that short plans cannot be implemented simply because China’s capital market has a firewall to insulate speculation.
- Market participants will nervously await the first opinion poll on April 24 in the presidential race in Peru between Keiko Fujimori and Ollanta Humala.
- Armenia’s nuclear power plant is operating the first generation Soviet reactors (built without containment vessels) well past their retirement age and lies on some of the world’s most earthquake prone terrain, according to National Geographic. The combination of design and location make the facility a danger to the entire region.
Tags: Average Wages, Bank Of China, Capital Expenditures, China Mobile, China Telecom, China Unicom, Equipment Providers, Financial Authorities, Income Tax Threshold, Interest Rate Liberalization, Meeting China, Negative Outlook, Pboc, Polish Government, Polish Zloty, Premier Wen Jiabao, Rmb 2002, S Industrial, Shantytowns, Telecom Carriers
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Monday, April 18th, 2011
Gangs of New York
by Jeffrey Saut, Chief Investment Strategist, Raymond James
April 18, 2011
“The appearance of law must be upheld, especially when it’s being broken”
… Boss Tweed, Gangs of New York
I love New York City! In fact, I wish I would have stayed there rather than moving to Atlanta in the early 1970s. Still, as I walked from the airplane into the terminal last Monday, I got the feeling I was traveling back in time since La Guardia is in need of a “refresh.” Proceeding to the taxi stand was likewise anachronistic as certain parts of my taxi were being held together with duck tape. Be that as it may, the trek into “the city” began. During the journey I preceded over potholed streets, decaying bridges, a tunnel that reminded me of my youth, and dead-zones that dropped numerous phone calls begging the question – What happened to those promised “shovel-ready” projects?! All in all, I felt like I was in a third-world country, not the greatest city in the world. Contrast that experience with Singapore’s Changi Airport. One arrives at arguably the best airport in the world, with over 80 airlines serving more than 180 cities. Despite the fact the airport has been open since 1981, it remains a benchmark for service excellence having won over 280 awards. Travel to and from the airport is modern and efficient, both by road and rail. Indeed, there are no potholed roads, no old taxis, no decrepit trains, no “dropped” phone calls … well, you get the idea.
Nonetheless, last Monday began with visits to a couple of hedge funds. At noon I arrived at Yahoo’s new TV studio to do a segment on “Breakout” with my friends Jeff Macke and Matt Nesto. From there, it was off to see some portfolio managers (PMs) before the next media “hit” at Fox Business with another friend, Brian Sullivan. While I am kindred spirits with these media anchors, by far the highlight of last Monday was dinner with President Bill Clinton.
The President opined, “I like living in the 21st century.” He talked about technological breakthroughs like those from the TRIUMF Cyclotron, which may offer clues on how “matter” holds together. He also was pretty excited about genome research since it is offering insights on healthcare issues, and, potentially, ways to prevent serious illnesses. Climate issues were on his mind, along with water and topsoil (if that sounds familiar, it should since I have been talking, and investing, in those themes for decades). In fact, the President actually commented, “Only two countries in the world have 20 feet of topsoil remaining – Brazil and Argentina.” From there the topic shifted to the U.S. and the various “systems” that make our country what it is (law, courts, government, food, shelter, education, etc.). The President suggested those systems have become problematic because our leaders want to hold on to their power; therefore, they don’t want the “systems” to change. Yet systems need to evolve to stay great, just as great companies stay great by evolving into becoming young again. He continued, “You need a strong economy to empower change; and there is too little discussion on how we propose to do that given the country’s budgetary constraints.” He concluded with the question, “How do you propose to do whatever you are talking about?!”
Next, he focused on the world. To wit, “Unless we find a way to ameliorate the world’s ‘poor people,’ it is going to affect our country.” “There is too much inequality in the world,” he said, “with half of the world’s population living on less than $2 per day.” Moreover, the world’s population is growing faster than the ability to deal with that growth. Hereto, feeding that growing population is another theme we have harped on for years. The President believes that the systems of wealthy countries need to be built in the world’s “poor places” to effect economic change. He also stated, “Giving woman access to jobs has always lowered the birth rate because it delays marriage.” This, he thinks, would help slow the burgeoning population growth. All said, he was upbeat about the world’s prospects, believing the positives versus the negatives currently net out to the positive side of the equation. “To be sure,” he maintained, “a certain amount of instability is a good thing because it fosters creativity, but too much uncertainty is a bad thing.”
The President closed by noting, “The current budget debate is really a food fight begging the question – what type of country do you want?” Manifestly, people have to believe that they can shape their own future; and on that point, the environment is questionable. He avers we have two Americas living in a parallel universe with political views being argued abundantly about the nation’s issues rather than the facts. His “call to arms” – “Many of you are in a position to answer the HOW question; and, the world manifestly needs you to answer that question!”
After reflecting on the former President’s words overnight, I spent a few hours Tuesday morning listening to Goldman Sachs Asset Management’s (GSAM) Jim O’Neill, who coined the acronym BRIC (Brazil, Russia, India, and China) some six years ago. Over that timeframe the BRIC’s equity markets have returned a stunning 817%. Recently, Jim has invented another acronym, the “Next 11” or N-11 (Bangladesh, Egypt, Indonesia, Iran, Mexico, Nigeria, Pakistan, Philippines, South Korea, and Vietnam), which GSAM believes have the potential, combined with the BRICs, to become the world’s largest economies in the 21st century. Obviously, that strategy “foots” with me since I have been talking about it ever since China joined the World Trade Organization in 1Q01. Importantly, Jim thinks, and I agree, that the BRICs and N-11 countries will be able to compensate for any sluggishness in the U.S. Additionally, Jim hinted that China has engineered a “soft landing,” although he does think China’s growth may disappoint this year because its government wants to slow the economy to provide more solid, long-term, growth. These are not unimportant points, for Jim O’Neil’s comments, when combined with President Clinton’s, have formed many of the strategies we have employed to “bend” portfolios over the past 10 years. We continue to embrace these themes and advise tilting portfolios accordingly.
The balance of last week was spent doing more media, conversing with my New York-based “gang” and seeing various money management “gangs.” In such meetings, after a brief top-down overview of the economy, interest rates, inflation, the equity markets, etc., the conversation turned toward individual stocks. At a number of accounts it was interesting to find that Williams Companies (WMB/$31.05/Outperform), a name we have continuously recommended, was heavily owned by the institutions we were seeing. It will also be interesting to see what happens when Williams’ offering documents, discussing that company’s pending spinoff, are released, giving investors the ability to value the embedded “options” within the two companies. Our sense is said documents will permit participants to more accurately value those “options” with an attendant “hop” in WMB’s share price. We also got traction with the Utica Shale Gas story, and its positive impact for 5.4% yielding EV Energy Partners (EVEP/$54.56/Outperform) given the potentially undervalued embedded “option” of EVEP’s 230,000 acres in that Utica resource.
Two other ideas we discussed with PMs last week, concurrent with the recent rotation into healthcare, were Covidien (COV/$53.80/Strong Buy) and Hospira. Covidien’s story has these drivers: 1) a shifting business mix toward higher margin med-devices (vascular products in particular); 2) recent FDA approval for “Pipeline Embolization Device” (PED) for treatment of brain aneurisms with approval coming two months early, providing upside to FY2012 numbers; and, giving us expectations of accelerating revenue growth and margin expansion. As for Hospira (HSP/$56.00/Outperform), it is a specialty generic pharma and medical device company. The macro story includes an industry-wide shift to generic drugs, an approval of Taxotere (breast/prostate cancer drug) two weeks earlier than expected, and the belief that “biosimilars” (like generics, but not exact chemical copies) will be as accepted here as they are in Europe. That combination leaves HSP trading at 13x 2012 estimates, in line with its peers, but below its historical average of ~14.5x. We expect mid single-digit revenue growth, yet mid-teens EPS growth, which leaves the shares undervalued.
The call for this week: I began this missive with a quote from the movie “Gangs of New York” that reads, “The appearance of law must be upheld, especially when it’s being broken.” I recalled that quip sparked by a remark from a particularly bright fellow last week who opined, “Only when the American people insist that sound business practices, and moral standards, be brought back will we be able to give the people of this country a future.” Unfortunately, as President Clinton averred at the U.N., “Political views (are) being argued about the nation’s issues rather than the facts.” The result seems to have left our government in stalemate mode. Similarly, the equity markets seem to be in stalemate mode recently as since the February 18th peak there has been not much desire to either Buy or Sell. This is confirmed by the Lowry’s organization, whose Buying Power Index has dropped by a mere 42 points, while Lowry’s Selling Pressure Index has risen by a paltry 16 points! To us, all the equity market appears to be doing is recharging its internal energy to garner enough power to burst above the February 18, 2011, intraday high of 1344. Last week was just another step in that direction for when the S&P 500 (SPX/1319.68) violated the 1320 – 1325 trading “fail safe” zone, it quickly traded down to ~1303, which was the 38.2% retracement of the recent rally mentioned in last Monday’s letter, before rallying into Friday’s close. All of which brings us to this week where we sense the weakness is likely to linger into mid-week before the internal energy is fully recharged for another leg to the upside.
Copyright © Raymond James
Tags: Begging The Question, Boss Tweed, Brazil, Brian Sullivan, BRIC, BRICs, Changi Airport, Chief Investment Strategist, Duck Tape, Friend Brian, Gangs Of New York, Gold, India, Jeff Macke, jeffrey saut, Kindred Spirits, Last Monday, Portfolio Managers, Potholed Streets, President Bill Clinton, Ready Projects, Service Excellence, Taxi Stand, Third World Country, Traveling Back In Time
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Friday, April 15th, 2011
by Bob Van Der Valk, via EconMatters
This year is an instant replay of 2008 with the average price of regular gasoline in the US expected to reach $4 per gallon in the next month. Californians have already surpassed that mark and are heading for $4.50 per gallon by Memorial Day.
On Monday, April 11, Jeffrey Currie, the global head of commodities at Goldman Sachs (GS), told his clients that rising demand from emerging market players earlier this year had been overtaken by a supply shock driven by the MENA (Middle East and North Africa) unrest.
“That has had the effect of introducing more downside risk into the trade, particularly given record levels of speculative longs (trading) in crude,”
In other words, he advised them to sell – sell – sell WTI (West Texas Intermediate) crude oil and investors, like lemmings, followed him off the cliff. The WTI crude oil price reacted by immediately dropping almost $6 a barrel, or 5.8%, in two days.
However, the price of crude oil is not based purely on supply and demand and has a speculative element built into it, which is once again being heavily influenced by money flows from the big hedge funds such as Goldman Sachs (GS) and Morgan Stanley (MS). In other words, Jeffrey Currie pulled a head fake and his investors have been willing to go along with him.
Lloyd Blankfein, the CEO of GS, made his now infamous remark to the Sunday Times of London on November 8, 2009, saying: “Investment bankers are just doing God’s work”.
Today the MENA unrest has caused increases in crude oil prices and investment banks are taking advantage of the opportunity to make huge profits. In any other times, this would have been called war profiteering, but now it is considered business as usual with Gordon Gekko’s motto “greed is good” back in vogue.
WTI is being used as the short leg of a spread involving funds playing off the MENA unrest. Investors are going long on Brent and shorting WTI then moving in and out of that spread whenever economic data is released in the US.
The chart below indicates we now have a significant disconnect between WTI and Brent futures in recent months. The black line shows the New York Mercantile Exchange (NYMEX) WTI and the red line shows the ICE Brent front month futures with the green line showing the basis (difference) between the two:
|Chart Source – Mercatus Energy Advisors|
Brent has thereby become more indicative of the world crude oil price and the price direction for U.S. gasoline prices.
The following chart produced by Doug Short shows the differential between WTI crude oil and the average price of gasoline for the last 10 years:
There are good reasons for the WTI prices to take a big plunge in the next few weeks with crude oil inventories at Cushing at an all time high. The direct connection to supply and demand was lost after paper traders took over managing those inventories at the Cushing, Oklahoma hub.
On Wednesday, April 13, the benchmark WTI crude oil price closed up 86 cents at $107.11 a barrel on the NYMEX after dropping 3.3% on Tuesday. The Brent crude oil for May delivery also went up to near $123 a barrel on Intercontinental Exchange (ICE) in London.
Goldman Sachs (GS) has enough investors following their advice to be able to control the ups and down of crude oil. Meanwhile, the Organization of Petroleum Exporting Countries (OPEC) said higher prices have begun to chip away at fuel consumption, but did not call for an emergency meeting to address the situation.
President Obama could soon make another call for a windfall profits tax on major oil companies, which could bring in nearly a billion dollars a day for the US Treasury. He called for just such a tax during his campaign in 2008 at the height of the last speculative run up in gasoline prices.
In the end, the additional cost of crude oil comes out of the consumers pockets. The high gasoline prices are costing the U.S. consumers $360 million per day more versus the price paid last year at the pump.
About The Author – Bob van der Valk lives in Terry, Montana and is a Petroleum Industry Analyst with over 50 years of experience in the petroleum, gasoline and lubricants industry. He has often been quoted by news media and his opinions are also solicited by government entities in addition to his daily business of managing large scale supply and marketing operations.
The views and opinions expressed herein are the author’s own and do not necessarily reflect those of EconMatters.
Tags: BRIC, BRICs, Commodities, Crude Oil, Crude Oil Price, Crude Oil Prices, Downside Risk, Gasoline Prices, Global Head, Gold, Goldman Sachs, Gordon Gekko, Instant Replay, Investment Banks, Money Flows, Morgan Stanley, oil, Price Of Crude Oil, Sachs Gs, Short Leg, Sunday Times Of London, Supply Shock, Times Of London, Van Der Valk, Wti Crude Oil, Wti Crude Oil Price
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Friday, April 15th, 2011
This week, the International Association of Public Transport (IAPT) World Congress held its 59th annual conference in Dubai. Two thousand delegates from 80 countries around the world attended the four-day event. In between their meetings, delegates took rides on the city's public transportation, including the longest driverless metro line in the world, completed less than two years ago.
Long known as a city dependent on its cars for convenient and comfortable travel, Dubai has been ramping up its infrastructure to relieve increasing traffic congestion driven by urbanization. Car traffic is forecasted to increase four times by 2020 as the population jumps from 1.2 million people in 2005 to more than 5 million by 2020.
To realize its vision of “Safe and Smooth Transport for All,” Dubai’s Roads and Transport Authority (RTA) has been fervently working on projects that cover several different modes of transport. These include 166 miles of metro lines, 268 new tram lines, 90 bus routes with 2,000 buses and 5 new waterways covering 130 miles with 67 water taxis.
Dubai is only one of several areas focused on these projects. The RTA Executive Director estimates that countries in the Middle East would most likely invest $80 billion in the public transport system over the next 10 years. A special report produced by the Financial Times highlights the progression of these projects. Across Saudi Arabia, Qatar and United Arab Emirates, numerous rail commuter and long-distance links are under construction or projected to be underway soon.
One high-speed rail project, the Mecca-Medina line, highlights a unique travel need in the region. To fulfill the requirements of the hajj, Muslims are expected to make the hajj pilgrimage to Mecca, the sacred city of Islam, at least once in their lifetime. And millions do.
Known as the largest annual gathering of people in the world, during the last month of the Islamic year, 2-to-3 million believers make the pilgrimage every year. Last November marked the first time that a metro light rail transported those making the journey at an estimated 199 miles per hour.
It will be interesting to see these exciting projects develop over the next several years. Between the urban areas of already crowded cities, to the spread-out, low-density regions across the desert, the pace of growth demands the infrastructure to support “safe and smooth” public transportation for local residents and visitors around the world.
Tags: Apos S, Car Traffic, Countries In The Middle East, Hajj Pilgrimage, High Speed Rail, High Speed Rail Project, Increasing Traffic, Infrastructure, Metro Line, Metro Lines, Modes Of Transport, Pilgrimage To Mecca, Public Transport System, Rail Commuter, Roads And Transport Authority, Sacred City, Traffic Congestion, Tram Lines, Travel Dubai, United Arab Emirates, Water Taxis
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