On 12 July, I mentioned that short term indicators are pointing towards a recovery of stock markets again. MSCI World was 106. Now it is 115. That's like a 8% rise in 2 weeks. MSCI Asia ex Japan rose from 55 to 56.1. Refer to the hyperlink.
http://musingsonwallstreet.blogspot.com/2010_07_13_archive.html
Here's the article on Barton Biggs' ding dong on stock outlook.
Biggs Buys Stocks Three Weeks After Cutting Holdings: Tom Keene
By Nikolaj Gammeltoft and Tom Keene
July 26 (Bloomberg) -- Barton Biggs, the hedge fund manager who sold half his equity holdings at the start of July, said today that signs the U.S. economy will avoid a recession spurred him to build the stakes back up.
Biggs, whose Traxis Partners LLC gained 38 percent in 2009 when he bought shares as the Standard & Poor’s 500 Index fell to a 12-year low, said bets that stocks will advance make up 75 percent of his fund, up from about 35 percent three weeks ago. Biggs said on July 2 that concern governments around the world would curtail stimulus measures too soon led him to sell almost all of his U.S. technology holdings.
“I’ve definitely changed my mind to the degree of risk out there,” Biggs said in a radio interview with Tom Keene on Bloomberg Surveillance. “Economic data around the world in the last 10 days to two weeks has turned more positive. It has exceeded forecasts almost without exception. The odds of the world slumping into a significant slowdown has diminished.”
Stocks rose today, with the benchmark index for U.S. equities advancing 1.1 percent to 1,115.01 as of 4:01 p.m. in New York. The MSCI World Index climbed 1.1 percent.
The S&P 500 has rallied 8.2 percent this month after more than 83 percent of companies reporting quarterly results topped analysts’ estimates and government reports showed U.S. building permits and factory production exceeded forecasts from economists. Biggs said the largest U.S. companies will benefit as the economy recovers, naming Procter & Gamble Co., Deere & Co., Caterpillar Inc., Cisco Systems Inc. and Microsoft Corp.
Decent Environment
“The environment is fairly decent right now and there are opportunities,” said Biggs, whose fund gained almost three times the industry average last year, according to data compiled by Bloomberg and Chicago-based Hedge Fund Research Inc. “You are where you are and it’s a new day.”
P&G in Cincinnati climbed 4.2 percent this month after the world’s largest consumer products company said on June 25 that it aims to reach 1 billion more consumers. Peoria, Illinois- based Caterpillar gained 17 percent as the world’s largest maker of construction equipment raised its earnings forecast on higher demand in developing countries for mining and rail equipment.
Microsoft, based in Redmond, Washington, rallied 13 percent in July as the world’s largest software maker posted record fourth-quarter revenue on July 23 after the most successful debut of its flagship operating system.
IMF Growth Forecast
The International Monetary Fund boosted its forecast for 2010 global growth to 4.6 percent from 4.2 percent on July 8 after a stronger-than-expected first half. That would be the largest gain since 2007.
Biggs’s reversal reflects the challenge facing professional investors trying to gauge the global economic outlook after concern Europe’s debt crisis will spread sent the S&P 500 down 13 percent in May and June. Stocks in the U.S. had fallen nine times in 10 days when Biggs said he’d cut his holdings on July 2. The Labor Department said that day that private employers added 83,000 people to payrolls in June, compared with an estimate of 110,000 in a survey of economists by Bloomberg.
“I’m not putting my money into anything,” Biggs said at the time. “I’ve taken basically all of it out in the U.S., and we had a broader exposure to consumer stocks and just, in general, I’ve reduced my net long position by about 30 or 40 percentage points.”
Equity Rebound
The S&P 500 advanced during the next six days, gaining 7.1 percent through July 13 as investors speculated corporate profits would top analysts’ projections and metals increased.
Hedge funds, endowments and pensions pushed equities up to 68 percent of their holdings in July, the highest level in 15 months, from 63 percent in April, a Citigroup Inc. survey showed. Institutions are preparing for a rally, according to Citigroup’s questionnaire from 120 respondents among those groups. Fifty-four percent said U.S. equities may gain up to 20 percent, compared with 50 percent in the last reading.
Hedge funds lost an average of 0.9 percent in June and 2.6 percent in May, according to the HFRX Global Hedge Fund Index, as the European debt crisis triggered declines in stocks, the euro and commodities.
Profits among S&P 500 companies may rise an average 34 percent in 2010 and 17 percent in 2011, the fastest two-year growth since 1995, according to forecasts tracked by Bloomberg. The S&P 500 trades at 14.9 times annual earnings, compared with an average of 16.5, according to data compiled by Bloomberg since 1954. The index is cheaper relative to estimated earnings for the next 12 months, with a multiple of 11.7, the data show.
To contact the reporters on this story: Nikolaj Gammeltoft in New York at ngammeltoft@bloomberg.net; Thomas R. Keene in New York tkeene@bloomberg.net.
Last Updated: July 26, 2010 17:01 EDT
Wednesday 28 July 2010
Tuesday 27 July 2010
Dow Erases 2010 Loss as S&P500 Tops Moving Average
I recalled Bloomberg conducting a phone interview with Barton Biggs last night. Just 3 weeks ago, he suddenly turned bearish, moving his equity allocation from 70% to 30%. He cited policy failures by developed nations' governments. Last night, he turned very bullish again, upping his equity to 90%.
I think he's a closet technical analyst. Even though he cites fundamental reasons for his shift in asset allocation, only a technical analyst will change his stance this fast. Anyone who follows technical analysis will know that this volatile period where most indices hover above and below moving averages, key supports will lead to constant buys and sells. There's just no trend this year, just whip lashes. Trend followers lost big time this year. Range traders did the best. Buy-and-hold fundamentalists probably just broke even.
I'll dig out the article about Barton Biggs later.
Dow Erases 2010 Loss as S&P 500 Tops Moving Average (Update2)
By Nikolaj Gammeltoft and Whitney Kisling
July 27 (Bloomberg) -- The rally that erased the Dow Jones Industrial Average’s 2010 loss yesterday and carried the Standard & Poor’s 500 Index above its 200-day average spurred optimism among chart analysts and investors who track earnings.
The Dow advanced 1 percent to 10,525.43 yesterday to wipe out an annual slump that reached 7.1 percent on July 2 after U.S. companies beat analysts’ profit estimates at twice the rate they trailed them in the second quarter. The S&P 500 rose above its mean price in the past 200 days for the first time in more than a month, after surging 8.2 percent since June 30.
Bullish signals are increasing in equities after the S&P 500 lost 13 percent in May and June, its biggest retreat since the bull market began in March 2009. Projections for the fastest S&P 500 income growth since 1988 are helping investors overcome concern that the economy will sink into its second recession in three years.
“Everybody loves an up market and stocks are looking better from a technical perspective,” said Matt McCormick, a money manager at Cincinnati-based Bahl & Gaynor Inc., which has $2.7 billion in assets. “If technicals start to turn, then psychology can turn and investors can get interested.”
As for earnings, “the numbers look good,” McCormick added.
The S&P 500 rallied 1.1 percent to a one-month high of 1,115.01 yesterday, topping its 200-day mean of 1,113.71, after new U.S. home sales beat the median economist estimate and package-delivery company FedEx Corp. boosted its profit forecast because of greater demand for international express shipments.
Benchmark Climbs
The U.S. benchmark advanced 0.4 percent to 1,119.04 as of 9:36 a.m. in New York, as earnings at companies from DuPont Co. to Lexmark International Inc. topped analyst estimates and home prices increased more than forecast. The Dow Jones Industrial Average climbed 0.3 percent to 10,559.60, the fourth straight day of gains.
Caterpillar Inc., General Electric Co. and American Express Co. surged more than 15 percent from July 2 through yesterday, leading gains in the Dow since it retreated to a nine-month low. Out of 30 companies in the measure, only one fell during that time: Johnson & Johnson.
The S&P 500 failed to surpass the moving average on May 27 and June 3 after coming within 0.2 percent amid the biggest equity losses since the bull market began in March 2009. The index spent five days above the 200-day average in the middle of June before sinking.
Moving Average
“It’s always a good thing when you reclaim an important moving average because it gets rid of resistance,” said Christian Bendixen, director of technical research at New York- based Bay Crest Partners LLP. “I’ve been bullish for the last couple of weeks on a variety of signals that the sell side was exhausted.”
Profits among S&P 500 companies will rise 35 percent in 2010, the fastest pace in 22 years, according to the average analyst estimate in a Bloomberg survey.
“There were some worries about the strength of the economic recovery, but now we’re reaching that key level of the 200-day moving average,” said Giri Cherukuri, a money manager and head trader at Oakbrook Investments in Lisle, Illinois, which manages $2.2 billion. “People are looking to see if we can sustain it.”
Slowing Expansion
Bearish investors are counting on a slower economic expansion than the pace seen before New York-based Lehman Brothers Holdings Inc.’s 2008 collapse. Global growth may average 3.25 percent to 3.5 percent in the next three to five years, below the 4.7 percent pace of the five years leading up to the 2008 slump, estimates Stephen Roach, non-executive chairman of Morgan Stanley Asia.
The S&P 500 has rallied this month as reports have signaled the economic rebound may continue. Since July 12, 83 percent of S&P 500 companies reporting quarterly results have topped estimates. The International Monetary Fund boosted its forecast for 2010 global growth to 4.6 percent from 4.2 percent on July 8 after a stronger-than-expected first half. That would be the largest gain since 2007.
This month’s rally has trimmed the S&P 500’s second-quarter retreat of 12 percent through yesterday, which was the most in a year. The index is still down 8.4 percent from the 19-month high it reached on April 23.
‘Nasty’ Quarter
“It’s reassuring that we could bounce back from that nasty second quarter,” said Ralph Shive, the South Bend, Indiana- based manager of the $1.5 billion Wasatch-1st Source Income Equity Fund. “It shows the correction was probably overdone, but we’re not back at the recovery high yet and we still need better news on the economy for people to get really comfortable about going back into equities.”
There have been 10 times that the Dow has fallen more than 5 percent and gone on to post a gain for the year, according to data from Westport, Connecticut-based Birinyi Associates Inc. going back to 1962. The index averages a 7.7 percent rally from the date of the reversal through the end of the year, Birinyi data show.
“Earnings are going to surprise again to the upside, and I think we’re starting to see the semblance of that already,” Brian Belski, Oppenheimer & Co.’s chief investment strategist, said in a Bloomberg Television interview on July 13. “Longer- term trajectory, the U.S. economy is improving -- period. Coming out of these types of malaises, typically and historically you’ve seen the market really catch fire.”
To contact the reporters on this story: Nikolaj Gammeltoft in New York at ngammeltoft@bloomberg.net; Whitney Kisling in New York at wkisling@bloomberg.net.
Last Updated: July 27, 2010 09:52 EDT
I think he's a closet technical analyst. Even though he cites fundamental reasons for his shift in asset allocation, only a technical analyst will change his stance this fast. Anyone who follows technical analysis will know that this volatile period where most indices hover above and below moving averages, key supports will lead to constant buys and sells. There's just no trend this year, just whip lashes. Trend followers lost big time this year. Range traders did the best. Buy-and-hold fundamentalists probably just broke even.
I'll dig out the article about Barton Biggs later.
Dow Erases 2010 Loss as S&P 500 Tops Moving Average (Update2)
By Nikolaj Gammeltoft and Whitney Kisling
July 27 (Bloomberg) -- The rally that erased the Dow Jones Industrial Average’s 2010 loss yesterday and carried the Standard & Poor’s 500 Index above its 200-day average spurred optimism among chart analysts and investors who track earnings.
The Dow advanced 1 percent to 10,525.43 yesterday to wipe out an annual slump that reached 7.1 percent on July 2 after U.S. companies beat analysts’ profit estimates at twice the rate they trailed them in the second quarter. The S&P 500 rose above its mean price in the past 200 days for the first time in more than a month, after surging 8.2 percent since June 30.
Bullish signals are increasing in equities after the S&P 500 lost 13 percent in May and June, its biggest retreat since the bull market began in March 2009. Projections for the fastest S&P 500 income growth since 1988 are helping investors overcome concern that the economy will sink into its second recession in three years.
“Everybody loves an up market and stocks are looking better from a technical perspective,” said Matt McCormick, a money manager at Cincinnati-based Bahl & Gaynor Inc., which has $2.7 billion in assets. “If technicals start to turn, then psychology can turn and investors can get interested.”
As for earnings, “the numbers look good,” McCormick added.
The S&P 500 rallied 1.1 percent to a one-month high of 1,115.01 yesterday, topping its 200-day mean of 1,113.71, after new U.S. home sales beat the median economist estimate and package-delivery company FedEx Corp. boosted its profit forecast because of greater demand for international express shipments.
Benchmark Climbs
The U.S. benchmark advanced 0.4 percent to 1,119.04 as of 9:36 a.m. in New York, as earnings at companies from DuPont Co. to Lexmark International Inc. topped analyst estimates and home prices increased more than forecast. The Dow Jones Industrial Average climbed 0.3 percent to 10,559.60, the fourth straight day of gains.
Caterpillar Inc., General Electric Co. and American Express Co. surged more than 15 percent from July 2 through yesterday, leading gains in the Dow since it retreated to a nine-month low. Out of 30 companies in the measure, only one fell during that time: Johnson & Johnson.
The S&P 500 failed to surpass the moving average on May 27 and June 3 after coming within 0.2 percent amid the biggest equity losses since the bull market began in March 2009. The index spent five days above the 200-day average in the middle of June before sinking.
Moving Average
“It’s always a good thing when you reclaim an important moving average because it gets rid of resistance,” said Christian Bendixen, director of technical research at New York- based Bay Crest Partners LLP. “I’ve been bullish for the last couple of weeks on a variety of signals that the sell side was exhausted.”
Profits among S&P 500 companies will rise 35 percent in 2010, the fastest pace in 22 years, according to the average analyst estimate in a Bloomberg survey.
“There were some worries about the strength of the economic recovery, but now we’re reaching that key level of the 200-day moving average,” said Giri Cherukuri, a money manager and head trader at Oakbrook Investments in Lisle, Illinois, which manages $2.2 billion. “People are looking to see if we can sustain it.”
Slowing Expansion
Bearish investors are counting on a slower economic expansion than the pace seen before New York-based Lehman Brothers Holdings Inc.’s 2008 collapse. Global growth may average 3.25 percent to 3.5 percent in the next three to five years, below the 4.7 percent pace of the five years leading up to the 2008 slump, estimates Stephen Roach, non-executive chairman of Morgan Stanley Asia.
The S&P 500 has rallied this month as reports have signaled the economic rebound may continue. Since July 12, 83 percent of S&P 500 companies reporting quarterly results have topped estimates. The International Monetary Fund boosted its forecast for 2010 global growth to 4.6 percent from 4.2 percent on July 8 after a stronger-than-expected first half. That would be the largest gain since 2007.
This month’s rally has trimmed the S&P 500’s second-quarter retreat of 12 percent through yesterday, which was the most in a year. The index is still down 8.4 percent from the 19-month high it reached on April 23.
‘Nasty’ Quarter
“It’s reassuring that we could bounce back from that nasty second quarter,” said Ralph Shive, the South Bend, Indiana- based manager of the $1.5 billion Wasatch-1st Source Income Equity Fund. “It shows the correction was probably overdone, but we’re not back at the recovery high yet and we still need better news on the economy for people to get really comfortable about going back into equities.”
There have been 10 times that the Dow has fallen more than 5 percent and gone on to post a gain for the year, according to data from Westport, Connecticut-based Birinyi Associates Inc. going back to 1962. The index averages a 7.7 percent rally from the date of the reversal through the end of the year, Birinyi data show.
“Earnings are going to surprise again to the upside, and I think we’re starting to see the semblance of that already,” Brian Belski, Oppenheimer & Co.’s chief investment strategist, said in a Bloomberg Television interview on July 13. “Longer- term trajectory, the U.S. economy is improving -- period. Coming out of these types of malaises, typically and historically you’ve seen the market really catch fire.”
To contact the reporters on this story: Nikolaj Gammeltoft in New York at ngammeltoft@bloomberg.net; Whitney Kisling in New York at wkisling@bloomberg.net.
Last Updated: July 27, 2010 09:52 EDT
Sunday 25 July 2010
Without a New Keeper, Arsenal Won't Win a Trophy Again This Season
From the 2010 World Cup, we see that goalkeepers are perhaps the most important position. They don't do much, because most of the time, the defence shields them. But on average, even for a very good defensive team like Spain, Germany and Holland, the defence fails 3 to 4 times every 90 minutes. It is during these few precious moments that differentiate between a winner and a lower. Spain's keeper, Iker Casillas, perhaps the best in the world, made a one-on-one save against Robben just minutes before Spain seized the lead. In the first half, Casillas made another important save.
Perhaps Asenal never won a trophy because 1) it has too many young players, 2) their defence is weak and 3) they never had a truly good keeper since David Seaman left. Almunia couldn't keep a clean sheet for the last 15 minutes, which resulted in Arsenal throwing away a 1-0 lead to lose 2-1 to Barcelona back in 2005.
If the whole world can see it, I don't understand why Wenger couldn't, or wouldn't. Perhaps Wenger has become too big for Arsenal. He has a say in everthing and noone dares to talk back. If he doesn't win another trophy this season, he should share power with someone who can stand up to him, a David Dein-like personality. If this doesn't work out, for the sake of Arsenal, Wenger should go.
Perhaps Asenal never won a trophy because 1) it has too many young players, 2) their defence is weak and 3) they never had a truly good keeper since David Seaman left. Almunia couldn't keep a clean sheet for the last 15 minutes, which resulted in Arsenal throwing away a 1-0 lead to lose 2-1 to Barcelona back in 2005.
If the whole world can see it, I don't understand why Wenger couldn't, or wouldn't. Perhaps Wenger has become too big for Arsenal. He has a say in everthing and noone dares to talk back. If he doesn't win another trophy this season, he should share power with someone who can stand up to him, a David Dein-like personality. If this doesn't work out, for the sake of Arsenal, Wenger should go.
Aftermath of Stress Test
So the stress test wasn't very stringent. European banks are probably still hurt by the drop in value of the PIIGS bonds in their balance sheet. Default risk of PIIGS is still real. But let's look at some vital signals of risk assets.
Exhibit 1: JP Morgan Non Investment Grade Index has fallen to 750. Lower highs, lower lows, since the peak in June 2010. This indicates that risk appetite is slowly rising.
Exhibit 1: JP Morgan Non Investment Grade Index has fallen to 750. Lower highs, lower lows, since the peak in June 2010. This indicates that risk appetite is slowly rising.
Saturday 24 July 2010
Stress Test is Out!!!
My comments later:
July 23, 2010, 4:05 p.m. EDT · Recommend · Post:
Stress test smack-down: U.S. vs. Europe
Banking system check-ups differed in big ways Explore related topics
By Alistair Barr, MarketWatch
SAN FRANCISCO (MarketWatch) -- As the results of Europe's much-awaited bank stress test emerged Friday, some analysts grumbled that it wasn't tough enough.
A comparison with the U.S. stress test from last year shows major differences, but suggests that Europe's effort may have been no softer on its big banks.
"They have been engineered to engender confidence," Tim Backshall, chief strategist at Credit Derivatives Research, wrote in a note to investors Friday.
Europe's Bank Stress Tests Not So Tough
Europe's banks largely passed tests designed to show how they'd fare if the region had a double-dip recession. But there's still questions being asked about the toughness of the tests and inconsistencies between countries
One controversial move was that European authorities included a possible sovereign debt shock, but only projected losses from such an event on banks' trading books -- not on the assets they hold to maturity.
"We all know that the biggest risk to solvency/liquidity that the EU banks face is sovereign risk haircuts and the fact that the stress is only driven into the trading book (which is perhaps 1% of total assets) means little capital will be needed," Backshall wrote.
Still, the EU test also included potential knock-on effects from a jump in government bond yields, including a significant increase in interest rates for other borrowers like corporations. The U.S. bank stress test didn't consider any sort of sovereign crisis.
Other differences and similarities are listed below.
What banks were tested and where?
In the U.S., 19 of the largest bank holding companies were tested. Three supervisory authorities were involved in one legal jurisdiction.
In Europe, 91 banks were tested, with 27 supervisory authorities involved in 27 jurisdictions.
When was the test done?
The U.S. stress test was done in February 2009 and the results came out in May 2009.
The European test was conducted in recent months and the results were released Friday. With more than a year having passed, European banks and governments have had longer to respond to the financial crisis. From October 2008 to the end of May this year, EU governments injected 236 billion euros into European banks, helping them boost capital ratios. Indeed, 38 of the 91 banks in the European stress test currently rely on government support.
General approach
U.S. authorities measured how much of an additional capital buffer each institution might need to ensure that it would have enough capital if the economy weakened more than expected.
The EU took a similar approach, but with a twist that included possible losses from another sovereign debt crisis like the one triggered earlier this year by Greece's problems.
What targets were used?
The U.S. stress test focused not only on the amount of capital but also on the composition of capital held by the 19 banks. It assessed the Tier 1 risk-based capital ratio and the proportion of Tier 1 capital that was common equity. Tier 1 Common capital measures common equity, which is the first element of the capital structure to absorb losses, offering protection to more senior parts of the capital structure and lowering the risk of insolvency. The Tier 1 Capital ratio had to be 6%, while the Tier 1 Common ratio had to be 4%.
Europe just focused on the Tier 1 Capital ratio, also having a 6% target. It didn't use a Tier 1 Common benchmark because there's no single definition of what that is in the region, so apples-to-apples comparisons would have been tricky.
Economic scenarios
The U.S. used the following adverse scenario: Real GDP would shrink 3.3% in 2009 and grow 0.5% in 2010; the unemployment rate would hit 8.9% in 2009 and 10.3% in 2010; and house prices would slump 22% in 2009 and fall 7% in 2010.
In Europe, authorities projected that EU real GDP would be on average 3 percentage points lower than currently expected in 2010 and 2011. That implies a recession in those years. Along with that, "significant" increases in interest rates were modeled in 2010 and 2011. A sovereign debt "shock" was also modeled, in which five-year government bond yields jump to 4.6% on average from 2.69% at the end of 2009. Knock-on effects from this were also taken into account -- for instance the possibility that if government yields jump, interest rates for other types of borrowers would rise too, making losses on assets like corporate bonds more likely for banks.
What assets were stressed?
In the U.S. stress test, generally all the banks' assets were evaluated under the adverse economic scenario.
European authorities tested all the assets of the banks under its adverse economic scenario. But the sovereign shock only applied to banks' shorter-term trading books, not the assets they hold to maturity. The held-to-maturity part of banks' balance sheets is typically much larger, leading some analysts to question how tough the European stress test was. However, EU authorities noted that massive bailout programs they put in place after Greece's debt crisis have made it highly unlikely that a European country would default. That means banks might have to mark down the value of government bonds in their trading books in the short term. But by the time the debt matures and is paid off, values will have returned to their original levels.
General results
U.S. authorities projected that if the economy were to follow the more adverse scenario, losses at the 19 banks during 2009 and 2010 could be $600 billion. The bulk of the estimated losses -- roughly $455 billion -- would come from losses on the banks' accrual loan portfolios, particularly from residential mortgages and other consumer loans. Estimated losses from trading-related exposures and securities held in investment portfolios totaled $135 billion. U.S. banks needed to raise $75 billion in capital. Most of the shortfall was in Tier 1 Common capital, with virtually no shortfall in Tier 1 capital.
The EU's adverse economic scenario produced projected losses of 473 billion euros in 2010 and 2011 for the 91 banks in the test. All that was from impaired loans on the banks' balance sheets. A sovereign debt shock would trigger another 39 billion euros of losses in banks' trading books, while knock-on effects from such a crisis could add another 28 billion euros in losses over 2010 and 2011. That produced a total of 566 billion euros in losses.
Which banks failed the tests?
In the U.S., 10 out of the 19 banks failed the test and nine passed. Bank of America /quotes/comstock/13*!bac/quotes/nls/bac (BAC 13.75, +0.01, +0.07%) , Citigroup /quotes/comstock/13*!c/quotes/nls/c (C 4.03, +0.01, +0.25%) , Wells Fargo /quotes/comstock/13*!wfc/quotes/nls/wfc (WFC 27.43, +0.01, +0.04%) , Fifth Third /quotes/comstock/15*!fitb/quotes/nls/fitb (FITB 12.29, -0.16, -1.29%) , GMAC, KeyCorp /quotes/comstock/13*!key/quotes/nls/key (KEY 8.03, +0.08, +1.01%) , Morgan Stanley /quotes/comstock/13*!ms/quotes/nls/ms (MS 26.91, +0.02, +0.07%) , PNC Financial /quotes/comstock/13*!pnc/quotes/nls/pnc (PNC 60.90, -0.12, -0.20%) , Regions Financial /quotes/comstock/13*!rf/quotes/nls/rf (RF 6.65, +0.05, +0.76%) , SunTrust /quotes/comstock/13*!sti/quotes/nls/sti (STI 25.04, +0.46, +1.87%) all needed to raise capital.
In Europe, seven banks failed in three countries. Germany's Hypo Real Estate and Greece's ATEBank couldn't keep a Tier 1 Capital ratio of more than 6% under the test. Five banks in Spain, including recently merged Cajasur, also didn't make the grade.
Alistair Barr is a reporter for MarketWatch in San Francisco.
July 23, 2010, 4:05 p.m. EDT · Recommend · Post:
Stress test smack-down: U.S. vs. Europe
Banking system check-ups differed in big ways Explore related topics
By Alistair Barr, MarketWatch
SAN FRANCISCO (MarketWatch) -- As the results of Europe's much-awaited bank stress test emerged Friday, some analysts grumbled that it wasn't tough enough.
A comparison with the U.S. stress test from last year shows major differences, but suggests that Europe's effort may have been no softer on its big banks.
"They have been engineered to engender confidence," Tim Backshall, chief strategist at Credit Derivatives Research, wrote in a note to investors Friday.
Europe's Bank Stress Tests Not So Tough
Europe's banks largely passed tests designed to show how they'd fare if the region had a double-dip recession. But there's still questions being asked about the toughness of the tests and inconsistencies between countries
One controversial move was that European authorities included a possible sovereign debt shock, but only projected losses from such an event on banks' trading books -- not on the assets they hold to maturity.
"We all know that the biggest risk to solvency/liquidity that the EU banks face is sovereign risk haircuts and the fact that the stress is only driven into the trading book (which is perhaps 1% of total assets) means little capital will be needed," Backshall wrote.
Still, the EU test also included potential knock-on effects from a jump in government bond yields, including a significant increase in interest rates for other borrowers like corporations. The U.S. bank stress test didn't consider any sort of sovereign crisis.
Other differences and similarities are listed below.
What banks were tested and where?
In the U.S., 19 of the largest bank holding companies were tested. Three supervisory authorities were involved in one legal jurisdiction.
In Europe, 91 banks were tested, with 27 supervisory authorities involved in 27 jurisdictions.
When was the test done?
The U.S. stress test was done in February 2009 and the results came out in May 2009.
The European test was conducted in recent months and the results were released Friday. With more than a year having passed, European banks and governments have had longer to respond to the financial crisis. From October 2008 to the end of May this year, EU governments injected 236 billion euros into European banks, helping them boost capital ratios. Indeed, 38 of the 91 banks in the European stress test currently rely on government support.
General approach
U.S. authorities measured how much of an additional capital buffer each institution might need to ensure that it would have enough capital if the economy weakened more than expected.
The EU took a similar approach, but with a twist that included possible losses from another sovereign debt crisis like the one triggered earlier this year by Greece's problems.
What targets were used?
The U.S. stress test focused not only on the amount of capital but also on the composition of capital held by the 19 banks. It assessed the Tier 1 risk-based capital ratio and the proportion of Tier 1 capital that was common equity. Tier 1 Common capital measures common equity, which is the first element of the capital structure to absorb losses, offering protection to more senior parts of the capital structure and lowering the risk of insolvency. The Tier 1 Capital ratio had to be 6%, while the Tier 1 Common ratio had to be 4%.
Europe just focused on the Tier 1 Capital ratio, also having a 6% target. It didn't use a Tier 1 Common benchmark because there's no single definition of what that is in the region, so apples-to-apples comparisons would have been tricky.
Economic scenarios
The U.S. used the following adverse scenario: Real GDP would shrink 3.3% in 2009 and grow 0.5% in 2010; the unemployment rate would hit 8.9% in 2009 and 10.3% in 2010; and house prices would slump 22% in 2009 and fall 7% in 2010.
In Europe, authorities projected that EU real GDP would be on average 3 percentage points lower than currently expected in 2010 and 2011. That implies a recession in those years. Along with that, "significant" increases in interest rates were modeled in 2010 and 2011. A sovereign debt "shock" was also modeled, in which five-year government bond yields jump to 4.6% on average from 2.69% at the end of 2009. Knock-on effects from this were also taken into account -- for instance the possibility that if government yields jump, interest rates for other types of borrowers would rise too, making losses on assets like corporate bonds more likely for banks.
What assets were stressed?
In the U.S. stress test, generally all the banks' assets were evaluated under the adverse economic scenario.
European authorities tested all the assets of the banks under its adverse economic scenario. But the sovereign shock only applied to banks' shorter-term trading books, not the assets they hold to maturity. The held-to-maturity part of banks' balance sheets is typically much larger, leading some analysts to question how tough the European stress test was. However, EU authorities noted that massive bailout programs they put in place after Greece's debt crisis have made it highly unlikely that a European country would default. That means banks might have to mark down the value of government bonds in their trading books in the short term. But by the time the debt matures and is paid off, values will have returned to their original levels.
General results
U.S. authorities projected that if the economy were to follow the more adverse scenario, losses at the 19 banks during 2009 and 2010 could be $600 billion. The bulk of the estimated losses -- roughly $455 billion -- would come from losses on the banks' accrual loan portfolios, particularly from residential mortgages and other consumer loans. Estimated losses from trading-related exposures and securities held in investment portfolios totaled $135 billion. U.S. banks needed to raise $75 billion in capital. Most of the shortfall was in Tier 1 Common capital, with virtually no shortfall in Tier 1 capital.
The EU's adverse economic scenario produced projected losses of 473 billion euros in 2010 and 2011 for the 91 banks in the test. All that was from impaired loans on the banks' balance sheets. A sovereign debt shock would trigger another 39 billion euros of losses in banks' trading books, while knock-on effects from such a crisis could add another 28 billion euros in losses over 2010 and 2011. That produced a total of 566 billion euros in losses.
Which banks failed the tests?
In the U.S., 10 out of the 19 banks failed the test and nine passed. Bank of America /quotes/comstock/13*!bac/quotes/nls/bac (BAC 13.75, +0.01, +0.07%) , Citigroup /quotes/comstock/13*!c/quotes/nls/c (C 4.03, +0.01, +0.25%) , Wells Fargo /quotes/comstock/13*!wfc/quotes/nls/wfc (WFC 27.43, +0.01, +0.04%) , Fifth Third /quotes/comstock/15*!fitb/quotes/nls/fitb (FITB 12.29, -0.16, -1.29%) , GMAC, KeyCorp /quotes/comstock/13*!key/quotes/nls/key (KEY 8.03, +0.08, +1.01%) , Morgan Stanley /quotes/comstock/13*!ms/quotes/nls/ms (MS 26.91, +0.02, +0.07%) , PNC Financial /quotes/comstock/13*!pnc/quotes/nls/pnc (PNC 60.90, -0.12, -0.20%) , Regions Financial /quotes/comstock/13*!rf/quotes/nls/rf (RF 6.65, +0.05, +0.76%) , SunTrust /quotes/comstock/13*!sti/quotes/nls/sti (STI 25.04, +0.46, +1.87%) all needed to raise capital.
In Europe, seven banks failed in three countries. Germany's Hypo Real Estate and Greece's ATEBank couldn't keep a Tier 1 Capital ratio of more than 6% under the test. Five banks in Spain, including recently merged Cajasur, also didn't make the grade.
Alistair Barr is a reporter for MarketWatch in San Francisco.
Thursday 22 July 2010
The FinReg Will Not Affect Asia's Banks
An old friend who left the banking industry to be an entrepreneur told me that the finreg will cause the demise of the banking industry. Yes, it will probably reduce the earnings of investment banks as trading in derivatives and other activities deemed "risky" will be curbed. Also, banks are required to hold more capital. But the bulk of such measures will affect the i Banks the most, not consumer banks, not private banking. Corporate banking's margins will be further reduced due to the extra capital required. Since securitisation may be more difficult, loans books may grow more slowly. This is not the Glass-Steagall Act. It is Volker's Act that is a watered-down version of the Glass-Steagall Act.
The bonuses of i Bankers in the US will be curbed for sure. In UK, bankers' bonuses will be scrutinised. But the safe haven remains wealth management and private banking. The only curbs I can see is more restriction on selling derivative products to retail clients. But for the business that caters to the wealthy and sophisticated, it is business as usual.
According to MTI's report published back in 2004, the banking industry is on average the best pay master in Singapore. Only the chemical industry pays more, read Exxon Mobile. Pharmaceuticals used to be a darling too, but their patents are slowly expiring and there are fewer blockbuster drugs produced. Another important trait is that in most industries, the earning power of an employee tapers off after he/she reaches 45. But for industries that rely less on physical strength and more on brain and networking power, earnings continue to rise right up to retirement age.
Entrepreneurship has great rewards and great failures. On average, 70% of start-ups fail and I'm being very generous. No doubt those who make it will enjoy great wealth. But if you multiply probability of success with reward, the expected returns are probably lower.
The bonuses of i Bankers in the US will be curbed for sure. In UK, bankers' bonuses will be scrutinised. But the safe haven remains wealth management and private banking. The only curbs I can see is more restriction on selling derivative products to retail clients. But for the business that caters to the wealthy and sophisticated, it is business as usual.
According to MTI's report published back in 2004, the banking industry is on average the best pay master in Singapore. Only the chemical industry pays more, read Exxon Mobile. Pharmaceuticals used to be a darling too, but their patents are slowly expiring and there are fewer blockbuster drugs produced. Another important trait is that in most industries, the earning power of an employee tapers off after he/she reaches 45. But for industries that rely less on physical strength and more on brain and networking power, earnings continue to rise right up to retirement age.
Entrepreneurship has great rewards and great failures. On average, 70% of start-ups fail and I'm being very generous. No doubt those who make it will enjoy great wealth. But if you multiply probability of success with reward, the expected returns are probably lower.
Tuesday 20 July 2010
We Are Hurtling Towards a Double Dip Unless The Governments Do This
Let's face it; the data in the last 2 months have been terrible. Housing starts collapsed in the US, retail sales down, consumer confidence down. In China, 60 million houses do not have electricity bills. In the EU, austerity measures are being implemented at a time when we need more fiscal stimulus.
Here are the scenarios: If the governments of the US, EU and China implement another stimulus, we might avoid a second dip and then face slow GDP growth in 2011. Perhaps 2 - 3% GDP growth in the US, 1 - 2.5% in the EU and 5% in most of Asia. But if the much needed stimulus is not implemented, we can face 1 - 2% in the US, -1 to 1% in the EU and 3% in most of Asia.
The asset classes most able to shelter us from major upheavel are volatility funds like the Amundi Volatility World, emerging market debt funds like Schroder Emerging Market Debt and Templeton Global Total Return funds.
Senate Democrats Set to Pass Extension of Unemployment Benefits
July 20 (Bloomberg) -- Senate Democrats are poised today to break an impasse over financing unemployment benefits that has resulted in aid being cut off to more than 2 million Americans.
With the seating of Carte Goodwin, the successor to the late Senator Robert Byrd, Democrats say they will have the 60 votes needed to overcome stalling tactics of Republicans, who have demanded that Democrats find savings elsewhere in the federal budget to pay for the bill and avoid adding to the deficit.
Democrats, who came up one vote short in their latest bid to extend aid, opted to wait for Goodwin to give them the clinching vote. Senate leaders have scheduled a procedural vote this afternoon to bring debate on the matter to a close, immediately after Goodwin’s seating.
Along with Goodwin, Maine Republicans Susan Collins and Olympia Snowe are expected to vote with the Democrats to end the Republican filibuster.
The legislation, already approved by the House, could clear the Senate today. It would extend through November a program offering the long-term unemployed up to 99 weeks of assistance.
Democrats dropped several other pieces of unemployment assistance amid complaints over the cost, so even with passage of this measure, the unemployed will receive less benefits.
Benefit Reduced
A 65 percent subsidy created last year to help the jobless buy health insurance through their former employers will be allowed to lapse. It benefited 2 million households, according to the Treasury Department.
The measure also would not renew a provision boosting unemployment checks by $25 that was part of last year’s economic stimulus package. Nor would it extend provisions exempting the first $2400 in unemployment aid from taxation. In addition, Democrats have no plan to extend aid to the growing number of Americans who already have received the maximum amount of allowable aid.
The bill comes amid a growing debate over whether the aid extensions are contributing to the jobless rate.
An April report by a pair of economists at the Federal Reserve Bank of San Francisco found that extensions have had a “relatively modest effect” on the unemployment rate, estimating the figure would have been 9.6 percent at the end of last year rather than 10.0 percent without the aid. The unemployment rate in June was 9.5 percent.
White House spokesman Robert Gibbs said yesterday the extension probably won’t be the last. “I think it is fair and safe to assume that we are not going to wake up at the end of November and find ourselves at a rate of employment that one would consider not to be still in an emergency,” he told reporters.
To contact the reporter on this story: Brian Faler in Washington at bfaler@bloomberg.net
Last Updated: July 20, 2010 08:49 EDT
Here are the scenarios: If the governments of the US, EU and China implement another stimulus, we might avoid a second dip and then face slow GDP growth in 2011. Perhaps 2 - 3% GDP growth in the US, 1 - 2.5% in the EU and 5% in most of Asia. But if the much needed stimulus is not implemented, we can face 1 - 2% in the US, -1 to 1% in the EU and 3% in most of Asia.
The asset classes most able to shelter us from major upheavel are volatility funds like the Amundi Volatility World, emerging market debt funds like Schroder Emerging Market Debt and Templeton Global Total Return funds.
Senate Democrats Set to Pass Extension of Unemployment Benefits
July 20 (Bloomberg) -- Senate Democrats are poised today to break an impasse over financing unemployment benefits that has resulted in aid being cut off to more than 2 million Americans.
With the seating of Carte Goodwin, the successor to the late Senator Robert Byrd, Democrats say they will have the 60 votes needed to overcome stalling tactics of Republicans, who have demanded that Democrats find savings elsewhere in the federal budget to pay for the bill and avoid adding to the deficit.
Democrats, who came up one vote short in their latest bid to extend aid, opted to wait for Goodwin to give them the clinching vote. Senate leaders have scheduled a procedural vote this afternoon to bring debate on the matter to a close, immediately after Goodwin’s seating.
Along with Goodwin, Maine Republicans Susan Collins and Olympia Snowe are expected to vote with the Democrats to end the Republican filibuster.
The legislation, already approved by the House, could clear the Senate today. It would extend through November a program offering the long-term unemployed up to 99 weeks of assistance.
Democrats dropped several other pieces of unemployment assistance amid complaints over the cost, so even with passage of this measure, the unemployed will receive less benefits.
Benefit Reduced
A 65 percent subsidy created last year to help the jobless buy health insurance through their former employers will be allowed to lapse. It benefited 2 million households, according to the Treasury Department.
The measure also would not renew a provision boosting unemployment checks by $25 that was part of last year’s economic stimulus package. Nor would it extend provisions exempting the first $2400 in unemployment aid from taxation. In addition, Democrats have no plan to extend aid to the growing number of Americans who already have received the maximum amount of allowable aid.
The bill comes amid a growing debate over whether the aid extensions are contributing to the jobless rate.
An April report by a pair of economists at the Federal Reserve Bank of San Francisco found that extensions have had a “relatively modest effect” on the unemployment rate, estimating the figure would have been 9.6 percent at the end of last year rather than 10.0 percent without the aid. The unemployment rate in June was 9.5 percent.
White House spokesman Robert Gibbs said yesterday the extension probably won’t be the last. “I think it is fair and safe to assume that we are not going to wake up at the end of November and find ourselves at a rate of employment that one would consider not to be still in an emergency,” he told reporters.
To contact the reporter on this story: Brian Faler in Washington at bfaler@bloomberg.net
Last Updated: July 20, 2010 08:49 EDT
Which Way Forward for BP?
http://www.bbc.co.uk/news/10520619
6 July 2010 Which way forward for BP?
By Laurence Knight
Business reporter, BBC News
BP want some way to draw a line under the Gulf of Mexico disaster and move on
In June, financial markets were briefly pricing a bankruptcy of BP in the next five years as an odds-on probability as a result of the ongoing oil spill in the Gulf of Mexico.
Things are not so bad now.
BP's share price - which had more than halved since the Deepwater Horizon oil rig explosion in April first triggered the company's woes - has staged an impressive recovery in recent weeks.
Yet talk continues to circulate of a possible strategic investor in BP - either as a welcome provider of fresh capital to the company, or an unwelcome opportunist sniffing a bargain.
So what are the options now for BP?
Bankruptcy
On 16 June, the cost of buying financial protection for one year against a possible debt default by BP reached a staggering 10%.
Continue reading the main story “
Start Quote
I think markets are [pricing in] a scenario considerably bleaker than will prove to be the case.”
End Quote
Alan Sinclair
Oil and gas analyst, Seymour Pierce
During those panicky days, credit markets were in effect saying that a BP bankruptcy in the next few years was more likely than not.
Things have calmed down since then, although the oil giant's bonds still trade at prices comparable with companies rated "junk", even though the credit rating agencies have yet to actually stick that ignominious label on BP.
The about turn has been extraordinary. Before its money and reputation began bleeding away in the Gulf of Mexico, the oil giant was considered the safest of blue chip companies, because its debts were so low and its income so high.
"I think markets are [pricing in] a scenario considerably bleaker than will prove to be the case," says Alan Sinclair, oil and gas analyst at stock brokers Seymour Pierce.
He points out that just by cancelling its remaining dividends this year, the company should already have enough money in hand to cover what he expects to be the $6bn (£4bn) direct cost of the clean-up.
That is about double what the company has already forked out to date.
"If you add in all the civil liabilities... I would be surprised if it comes to more than the $20bn they already agreed to set aside," Mr Sinclair adds, on the assumption that the relief wells currently being drilled succeed in stopping the leak in August.
Limited liability
The company could seek ways to limit its liability to the oil spill.
BP
Last Updated at 20 Jul 2010, 07:01 GMT
price change %
396.00 p + +8.15 + +2.10
More data on this share price
There is already a statutory limit under US law for oil spill costs of a mere $75m, but BP long ago waived this limit, as hiding behind it would have been politically untenable.
However, BP had two co-investors in the Deepwater Horizon well - Anadarko of the US and Mitsui of Japan - who together own 35% of the project.
The UK company has called on its partners to pay their share of the spiralling costs, and Mr Sinclair thinks that if it comes to a legal fight, BP would prevail.
The oil firm could also take more active steps to limit its liability, for instance through a selective bankruptcy of its US business.
But this would almost certainly be unpalatable to the company's board, as it would enrage US politicians, including President Barack Obama, and probably cut off the entire US market to BP.
So the political reality is that BP's liability in the Gulf of Mexico remains unlimited, and this continues to weigh down the company's share price.
Strategic investor or acquisition target?
In this context, speculation has arisen that BP may look to an outside investor to provide a capital injection to help cover these costs.
BP Facts
Continue reading the main story Clean-up:
Cost to date: $3.1bn approx
Escrow account promise: $20bn
Shares:
Share price on 20 April (before leak began): 656p
Share price lowest point (on 25 June): 296p (55% fall)
2009 profits: £10bn
2010 dividend: £1.8bn in Q1; Q2-4 cancelled, saving £5.4bn
Debt:
Total debts: £17bn, of which £4.9 due by end-2011
2009 cashflow: £21bn
Credit ratings: A2/A (Moodys/S&P)
Credit default swap spread (5 years): 4.1% per annum
Strategic investors:
Market capitalisation: £65bn (at 345p current share price)
Kuwait shareholding: 1.75%
China shareholding: 1.1%
Data: Bloomberg as of 6 July 2010
Or alternatively it could fall victim to an unwanted suitor looking to buy up the company cheaply on the stock market.
Kuwait is high on the list. It has had a relationship with the company ever since the UK government sold British Petroleum on the stock exchange in 1987.
But Kuwait's involvement in that flotation serves as a useful case study in the politics of such investments.
The Kuwait Investment Authority helpfully bought almost 30% of the company after the sale was almost derailed by the stock market crash.
But the Arabs later came under pressure from Downing Street to give up hopes of a takeover and scale back their investment.
Yet today Kuwait may be the most attractive suitor.
On Monday, Libya voiced interest in making a grab for the company.
Resource-hungry China is also mentioned as a possibility. Its national oil company attempted to buy California's Unocal in 2005, only to be blocked by the White House on national security grounds.
Among fellow oil companies, the names of Exxon Mobil and Shell are also being bandied about.
But the resulting company might be unacceptably big and powerful for US and European anti-trust authorities.
"Even in Europe, the EU would have a fit about the anti-trust implications," says Mr Sinclair of Seymour Pierce.
Asset sales
Indeed, he thinks the entire idea of an investor buying BP itself is questionable.
Libya may be one of the less welcome suitors "Why take on a company that is about to undertake several years of litigation... [with] unquantifiable potential civil penalties?" he asks.
Instead, he points to asset sales by BP as the likely way forwards.
BP could for example spin off US subsidiary Atlantic Richfield to one of its rivals.
Or it could sell individual wells and exploration rights to the Chinese.
This would minimise both political and anti-trust issues, and allow BP's existing management to keep control.
"BP can afford to fork out $4bn a year by selling assets... and being flexible about [capital expenditure]," notes Mr Sinclair.
Phoenix from the ashes?
The last possibility, and one that some market participants may be considering seriously again, is that BP will recover fully from its current debacle.
Having promised to set aside $20bn in a dedicated "escrow" account, some are hopeful there may be a tacit agreement with the White House that this figure will represent a cap on the company's liabilities.
Only time will tell.
6 July 2010 Which way forward for BP?
By Laurence Knight
Business reporter, BBC News
BP want some way to draw a line under the Gulf of Mexico disaster and move on
In June, financial markets were briefly pricing a bankruptcy of BP in the next five years as an odds-on probability as a result of the ongoing oil spill in the Gulf of Mexico.
Things are not so bad now.
BP's share price - which had more than halved since the Deepwater Horizon oil rig explosion in April first triggered the company's woes - has staged an impressive recovery in recent weeks.
Yet talk continues to circulate of a possible strategic investor in BP - either as a welcome provider of fresh capital to the company, or an unwelcome opportunist sniffing a bargain.
So what are the options now for BP?
Bankruptcy
On 16 June, the cost of buying financial protection for one year against a possible debt default by BP reached a staggering 10%.
Continue reading the main story “
Start Quote
I think markets are [pricing in] a scenario considerably bleaker than will prove to be the case.”
End Quote
Alan Sinclair
Oil and gas analyst, Seymour Pierce
During those panicky days, credit markets were in effect saying that a BP bankruptcy in the next few years was more likely than not.
Things have calmed down since then, although the oil giant's bonds still trade at prices comparable with companies rated "junk", even though the credit rating agencies have yet to actually stick that ignominious label on BP.
The about turn has been extraordinary. Before its money and reputation began bleeding away in the Gulf of Mexico, the oil giant was considered the safest of blue chip companies, because its debts were so low and its income so high.
"I think markets are [pricing in] a scenario considerably bleaker than will prove to be the case," says Alan Sinclair, oil and gas analyst at stock brokers Seymour Pierce.
He points out that just by cancelling its remaining dividends this year, the company should already have enough money in hand to cover what he expects to be the $6bn (£4bn) direct cost of the clean-up.
That is about double what the company has already forked out to date.
"If you add in all the civil liabilities... I would be surprised if it comes to more than the $20bn they already agreed to set aside," Mr Sinclair adds, on the assumption that the relief wells currently being drilled succeed in stopping the leak in August.
Limited liability
The company could seek ways to limit its liability to the oil spill.
BP
Last Updated at 20 Jul 2010, 07:01 GMT
price change %
396.00 p + +8.15 + +2.10
More data on this share price
There is already a statutory limit under US law for oil spill costs of a mere $75m, but BP long ago waived this limit, as hiding behind it would have been politically untenable.
However, BP had two co-investors in the Deepwater Horizon well - Anadarko of the US and Mitsui of Japan - who together own 35% of the project.
The UK company has called on its partners to pay their share of the spiralling costs, and Mr Sinclair thinks that if it comes to a legal fight, BP would prevail.
The oil firm could also take more active steps to limit its liability, for instance through a selective bankruptcy of its US business.
But this would almost certainly be unpalatable to the company's board, as it would enrage US politicians, including President Barack Obama, and probably cut off the entire US market to BP.
So the political reality is that BP's liability in the Gulf of Mexico remains unlimited, and this continues to weigh down the company's share price.
Strategic investor or acquisition target?
In this context, speculation has arisen that BP may look to an outside investor to provide a capital injection to help cover these costs.
BP Facts
Continue reading the main story Clean-up:
Cost to date: $3.1bn approx
Escrow account promise: $20bn
Shares:
Share price on 20 April (before leak began): 656p
Share price lowest point (on 25 June): 296p (55% fall)
2009 profits: £10bn
2010 dividend: £1.8bn in Q1; Q2-4 cancelled, saving £5.4bn
Debt:
Total debts: £17bn, of which £4.9 due by end-2011
2009 cashflow: £21bn
Credit ratings: A2/A (Moodys/S&P)
Credit default swap spread (5 years): 4.1% per annum
Strategic investors:
Market capitalisation: £65bn (at 345p current share price)
Kuwait shareholding: 1.75%
China shareholding: 1.1%
Data: Bloomberg as of 6 July 2010
Or alternatively it could fall victim to an unwanted suitor looking to buy up the company cheaply on the stock market.
Kuwait is high on the list. It has had a relationship with the company ever since the UK government sold British Petroleum on the stock exchange in 1987.
But Kuwait's involvement in that flotation serves as a useful case study in the politics of such investments.
The Kuwait Investment Authority helpfully bought almost 30% of the company after the sale was almost derailed by the stock market crash.
But the Arabs later came under pressure from Downing Street to give up hopes of a takeover and scale back their investment.
Yet today Kuwait may be the most attractive suitor.
On Monday, Libya voiced interest in making a grab for the company.
Resource-hungry China is also mentioned as a possibility. Its national oil company attempted to buy California's Unocal in 2005, only to be blocked by the White House on national security grounds.
Among fellow oil companies, the names of Exxon Mobil and Shell are also being bandied about.
But the resulting company might be unacceptably big and powerful for US and European anti-trust authorities.
"Even in Europe, the EU would have a fit about the anti-trust implications," says Mr Sinclair of Seymour Pierce.
Asset sales
Indeed, he thinks the entire idea of an investor buying BP itself is questionable.
Libya may be one of the less welcome suitors "Why take on a company that is about to undertake several years of litigation... [with] unquantifiable potential civil penalties?" he asks.
Instead, he points to asset sales by BP as the likely way forwards.
BP could for example spin off US subsidiary Atlantic Richfield to one of its rivals.
Or it could sell individual wells and exploration rights to the Chinese.
This would minimise both political and anti-trust issues, and allow BP's existing management to keep control.
"BP can afford to fork out $4bn a year by selling assets... and being flexible about [capital expenditure]," notes Mr Sinclair.
Phoenix from the ashes?
The last possibility, and one that some market participants may be considering seriously again, is that BP will recover fully from its current debacle.
Having promised to set aside $20bn in a dedicated "escrow" account, some are hopeful there may be a tacit agreement with the White House that this figure will represent a cap on the company's liabilities.
Only time will tell.
Friday 16 July 2010
BP Asset Buyers May Face Suits as it Raises Money to Pay Claims
BP Asset Buyers May Face Suits as It Raises Money to Pay Claims
By Linda Sandler
July 16 (Bloomberg) -- BP Plc may saddle potential buyers of its assets with lawsuits as it tries to raise money to pay claims that could reach $100 billion from the Gulf of Mexico oil spill, lawyers and analysts said.
Apache Corp. may agree to pay $10 billion to $11 billion in cash next week for some of BP’s Alaskan assets, according to people familiar with the deal. Exxon Mobil Corp., Royal Dutch Shell Plc and Tullow Oil Plc have also said they may be interested in buying some of BP’s properties.
Laws prohibiting fraudulent transfers could allow victims to sue a buyer to recover money deemed essential to pay claims, and successor liability could leave a purchaser with BP’s obligations, if BP files for bankruptcy. A proposed change to federal bankruptcy laws could force a buyer to wait for BP to get approval from victims for the sale, or persuade a judge it will have enough assets to pay claims in full.
“Any purchaser will worry about fraudulent transfer and successor liability issues, and perhaps request part of the purchase price be kept in escrow for such a contingency,”,” said New York bankruptcy lawyer Martin Bienenstock of Dewey & LeBoeuf LLP in an e-mail.
BP said yesterday it stopped the flow of oil from its broken Macondo well for the first time since an April 20 explosion at the Deepwater Horizon drilling rig killed 11 workers. The well had dumped as much as 60,000 barrels of oil a day into the Gulf, according to a U.S. government-led panel of scientists.
Victim Fund
Last month London-based BP agreed to deposit $20 billion in an independent account to pay compensation to victims. BP said it would sell $10 billion in assets to pay for damage from the disaster, which has already cost the company more than $3.5 billion.
Louisiana Treasurer John Kennedy has said the total cost of the oil spill may be as high as $100 billion. Oppenheimer & Co. analyst Fadel Gheit last month put the financial damage from the environmental catastrophe as high as $60 billion.
While BP could survive a $60 billion liability, “I am less certain they can survive $100 billion or more,” Gheit said in a phone interview.
BP generated $30 billion in cash flow in the last four quarters and had $5 billion in available cash, another $5 billion in credit lines and $5 billion in standby loans as of June 4, said spokesman Toby Odone. BP has said it won’t file for bankruptcy.
Potential Buyers
Odone declined to comment on whether potential asset buyers or lenders had raised the issue of fraudulent transfer law or proposed U.S. legislation on asset transfer.
Apache declined to comment through spokesman Robert Dye. Alan Jeffers, an Exxon spokesman, wouldn’t comment on BP. “Any asset purchase agreement has lots of complications that need to be evaluated,” he said. Wendel Broere, a Shell spokesman, declined to comment.
Under current law, if BP were to declare bankruptcy, the company could try to sell assets free and clear of liabilities through a so-called 363 sale, as General Motors Co. and Chrysler Group LLC did last year.
“If I were Exxon or Shell, I would try to buy BP’s assets out of bankruptcy,” said Nancy Rapoport, a bankruptcy law professor at the University of Nevada, Las Vegas. “You get clean title.”
Proposed Change
If the proposed change in the law, which has passed the House, is enacted, a bankrupt BP couldn’t do a 363 sale. It would instead have to get approval for the sale from spill victims holding two-thirds of unpaid claims, or prove to a judge it would have enough assets left to pay claims in full.
Credit-default swaps traders last month were pricing in more than 40 percent odds that BP would default within the next five years, according to data provider CMA.
The contracts, which rise as investor confidence deteriorates and fall as it improves, have dropped the past two weeks, falling 234 basis points since June 29 to 360 basis points yesterday, CMA prices show. That implies the market has priced in a 26 percent probability of default, assuming bondholders would recover 40 percent of their investment.
“Other than bankruptcy, which BP will try to avoid like the plague, there is no vehicle that will enable BP to clear the decks and eliminate the cloud of liability hanging over it for many years to come,” said Bienenstock, who advised GM on its bankruptcy.
Sale Challenges
Even 363 sales can be challenged. Defunct Lehman Brothers Holdings Inc. and its creditors are trying to recover an alleged $11 billion “windfall” from Barclays Plc, which bought Lehman’s brokerage in 2008. Barclays has denied wrongdoing.
“The buyer of BP assets will require a discount because of the uncertainty,” said John Tucker, a lawyer with Rhodes Hieronymus Jones Tucker & Gable in Tulsa. “They have to make certain they’re paying a justifiable price” or else a bankruptcy court could reverse the deal in the future. Tucker’s clients include Thomas Kivisto, former chairman of bankrupt SemGroup LP.
The risk of lawsuits is lower if BP hires investment bankers to run a bidding process, recording bid prices that showed the buyer paid a market-tested value for the asset, said Bienenstock.
“Arm’s-length commercial deals are rarely set aside as fraudulent transfers,” he said. “Courts don’t like to second guess arm’s-length negotiations.”
Independent Appraiser
Apache might hire an independent appraiser to write an opinion letter saying either that the price was reasonable, or that BP was solvent, said Stephen Lubben, a bankruptcy law professor at Seton Hall University School of Law in Newark, New Jersey. Apache’s purchase if completed will include half of BP’s stake in Alaska’s Prudhoe Bay oil field, the people familiar with the deal said.
“Either defeats an element of a fraudulent transfer action,” Lubben said. “Somebody could always challenge the opinion letter, but it makes it much more costly for the plaintiffs.”
Under some state laws, an oil spill victim could sue to undo a BP sale that closed four years earlier, said Lynn Lopucki, a law professor at the University of California, Los Angeles. New York State law goes back six years, Lubben said.
BP sold $289 million of assets to Magellan Midstream Partners LP in a deal that the companies began negotiating in February. The sale includes oil storage tanks in Cushing, Oklahoma, and pipelines that connect refineries in southern Texas, including BP’s plant in Texas City.
Lukoil Sale
BP also sold its interest in Kazakhstan’s Tengiz oilfield and the Caspian Pipeline Consortium to Moscow-based OAO Lukoil for $1.6 billion in cash in December. Lukoil, which bought Getty Petroleum Marketing Inc. in 2000, owns a network of U.S. filling stations with Houston-based ConocoPhillips.
BP needn’t be insolvent or in bankruptcy for a plaintiff to sue a buyer of its properties under state law, Lopucki said.
“Tort victims could sue because the assets remaining to pay them have been reduced” by the sale,” he said. “They might argue the $20 billion fund is not enough.”
Even a foreign buyer of BP assets outside of the U.S. might not be able to avoid U.S. law, Lopucki said. “As long as the foreign buyer has assets in the U.S., U.S. courts would have jurisdiction,” he said.
BP’s Odone said the company will wait until its next set of results to decide whether to borrow more money to pay its spill bills. BP is due to report quarterly results on July 27.
BP faces more than 300 lawsuits filed by fishermen, property owners, restaurant operators, environmentalists, local governments and its own employees. Most of the lawsuits have been filed as class actions in federal courts in the five states along the Gulf coast, Louisiana, Alabama, Texas, Mississippi and Florida.
To contact the reporters on this story: Linda Sandler in New York at lsandler@bloomberg.net.
Last Updated: July 16, 2010 00:01 EDT
By Linda Sandler
July 16 (Bloomberg) -- BP Plc may saddle potential buyers of its assets with lawsuits as it tries to raise money to pay claims that could reach $100 billion from the Gulf of Mexico oil spill, lawyers and analysts said.
Apache Corp. may agree to pay $10 billion to $11 billion in cash next week for some of BP’s Alaskan assets, according to people familiar with the deal. Exxon Mobil Corp., Royal Dutch Shell Plc and Tullow Oil Plc have also said they may be interested in buying some of BP’s properties.
Laws prohibiting fraudulent transfers could allow victims to sue a buyer to recover money deemed essential to pay claims, and successor liability could leave a purchaser with BP’s obligations, if BP files for bankruptcy. A proposed change to federal bankruptcy laws could force a buyer to wait for BP to get approval from victims for the sale, or persuade a judge it will have enough assets to pay claims in full.
“Any purchaser will worry about fraudulent transfer and successor liability issues, and perhaps request part of the purchase price be kept in escrow for such a contingency,”,” said New York bankruptcy lawyer Martin Bienenstock of Dewey & LeBoeuf LLP in an e-mail.
BP said yesterday it stopped the flow of oil from its broken Macondo well for the first time since an April 20 explosion at the Deepwater Horizon drilling rig killed 11 workers. The well had dumped as much as 60,000 barrels of oil a day into the Gulf, according to a U.S. government-led panel of scientists.
Victim Fund
Last month London-based BP agreed to deposit $20 billion in an independent account to pay compensation to victims. BP said it would sell $10 billion in assets to pay for damage from the disaster, which has already cost the company more than $3.5 billion.
Louisiana Treasurer John Kennedy has said the total cost of the oil spill may be as high as $100 billion. Oppenheimer & Co. analyst Fadel Gheit last month put the financial damage from the environmental catastrophe as high as $60 billion.
While BP could survive a $60 billion liability, “I am less certain they can survive $100 billion or more,” Gheit said in a phone interview.
BP generated $30 billion in cash flow in the last four quarters and had $5 billion in available cash, another $5 billion in credit lines and $5 billion in standby loans as of June 4, said spokesman Toby Odone. BP has said it won’t file for bankruptcy.
Potential Buyers
Odone declined to comment on whether potential asset buyers or lenders had raised the issue of fraudulent transfer law or proposed U.S. legislation on asset transfer.
Apache declined to comment through spokesman Robert Dye. Alan Jeffers, an Exxon spokesman, wouldn’t comment on BP. “Any asset purchase agreement has lots of complications that need to be evaluated,” he said. Wendel Broere, a Shell spokesman, declined to comment.
Under current law, if BP were to declare bankruptcy, the company could try to sell assets free and clear of liabilities through a so-called 363 sale, as General Motors Co. and Chrysler Group LLC did last year.
“If I were Exxon or Shell, I would try to buy BP’s assets out of bankruptcy,” said Nancy Rapoport, a bankruptcy law professor at the University of Nevada, Las Vegas. “You get clean title.”
Proposed Change
If the proposed change in the law, which has passed the House, is enacted, a bankrupt BP couldn’t do a 363 sale. It would instead have to get approval for the sale from spill victims holding two-thirds of unpaid claims, or prove to a judge it would have enough assets left to pay claims in full.
Credit-default swaps traders last month were pricing in more than 40 percent odds that BP would default within the next five years, according to data provider CMA.
The contracts, which rise as investor confidence deteriorates and fall as it improves, have dropped the past two weeks, falling 234 basis points since June 29 to 360 basis points yesterday, CMA prices show. That implies the market has priced in a 26 percent probability of default, assuming bondholders would recover 40 percent of their investment.
“Other than bankruptcy, which BP will try to avoid like the plague, there is no vehicle that will enable BP to clear the decks and eliminate the cloud of liability hanging over it for many years to come,” said Bienenstock, who advised GM on its bankruptcy.
Sale Challenges
Even 363 sales can be challenged. Defunct Lehman Brothers Holdings Inc. and its creditors are trying to recover an alleged $11 billion “windfall” from Barclays Plc, which bought Lehman’s brokerage in 2008. Barclays has denied wrongdoing.
“The buyer of BP assets will require a discount because of the uncertainty,” said John Tucker, a lawyer with Rhodes Hieronymus Jones Tucker & Gable in Tulsa. “They have to make certain they’re paying a justifiable price” or else a bankruptcy court could reverse the deal in the future. Tucker’s clients include Thomas Kivisto, former chairman of bankrupt SemGroup LP.
The risk of lawsuits is lower if BP hires investment bankers to run a bidding process, recording bid prices that showed the buyer paid a market-tested value for the asset, said Bienenstock.
“Arm’s-length commercial deals are rarely set aside as fraudulent transfers,” he said. “Courts don’t like to second guess arm’s-length negotiations.”
Independent Appraiser
Apache might hire an independent appraiser to write an opinion letter saying either that the price was reasonable, or that BP was solvent, said Stephen Lubben, a bankruptcy law professor at Seton Hall University School of Law in Newark, New Jersey. Apache’s purchase if completed will include half of BP’s stake in Alaska’s Prudhoe Bay oil field, the people familiar with the deal said.
“Either defeats an element of a fraudulent transfer action,” Lubben said. “Somebody could always challenge the opinion letter, but it makes it much more costly for the plaintiffs.”
Under some state laws, an oil spill victim could sue to undo a BP sale that closed four years earlier, said Lynn Lopucki, a law professor at the University of California, Los Angeles. New York State law goes back six years, Lubben said.
BP sold $289 million of assets to Magellan Midstream Partners LP in a deal that the companies began negotiating in February. The sale includes oil storage tanks in Cushing, Oklahoma, and pipelines that connect refineries in southern Texas, including BP’s plant in Texas City.
Lukoil Sale
BP also sold its interest in Kazakhstan’s Tengiz oilfield and the Caspian Pipeline Consortium to Moscow-based OAO Lukoil for $1.6 billion in cash in December. Lukoil, which bought Getty Petroleum Marketing Inc. in 2000, owns a network of U.S. filling stations with Houston-based ConocoPhillips.
BP needn’t be insolvent or in bankruptcy for a plaintiff to sue a buyer of its properties under state law, Lopucki said.
“Tort victims could sue because the assets remaining to pay them have been reduced” by the sale,” he said. “They might argue the $20 billion fund is not enough.”
Even a foreign buyer of BP assets outside of the U.S. might not be able to avoid U.S. law, Lopucki said. “As long as the foreign buyer has assets in the U.S., U.S. courts would have jurisdiction,” he said.
BP’s Odone said the company will wait until its next set of results to decide whether to borrow more money to pay its spill bills. BP is due to report quarterly results on July 27.
BP faces more than 300 lawsuits filed by fishermen, property owners, restaurant operators, environmentalists, local governments and its own employees. Most of the lawsuits have been filed as class actions in federal courts in the five states along the Gulf coast, Louisiana, Alabama, Texas, Mississippi and Florida.
To contact the reporters on this story: Linda Sandler in New York at lsandler@bloomberg.net.
Last Updated: July 16, 2010 00:01 EDT
Thursday 15 July 2010
Apple IPhone 4 Recall Odds Increasing
Buy or sell? You gotta ask yourself whether a company that has operating earnings of USD4b per quarter, and generated USD2.3b of operating cashflow per quarter can be hit by any recall.
Apple IPhone 4 Recall Odds Increasing, Irish Bookmaker Says
July 14 (Bloomberg) -- Apple Inc. is increasingly likely to recall its iPhone 4 after complaints about poor reception and a critical review from Consumer Reports, according to a betting company that tracks odds for such events.
Paddy Power Plc, Ireland’s biggest bookmaker, said the chances that Apple will ultimately recall the phone have increased following what it described a “betting frenzy” after the Consumer Reports review. The consumer organization said on July 12 it wouldn’t recommend the phone because of its tendency to lose signal strength when held in a certain way.
“If the current betting trends are to be believed, it now seems certain that a recall is in the cards,” Paddy Power said in a press release. Natalie Kerris, an Apple spokeswoman, didn’t immediately return messages left outside of business hours.
Paddy Power first offered odds of 2-to-1 against a recall, meaning a bet on a recall would pay $2 plus the initial $1 if such an event occurred. Now those odds are 4-to-6, meaning a winning bet of $1 would pay $1.66 if a recall were to occur.
Consumer Reports said it wouldn’t recommend the latest iPhone until the signal problem is fixed, though the device otherwise received high ratings. The test results showed that when a user covers the phone’s lower-left side, where two parts of the antenna meet, the loss of signal strength may lead to dropped calls in areas where AT&T Inc.’s coverage is weak, Consumer Reports said.
On July 2, Apple blamed the problem on software that helps display the phone’s signal strength, and has promised to issue a free fix to iPhone owners. It hasn’t specified when that fix will be available.
Recall Costs
Analysts have started to estimate the impact of an iPhone recall on the company’s earnings. Toni Sacconaghi, an analyst at Sanford Bernstein & Co. in New York, put the price tag at $1.5 billion, though he said a recall is “highly unlikely.” A more likely step would be issuing rubber cases to cover the phone’s bottom-left corner, which would cost Apple $1 or less per phone, he said in a report.
Vijay Rakesh, an analyst with Sterne Agee & Leach in Chicago, estimated that a recall would cost Apple less than $100 million.
Apple rose $2.41 to $254.21 at 11:15 a.m. New York time in Nasdaq Stock Market trading. The stock had risen 19 percent this year before today.
To contact the reporter on this story: Arik Hesseldahl in New York at ahesseldahl@bloomberg.net
Last Updated: July 14, 2010 11:19 EDT
Apple IPhone 4 Recall Odds Increasing, Irish Bookmaker Says
July 14 (Bloomberg) -- Apple Inc. is increasingly likely to recall its iPhone 4 after complaints about poor reception and a critical review from Consumer Reports, according to a betting company that tracks odds for such events.
Paddy Power Plc, Ireland’s biggest bookmaker, said the chances that Apple will ultimately recall the phone have increased following what it described a “betting frenzy” after the Consumer Reports review. The consumer organization said on July 12 it wouldn’t recommend the phone because of its tendency to lose signal strength when held in a certain way.
“If the current betting trends are to be believed, it now seems certain that a recall is in the cards,” Paddy Power said in a press release. Natalie Kerris, an Apple spokeswoman, didn’t immediately return messages left outside of business hours.
Paddy Power first offered odds of 2-to-1 against a recall, meaning a bet on a recall would pay $2 plus the initial $1 if such an event occurred. Now those odds are 4-to-6, meaning a winning bet of $1 would pay $1.66 if a recall were to occur.
Consumer Reports said it wouldn’t recommend the latest iPhone until the signal problem is fixed, though the device otherwise received high ratings. The test results showed that when a user covers the phone’s lower-left side, where two parts of the antenna meet, the loss of signal strength may lead to dropped calls in areas where AT&T Inc.’s coverage is weak, Consumer Reports said.
On July 2, Apple blamed the problem on software that helps display the phone’s signal strength, and has promised to issue a free fix to iPhone owners. It hasn’t specified when that fix will be available.
Recall Costs
Analysts have started to estimate the impact of an iPhone recall on the company’s earnings. Toni Sacconaghi, an analyst at Sanford Bernstein & Co. in New York, put the price tag at $1.5 billion, though he said a recall is “highly unlikely.” A more likely step would be issuing rubber cases to cover the phone’s bottom-left corner, which would cost Apple $1 or less per phone, he said in a report.
Vijay Rakesh, an analyst with Sterne Agee & Leach in Chicago, estimated that a recall would cost Apple less than $100 million.
Apple rose $2.41 to $254.21 at 11:15 a.m. New York time in Nasdaq Stock Market trading. The stock had risen 19 percent this year before today.
To contact the reporter on this story: Arik Hesseldahl in New York at ahesseldahl@bloomberg.net
Last Updated: July 14, 2010 11:19 EDT
BP Will be OK
http://seekingalpha.com/article/210598-bp-will-be-ok
BP Will Be OK
Once the decline in BP plc (BP) stock reached 20% after the Gulf spill I was in the camp that felt that BP’s stock price drop was overdone given the oil giant’s financial strength. However, as the oil has continued to gush despite repeated efforts to stem the flow, BP shares have continued to fall, which at its worst levels amounted to a market value loss of 50% or $95 billion. While my initial nibbling in the stock was premature (I, like many people, figured BP would have better success containing the well after 2 months of trying), I still believe the stock market reaction has been excessive.
Thus far on this blog I have resisted providing specific financial projections to back up such an assertion, due mostly to the fact that the oil continues to pour out of the ruptured well, making the potential liability unlimited and unknowable. That said, Wednesday’s meeting between the Obama Administration and BP executives was helpful for value investors looking at BP. During the meeting they were able to agree on a timetable for cash outlays to cover the spill’s economic damages, which gives us a lot more clarity as to the financial impact on BP in the coming months and years.
As a result, I will run through some of these numbers and show why I still believe that BP can survive this spill somewhat easily, simply due to the size and financial strength of the entire company. We must remember that BP is one of the world’s largest and most profitable companies (we are not dealing with accounting games at Enron or 30x leverage at Lehman Brothers).
Let’s start with the costs of the containment efforts and the clean-up of the oil. So far BP has spent $1.75 billion in the two months since the Deepwater Horizon rig exploded. Industry experts expect this run-rate of expenses (about $1 billion per month) to drop once the well has been capped (evidently undersea robots drilling with diamond studded saws are pretty costly), but to be extremely conservative I have been assuming that the containment/clean-up costs continue at $1 billion per month through 2011 before the drop. This equates to $12 billion per year in containment and cleanup costs as a conservative estimate.
The White House and BP agreed Wednesday to a $20 billion escrow account to be used for economic claims from businesses. BP has announced it will pay $5 billion into the fund this year and an additional $1.25 billion each quarter beginning in 2011, until the $20 billion has been fully funded. This comes to $5 billion per year for 2010 through 2013.
It is also important to understand that BP will be subject to additional fines and penalties under the U.S. Clean Water Act, based on how much oil ultimately is determined to have been spilled into the ocean. Because the oil continues to flow from the broken well, this aspect of the cost equation is still unknown, as is the exact daily flow rate. Current estimates are 35,000-60,000 barrels per day. If we assume the oil flow is completely stopped by September 30th (the current expectation is sometime in August) and a penalty of $4,300 per barrel is assessed, these fines could amount to about $30 billion. However, those fines and penalties will likely be fought over in court and therefore the amount will be unclear for a while. Still, because of this unknown liability, I likely will not be buying more BP stock until the well has been capped completely.
The question for investors, obviously, is whether or not BP can afford these projected costs. We are talking about $17 billion per year in containment, clean-up, and damages, plus fines. Let’s look at some of their first quarter 2010 financial metrics to get an idea of their financial capacity:
Operating Cash Flow: $7.7B
Capital Expenditures: $4.3B
Free Cash Flow: $3.4B
Dividends Paid: $2.6B
The dividend has been scrapped for now, so we can expect that BP’s ongoing operations will generate about $14 billion per year in free cash flow. However, we must keep in mind that these costs are pre-tax figures. BP paid about $8 billion of income taxes in 2009 and all spill costs will be able to be used to offset operating profits and therefore save the company billions in taxes. On an after-tax basis, $17 billion in annual spill costs comes out to an adjusted figure of about $12 billion of cash outlay. As you can see, BP should be able to handle these clean-up costs without dramatic capital expenditure reductions (they have announced a 10%/$2 billion annual reduction in capex).
Additionally, BP has said they have about $10 billion in available credit facilities and also expect to divest $10 billion of assets over the next 12 months. Undoubtedly that money will be used to help pay the penalties and fines that it will ultimately be forced to pay, as well as serve as a cushion if claims come in higher than $20 billion or the well gets worse rather than better. Unlike some energy firms, BP has a very strong balance sheet, with $8 billion of cash and a debt-to-capital ratio of 20%, at the low end of their 20-30% target range. As a result, the company could take on up to $17 billion in new debt and still be within that range.
Finally, we cannot forget that BP only owns 65% of the ruptured well. They will almost certainly ask Anadarko (APC) and their other partners to foot their portion of the bill, although we can expect the court system to play a major role in that process.
All in all, the financial strength and size of BP makes it possible for the company to use normal business activities and a bit of financial management to pay for the spill. Even using an aggressive estimate, $50 billion in total spill-related costs over the next few years should not force BP into dire financial straits. Not only that, but the last Exxon Valdez spill claims were settled quite recently, about 20 years after the accident occurred. Even if costs are higher than current estimates and take longer to resolve, BP should be okay given that the company brings in about $30 billion per year in operating cash flow.
I figured it would be helpful to go through these figures because some people on Wall Street have been talking about BP being forced into bankruptcy due to the Deepwater Horizon disaster. Barring some unforeseen, unexpected, or simply unheard-of developments, it certainly seems that BP’s reputation will be hurt far more from this spill than their finances will be. Obviously things can change, but these are the kinds of numbers I have been looking at in recent weeks and I think they are very interesting, even if one has no interest in bottom-fishing in BP stock. Less aggressive investors might want to look at BP bonds, which recently yielded between 8% and 10% in the 1- to 5-year maturity range.
Disclosure: Peridot Capital had a small long position in BP stock at the time of writing, but positions may change at any time
BP Will Be OK
Once the decline in BP plc (BP) stock reached 20% after the Gulf spill I was in the camp that felt that BP’s stock price drop was overdone given the oil giant’s financial strength. However, as the oil has continued to gush despite repeated efforts to stem the flow, BP shares have continued to fall, which at its worst levels amounted to a market value loss of 50% or $95 billion. While my initial nibbling in the stock was premature (I, like many people, figured BP would have better success containing the well after 2 months of trying), I still believe the stock market reaction has been excessive.
Thus far on this blog I have resisted providing specific financial projections to back up such an assertion, due mostly to the fact that the oil continues to pour out of the ruptured well, making the potential liability unlimited and unknowable. That said, Wednesday’s meeting between the Obama Administration and BP executives was helpful for value investors looking at BP. During the meeting they were able to agree on a timetable for cash outlays to cover the spill’s economic damages, which gives us a lot more clarity as to the financial impact on BP in the coming months and years.
As a result, I will run through some of these numbers and show why I still believe that BP can survive this spill somewhat easily, simply due to the size and financial strength of the entire company. We must remember that BP is one of the world’s largest and most profitable companies (we are not dealing with accounting games at Enron or 30x leverage at Lehman Brothers).
Let’s start with the costs of the containment efforts and the clean-up of the oil. So far BP has spent $1.75 billion in the two months since the Deepwater Horizon rig exploded. Industry experts expect this run-rate of expenses (about $1 billion per month) to drop once the well has been capped (evidently undersea robots drilling with diamond studded saws are pretty costly), but to be extremely conservative I have been assuming that the containment/clean-up costs continue at $1 billion per month through 2011 before the drop. This equates to $12 billion per year in containment and cleanup costs as a conservative estimate.
The White House and BP agreed Wednesday to a $20 billion escrow account to be used for economic claims from businesses. BP has announced it will pay $5 billion into the fund this year and an additional $1.25 billion each quarter beginning in 2011, until the $20 billion has been fully funded. This comes to $5 billion per year for 2010 through 2013.
It is also important to understand that BP will be subject to additional fines and penalties under the U.S. Clean Water Act, based on how much oil ultimately is determined to have been spilled into the ocean. Because the oil continues to flow from the broken well, this aspect of the cost equation is still unknown, as is the exact daily flow rate. Current estimates are 35,000-60,000 barrels per day. If we assume the oil flow is completely stopped by September 30th (the current expectation is sometime in August) and a penalty of $4,300 per barrel is assessed, these fines could amount to about $30 billion. However, those fines and penalties will likely be fought over in court and therefore the amount will be unclear for a while. Still, because of this unknown liability, I likely will not be buying more BP stock until the well has been capped completely.
The question for investors, obviously, is whether or not BP can afford these projected costs. We are talking about $17 billion per year in containment, clean-up, and damages, plus fines. Let’s look at some of their first quarter 2010 financial metrics to get an idea of their financial capacity:
Operating Cash Flow: $7.7B
Capital Expenditures: $4.3B
Free Cash Flow: $3.4B
Dividends Paid: $2.6B
The dividend has been scrapped for now, so we can expect that BP’s ongoing operations will generate about $14 billion per year in free cash flow. However, we must keep in mind that these costs are pre-tax figures. BP paid about $8 billion of income taxes in 2009 and all spill costs will be able to be used to offset operating profits and therefore save the company billions in taxes. On an after-tax basis, $17 billion in annual spill costs comes out to an adjusted figure of about $12 billion of cash outlay. As you can see, BP should be able to handle these clean-up costs without dramatic capital expenditure reductions (they have announced a 10%/$2 billion annual reduction in capex).
Additionally, BP has said they have about $10 billion in available credit facilities and also expect to divest $10 billion of assets over the next 12 months. Undoubtedly that money will be used to help pay the penalties and fines that it will ultimately be forced to pay, as well as serve as a cushion if claims come in higher than $20 billion or the well gets worse rather than better. Unlike some energy firms, BP has a very strong balance sheet, with $8 billion of cash and a debt-to-capital ratio of 20%, at the low end of their 20-30% target range. As a result, the company could take on up to $17 billion in new debt and still be within that range.
Finally, we cannot forget that BP only owns 65% of the ruptured well. They will almost certainly ask Anadarko (APC) and their other partners to foot their portion of the bill, although we can expect the court system to play a major role in that process.
All in all, the financial strength and size of BP makes it possible for the company to use normal business activities and a bit of financial management to pay for the spill. Even using an aggressive estimate, $50 billion in total spill-related costs over the next few years should not force BP into dire financial straits. Not only that, but the last Exxon Valdez spill claims were settled quite recently, about 20 years after the accident occurred. Even if costs are higher than current estimates and take longer to resolve, BP should be okay given that the company brings in about $30 billion per year in operating cash flow.
I figured it would be helpful to go through these figures because some people on Wall Street have been talking about BP being forced into bankruptcy due to the Deepwater Horizon disaster. Barring some unforeseen, unexpected, or simply unheard-of developments, it certainly seems that BP’s reputation will be hurt far more from this spill than their finances will be. Obviously things can change, but these are the kinds of numbers I have been looking at in recent weeks and I think they are very interesting, even if one has no interest in bottom-fishing in BP stock. Less aggressive investors might want to look at BP bonds, which recently yielded between 8% and 10% in the 1- to 5-year maturity range.
Disclosure: Peridot Capital had a small long position in BP stock at the time of writing, but positions may change at any time
Tuesday 13 July 2010
Short Term Indicator Has Turned Bullish Again
AUDJPY, the risk aversion cross that I look at, has turned positive again in the short term. Bullish at least for the week.
I've been doing some stock take to identify investment opportunities of various asset classes. Will discuss with some of you accordingly. Cheers.
I've been doing some stock take to identify investment opportunities of various asset classes. Will discuss with some of you accordingly. Cheers.
Monday 12 July 2010
Slowdown in GDP Growth, Not Double Dip. But Equity Returns Likely to be Low
Here's another report substantiating why a double dip is unlikely. However, even if we do avoid a double dip, stock returns are not going to be like in 2009.
Spain 1 Holland 0: The Better Team Won
Holland's strategy was to disrupt Spain's rythm by fouling them. Like Germany, they defended with 6 to 7 men most of the time, hoping to hit Spain on the counter. They almost succeeded several times, catching Puyol's lack of space. The Spaniards played a patient game, passing in small triangles, hoping to unlock the Dutch's packed defence.
In the end, it took a red card to release some space for Spain. The red was deserved and a long time coming. The Dutch played with violence throughout this tournament. Had they won the World Cup, a negative signal would have been sent to young fans that soccer is about negativity. Neutrals love to watch Spain because they can string together 20 - 30 passes before scoring.
This World Cup brought to light several trends:
1. Obviously the pressure on FIFA to introduce video technology has increased with several high profile errors.
2. The proliferation of 4-2-3-1 formation, with the lone striker supported by 3 attacking midfielders, 2 holding midfielders protecting 4 defenders. As a result the number of goals scored in this world cup is the lowest since 1994. This formation requires 3 very fit midfielders rushing up to support the lone striker. It requires the striker to hold the ball while waiting for support. As the attacking mid had defensive duties too, the quality of attack is compromised.
3. The technique has improved tremendously, especially for European teams. Germany, which previously played drab, cautious soccer, became one of the most skilful team. The South American teams like traditionally power-houses Brazil and Argentina continued to show superiority in technique, but were let down by indiscipline at the back. Asian teams like Japan and South Korea showed surprising flair to reach the last 16.
4. 2 distinct styles have developed. For the taller teams, particularly from northern Europe, the direct approach of punting the ball far up with one supporting striker heading the ball down for his team mate to score has been more frequently attempted. The Dutch almost succeeded against the Spaniards. For the less tall Meditterranean European, South American and Far East Asian teams, the trend is towards possession football, a compact midfield and technique.
World domination for Spain
Iniesta scores in 116th minute in clash of 13 players booked
By James Dall Last updated: 11th July 2010
In an encounter riddled with persistent fouling, in particular from the Dutch, who had John Heitinga dismissed late on, Spain emerged as victors courtesy of Iniesta's effort that came in the 116th minute of the tie.
As expected, Spain head coach Vicente del Bosque again overlooked the rusty Fernando Torres with the 22-year-old Pedro keeping his place in the starting XI that defeated Germany. For Holland, Gregory van der Wiel and Nigel de Jong returned from suspension to replace Khalid Boulahrouz and Demy De Zeeuw.
Robin van Persie's foul on Sergio Busquets in the first minute was indicative of Holland's beginning to the encounter as they went about pressing their opponents robustly. But Spain were unruffled and the on-fire David Villa threatened to break clear on three minutes only to be flagged offside.
And it took the reigning European champions just five minutes to draw a fine stop from goalkeeper Maarten Stekelenburg, who was forced to get down to his right and parry clear following a powerful header from Sergio Ramos after Xavi had whipped in a free-kick from out wide. Gerard Pique was unable to turn home the rebound.
Tiki-taka
After yet more eager running from Villa, who was again called offside, a rare mistake in possession from the Spanish gifted Holland the ball. Busquets was sloppy as he tried to flick on a pass, and Dirk Kuyt looked to punish the holding midfielder. But the Liverpool forward's effort from distance was speculative and easy for Iker Casillas.
Spain continued to be very much on the front foot during the opening exchanges, with Holland seemingly dazed by the tiki-taka hypnosis. Ramos breezed past a heavy-footed Kuyt in the area before seeing his lash deflected out for a corner by the hopeful boot of Heitinga. Then, Villa thumped into the side-netting following a wicked cross by Xabi Alonso.
Referee Webb produced his first yellow card of the match on 15 minutes, cautioning Van Persie for a chop on Joan Capdevila. A minute later, Webb again brandished a booking, this time for Carles Puyol for a scythe from behind on so far quiet Arjen Robben.
But in the 22nd minute, the fouling resumed. First, the sometimes invisible Mark van Bommel was rightly carded for a horrid foul on Iniesta before Ramos joined him in Webb's notepad.
Cue another brutish incident in the 28th minute, with De Jong the culprit. The Manchester City enforcer dangled a high boot and his studs slammed into the chest of Alonso. A yellow was the fortunate outcome with Alonso lucky to escape sustaining a broken rib.
Quite the astonishing scare for Spain occurred on 34 minutes. As Holland sportingly pumped possession back goalwards to Casillas, the shot-stopper misjudged the ball's bounce as it skipped off the turf and threatened to drop in, with Casillas forced to stretch and flick out for a corner before swallowing to push his heart back from his throat to where it belongs.
After Van Bommel continued to play devil's advocate as he clattered into Xavi, a fractured first 45 minutes drew to a close, but not before a typical left-footer from Robben called Casillas into action as the keeper pushed away from danger.
Webb
Robben let fire with another trademark cut-in from the right channel but it was routine for Casillas. The game then began to open up, but the bookings also continued to rain down. Dutch skipper Giovanni Van Bronckhorst was carded for blocking off an opponent before Heitinga was given a yellow for catching Villa.
Del Bosque was the first of the two managers to make a substitution. The Spain head coach opted to bring on Jesus Navas for Pedro in the 60th minute. But it was the Dutch who were next to threaten as Van Persie's header floated off target following a Kuyt cross.
Then came the chance of the final thus far. Sneijder wonderfully threaded through Robben, who burst in on the exposed Casillas. Robben waited and waited for Casillas to commit before striking, only to see his effort clip off the dangling leg of the keeper, who deserves many plaudits for the stop.
Navas proved a decent introduction by Del Bosque as his liveliness on the right wing caused issues for Holland. Indeed, after Capdevila received the eighth yellow card of the game, in the 70th minute Navas drilled across goal. The ball was only half-cleared, as Villa pounced from close range, but Heitinga made the most vital of blocks to deny the striker.
On 77 minutes a curling corner found a completely unmarked Ramos. Yet from just seven yards out the Real Madrid defender planted his header over the bar to mark an astonishing miss. Meanwhile, the bitty nature of the clash failed to die down as an altercation between the hot-headed Van Bommel and Iniesta almost boiled over.
As the tension rose, Sneijder made a crucial intervention when he slid to snatch the ball away from Iniesta. Moments later, Robben's pace through the middle again caused problems with Puyol laboured. But, despite having the opportunity to go down under a Puyol challenge, Robben eventually lost possession as Casillas gathered. Robben was subsequently booked for protesting.
With four minutes remaining, Arsenal captain Cesc Fabregas entered the fray in place of Alonso. The alteration, however, failed to prevent the fixture reaching extra-time, with Robben and Ramos both left to reflect on what might have been following their respective clear-cut opportunities.
Dismissal
Three minutes into the first period of extra-time, Spain had appeals for a penalty rightly turned down by Webb, who judged that Xavi kicked into Heitinga when in the area. Two minutes after said claims, Fabregas was sent clean through following a super Iniesta pass, but his stab at goal was well saved by the foot of Stekelenburg.
Then it was Holland's chance to come close. Casillas was left in no man's land as Mathijsen rose, but the defender's header flashed over the bar despite the goal gaping. And twice in the space of two minutes, Van Bronckhorst was Holland's hero as he shut out Iniesta then deflected Navas' strike wide.
In the 19th minute of extra-time, Holland were reduced to 10 men after Heitinga received a second booking for pulling on Iniesta's shoulder. And with four minutes remaining, Spain scored the goal that won them the 2010 World Cup.
Fabregas slipped a pass to his right, and waiting was Iniesta. The Barcelona schemer took one touch before planting the ball past Stekelenburg with aplomb, sparking delirium from the Spanish players as they completed their mission for world domination.
Netherlands Team Statistics Spain
0 Goals 1
0 1st Half Goals 0
4 Shots on Target 4
8 Shots off Target 13
2 Blocked Shots 4
6 Corners 8
28 Fouls 19
7 Offsides 6
7 Yellow Cards 5
1 Red Cards 0
69 Passing Success 84.2
31 Tackles 28
67.7 Tackles Success 89.3
37.1 Possession 62.9
47.9 Territorial Advantage 52.1
In the end, it took a red card to release some space for Spain. The red was deserved and a long time coming. The Dutch played with violence throughout this tournament. Had they won the World Cup, a negative signal would have been sent to young fans that soccer is about negativity. Neutrals love to watch Spain because they can string together 20 - 30 passes before scoring.
This World Cup brought to light several trends:
1. Obviously the pressure on FIFA to introduce video technology has increased with several high profile errors.
2. The proliferation of 4-2-3-1 formation, with the lone striker supported by 3 attacking midfielders, 2 holding midfielders protecting 4 defenders. As a result the number of goals scored in this world cup is the lowest since 1994. This formation requires 3 very fit midfielders rushing up to support the lone striker. It requires the striker to hold the ball while waiting for support. As the attacking mid had defensive duties too, the quality of attack is compromised.
3. The technique has improved tremendously, especially for European teams. Germany, which previously played drab, cautious soccer, became one of the most skilful team. The South American teams like traditionally power-houses Brazil and Argentina continued to show superiority in technique, but were let down by indiscipline at the back. Asian teams like Japan and South Korea showed surprising flair to reach the last 16.
4. 2 distinct styles have developed. For the taller teams, particularly from northern Europe, the direct approach of punting the ball far up with one supporting striker heading the ball down for his team mate to score has been more frequently attempted. The Dutch almost succeeded against the Spaniards. For the less tall Meditterranean European, South American and Far East Asian teams, the trend is towards possession football, a compact midfield and technique.
World domination for Spain
Iniesta scores in 116th minute in clash of 13 players booked
By James Dall Last updated: 11th July 2010
In an encounter riddled with persistent fouling, in particular from the Dutch, who had John Heitinga dismissed late on, Spain emerged as victors courtesy of Iniesta's effort that came in the 116th minute of the tie.
As expected, Spain head coach Vicente del Bosque again overlooked the rusty Fernando Torres with the 22-year-old Pedro keeping his place in the starting XI that defeated Germany. For Holland, Gregory van der Wiel and Nigel de Jong returned from suspension to replace Khalid Boulahrouz and Demy De Zeeuw.
Robin van Persie's foul on Sergio Busquets in the first minute was indicative of Holland's beginning to the encounter as they went about pressing their opponents robustly. But Spain were unruffled and the on-fire David Villa threatened to break clear on three minutes only to be flagged offside.
And it took the reigning European champions just five minutes to draw a fine stop from goalkeeper Maarten Stekelenburg, who was forced to get down to his right and parry clear following a powerful header from Sergio Ramos after Xavi had whipped in a free-kick from out wide. Gerard Pique was unable to turn home the rebound.
Tiki-taka
After yet more eager running from Villa, who was again called offside, a rare mistake in possession from the Spanish gifted Holland the ball. Busquets was sloppy as he tried to flick on a pass, and Dirk Kuyt looked to punish the holding midfielder. But the Liverpool forward's effort from distance was speculative and easy for Iker Casillas.
Spain continued to be very much on the front foot during the opening exchanges, with Holland seemingly dazed by the tiki-taka hypnosis. Ramos breezed past a heavy-footed Kuyt in the area before seeing his lash deflected out for a corner by the hopeful boot of Heitinga. Then, Villa thumped into the side-netting following a wicked cross by Xabi Alonso.
Referee Webb produced his first yellow card of the match on 15 minutes, cautioning Van Persie for a chop on Joan Capdevila. A minute later, Webb again brandished a booking, this time for Carles Puyol for a scythe from behind on so far quiet Arjen Robben.
But in the 22nd minute, the fouling resumed. First, the sometimes invisible Mark van Bommel was rightly carded for a horrid foul on Iniesta before Ramos joined him in Webb's notepad.
Cue another brutish incident in the 28th minute, with De Jong the culprit. The Manchester City enforcer dangled a high boot and his studs slammed into the chest of Alonso. A yellow was the fortunate outcome with Alonso lucky to escape sustaining a broken rib.
Quite the astonishing scare for Spain occurred on 34 minutes. As Holland sportingly pumped possession back goalwards to Casillas, the shot-stopper misjudged the ball's bounce as it skipped off the turf and threatened to drop in, with Casillas forced to stretch and flick out for a corner before swallowing to push his heart back from his throat to where it belongs.
After Van Bommel continued to play devil's advocate as he clattered into Xavi, a fractured first 45 minutes drew to a close, but not before a typical left-footer from Robben called Casillas into action as the keeper pushed away from danger.
Webb
Robben let fire with another trademark cut-in from the right channel but it was routine for Casillas. The game then began to open up, but the bookings also continued to rain down. Dutch skipper Giovanni Van Bronckhorst was carded for blocking off an opponent before Heitinga was given a yellow for catching Villa.
Del Bosque was the first of the two managers to make a substitution. The Spain head coach opted to bring on Jesus Navas for Pedro in the 60th minute. But it was the Dutch who were next to threaten as Van Persie's header floated off target following a Kuyt cross.
Then came the chance of the final thus far. Sneijder wonderfully threaded through Robben, who burst in on the exposed Casillas. Robben waited and waited for Casillas to commit before striking, only to see his effort clip off the dangling leg of the keeper, who deserves many plaudits for the stop.
Navas proved a decent introduction by Del Bosque as his liveliness on the right wing caused issues for Holland. Indeed, after Capdevila received the eighth yellow card of the game, in the 70th minute Navas drilled across goal. The ball was only half-cleared, as Villa pounced from close range, but Heitinga made the most vital of blocks to deny the striker.
On 77 minutes a curling corner found a completely unmarked Ramos. Yet from just seven yards out the Real Madrid defender planted his header over the bar to mark an astonishing miss. Meanwhile, the bitty nature of the clash failed to die down as an altercation between the hot-headed Van Bommel and Iniesta almost boiled over.
As the tension rose, Sneijder made a crucial intervention when he slid to snatch the ball away from Iniesta. Moments later, Robben's pace through the middle again caused problems with Puyol laboured. But, despite having the opportunity to go down under a Puyol challenge, Robben eventually lost possession as Casillas gathered. Robben was subsequently booked for protesting.
With four minutes remaining, Arsenal captain Cesc Fabregas entered the fray in place of Alonso. The alteration, however, failed to prevent the fixture reaching extra-time, with Robben and Ramos both left to reflect on what might have been following their respective clear-cut opportunities.
Dismissal
Three minutes into the first period of extra-time, Spain had appeals for a penalty rightly turned down by Webb, who judged that Xavi kicked into Heitinga when in the area. Two minutes after said claims, Fabregas was sent clean through following a super Iniesta pass, but his stab at goal was well saved by the foot of Stekelenburg.
Then it was Holland's chance to come close. Casillas was left in no man's land as Mathijsen rose, but the defender's header flashed over the bar despite the goal gaping. And twice in the space of two minutes, Van Bronckhorst was Holland's hero as he shut out Iniesta then deflected Navas' strike wide.
In the 19th minute of extra-time, Holland were reduced to 10 men after Heitinga received a second booking for pulling on Iniesta's shoulder. And with four minutes remaining, Spain scored the goal that won them the 2010 World Cup.
Fabregas slipped a pass to his right, and waiting was Iniesta. The Barcelona schemer took one touch before planting the ball past Stekelenburg with aplomb, sparking delirium from the Spanish players as they completed their mission for world domination.
Netherlands Team Statistics Spain
0 Goals 1
0 1st Half Goals 0
4 Shots on Target 4
8 Shots off Target 13
2 Blocked Shots 4
6 Corners 8
28 Fouls 19
7 Offsides 6
7 Yellow Cards 5
1 Red Cards 0
69 Passing Success 84.2
31 Tackles 28
67.7 Tackles Success 89.3
37.1 Possession 62.9
47.9 Territorial Advantage 52.1
Sunday 11 July 2010
Mutual funds look to bank on BP
http://www.marketwatch.com/story/mutual-funds-look-to-bank-on-bp-shares-2010-07-09?pagenumber=1
FundWatch
July 9, 2010,
Mutual funds look to bank on BP
Plunge in troubled oil giant's stock brings out bargain hunters
NEW YORK (MarketWatch) -- Since losing more than 40% of its market value amid the Gulf of Mexico oil spill, BP PLC stock has caught the eyes of certain fund managers who think the battered oil major not only will survive but now offers exceptional value.
According to one bargain buyer, BP's /quotes/comstock/13*!bp/quotes/nls/bp (BP 34.05, +0.31, +0.92%) core operating strengths and the U.S. legal system's slow ruling process will keep the company's head above water.
Tilson Focus Fund /quotes/comstock/10r!tilfx (TILFX 11.26, +0.13, +1.17%) co-manager Glenn Tongue said his midcap value fund picked up BP shares a few weeks after the rig exploded, buying units at $36 a piece. More recently, the fund increased its stake when shares dipped near $27 each.
The portfolio currently has around 4% to 5% of its assets in BP stock.
At its lowest, investors saw 55% of BP's market capitalization evaporate since the Deepwater Horizon accident on April 20, as shareholders sold off on constant news of failures to plug the oil leak, CEO Tony Hayward's controversial actions, storm threats, and mounting claims.
Yet while the public markets reacted to headlines, some managers saw opportunity.
"We love buying when other investors are panicking," said Glenn Tongue and Whitney Tilson, co-mangers of the Tilson Focus Fund, in a note to investors. "We own the stock for two simple reasons -- BP is not going bankrupt [and] the stock is extraordinarily cheap." With BP shares trading around $34 a share, Tongue sees long-term value in the depressed stock, citing an overreaction by the market over spill troubles and ultimate survival of the troubled oil giant.
Looking for returns off clobbered prices, other fund managers have been buying BP stock recently as well.
Hartford Capital made a fresh investment of 4.5 million BP shares in its Appreciation A Fund and added more than 1.1 million shares to its Appreciation HLS IA Fund , according to the firm's May 31 filings.
As of May 31, Fidelity held BP in several of its funds, including an increase of 3.8 million shares in Fidelity Diversified International and 1.7 million shares in Advisor Diversified International . As of April 30, American Beacon also had boosted holdings by 169,500 shares in its Large Cap Value Fund .
Challenges and risks
Tilson and Tongue believe that BP, the world's fourth-most profitable company, will likely cover all clean-up costs and any future fines. Making over $30 billion in operating income each year, the oil giant will be able to "earn its way out of trouble," the fund managers noted, especially if the liabilities are spread over several years.
The fund managers' note suggests that while analysts focus on what the total costs may be, it is also important to know when BP will pay it. For example, Exxon Mobil Corp did not receive a final ruling from the Supreme Court on its Valdez spill until 19 years after the incident.
Looking back on the history of large oil disasters, Tongue said all prior costs were negligible compared to the figures floating around regarding BP's final bill.
Page 1Page 2
Continued from page 1
Page 1Page 2
Moreover, many cost estimates overlook the fact that 50% of any uncontained oil is expected to evaporate naturally. "Nature does its part," Tongue said.
Despite this week's 14.6% share-price gain, BP remains undervalued in the public market against industry benchmarks. Shares traded at less than five times BP's forward 2011 earnings versus its competitors' of six to eight times, based on Thomson Financial data.
According to Tongue, the marketplace has discounted about $100 billion from BP shares' market value. He said the fund's analysis recognizes that final liabilities will be "big," but $100 billion is simply "too big."
"Investors overestimate short-term impacts and underestimate long term impacts," said Tongue, also a managing partner at T2 Partners. "Ultimately, we see that [BP's] intrinsic value, the value of its assets, surpass the value the market is applying to it."
Another recent owner of BP also sees the oil producer surviving this crisis. Lord Abbett owned over half a million shares of BP in its Affiliated Fund as of March 31, the most recent filing date. Lord Abbett Senior Economist and Market Strategist Milton Ezrati said he's "skeptical about a BP bankruptcy. BP is very, very important to the British government."
On the sell-side, research analysts have largely maintained buy ratings for the oil major's U.S. and U.K.-listed shares . As of July 1, seven out of 31 analysts held outperform grades for units traded on the New York Stock Exchange, while 27 out of 41 analysts held buy recommendations on London shares.
On Tuesday, Royal Bank of Scotland Group, a British state-owned investment bank, upgraded BP to buy from hold, citing pessimistic view on spill-related costs already discounted into current prices.
Then there are fund managers who have stuck to the other end of the spectrum, staying away from the shares they say are largely news-driven and too difficult to value. Many in this camp say the final amount BP will owe is unquantifiable at this point.
On Monday, BP reported response-related costs have mounted to $3.2 billion.
Fiduciary Management Investments dumped its full position of more than 2.4 million BP shares on June 1, according to a note sent to investors. The firm declined to comment on reasons behind the sale.
Of course, there is a chance the worst-case scenario will strike, where a frontloaded payment of $100 billion might cripple the company to become a takeover target or serve its demise altogether. The possibilities are endless.
But every company is susceptible to risk and the unknown, Tongue explained. While Tilson Funds has gone on record to say the managers do not defend BP's safety record and response efforts, Tongue said their job is to find value.
"Most people don't realize that when they invest, there's uncertainty," Tongue said. "The uncertainty was there the day before the spill. The accident just exposed it."
Cynthia Lin is a MarketWatch reporter based in New York.
FundWatch
July 9, 2010,
Mutual funds look to bank on BP
Plunge in troubled oil giant's stock brings out bargain hunters
NEW YORK (MarketWatch) -- Since losing more than 40% of its market value amid the Gulf of Mexico oil spill, BP PLC stock has caught the eyes of certain fund managers who think the battered oil major not only will survive but now offers exceptional value.
According to one bargain buyer, BP's /quotes/comstock/13*!bp/quotes/nls/bp (BP 34.05, +0.31, +0.92%) core operating strengths and the U.S. legal system's slow ruling process will keep the company's head above water.
Tilson Focus Fund /quotes/comstock/10r!tilfx (TILFX 11.26, +0.13, +1.17%) co-manager Glenn Tongue said his midcap value fund picked up BP shares a few weeks after the rig exploded, buying units at $36 a piece. More recently, the fund increased its stake when shares dipped near $27 each.
The portfolio currently has around 4% to 5% of its assets in BP stock.
At its lowest, investors saw 55% of BP's market capitalization evaporate since the Deepwater Horizon accident on April 20, as shareholders sold off on constant news of failures to plug the oil leak, CEO Tony Hayward's controversial actions, storm threats, and mounting claims.
Yet while the public markets reacted to headlines, some managers saw opportunity.
"We love buying when other investors are panicking," said Glenn Tongue and Whitney Tilson, co-mangers of the Tilson Focus Fund, in a note to investors. "We own the stock for two simple reasons -- BP is not going bankrupt [and] the stock is extraordinarily cheap." With BP shares trading around $34 a share, Tongue sees long-term value in the depressed stock, citing an overreaction by the market over spill troubles and ultimate survival of the troubled oil giant.
Looking for returns off clobbered prices, other fund managers have been buying BP stock recently as well.
Hartford Capital made a fresh investment of 4.5 million BP shares in its Appreciation A Fund and added more than 1.1 million shares to its Appreciation HLS IA Fund , according to the firm's May 31 filings.
As of May 31, Fidelity held BP in several of its funds, including an increase of 3.8 million shares in Fidelity Diversified International and 1.7 million shares in Advisor Diversified International . As of April 30, American Beacon also had boosted holdings by 169,500 shares in its Large Cap Value Fund .
Challenges and risks
Tilson and Tongue believe that BP, the world's fourth-most profitable company, will likely cover all clean-up costs and any future fines. Making over $30 billion in operating income each year, the oil giant will be able to "earn its way out of trouble," the fund managers noted, especially if the liabilities are spread over several years.
The fund managers' note suggests that while analysts focus on what the total costs may be, it is also important to know when BP will pay it. For example, Exxon Mobil Corp did not receive a final ruling from the Supreme Court on its Valdez spill until 19 years after the incident.
Looking back on the history of large oil disasters, Tongue said all prior costs were negligible compared to the figures floating around regarding BP's final bill.
Page 1Page 2
Continued from page 1
Page 1Page 2
Moreover, many cost estimates overlook the fact that 50% of any uncontained oil is expected to evaporate naturally. "Nature does its part," Tongue said.
Despite this week's 14.6% share-price gain, BP remains undervalued in the public market against industry benchmarks. Shares traded at less than five times BP's forward 2011 earnings versus its competitors' of six to eight times, based on Thomson Financial data.
According to Tongue, the marketplace has discounted about $100 billion from BP shares' market value. He said the fund's analysis recognizes that final liabilities will be "big," but $100 billion is simply "too big."
"Investors overestimate short-term impacts and underestimate long term impacts," said Tongue, also a managing partner at T2 Partners. "Ultimately, we see that [BP's] intrinsic value, the value of its assets, surpass the value the market is applying to it."
Another recent owner of BP also sees the oil producer surviving this crisis. Lord Abbett owned over half a million shares of BP in its Affiliated Fund as of March 31, the most recent filing date. Lord Abbett Senior Economist and Market Strategist Milton Ezrati said he's "skeptical about a BP bankruptcy. BP is very, very important to the British government."
On the sell-side, research analysts have largely maintained buy ratings for the oil major's U.S. and U.K.-listed shares . As of July 1, seven out of 31 analysts held outperform grades for units traded on the New York Stock Exchange, while 27 out of 41 analysts held buy recommendations on London shares.
On Tuesday, Royal Bank of Scotland Group, a British state-owned investment bank, upgraded BP to buy from hold, citing pessimistic view on spill-related costs already discounted into current prices.
Then there are fund managers who have stuck to the other end of the spectrum, staying away from the shares they say are largely news-driven and too difficult to value. Many in this camp say the final amount BP will owe is unquantifiable at this point.
On Monday, BP reported response-related costs have mounted to $3.2 billion.
Fiduciary Management Investments dumped its full position of more than 2.4 million BP shares on June 1, according to a note sent to investors. The firm declined to comment on reasons behind the sale.
Of course, there is a chance the worst-case scenario will strike, where a frontloaded payment of $100 billion might cripple the company to become a takeover target or serve its demise altogether. The possibilities are endless.
But every company is susceptible to risk and the unknown, Tongue explained. While Tilson Funds has gone on record to say the managers do not defend BP's safety record and response efforts, Tongue said their job is to find value.
"Most people don't realize that when they invest, there's uncertainty," Tongue said. "The uncertainty was there the day before the spill. The accident just exposed it."
Cynthia Lin is a MarketWatch reporter based in New York.
Wednesday 7 July 2010
The Stress Test May Relief Market Stress
23 July 2010. That's the fateful day that will prove to the world that the European banks are solvent. I've been reading a lengthy report by Morgan Stanley on the implications of the European stress test. You see, the reason that markets have been falling in the last 3 months is the freezing up of the European banking system. Although the VIX is now below 30, the JP Morgan Non Investment Grade Index is around 803 bps, the LIBOR - OIS spread remained stubbornly high for the last 4 months. While interest rates haver been kept low by ECB, the European banks have not been lending as they were using the cheap funds to repair their balance sheet.
Confidence needs to return to the market before a rally can begin. I think the ECB is determined to prove to the world that their banks are solvent. There are many ways to salvage them. Just borrow the template from the Americans. To prevent a default of any PIIG bond, the ECB must buy up most of the new PIIG bond issues in the next 2 years to prevent defaults. This must be done at below-market-interest rates. Next, ECB must introduce a European version of TARP to recapitalise their banks. Some form of nationalisation may occur, or the ECB may accept preferred shares instead of common shares with voting rights.
So if Europe is not a problem, where else should we worry? China's property bubble is fast deflating. I believe their banking system can withstand a 20 - 40% drop in property prices without causing systemic risk. After all, a typical Chinese pays between 20 - 50% downpayment for their first house. But the fall in wealth will affect their stock market.
Overall, the signs are pointing towards a U-shaped recovery, which is consistent with our stand all along. The 2nd year of the post recession tends to be slower growth, followed by much stronger growth in the 3rd year.
Don't forget, the yield curve spread is still very wide. 3 months UST is less than 0.5% while 10 years is 2.95%. Seldom, if ever does the US economy shrink when the yield curve is positive.
If short term rates are so low, it will only be a matter of time before those funds that have recently fled to money market funds come out of hiding and into risk assets such as property, stocks and commodities. Remember, it's always darkest before dawn.
Confidence needs to return to the market before a rally can begin. I think the ECB is determined to prove to the world that their banks are solvent. There are many ways to salvage them. Just borrow the template from the Americans. To prevent a default of any PIIG bond, the ECB must buy up most of the new PIIG bond issues in the next 2 years to prevent defaults. This must be done at below-market-interest rates. Next, ECB must introduce a European version of TARP to recapitalise their banks. Some form of nationalisation may occur, or the ECB may accept preferred shares instead of common shares with voting rights.
So if Europe is not a problem, where else should we worry? China's property bubble is fast deflating. I believe their banking system can withstand a 20 - 40% drop in property prices without causing systemic risk. After all, a typical Chinese pays between 20 - 50% downpayment for their first house. But the fall in wealth will affect their stock market.
Overall, the signs are pointing towards a U-shaped recovery, which is consistent with our stand all along. The 2nd year of the post recession tends to be slower growth, followed by much stronger growth in the 3rd year.
Don't forget, the yield curve spread is still very wide. 3 months UST is less than 0.5% while 10 years is 2.95%. Seldom, if ever does the US economy shrink when the yield curve is positive.
If short term rates are so low, it will only be a matter of time before those funds that have recently fled to money market funds come out of hiding and into risk assets such as property, stocks and commodities. Remember, it's always darkest before dawn.
Saturday 3 July 2010
Markets Are Pricing In a Double Dip
I may have sent by email to some of you this report about how investors are pricing in a double dip. If the expectation of the masses are a double dip, anything better than that will trigger a rally in stocks. You can cut your equity exposure down by 20 - 30%, even 40%, but stay invested in stocks because no other asset class is going to give you better-than-inflation returns.
If you haven't received my email on this report, please call or email me. Thanks.
Dutch Thugs Beat Brazil
I never saw the Dutch as dirty as this team. Mark van Bommel was committing one niggly foul after another and the Japanese referee who was an idiot failed to produce a single yellow on him. The Dutch baited and antagonised the Brazilians until Melo got the sack. This Dutch team has not won my admiration and I certainly hope they will get dumped out of the World Cup soon. The Brazilian team coached by Dunga may not be pretty. But they did not deserve to lose last night.
World Cup: European Height Beat South American Skills
Can somebody put a height limit on football players please? Those northern European teams are ruining it! Holland shocked Brazil with one own goal and another header. Now Germany seized the lead against Argentina with a header. Football is about skill, teamwork, tactics, not about pumping aerial balls to giraffes who score with their heads. The word Football means a game played with the "foot", not head. Otherwise, why not call it "head ball"? For that reason, I really hope the South Americans and Spaniards bundle Germany and Holland out of the game.
Diagnosis of the Situation
The last week has been a baffling; markets made an about turn. I would say the day that made me stand up and believe there will be SHORT TERM volatility, possibly another 10 - 15% downside to equities, was on 28 June 2010. Let's look at various indicators:
Sentiments
In terms of sentiment, commodity currencies have surprisingly fallen on 28 June. The Vix shot up to 35 before falling back to 30 on Friday (2 July). Non-Investment Grade credit spreads rose to 822 before falling back to 803. So the signals are mixed. On one hand, in the very short term, equity markets seem to point south. On the other hand, they do not point to a very BIG downside, i.e. a bear market because they are not breaking new highs. The Vix is hitting a lower high, or specifically, breaking on the downside. The credit spread surprisingly failed to break May 25th's high.
Valuations.
Earnings risk premium of most Asian indices are pretty close to a buy trigger. They are somewhere in the "middle of nowhere". But they are definitely not a "sell". Even in the west, valuations are not telling us to sell, unlike in 1999 and 2007. Take the example of the S&P500. Their trailing PE is around 15x. This means a earnings yield of 6.7%. The 10-year UST is around 2.9%, making the earnings yield premium at 3.8%. It is not as attractive as in 2009 when the risk premium was a staggering 8.5%, but it definitely isn't as expensive as in 2007, when the risk premium was only 1%.
Economic outlook
What concerns me is the 10y UST falling below 3%. The 3mth UST is still low, manipulated by government's loose monetary policy. But the 10y UST is signalling very slow economic growth ahead, to the tune of perhaps 2% GDP growth. At that rate of growth, inflation is likely to be 0 or no more than 1%.
The non-farm payrolls disappointed. Housing starts fell 33%, albeit that was the first month after the expiry of tax credits. The entire EU suddenly decided to embark on austerity measures, which I think is the biggest policy mistake since Roosevelt tried to balance public spending during the Great Depression.
The European banking system seems to be freezing up, reminding us of the Great Financial Crisis of 2008. While ECB is lending freely, at low rates, the banks are not lending because they are preoccupied with repairing their balance sheets. The one way out perhaps is to implement another TARP plan for the European banks, which will cause the EURO to tumble and stock markets to shoot up.
In Asia, China's latest PMI indicates a soft landing. Wages are rising in China, exports are slowing. A few countries like India are grappling with higher inflation.
Putting it together
The risk of a double dip has heightened, but is still unlikely. One fund manager I spoke to put the risk of a double dip at 30%. A V-shaped recovery is pretty much non existent, at 10%. A long, U-shaped recovery is still the most probable at 60%.
This is a very turbulent period whereby governments worldwide is trying to cut spending, hoping the private sector will pick up the slack. It's a very fine balance.
I am an optimist at this point and believe we will avoid a dip. We are in the age of printing paper money, where governments can inflate out of debt. I believe stock markets are likely to fall more. But when investors realise that a double dip is unlikely to materialise, stocks will make a strong rebound, eventually reaching a new high. After all, with interest rates at ZERO, where else can they park their money? Certainly not investment grade bonds.
Meantime, corrections of up to 25% are possible in a bull trend. I have spoken to many of my friends to diversify further, not to flee from equities. From last week, I've spoken to many to reduce positions that are in profit and keep the rest. We can't always sell on strength. Sometimes, we have to sell on the way down. but if it's the latter, we should sell slowly because markets may bounce up anytime.
Ultimately, investors should increase their efforts to diversify their assets. A "Neutral" mode of 60% equities / 40% non-equities is the best model right now. You then have the flexibility to downgrade stocks further if the situation deteriorates and other strategies like Vix will prop up your portfolio. The drawdown will not be big. If things improve, you can still partake in the upside via your equities.
My next post will identify some investment opportunities.
Sentiments
In terms of sentiment, commodity currencies have surprisingly fallen on 28 June. The Vix shot up to 35 before falling back to 30 on Friday (2 July). Non-Investment Grade credit spreads rose to 822 before falling back to 803. So the signals are mixed. On one hand, in the very short term, equity markets seem to point south. On the other hand, they do not point to a very BIG downside, i.e. a bear market because they are not breaking new highs. The Vix is hitting a lower high, or specifically, breaking on the downside. The credit spread surprisingly failed to break May 25th's high.
Valuations.
Earnings risk premium of most Asian indices are pretty close to a buy trigger. They are somewhere in the "middle of nowhere". But they are definitely not a "sell". Even in the west, valuations are not telling us to sell, unlike in 1999 and 2007. Take the example of the S&P500. Their trailing PE is around 15x. This means a earnings yield of 6.7%. The 10-year UST is around 2.9%, making the earnings yield premium at 3.8%. It is not as attractive as in 2009 when the risk premium was a staggering 8.5%, but it definitely isn't as expensive as in 2007, when the risk premium was only 1%.
Economic outlook
What concerns me is the 10y UST falling below 3%. The 3mth UST is still low, manipulated by government's loose monetary policy. But the 10y UST is signalling very slow economic growth ahead, to the tune of perhaps 2% GDP growth. At that rate of growth, inflation is likely to be 0 or no more than 1%.
The non-farm payrolls disappointed. Housing starts fell 33%, albeit that was the first month after the expiry of tax credits. The entire EU suddenly decided to embark on austerity measures, which I think is the biggest policy mistake since Roosevelt tried to balance public spending during the Great Depression.
The European banking system seems to be freezing up, reminding us of the Great Financial Crisis of 2008. While ECB is lending freely, at low rates, the banks are not lending because they are preoccupied with repairing their balance sheets. The one way out perhaps is to implement another TARP plan for the European banks, which will cause the EURO to tumble and stock markets to shoot up.
In Asia, China's latest PMI indicates a soft landing. Wages are rising in China, exports are slowing. A few countries like India are grappling with higher inflation.
Putting it together
The risk of a double dip has heightened, but is still unlikely. One fund manager I spoke to put the risk of a double dip at 30%. A V-shaped recovery is pretty much non existent, at 10%. A long, U-shaped recovery is still the most probable at 60%.
This is a very turbulent period whereby governments worldwide is trying to cut spending, hoping the private sector will pick up the slack. It's a very fine balance.
I am an optimist at this point and believe we will avoid a dip. We are in the age of printing paper money, where governments can inflate out of debt. I believe stock markets are likely to fall more. But when investors realise that a double dip is unlikely to materialise, stocks will make a strong rebound, eventually reaching a new high. After all, with interest rates at ZERO, where else can they park their money? Certainly not investment grade bonds.
Meantime, corrections of up to 25% are possible in a bull trend. I have spoken to many of my friends to diversify further, not to flee from equities. From last week, I've spoken to many to reduce positions that are in profit and keep the rest. We can't always sell on strength. Sometimes, we have to sell on the way down. but if it's the latter, we should sell slowly because markets may bounce up anytime.
Ultimately, investors should increase their efforts to diversify their assets. A "Neutral" mode of 60% equities / 40% non-equities is the best model right now. You then have the flexibility to downgrade stocks further if the situation deteriorates and other strategies like Vix will prop up your portfolio. The drawdown will not be big. If things improve, you can still partake in the upside via your equities.
My next post will identify some investment opportunities.
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