Posts Tagged ‘Mergers And Acquisitions’

Energy and Natural Resources Market Radar (June 11, 2012)

Sunday, June 10th, 2012

Energy and Natural Resources Market Radar (June 11, 2012)

Total US and Global Oil and Gas Capital Expenditures

Strengths

  • A bounce in stocks over the last week set the Global Resources Fund in a positive direction. For another consecutive week, the fund exceeded its benchmark and the median return of its peer group due to contribution from mergers and acquisitions (M&A) in junior oil and gas stocks and a rally in gold and silver mining stocks.
  • The Wall Street Journal highlighted this week that China’s overseas investment surged in the first quarter to $21.4 billion as state-owned companies snapped up resource-related assets around the globe, according to a report by a private investment firm that counts China’s sovereign-wealth fund among its partners.
  • In a sign of relative strength in the agricultural commodities area, Monsanto Co., the world’s largest seed company, will repurchase as much as $1 billion of shares as rising profit boosts the company’s cash hoard to a record. The buyback program is authorized for a three-year period beginning July 1, St. Louis-based Monsanto said this week in a statement. Profit in the three months through May is expected to rise to $1.57 to $1.62 a share, topping analysts’ estimates, as farmers in the U.S., Latin America and Eastern Europe bought more genetically modified crop seeds, Monsanto said.

Weaknesses

  • Caterpillar said demand from the U.S. coal-mining industry is slowing after a mild winter, Steve Wunning, Caterpillar’s group president for resource industries said. “Global demand for our equipment will offset any slowdown in the U.S. as it relates to mining,” Wunning said. “We don’t see as much growth in the U.S. in coal as we do in other regions like China and like India,” Wunning said. “The longer-term growth in the U.S. is questionable because the government is not permitting many new coal mine operations and not permitting coal-fired power plants,” he added.
  • According to a Reuters news report, coal’s contribution to March U.S. power generation at 34 percent was at the lowest level since 1973. Low natural gas prices and record warm March weather led to coal’s share in generation falling again to 34 percent and the natural gas share rising to 30 percent.

Opportunities

  • Chevron said it expects global energy demand to rise by 40 percent by 2030. It also stated that world gas consumption will increase by 60 trillion cubic feet a year.
  • Macquarie Capital noted that the seaborne coking coal market is looking fundamentally better, with spot and contract prices rising as ex-China buyers return to the market.
  • The People’s Daily reported that the Chinese steel industry is gearing up for an expected surge in demand in the wake of a speedup in the approval of major infrastructure and industrial projects, experts said. As the State Council announced a series of policies to stimulate the economy by accelerating the approval of many important projects, including railway, energy and infrastructure construction in rural region and western China, steel industry analysts said the pipeline of new work will increase demand for steel in the long term. They expected steel prices to rebound as early as the end of this month as a result.
  • Pipeline company Trans-Canada is planning a new gas pipeline to the port terminal at Kitimat. Canada’s federal government is encouraging the gas developments. This builds on a decision by Shell last month to ship 1.6 billion cubic feet a day from the Kitimat terminal. The pipeline project does face a permitting process in British Columbia, but assuming it can be completed, it should reduce pressure on U.S. gas prices from Canadian imports, according to the Wall Street Journal.

Threats

  • China is seeing its steel inventory accumulate as capacity expands despite weak domestic demand and falling foreign orders and exports, partly caused by the anti-dumping investigations launched by other countries, according to the 21st Century Business Herald. The China Iron and Steel Association’s data showed that as of June 1, total inventory of deformed steel bars, steel wire rods and steel plates in the country’s 26 main markets was 15.62 million tons, up 1.19 million tons from last year.
  • As of Wednesday, coal stockpiles stood at 8.7 million metric tons at Qinhuangdao port, China’s biggest coal port in Hebei province, up 40 percent year-over-year, statistics from Wind Information show. “The inventory level is the highest so far this year,” said Xiao Xinjian, industry analyst at the Energy Research Institute. “But destocking will begin as electricity demand peaks,” Xiao said. Also, iron ore inventories at China’s major ports have surpassed 100 million tons, compared with 90 million tons last year, according to umetal.com. “Iron ore inventories at major ports have been building up since the Lunar New Year, which is quite unusual,” said Wei Hongbing, president of Tianjin Harvest International Shipping Co. These ports are almost out of space for storage, Wei added.

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The Ten IPO Commandments

Friday, May 25th, 2012

 

Via Nic Colas of ConvergEx Group

There’s been a lot of hand-wringing about busted Initial Public Offerings of late, but the process itself is hardly rocket science.  Like Tolstoy’s comment about families, every “Happy” IPO is essentially the same, while every miserable one is different in its own way.  There are rules to the successful IPO, and today we offer up Nic Colas’ manual, a step-by-step checklist for investors to assess if an offering is on track.  From maintaining the illusion of scarcity to managing company and investor expectations, the road from salesforce “teach-in” to final pricing is narrow but well-marked.

I spent the better part of a decade as a senior U.S. equity research analyst at Credit Suisse in the 1990s, covering the auto and auto parts sector.  This was in many ways the heyday of the equity research function at large investment banks, largely because analysts were so deeply involved in capital markets transactions as well as mergers and acquisitions.  In my nine year run I did a variety of lead and co-managed Initial Public Offerings as well as secondary equity issuances for the likes of Chrysler, General Motors, Budget and Dollar Thrifty Rent-a-Car, Goodyear Tire, Ducati, as well as a variety of lesser-known auto aftermarket parts companies and foreign automakers and suppliers.

The process of raising capital in U.S. equity markets has changed very little in the last decade – far less than other parts of the market such as electronic trading.  Companies still choose bankers based on formalized pitch meetings with positioning and valuation discussions.  Analysts do play a smaller role at the front end of the process, but their buy-in is every bit as critical during the marketing of the deal.  And equity salesforces still have an important position in the workflow, pitching the investment merits of the company at hand to first get a meeting and then an order from a long-only or hedge fund client.  Issuing stock is still a basically a specialized house-to-house search for appropriate owners, setting market expectations for near term performance, and getting the equity story out in a consistent and accurate manner.

At the same time, mistakes still happen in even the most well established business processes, as we have seen over the past week.  No need to “Name names” here, because it is not the point of this note to rewarm the leftovers of an already well-publicized failure.  Rather, as I watched the drama unfold in all its can’t-look-away-from-the-car-accident glory, it occurred to me that the wounds of the past week were somewhat self-inflicted.  There are rules to doing an Initial Public Offering.  By and large, investment banks follow these “Commandments” to the letter.  But when they don’t, well, that’s when someone loses an eye.

As I reminisced about the various transactions I witnessed during the 1990s, I started to jot down what I realized are the unwritten, but critical, rules to a successful public offering.  They apply reasonably well to both IPOs and secondaries.  And – conveniently – there are ten of them.

Our “Ten IPO Commandments” are as follows:

1)      Create The Illusion of Scarcity.  The biggest challenge to a successful stock offering is to convince the base of buyers that there is much more demand than supply.  Raising the price range of an offering a good sign.  Increasing the number of shares is much more problematic and requires a “Measure twice, cut once” approach.  It is, after all, a signal that the sellers – who are almost always better informed than buyers – think the price of the offering is compellingly attractive versus their knowledge of the company and its prospects.
2)      Maintain a Consistent and Improving Narrative about the Business.  For an IPO, there is a fairly long window between when you FedEx the initial documents to the Securities and Exchange Commission and the pricing of the deal.  Months, in fact.  Investors’ initial contact with the company comes when they read that initial filing.  From that point on, they want to see and hear an improving story about the business and its prospects.  If that means keeping expectations and commentary about the business modest at first, so be it.  Trajectory is everything.
3)      Make Management Available To Investors.  Chairmen/women and Chief Executive Officers rarely achieve those positions without a healthy dose of self-esteem.  And they often bridle at being quizzed about their company by investors who know much less about the business than they do.  Fair enough, but it is part of the process and investment bankers need to deliver that message and get the most senior people to travel on the roadshow.  My most memorable experience with rocks-star management was Lee Iacocca, the former Chairman of Chrysler, and a bigger-than-life personality.  The key to making sure he was happy on the roadshow was to simply book the biggest hotel meeting space in all the major cities on the agenda.  We called him “Sinatra” and he enjoyed the nickname.  And he was happy to go anywhere and meet anyone after selling out the big rooms.  Investors appreciated that, and I believe they cut the company a lot more slack over time because they had seen Sinatra up close and personal.
4)      Talk to your fellow underwriters.  The best capital markets officers I worked with always maintained an open dialog with their fellow lead and co-manager counterparts.  More information about how the market hears a story is always helpful.  And yet certain investment banks have a reputation for keeping things very close to vest.  Caveat emptor there.
5)      Know Who is Buying.  “Building a book” is the tough part of any stock offering. How much is “Real” – legitimate orders from institutions who want to own the stock – and how much are “Flippers?” Sadly for many capital markets desks, buy-and-hold institutions now trade far less than faster-moving hedge funds.  As deals heat up, customers will try to leverage their importance to the day-to-day trading operation of the underwriters in return for better a allocation.
6)      The IPO is Just the “First Date.”  Many companies think of the IPO as the end of a long journey, which may have started in a dorm room or a garage and ended by ringing a buzzer or a bell.  But for investors, that sound is the beginning of their involvement with the company.  No matter how great the business model or convincing the management team might be, the goal posts have shifted.  Bottom line – as a company, want your IPO to work on day one, week one, and month one.  It will pay dividends when you come back to the capital markets.  And, trust me, you’ll be back.
7)      Know Who is Selling.  No matter how carefully constructed the deal book might be, some significant portion of the accounts will be sellers.  The underwriter needs to have a home for those shares (see Commandment #5).
8)      Retail Is Different.  Most equity offerings allocate 20-30% of the deal to what investment banks call “Retail.” This term connotes individual investors, but can also mean smaller institutions.  If the business is consumer-focused, it will be at the higher end of the range, since these buyers are thought to be customers as well.  And retail is considered “Sticky” money, less likely to sell into any initial stock price pop.  The relationship, however, cuts both ways. A poorly executed IPO stands the chance to alienate customers and damage the company’s brand.  All of which means retail-heavy stock offerings need to be especially well run.
9)      Bankers – Manage Your Client.  The best bankers I have worked with over my career had one thing in common: they established themselves as a financial expert with their clients and never let go of that position.  This is not an easy thing to do, but the reason bankers add value to the process of raising capital is not their ability to socialize or play golf or feign enthusiasm for a company in a pitch.  Their value is that they know more about the intersection of business analysis and capital markets than the clients they serve.  If the client comes to feel that they know more about the process than their bankers, and is allowed to act on that impulse, you can turn out the lights and head home.  The deal isn’t going to work.
10)   Don’t be Afraid to Walk Away.  This applies to both buyers and bankers alike.  The stock market in the U.S. is open from 9:30am to 4:00pm every day.  If you are unsure about the deal, you can still buy it the next day, or the next week, or the next month.  The illusion of scarcity is just that.

And for my hustling banker friends, a story to close out this note…

The most stressful 24 hours of my professional career occurred when I found out a company I was working to take public had inadvertently hired a senior person with falsified credentials.  I took the information to the head of equities, a tough as nails West Point grad.  He immediately called the head of the firm and said the deal was off unless the individual with the fake resume was removed from the transaction.  This was a courageous move, for the deal was extremely high profile and we were the lead manager.  No one argued.  I never saw the fellow again.  I think he is a potato farmer somewhere.

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Economic Insights: When Will Corporate Cash Flow? (Ezrati)

Tuesday, April 3rd, 2012

 

by Milton Ezrati, Lord Abbett

One of the great constants in this otherwise inconstant environment is the strength of corporate finances. Financial excesses and the need to de-leverage concern governments and households, not the corporate sector, which actually came out of the 2008–09 financial crisis and recession with its finances in good order, and has only strengthened them since. The question now is how and when companies will deploy these impressive financial resources—whether on capital spending, hiring, or, especially, on the mergers and acquisitions (M&A) that typically proceed from strong corporate finances.

Huge cash holdings constitute the most impressive aspect of this financial strength. At the close of 2011 (the most recent period for which complete data are available), cash on non-financial corporate balance sheets had risen to more than $1.9 trillion—a jump of almost 60% from the dark days of 2008 and more than 50% from the last cyclical peak in 2007. Cash and cash equivalents have risen, so that today they constitute almost 13% of all corporate financial assets, up from 9.4% in 2008 and 9.1% in the cyclical peak year 2007. They amount to some 14% of all corporate liabilities, up from 9.2% in 2008 and 9.7% in 2007, and almost 12% of corporate net worth, up from 8.9% in 2008 and 8.0% in 2007.

Aside from the powerful cash flows that permitted such accumulations, it is the high and persistent levels of uncertainty that have kept the funds in cash instead of flowing into other corporate uses. Speaking volumes to this motivation is the fact that the bulk of this cash sits neither in time nor savings deposits nor money market shares nor in commercial paper, but rather in checkable deposits. These have grown remarkably—more than 1,500%, in fact—since 2008. The high level of uncertainty behind this behavior is hardly surprising either, on at least four counts.

First and primary as a behavioral motivator is the legacy of the 2008–09 financial crisis. Still fresh in managers’ collective memories, these events have kept companies sensitive to how suddenly economic and financial conditions can change and, consequently, how valuable ready, liquid assets can be. But more, because bank credit standards tightened during the crisis and by and large have remained tight since, companies have lost the conviction that they can borrow should the need arise. It does not help in this regard that many banks during the crisis withheld formerly well-established corporate lines of credit, an act that has left in its wake conviction among corporations that they ought to rely more on self-financing. The sovereign debt problems in Europe, threatening a rerun of 2008–09, have only redoubled this conviction.

Second, Obamacare has contributed, too. Whether a good idea or a bad one, good legislation or not, the huge changes built into this complex law impose tremendous uncertainty on corporate decision making, particularly about hiring. The natural response in the circumstance is to hold back on major corporate decisions and the enlarged cash holdings are an obvious financial reflection of that posture.

Third, the Dodd-Frank financial reform has had its own separate influence. Although this huge piece of legislation covers only financial corporations, it does nonetheless create uncertainty among all companies about future financing, both availability and cost. In this regard, whether Dodd-Frank is good law or bad, it has surely had an effect similar to the liquidity problems of 2008–09, even though it was ostensibly designed to correct them, adding to management convictions that they can no longer rely on credit lines from financial institutions and need, therefore, to do more than previously to cover their short-term cash needs for themselves.

And fourth, if these matters did not weigh heavily enough, corporations must also cope with the uncertainties surrounding the federal budget debate. Without knowing the nature and size of future federal spending or taxes or even the federal government’s prospective borrowing needs, it is difficult for managers to gain any sense of the future and, consequently, how to deploy their resources.

But for all this, there are tentative signs that corporations are beginning to use some small portion of this cash accumulation. Though compared with past cyclical standards hiring has remained subpar (hardly a surprise in such an uncertain environment), it has nevertheless picked up some in recent months. Corporations have also increased capital spending, raising such outlays by almost 8% over the course of 2011—hardly a boom, but certainly faster than sales have risen and a use for some of these surplus funds. At the same time, corporations have shown a modest willingness to extend themselves by accepting a rise in their trade and tax payables. Together, these have risen more than 13% during the past year, faster than sales and even than cash balances.

Still, it will take time before a return of confidence can move matters beyond these recent, tentative expressions. Cash and the lack of confidence it reflects remain high. There is, however, a tremendous potential for dramatic expansion in corporate spending, hiring, and M&A activity from even a modest improvement in confidence. Especially because equity market valuations these days make it cheaper to buy than to build, the M&A potential, with its always immediate market impact, looks particularly powerful.

The value of investments in equity securities will fluctuate in response to general economic conditions and to changes in the prospects of particular companies and/or sectors in the economy.

The opinions in the preceding commentary are as of the date of publication and subject to change based on subsequent developments and may not reflect the views of the firm as a whole. This material is not intended to be legal or tax advice and is not to be relied upon as a forecast, or research or investment advice regarding a particular investment or the markets in general, nor is it intended to predict or depict performance of any investment. Investors should not assume that investments in the securities and/or sectors described were or will be profitable. This document is prepared based on information Lord Abbett deems reliable; however, Lord Abbett does not warrant the accuracy or completeness of the information. Investors should consult with a financial advisor prior to making an investment decision.

Investors should carefully consider the investment objectives, risks, charges, and expenses of the Lord Abbett funds. This and other important information is contained in each fund’s summary prospectus and/or prospectus. To obtain a prospectus or summary prospectus on any Lord Abbett mutual fund, contact your investment professional or Lord Abbett Distributor LLC at 888-522-2388 or visit us at www.lordabbett.com. Read the prospectus carefully before you invest.

 

Copyright © Lord Abbett

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U.S. Equity Market Radar (April 2, 2012)

Sunday, April 1st, 2012

U.S. Equity Market Radar (April 2, 2012)

The S&P 500 Index rose 0.81 percent this week driven by the healthcare sector, which rallied on the prospect of a Supreme Court decision rejecting the Affordable Care Act.

S&P 500 Economic Sectors

Strengths

  • Defensive sectors tended to outperform this week, along with healthcare, utilities and consumer staples were among the week’s best performers.
  • Within the healthcare sector, managed care stocks were among the best performers with Wellpoint, Coventry Health and Aetna all rising by at least 10 percent.
  • Red Hat was the best performer in the S&P 500 this week, rising by more than 15 percent as the company reported better than expected earnings and increased guidance.

Weaknesses

  • With the likelihood of mergers and acquisitions disappearing for utilities, the sector was the worst performer in the S&P 500 this week.
  • The energy sector was also weak as oil fell more than three percent on continued fears of an economic slowdown in China.
  • Best Buy was this week’s worst performer on a stock-specific basis as the company announced disappointing results and closure of 50 big box stores.

Opportunities

  • The market continues to grind higher on recent news and the “trend is your friend” until this pattern changes.

Threats

  • The S&P 500 is arguably overbought in the short term and could be vulnerable to profit taking.

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Emerging Markets Radar (January 30, 2012)

Sunday, January 29th, 2012

Emerging Markets Radar (January 30, 2012)

Strengths

  • Despite worldwide economic turmoil, global foreign direct investment (FDI) flows jumped by 17 percent in 2011. This number, however, widely reflects the large number of cross-border mergers and acquisitions. China was the second-largest FDI destination, receiving a record $124 billion. India’s FDI rebounded 38 percent after a big fall in 2010, but remained far behind China.
  • Poland’s economy expanded at the quickest pace in three years during 2011, as companies boosted investment and a weakening Polish zloty buoyed exports. The country’s GDP rose 4.3 percent from the previous year, compared with a revised 3.9 percent in 2010.
  • With a more favorable policy environment and an end in sight for the industrial destocking process, we anticipate more stable economic growth in China for February after the Chinese New Year celebrations are complete. CEBM concluded in a recent research report that historical experience shows the destocking cycle usually lasts four months and the firm thinks the end of the destocking process is likely to emerge around March.
  • Chinese banks listed in Hong Kong are currently cheaper than during the 2008 lows. Banks are currently pricing at 5.4x 2012 price-to-earnings (P/E), 1.1x price-to-book value, and 21.63 percent return on equity, according to JP Morgan’s recent research.
  • In China, 22 out of 31 provinces have seen their total GDP surpass Rmb 1 trillion. The Guangdong province leads all of them with Rmb 5.3 trillion. The Shandong province hasn’t reported its 2011 GDP yet, but it is probably the third largest provincial economy in China after Jiangsu province with Rmb 4.8 trillion. Shanghai’s GDP is Rmb 1.9 trillion.
  • In 2011, nearly 20 percent of the houses in Hong Kong were bought by people from mainland China.
  • In 2011, China became the second-largest global market for Mercedes-Benz and BMW behind the U.S. CEBM reports Mercedes-Benz posted year-over-year sales growth of 32.8 percent during the first three quarters of 2011. This is roughly 25 percent of China’s luxury car market. CAAM expects sales of luxury cars to outperform the overall sedan market in 2012.

Weaknesses

  • Bloomberg News reports that the world’s best-performing consumer stocks have become the lowest-rated by analysts after valuations of South African retailers and food producers climbed to the most expensive levels on record. Five companies in the MSCI South Africa Consumer Staples Index, including Shoprite Holdings and Massmart Holdings, are rated the lowest among peers in 36 countries.
  • Weekly housing sales transactions in Beijing declined 70 percent from the previous week and 83 percent from the previous year. Although the Chinese New Year was a factor, the trend will continue until the price has dropped to a level that satisfies the government. In China, housing market speculators have been squeezed out of the market in the last two years by tightening policy. Now potential buyers are waiting for a further price drop to get into the market. What the government fears is that if the tightening policy is lifted, the speculators will come back into the market.
  • Korea reported forth quarter preliminary GDP growth at 3.4 percent on a yearly basis, lower than the estimate of 3.5 percent. On a quarterly basis, it was up 0.4 percent, weaker than the consensus forecast of 0.5 percent.
  • Japan’s December CPI fell 0.2 percent on a yearly basis, and Japan’s core CPI fell 0.3 percent year-over-year for 2011. This shows the Japanese economy is structurally weak.
  • Korean manufacturing confidence registered at 81 for February, improving from January’s 79 but still hovering near 30-month lows. Consumer confidence for January came in at 98, dropping 1 point from December’s reading and registering a 10-month low.
  • Thailand’s industrial production shrank by 25.8 percent in December, contracting for a fourth month on continuing effects from the flooding.
  • Many migrant workers may not come back to the coastal cities after the Lunar New Year since they can just find a job inland locally in China, Zhongguang Web reported in Beijing. A tight labor market will force employers to raise wages and increase their costs.

Opportunities

  • HSBC Emerging Markets reports that their key forecasts see China avoiding a hard landing and growing 8.6 percent, Brazil cutting interest rates to 9 percent by midyear, the Czech Republic and Hungary being the only two emerging markets falling into recession, Turkey’s inflation remaining high and monetary policy unorthodox, India’s inflation finally easing, and Russia’s economy growing 3 percent. As emerging markets have started to show signs of an economic slowdown, policymakers have switched back to a reflating mode and we expect them to accelerate their efforts if conditions warrant a more aggressive response.
  • Colombia expects about $10 billion in international investment in crude, mining and energy projects this year, the Mines Minster Mauricio Cardenas said this week. Colombia is South America’s third-largest oil producer.
  • Poland “deserves a rating upgrade after all the work it has done since 1989” and because growth is bolstering investor confidence, said the CEO of Deutsche Bank’s local unit in Poland. Poland is rated A2 by Moody’s Investor Service, on par with Italy.

Fiscal Policy Easing May Have Already Started in China

Threats

  • Argentina has announced that it will extend the list of goods that require a government permit to be imported and will raise import taxes for 100 products to 35 percent from 20 percent, a leading newspaper in the country reports.
  • On January 31, Russia will release the country’s fourth quarter GDP data. Analysts at Roubini Global Economics are forecasting that the number will show a meaningful decline from the third quarter’s 4.8 percent year-over-year increase.
  • Two major sets of Chinese economic data that can continue to decline in the first half of 2012 are GDP growth and property investment. Before the economy touches its lowest growth rate, the market may have to adapt to a large amount of bad news in the property market, such as sales dry-up and a sharp price fall.

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Energy and Natural Resources Market Radar (December 28, 2011)

Tuesday, December 27th, 2011

Energy and Natural Resources Market Radar (December 28, 2011)

Chinese Inflation Slows

Strengths

  • A weak dollar and a new lending program from the European Central Bank helped drive prices for commodities and commodities-related stocks higher this week. West Texas Intermediate (WTI) Crude oil finished the week near $100 per barrel, up about 7 percent. Copper closed near $3.46 per pound, up 4 percent for the week.
  • A record level of deals in the coal industry this year has slashed the number of potential takeout targets in Australia, the world’s largest coal-exporting country. Rising demand in China and India has pushed mergers and acquisitions globally to a record high total of $34.5 billion in deals this year. This compares to $30.3 billion in deals last year. Overall, 192 companies have been acquired. Australian deals reached an all-time high this month with the $5.1 billion Whitehaven–Aston deal and the $2.1 billion Gloucester Coal–Yanzhou Coal deal.
  • China’s oil refiners boosted daily processing to a record 9.25 million barrels a day in November and increased net diesel imports to the highest level this year in October in order to alleviate a local shortage partially caused by seasonal maintenance.
  • The latest Chinese import data shows a major jump in refined copper imports. Despite ongoing concern about a slowing Chinese economy, Macquarie Research highlighted that net imports of refined copper will be 700,000-750,000 tons higher in the second half of 2011 compared to the first six months of the year. Additionally, it was reported this week that refined-copper imports by China, the world’s largest user, climbed to the highest level since June 2009 as lower prices in London prompted an arbitrage trade.

Weaknesses

  • Barclays recently analyzed commodity price performance for 2011. It noted that at the end of 2010, only seven out of 48 commodities showed negative price performance. This year, however, only 11 show a positive price performance. In addition, this year’s best performer, which is feeder cattle up 18 percent, is showing a dismal performance compared to last year when cotton led the way with a 93 percent increase. Only seven commodities have posted double-digit price gains for the year, while 37 did in 2010. Barclays said, “This year’s Christmas tree looks like it has been ravaged by the storm of European sovereign debt.”
  • Data published by Worldsteel this week showed a 4 percent month-over-month decline in global steel production during November. Global production now totals 1,405 million tons on an annualized basis, marking the fifth-consecutive month below 1,500 million tons annualized.
  • Bloomberg News reported that speculators have reduced bets on commodities to a 31-month low on concern that global economic growth is slowing. Commodity Futures Trading Commission (CFTC) data shows that money managers cut net-long positions across 18 U.S. futures and options by 9.6 percent during the week ended December 13.

Opportunities

  • After growing almost 24 percent in 2011, Komatsu, the world’s second-largest mining equipment maker, expects growth of at least 10 percent next year. President of the Mining Equipment Division, Kazuhiko Iwata, said that demand for equipment in Indonesia, Australia and Chile remains strong despite turbulence in financial markets and a slowing global economy. With mined ore grade degradation set to be a persistent theme in the coming years, analysts at Macquarie see the mining equipment industry as the main beneficiaries.
  • It is reported that in its first-ever report about thermal coal, the International Energy Agency (IEA) paints a fairly rosy outlook for the next five years. The report forecast strong demand for thermal coal from China and India until 2016. The IEA said that consumption would continue to expand over the next several years despite calls from environmentalists to cut reliance on this carbon-intensive fuel as a primary energy source. The IEA projects average thermal coal demand to grow by 600,000 tons per day over the next five years. This is a remarkable pace but is actually slower than the growth experienced from 2000 to 2010 when demand growth averaged 720,000 tons per day, according to Nomura Securities.
  • Reuters reported that Monsanto won approval to sell a genetically engineered variety of drought-resistant corn in the United States, raising hopes for increased production of the grain. The U.S. Department of Agriculture approved the use of the modified corn after reviewing environmental and risk assessments, public comments, and research data from the seed giant. The company has been developing the product for years in collaboration with German chemical firm BASF.

Threats

  • Rising costs to develop natural resources projects remain a common theme many companies are grappling with. For instance, Anglo American announced a 15 percent increase in the capital cost of its Minas-Rio iron ore project in Brazil. This is in addition to more than $5 billion the company had previously projected. The company said the increase in cost is due to general inflation in the mining industry coupled with the need to manage construction of the project around newly discovered caves of special scientific interest. Also, CAP, Chile’s largest steel producer and iron ore miner, has said that the cost of developing its Cerro Negro Norte project has increased nearly 40 percent to $800 million. The increase has pushed the anticipated start-up of the 4 million tons-per-year mine to fourth quarter of 2013 instead of the first quarter.
  • Metal demand in China may grow at a slower pace in 2012 and prices may be lower than this year, Wang Huajun, deputy secretary-general of the China Nonferrous Metals Industry Association said at a forum in Shanghai. “It is unlikely to see metals demand to grow at more than 10 percent next year, given the macroeconomic environment,” Wang said. Refined copper demand may increase 6 percent, while primary aluminum consumption may grow 8 percent, he said. Lead and zinc consumption may rise by 7 percent and 5 percent, respectively, Wang said.

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Self-Sustaining (Saut)

Tuesday, December 13th, 2011

“Self Sustaining”

by Jeffrey Saut, Chief Investment Strategist, Raymond James

December 12, 2011

“The violent swings in the U.S. stock market have damaged investors’ psyches, but money managers at this week’s 2012 Reuters Investment Outlook Summit see the environment as a buying opportunity. The sell-offs this year have produced low price-to-earnings multiples on the stocks of companies with world-class, global franchises and strong balance sheets, investors said. In fact, U.S. corporations still have record amounts of cash on their balance sheets ($2 trillion), which could lead to shareholder-friendly moves including share buybacks, dividend increases, and mergers and acquisitions. ’I think this is going to be a good environment for shareholder value,’ said Leo Grohowski, chief investment officer of BNY Mellon Wealth Management. Technology and energy stocks warrant overweighting, said Grohowski, adding that he is ‘slightly overweight financials.’ He predicts the benchmark S&P 500 index will end 2012 at 1,350 points, an 8 percent gain from current levels. For the most part, money managers like Grohowski think bad news from Europe is already priced into the markets. ‘The economy globally is much stronger than people think,’ said Ken Fisher, chief executive of Fisher Investments, who said he is overweight anything ‘economically sensitive’.”

. . . Reuters News, 12/7/11

As I read the above quip from the Reuters organization, I could not shake the feeling that it was me who wrote said article. Indeed, the volatility of the past five months has clearly dampened investors’ psyches to the point where the world is profoundly underinvested in U.S. stocks, which I think may be one of the best investments you can make over the next few years. Verily, hedge funds are having a terrible year, having been caught “short,” as well as underinvested with only a 43.8% net long investment position. Or how about the endowment funds that are only ~12% net long U.S. stocks? How can those endowment funds achieve their mandates of roughly 8% per year using 2%-yielding 10-year Treasury Notes? The answer is they can’t! Then there is the retail investor that is so freaked out they never want to own U.S. stocks again. Ladies and gentlemen, for the well prepared investor, who raised some cash last March/April, the July – August decline presented a great opportunity to reinvest that cash because the S&P 500 (SPX/1255.19) has rallied more than 17% from its recent reaction low. Moreover, I think there is more to come on the upside.

Consider this – it looks to me like the economic expansion is becoming self-sustaining, as can be seen in the attendant chart on page 3 from our friends at the Bespoke Investment Group, whose Economic Diffusion Index is near a six-month high. The self-sustaining sequence goes something like this: vehicle sales increase, vehicle production increases, employment increases, retail sales increase, profits increase, capital expenditures increase, credit expands, employment increases (again), and the virtuous circle repeats. Clearly there are potential headwinds – Iran could erupt, leading to $150+ per barrel oil, real estate could have another death spiral, our elected leaders could make a policy mistake, Euroquake could implode, etc. Yet, it increasingly seems to me that none of those ”boogie men“ are going to burst on the scene.

However, last Thursday it was a subtle sneak preview from the Euroquake “boogie man” that spooked the equity markets when Mario (3-card Monte) Draghi pulled a “now you see it – now you don’t” card trick by contradicting a “street friendly” statement from the ECB that hit the news wires just 10 minutes before. That sleight of hand caused a Dow Dump of 198 points. By Friday cooler heads had prevailed when the ECB clarified its comments. While the restatement fell short of the 50-basis point reduction in interest rates, as well as the equivalent of a QE2 type of announcement investors were hoping for, the ECB still made some pretty big moves. For example, the ECB now has a complete set of tools to provide unlimited liquidity to the banks. As the astute GaveKal organization writes:

  1. “Two major three-year refinancing operations, on December 21st and on February 28th 2012, with full allotment. This will provide plenty of liquidity to banks, as well as drive the money market rate below target.
  2. Easier ECB collateral requirements. Moreover, national central banks will be allowed to accept bank loans as collateral; one could see it as a sort of generalization of emergency loans (ELAs) that individual EMU central banks can provide to their local banks in distress – if so, this would be very expansionary.
  3. Banks’ reserve ratios have been cut from 2% to 1%.
  4. Fine-tuning operations are being discontinued.
  5. Cheaper USD swap lines with less collateral (from an initial margin of 20% to the current 12%) will lessen the impact of a US$ crunch and cap interbank rates.“

We think you will see additional positive comments this week when the FOMC releases its policy statement Tuesday afternoon (2:15 p.m.). To wit, parsing recent comments from Fed Governors suggests there is another QE2 type of maneuver in the works. Accordingly, to the underinvested crowd the current news backdrop continues to be a nightmare.

Speaking of underinvested, consider this insight from The Economist:

“Meanwhile, the financial assets of developing-world investors are growing fast, but such investors tend to have a very small exposure to stock markets. Indians have only 8% of their wealth in equities. As they get richer, investors in the developing world will diversify their portfolios. McKinsey estimates they would have to raise their equity allocations to the 42% owned by American households to close the gap completely.”

Consistent with these thoughts, we continue to favor the upside unless the often mention 1217 level on the SPX is decisively violated to the downside. For trading ideas playing to the upside seasonality, we screened our research universe looking for the favorably rated stocks that have had the best relative strength since the “buying stampede” began on 11/28/11. That list includes: Dollar Tree (DLTR/$82.55/Strong Buy); Mastercard (MA/$377.42/Outperform); Nuance Communications (NUAN/$24.74/Strong Buy); Polaris Industries (PII/$59.80/Strong Buy); Ulta Salon (ULTA/$74.06/Outperform); and W.W. Grainger (GWW/$186.52/Outperform).

We have encouraged investors to consider numerous master limited partnerships (MLPs) over the past three years. Many of these stocks have done well and we continue to like the group overall. Last Tuesday our MLP analysts upgraded their recommendation on 4.4%-yielding Tesoro Logistics (TLLP/$31.74) from Outperform to Strong Buy. Their reasoning goes like this:

  1. Stable, fee-based model provides solid DCF foundation. Ninety five percent of its 2011 revenue is backed by long-term, fee-based agreements, which carry minimum volume commitments. Tesoro Corp. (TSO/$21.79/Underperform) must pay regardless of whether it actually utilizes the partnership`s assets with fee adjustments to protect against inflation.
  2. Multi-faceted approach to growth: $100 million 2012-2013 organic growth program (Bakken-focused), Martinez crude oil terminal dropdown to drive approximately $100 million run-rate EBITDA in 2013. 2012-2013 organic growth capex should approximate $100 million, double our $50 million forecast, likely reflecting 3-5x EBITDA (15-20%+ IRR fully financed). Focus will remain on the Bakken, related to increased volumes from third party contracts and a 50% increase in trucking volumes, driving $25-$35 million of incremental EBITDA by the end of 2013. In addition, the Martinez terminal acquisition is expected to contribute $8 million of EBITDA. All in, growth stands to exceed 2011 run-rate EBITDA by roughly 50% in 2013.
  3. Compelling valuation. Based on the aforementioned growth drivers, we model 2011-2014 distribution CAGR of 12.5% with conservative coverage above 1.4x. Our revised $33 target price is based on a conservative 6.25% yield (140 bp above the stock`s current yield). Each 25 bp of additional yield compression adds $1/unit to our target price. Total return target is 17-18% (+500 bp above peer average).

Please see the company comment dated December 6, 2011 for the full story, including the full justification of the price target.

The call for this week: Last week the ECB’s interest rate cut took center stage, but that “cut” should be viewed within the context of the 40 world wide interest rate cuts that preceded it. Clearly, there is a global easing cycle underway; and, we think you will see more such news this week when the FOMC announces it policy statement Tuesday afternoon. Accordingly, I think stocks will continue to grind irregularly higher driven by portfolio managers trying to play “catch up” (read: performance anxiety), the upside seasonal bias, low valuations, improving economic trends, still depressed sentiment readings, and the knowledge that we have now entered the best performing six months of the year for stocks. And don’t look now, but our Analysts Best Picks for 2012 will be released after the close today.


Click here to enlarge

 

Copyright © Raymond James

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Energy and Natural Resources Market Cheat Sheet

Monday, August 15th, 2011

Energy and Natural Resources Market Cheat Sheet (August 15, 2011)

World Industrial Production Showing Loss of Momentum

Strengths

  • Despite this week’s late pullbacks in gold and equities, our Global Resources Fund outperformed for the week. The fund has also taken on a defensive position, focusing on the food and agriculture sectors, which have historically shown positive performance during uncertain times.
  • Global sovereign uncertainty has caused investors to seek refuge in bullion, driving the price of the precious metal to new highs.
  • Fertilizers, natural gas and chemicals were among the top half of the better-performing sectors this past week. The fund was able to make positive gains from exposure to these sectors.
  • Oil rose on Friday, paring this week’s decline, and reversed losses as European equities and the U.S. stock-index futures climbed.
  • Silver-buying in China and India is set to rise 40 percent in 2012. Industrial demand is the main driver coupled with the devaluation of the dollar. Economic problems, political tensions, inflation and exchange rates are additional factors contributing to rising silver prices. Silver demand in both countries has increased sharply in recent years as more investors use silver as a store of value.

Weaknesses

  • Oil tanker stocks and the construction material and steel sectors were among the bottom-half performers this past week. These sectors continue to perform badly relative to other resources.
  • Industrial metals suffered sharp liquidation on commodity trading advisor (CTA) and hedge fund selling. If the market repeats the 2010 second-quarter correction of 17 percent, this will indicate that copper could fall to $8,150.00 per ton.
  • This week saw a couple of mergers and acquisitions fall apart. Among these, Coal India’s $1 billion plan to acquire Indonesia’s Golden Energy unraveled due to government approval complications and unfeasible numbers. Negotiations between Peabody and Arcelor, who are both biding for Macarthur Coal for a total of $5.2 billion, have been reported as turning hostile.
  • Lackluster results in terms of South Africa’s output for the month of June were published. Gold output fell 5.7 percent in volume terms while mineral production fell 0.7 percent. Production of non-gold minerals was flat compared to last year.

Opportunities

  • China’s July auto sales were up 6.7 percent. Year to date, total sales of commercial and passenger cars rose 2.2 percent.
  • Analysts at Macquarie believe that a combination of factors, led by Chinese demand, offer fundamental support for steel at current price levels. With steel being a benchmark of economic development, the recent concerns over economic growth and sovereign turmoil have made many concerned about the near-term future for prices. They say it is unlikely to worsen and may well hold up better than more championed peers.
  • On August 11, the USDA cut its U.S. corn and soybean production forecasts sharply, on lower acreage and yields. With weather disappointing during both the U.S. planting and growing season, prices will need to rally further to adjust demand down to the lower available supplies. This suggests that agricultural prices will continue to hold up relatively well in a slowing economic environment.
  • Vale South Africa Exploration, a subsidiary of Vale Inco, the second-largest metal mining company in the world, acquired an industrial mining exploration license in Ethiopia last week.
  • Canaccord stated that the projected tight supply-demand environment “should underpin investor confidence that copper prices of $6,600 and above are now simply normal.” Outlook for copper prices looks robust going forward because of tight supply as medium-term demand is higher than projected capacity.

Threats

  • Concern over Namibia’s mining tax plans continue to surface. The Namibian government’s proposals for additional taxes on mining could shake the foundations of the country’s industry, according to industry players in the southern African state. Windhoek analysts estimate that the impact of the new taxes on mine profits could be as much as 15 percent.
  • Continuing European sovereign turmoil may continue to negatively affect commodities.

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Gold Market Cheat Sheet (August 2, 2011)

Monday, August 1st, 2011

Gold Market Cheat Sheet (August 2, 2011)

For the week, spot gold closed at $1626.02, up $24.75 per ounce, or 1.5 percent for the week. Gold equities, as measured by the Philadelphia Gold & Silver Index, fell 6.6 percent. The U.S. Trade-Weighted Dollar Index slid 0.51 percent for the week.

Strengths

  • The gold price advanced to a record high of $1,632.80 per ounce on Friday morning after news that U.S. GDP rose at a 1.3 percent annualized pace in the second quarter, well below market expectations. The gold price was also boosted by the fact that President Obama and the House Republicans remain unable to forge an agreement to raise the debt ceiling.
  • India’s physical demand for gold remains high despite the spike in prices, wealth management firm UBS has said, adding that gold sales to India increased 23 percent from the start of the year until July. Also, gold sales rose 76 percent in May as compared to sales in April and a thumping 161 percent from a year ago, UBS said in a report.
  • Newmont Mining Corporation, the largest U.S. gold producer, boosted its dividend this quarter by 50 percent to 30 cents. The company raised the dividend as gold prices continue to reach record highs. Newmont said it will raise dividends by 5 cents for each $100 increase in the average price of gold during the previous quarter.

Weaknesses

  • South African gold mine workers and the major producers were due to meet on Friday for wage talks, in a bid to end a strike that could halt daily output worth up to $25 million at a time when the price of bullion is near record highs.
  • Goldcorp, the world’s second largest gold producer, cut its production guidance for the year to between 2.50 million and 2.55 million ounces, from 2.65 million to 2.75 million ounces, due to production problems at three mines.

Opportunities

  • Mining mergers and acquisitions transactional value in the first half of 2011 reached $96.3 billion, almost overtaking 2010’s value of $113.7 billion. Ernst & Young predicts that in the remainder of 2011 and in the whole of 2012 global mining merger activity will rise, with increases in transaction values.
  • Sovereign debt worries in Europe and in the United States could push the gold price up to $2,500 per ounce, and possibly even as high as $5,000 per ounce, according to research from Citigroup. “It is difficult to argue that gold is going to $5,000 an ounce on the basis of equivalence with the seventies bull market. However the drivers are the same—the debasement of fiat currencies as a store of value and fear over the outlook for the global economy,” Citigroup said.
  • Reuters’ biannual poll of precious metals price forecasts found that over half of the respondents expect prices to average $1,500 an ounce or more this year. Analyst responses indicated that continued eurozone debt concerns, a weak dollar, and increased demand from emerging economies and central banks will support the gold price.

Threats

  • Barrick Gold, the world’s largest gold producer, raised its capital expenditure estimates for two of its main mines.
  • Barrick noted capital expenditures at the Pascua Lama mine could now cost $5 billion, compared to the previous $3.6 billion. Also, Pueblo Viejo will cost approximately $3.8 billion, exceeding the initial $3.3 billion estimate.
  • Rising capital costs is a threat to margin expansion for the miners. This has been a headwind to their price performance.

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Energy and Natural Resources Market Cheat Sheet (February 7, 2011)

Saturday, February 5th, 2011

Energy and Natural Resources Market Cheat Sheet (February 7, 2011)

Increased Transaction Activity in Upstream Coal

Strengths

  • Ukraine’s coal production rose 9.6 percent from a year earlier in January, the Coal and Energy Ministry said.
  • The Journal of Commerce reported that U.S. steel imports rose by 47.2 percent on a year-over-year basis in 2010.
  • Supply disruption fears due to cyclone weather activity off the coast of Australia pushed copper prices to record levels in London this week.
  • Analysts at IHS Herold highlighted in a report this week that global coal mergers and acquisitions set a record in 2010 with $20 billion worth of deals.

Weaknesses

  • The Indonesian Coal Mining Association said the country’s 2011 coal output may reach 320-330 million tons, below the target of 340 million tons.
  • India’s domestic coal production will fall short of demand by 142 million metric tons in the year starting April 1, exceeding a previous estimate. Coal demand in the next financial year is expected to be 696 million metric tons, compared with domestic output of 554 million tons.

Opportunities

  • China will have more difficulty feeding itself in the coming years as expanding demand, spurred by increased urbanization, strains resources, a state official said. From 2011-2015, more than half of the country’s population is expected to be living in cities or towns, creating additional demand of 4 million metric tons of grain, 800,000 tons of vegetable oil and 1 million tons of meat every year.
  • The next annual coal-supply contracts between mining companies and Asian utilities, which run from April, are likely to set record prices, the Financial Times reported. This year’s estimates range from $130-$145 per metric ton, compared with $125 in 2008-09 and $98 in 2010-11.
  • In an effort to fend off tough competition from Asian rivals and offset shrinking demand from domestic automakers, Japan’s Nippon Steel Corp. and Sumitomo Metal Industries plan to merge. This would create the world’s second-largest steelmaker. The deal comes as the industry grapples with surging raw materials prices, which have been exacerbated recently by floods in Australia.
  • Reuters reported that Chinese oil company CNOOC will pay $1.3 billion for its second shale deal with Chesapeake Energy in the U.S. The company will buy a 33.3 percent stake in Chesapeake’s leasehold acres in northeast Colorado and southeast Wyoming for $570 million. CNOOC also agreed to fund 66.7 percent of Chesapeake’s drilling and completion costs until an additional $697 million is paid.

Threats

  • Xstrata evacuated its 230,000 tons per year copper refinery—1 percent of global production—in Queensland, Australia in a precautionary move. Cyclone Yasi is expected to make landfall during the week.
  • China’s oil demand growth rate in 2011 may slow to half of last year. Despite the slowdown, it would still account for 40 percent of the 1.4 million barrels per day of global demand growth forecasted by the International Energy Agency (IEA).
  • U.S. gasoline at the pump may rise 13 percent by May as crude oil in New York tops $100 a barrel and a recovering economy boosts fuel demand, according to analysts surveyed by Bloomberg News. The highest price for regular gasoline this year will be $3.50 a gallon, based on the median estimate of 14 analysts. Gasoline hasn’t reached that level since Oct. 6, 2008, according to AAA.

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