Friday, July 30th, 2010

Daily Download: Financial and Stock Investing News for 12-21-09

December 21st, 2009 at 8:32 am by CB | No Comments

Good morning, investors and traders! You are reading the Daily Download (”Daily DL”), which includes summaries and links to the day’s selected economic and stock investing news. The Daily DL is maintained by Chain Bridge Investing (“CB”), which is a financial blog at www.chainbridgeinvesting.com. Chain Bridge Investing is constantly improving and adding new financial and investing content to the website. Please let us know if you have any suggestions at the following email address: .

General News & Headlines Summary

News items not covered below are as follows: (1) Airvana will be taken private in the first quarter of 2010 by a group of investors for nearly $530 million; (2) Telstra, a large Australian telecommunications company, indicated that its first-half revenue would be lower than the prior year’s and it also cut its full year guidance primarily due to increased competition along with increases in the quantity of wireless homes; (3) Bucyrus International, a mining-equipment manufacturer, stated that it is paying $1.3 billion, in cash, for the mining division of Terex Corp. and expects the deal to be accretive to earnings withing the first year; (4) Royal Dutch Shell is planning to sell 10 Nigerian onshore oil assets, which are valued between $4 billion to $5 billion and have proven oil reserves of nearly 100 million barrels; (5) Spyker Cars has made a revised bid, with previous obstacles removed, to purchase Saab; and (6) the London Stock Exchange will purchase a 60% stake in the Turquoise trading platform in a deal that is intended to lead to significant cost savings.

No Upcoming Economic Data for the Day (all times EST)

11:30 AM 3 – Month Bill Auction

11:30 AM 6 – Month Bill Auction

Initial Public Offerings (”IPOs”) for the Week of December 21- 25, 2009

Data from the WSJ Market Data Group

For Daily Market Performance Data, Please Visit the Daily Market Sheet

News

Business Chiefs Hit at Climate Agreement – Financial Times

Summary: Many energy business leaders believe that the climate deal at Copenhagen does not provide enough certainty and indicate that much more is needed from the agreement. While the deal states that there is a general global commitment to constrain the rise of global temperatures, it does not detail the measures necessary to achieve this commitment especially regarding the required caps on emissions. At present, the support from business leaders is critical due to the fact that businesses will account for nearly 90% of the annual $500 billion investment to fight global warming. More details of the agreement and will be decided over the next several months. Furthermore, the conference’s failure to determine a time line for the global treaty could lead to weakened confidence in the carbon markets.

Oil Demand Recovery to be Sluggish – Financial Times

Summary: The five leading oil trading firms, which trade nearly 15% of the world’s oil output, are: (1) Vitol; (2) Glencore; (3) Trafigura; (4) Gunvor; and (5) Mercuria. Early this week, the Organization of the Petroleum Exporting Countries (“OPEC”) will analyze the views of these top trading firms regarding oil demand for 2010, as OPEC discusses production policy. At present, Vitol along with Glencore and Gunvor foresee oil prices remaining within the $70 to $80 a barrel range during the first half of 2010 primarily due to the lack of fundamental support for the current prices. According to Mercuria, the demand for oil in both China and India will remain strong, while demand growth in developed nations will likely remain week. Despite the International Energy Agency’s (“IEA”) prediction that oil demand in 2010 will increase by 1.5 million barrels a day, most of these top traders tend to believe it will increase nearly 1 million barrels a day, while OPEC is currently forecasting an increase of .8 million barrels a day in 2010.

China Tightens Land Rules – The Wall Street Journal

Summary: China, in an attempt to reduce the recent price increases in its property market, has introduced the following new rules regarding property purchases: (1) a minimum 50% down payment will be required for land purchased from the government; (2) land purchases from the government must be repaid within a year of the sale agreement, but for certain projects a year extension may be granted; and (3) developers will not be allowed to purchase new land if they have not paid for their existing land in a timely manner. At the end of November, China’s urban property prices had increased 5.7% from a year earlier.

CB: These rules are significant since the government has ownership over all of the land in China. Land purchases are technically long-term leases. Going back a couple of years, China had implemented measures to contain already rising property prices. For instance, a property sold within five years of purchase is subject to a 5% tax in order to discourage flipping. Furthermore, even two years ago lenders required a 30% down payment for mortgages, much higher than those being conducted during the real estate boom in the U.S.. Moreover, to control foreign buying, a source of rising property prices, a non-Chinese citizen would have to live in China for a year before being allowed to buy a home. Yet, there have been many noted ways around some of these older provisions.

Ethanol Recovery Faces Oversupply Repeat – The Wall Street Journal

Summary: At present, ethanol margins have been increasing, while the prices of natural gas and corn have remained relatively low. Meanwhile, according to Renewable Fuels Association, the installed capacity of corn ethanol is nearly 13.1 billion gallons a year with approximately 1.2 billion gallons of idle capacity. With the improved ethanol margins companies like Valero Energy, Archer Daniels Midland, and Pacific Ethanol want to bring online new and temporarily idled capacity. These above mentioned companies are expected to bring online nearly 940 million gallons of capacity in 2010 along with another 1.4 billion gallons of capacity expected from industry-wide expansion projects. This large amount of supply may be enough to create an ethanol glut and send ethanol margins falling, thus leading to more potential business failures in the ethanol industry.

CB: If this scenario plays out, then it may be to the benefit of the largest and most efficient producers to take the short-term losses and run the less efficient competitors into the ground, while maintaining enough cash and debt capacity to purchase the competitors’ assets at a later time. This industry recently went through a boom-bust cycle, and most participants probably do not want to experience another instance of bust so soon, especially shareholders. Furthermore, the article focused primarily on the supply side, but some of these ethanol companies will be in for some pain if corn and natural gas prices begin to rise. An occurrence of rising corn prices does not seem to be remote.

Sales of Dollar Junk Bonds Hit Record – Financial Times

Summary: According to Dealogic, for the year-to-date period, global issuance for high-yield bonds has reached the level of $144 billion, surpassing the previous high of $143 billion for 2006. Furthermore, returns on high-yield bonds for the year are at 56%, a record level, exceeding the previous record of 39% set in 1991. As of the end of November, the default rate for high-yield bonds was at 12.7%, or 250 defaults. While Moody’s originally estimated that the default rate would peak at 16.4%, it has revised its projections and believes the default rate has peaked and will drop to nearly 4% next year.

CB: When filling in the details about this rally in high-yield bonds, or junk bonds, it does not bode well from a risk perspective for the markets. First, as of November, triple C rated bonds, which are considered deep into the junk rating, accounted for a fifth of all high-yield issuance. Second, the newer issues of high-yield bonds are starting to resort to the following frowned-upon bond practices witnessed before the financial crisis: (1) payment-in-kind notes, which can be repaid with more debt; (2) covenant light notes, which have very few restrictions or operating constraints relative to the risk level; and (3) dividend recaps, which allow companies to access additional debt in order to pay dividends to owners. Third, due to the banks are denying loans to companies that they consider risky, these companies with bad credit risk are going to the high-yield bond market to receive additional financing. As a result of the recent high returns in the high-yield market and fewer than expected defaults, companies are not facing as much scrutiny when they issue their debt and investors are more than willing to invest given the recent returns.

These are dangerous details regarding the high-yield bond market. The fact that the market is already returning to the practices used immediately prior to the crisis, indicates that the markets have not learned their lessons. Companies still have over-leveraged balance sheets. Credit through the bond markets remains easy to obtain. If companies are being turned away from banks, then it implies there is a significant risk that the companies are, or will be unable, to make payments on the debt they are seeking. Furthermore, the economy is still fragile and any slight hiccup could send these over-leveraged companies into operational and financial trouble. If anything, this current run in the high-yield bond market exposes the human tendency to focus on returns and avoid analyzing risk factors, or downside. Also, it shows that people do not remember lessons of the past cycle, regardless of the pain experienced. The more triple C bonds that are issued, the higher that default rate will move.

CB would like to see a break down of the sectors issuing these high-yield bonds. Some sectors are in no shape for additional business investing, and therefore cannot profitably utilize the funds they are being provided in the high-yield market. If CB were looking for shorts, it would follow the high-yield debt and look for those sectors confronting slack and overcapacity issues. Its only a matter of time before the over-leveraged companies begin to experience significant problems. They possibly already have experienced problems, thus explaining the need to issue high-yield debt.

In the end, investors have not learned the most recent lessons. This rally into high-yield bonds is not built on firm foundations. Investors do not appear to be heeding risk. Perhaps, the bailouts eased the fall and failed to imprint the previous cycle’s lessons in investors’ minds. CB is reminded of England in the Middle Ages. When determining the legal boundaries of a person’s property for a contract, the officials would bring some children with them to witness the boundaries of the land. After wards, the children were beaten. As a result, in most cases, those children never forgot where the boundaries were for the rest of their lives. Apparently, the recent level of pain was not enough for investors.

Citadel Broadcasting Files for Bankruptcy – The New York Times & Citadel Files for Bankruptcy Amid Harsh Radio Climate – The Wall Street Journal

Summary: As the radio industry continues to suffer from increased competition from the Internet and declining ad revenue, which is expected to decline 19% this year according to BIA/Kelsey, Citadel Broadcasting, the third-largest ratio broadcaster in the nation, filed a prearranged Chapter 11 with the support of the lenders who hold over 60% of the debt value, but for judge approval the plan requires two-thirds of lenders support along with the majority support of the individual creditors. At present, the company reports owning $1.4 billion in assets, which includes 224 stations in the U.S., and having $2.4 billion in debt obligations. According to Citadel’s bankruptcy plan, the lenders owed nearly $2 billion by the company would receive 90% equity ownership in the reorganized company in exchange for a significant portion of the debt. Consequently, Citadel’s debt load would be reduced to approximately $762.5 million. Furthermore, current equity stakes will be terminated under the bankruptcy reorganization.

More Links of Note

Deposit Insurance Fund, Unofficially – Rolfe Winkler

And the Best Performing Fund of the Decade is.. – Mike Foster

Small Speculators Haven’t been this Bearish Since the March Bottom – PragCap

China Asset Bubbles Will Burst on Inflation, Xie Says – Bloomberg