Sometimes the most attractive energy assets aren’t found in the ground. Rather, at times like today, they are listed on the stock exchange.
Billionaire businessman Carl Icahn is one investor seeing value in energy companies. This week, the hedge fund manager announced his purchase of 60 million shares in the Canadian oil and gas producer, Talisman Energy. Icahn has built up a nearly 6 percent stake in the Calgary-based energy producer, worth a whopping $300 million. Even though the company has been a perennial underperformer, after Icahn’s tweet, the stock climbed to the highest level in more than a year.
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According to Forbes, analysts figure if Icahn and the CEO can successfully turn the company around, “The gain on the legendary raider’s 6 percent could be more than $500 million.”
I believe this “raider’s” deal represents one of the many potentially lucrative energy plays that savvy investors are getting excited about. Whereas last summer, Chinese companies were scooping up valuable resource assets, now a different phenomenon is taking place.
For example, I recently talked to Martin Soong on CNBC Asia about Petrominerales being purchased for about $900 million in cash by Bogota-based major oil producer Pacific Rubiales. Petrominerales’ stock popped an incredible 42 percent on September 27 before trading on the stock was halted.
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U.S. investors don’t have to go far to find significant opportunity, as “U.S. resources are exerting a strong pull” for potential mergers and acquisitions, according to Oil and Gas Investor. There are many profitable energy plays to be found in places such as North Dakota, Ohio, Texas, and West Virginia.
This is likely part of Aubrey McClendon’s plan. Even before the “ink was dry on his firing notice,” the former CEO of Chesapeake Energy raised a massive $1.7 billion for his new company, American Energy Partners, which is expected to operate in the Utica shale play in Ohio, says MarketWatch.
To benefit from this tremendous growth potential, we think investors should be discriminating buyers. Evan Smith, CFA, co-portfolio manager of the Global Resources Fund (PSPFX) believes great value in today’s energy market lies in selectively choosing companies that own high-quality assets in the core basin areas of Eagle Ford, Permian, Marcellus and Bakken. What’s important to our investment process is owning oil and gas companies that are growing their reserves, production and cash flows on a per share basis.
The new publicly traded Antero Resources (AR) is a great example. Antero is an experienced Appalachia producer with an attractive resource base in the Marcellus shale basin located in West Virginia, Ohio and Pennsylvania. According to research from ISI, the company’s acreage in Utica is the “industry’s largest” and early leasing in core areas “has created a scalable and ‘blocked-up’ acreage footprint that would not be possible to replicated today.”
This company has been impressing its industry peers for years, with its experienced management team that has had “proven success having built and sold three companies prior to AR, with all yielding large financial gains,” says ISI.
After the company announced its initial public offering, there was so much demand from eager investors that underwriters increased the amount of available shares and raised the IPO price.
Investors have profited handsomely so far. Following its first day of trading, the stock was “up 18 percent after pricing at $44, above their anticipated range,” according to the Wall Street Journal.
Another company Evan likes is Gulfport Energy Corporation (GPOR) due to its concentrated acreage in the core part of the Utica Shale in Eastern Ohio and impressive well results, which continue to define this play as one of the best natural gas plays in the U.S.
So even though commodity prices have been unspectacular, oil and gas companies can still produce outstanding results for investors. Consider the plummeting price of natural gas in recent years, which may have caused some investors to dismiss companies related to the commodity. Even though the price of natural gas represented by the United States Natural Gas Fund (UNG) is basically flat on a year-to-date basis, the Bloomberg Natural Gas Producers Index has gained nearly 30 percent.
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Investors should expect more M&A activity, especially in the natural gas area, according to Oil and Gas Investor. As natural gas prices stabilized “non-Free Trade Agreement approvals are starting to flow, and there is a steady stream of announced petrochemical and other gas-fed projects.” And with M&A expected to be resurging soon and big hedge fund managers participating, the energy sector will likely be gaining strength. You might not want to wait much longer. Check out one diversified way you can participate.
To all our Canadian readers, we wish you have a very happy Thanksgiving!
Evan Smith, CFA contributed to the commentary.
- Major market indices finished mixed this week. The Dow Jones Industrial Average rose 1.09 percent. The S&P 500 Stock Index gained 0.75 percent, while the Nasdaq Composite fell 0.42 percent. The Russell 2000 small capitalization Index rose 0.56 percent this week.
- The Hang Seng Composite rose 0.70 percent; Taiwan lost 0.18 percent while the KOSPI gained 1.40 percent.
- The 10-year Treasury bond yield rose 5 basis points this week to 2.69 percent.
Domestic Equity Market
The S&P 500 experienced quite a bit of volatility this week but ended the week higher on optimism that a solution would be found for the debt ceiling impasse. Defensive sectors led the way, with utilities and consumer staples outperforming, while cyclical areas tended to underperform.
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- The utilities sector was the best performer this week and every constituent in the group was higher for the week. The sector had underperformed in recent months and concern of a Treasury debt default pushed investors into relative safe havens.
- The consumer staples sector also rallied this week led by Safeway, which reported a lackluster quarter but the company announced it was exiting the Chicago market and selling stores. The company also indicated that other divestitures would be considered. The market reacted positively to these attempts to raise returns on capital.
- Darden Restaurants was the best performer in the S&P 500 this week rising 8.09 percent. An activist investor has taken a stake in the company and is pushing for a possible break up of the chain.
- The consumer discretion sector was the worst performing group this week as retailers generally reported disappointing September results. L Brands and The Gap both fell by more than 9 percent on weak results. Internet related names were also weak such as Netflix, TripAdvisor and Priceline.com but have performed well recently.
- Materials also lagged and ended roughly flat for the week. Results were truly mixed with themes difficult to identify.
- Citrix Systems was the worst performer in the S&P 500 for the second week in a row, falling 16.17 percent. The company preannounced disappointing quarterly results which appear broad based and the company did not offer much clarity on the drivers behind the miss.
- The current macro environment remains positive as economic data remains robust enough to give investors confidence in an economic recovery but not too strong as to force the Fed to change course in the near term.
- Money flows are likely to find their way into domestic U.S. equities and out of bonds and emerging markets.
- The improving macro backdrop of Europe and China could be the next catalyst for the market to move higher.
- A market consolidation could occur in the near term after such a strong year.
- Higher interest rates are a threat for the whole economy. The Fed must walk a fine line and the potential for policy error is potentially large.
- The debt-ceiling debate has captured investor attention this week and potential missteps in Congress could create uncertainty and offer short-term oriented investors a reason to sell.
The Economy and Bond Market
Treasury bond yields were little changed this week as the government shutdown has delayed numerous government economic reports, but that is not to say that it has been a quiet week. As widely expected, Janet Yellen was nominated to succeed Ben Bernanke as Fed Chairman. The Debt ceiling “game of chicken” thrashed about this week with some positive signs of a short-term resolution emerging by the end of the week. The very short end of the Treasury bill market was unusually volatile this week as some investors sold aggressively just in case a resolution on the debt ceiling could not be hammered out by the middle of next week and the U.S. experienced a default on maturing Treasury bills. Consumer confidence hit the lowest levels in nine months as higher interest rates and frustration with the politicians in Washington weighed on consumers expectations.
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- Janet Yellen was nominated to succeed Ben Bernanke as Fed Chairman. She is widely viewed as very capable and expectations are she would continue to follow the path the Fed has set.
- The government shut down and debt-ceiling impasse appears to be close to a resolution based on this week’s events.
- The European Central Bank president Mario Draghi indicated that further interest rate cuts were possible if needed.
- Retail sales disappointed in September with numerous companies missing same store sales estimates.
- The weakness in retail sales may be driven by the weakness seen in consumer confidence indicators in recent months.
- Brazil raised interest rates by another 50 basis points to 9.50 percent, which is the fifth increase since April.
- Despite recent conflicting commentary, the Fed continues to remain committed to an overall accommodative policy and is unlikely to raise interest rates in 2013 or 2014.
- Key global central bankers remain in easing mode such as the European Central Bank, the Bank of England and the Bank of Japan.
- If the shutdown continues for much longer, the Fed would be less likely to reduce its quantitative easing program.
- Inflation in some corners of the globe is getting the attention of policy makers and may be an early indicator for the rest of the world.
- Trade and/or currency “wars” cannot be ruled out which may cause unintended consequences and volatility in the financial markets.
- The recent bond market sell off may be a “shot across the bow” as the markets reassess the changing macro dynamics.
For the week, spot gold closed at $1,272.18, down $38.62 per ounce, or 2.95 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, declined 4.50 percent. The U.S. Trade-Weighted Dollar Index rose 0.41 percent for the week.
- Recently there have been predictions that imports of gold into China would slow down and that current levels cannot be sustained. In August, import figures declined minimally for the prior month but still remained above the sizeable volume of 100 tons. China remains on track to comfortably exceed 1,000 tons of known net gold imports for the year. By “known” we mean those being imported legally through Hong Kong, the only entry point where volumes are reported. There are plenty of other major ports of entry for trade into China; not least Shanghai, where the Shanghai Gold Exchange and the Shanghai Futures Exchange have become the world’s most active physical gold exchange markets, and the second most active gold futures market, in just a few short years. The amount of physical gold traded in Shanghai gets close to total global mine production at times.
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- This year central banks will add as much as 350 tons of gold, valued at about $15 billion, estimates the London-based World Gold Council. Similarly, European central banks sold 5.1 metric tons of gold this year, the lowest on record. But what about the U.S. Treasury? In a recent document, the Treasury admitted to considering a range of options with respect to how it would operate if the U.S. had exhausted its borrowing authority. In conclusion, the Treasury considered asset sales while it outright rejected the option of selling the nation’s gold to meet payment obligations. The Treasury reasons that selling gold would undercut confidence in the U.S. both here and abroad, and would be destabilizing to the world financial system as well. In other words, according to the official position of the U.S. Treasury, the promises and commitments of the government, and its “full faith and credit,” are actually worth less than gold.
- This week, Rio Alto Mining announced third-quarter gold production and sales of 59,157 ounces from its La Arena operations in Peru. Production hit a new quarterly record, and came in at a higher grade of 0.58 grams per ton. Full-year guidance for 2013 was reaffirmed. Meanwhile, Kinross Gold Corp. announced the achievement of commercial production at its newest mine on schedule and on budget. The new Dvoinoye gold mine in Russia’s Chukotka Region is a low-cost mine which strongly reflects the company’s focus on maximizing margins and cash flow. At peak production, Dvoinoye is expected to produce between 235,000 to 300,000 gold-equivalent ounces, annually.
- The National Bank Financial team of mining analysts expects that momentum for producers could remain subdued through year-end, as depressed gold prices could trigger another round of impairment charges in the third quarter. This is in addition to possible reserve write-downs at year end, and to significant revisions to 2014 mine plans as companies revisit cut-off grade strategies to navigate the current, low gold price environment. They go on to add that now that newest, capital-intensive projects have been shelved, the quality over quantity focus has extended decidedly to operating costs as companies adopt strategies to provide more breathing room and/or to restore more sustainable margins. This leads to the conclusion that there is potential for another round of corporate G&A cuts coming before year-end.
- Detour Gold Corp. reported its quarterly production number, coming in below expectations at 75,000 ounces. Grades were also lower at 0.72 grams per ton, compared to expectations of 0.83 grams per ton. The decline in grades is partially attributed to throughput coming in from low grade stockpiles. Similarly, Allied Nevada Gold Corp. reported quarterly production of 52,200 ounces from its Hycroft mine in Nevada. However, concerns remain over the feasibility of the large mill initiative at current gold and silver prices. The company will have an estimated year-end working capital position of around $58 million, according to analyst Michael Gray of Macquarie. This financial position poses significant risks considering the $580 million of debt, and the minimum of around $11 million quarterly interest payments.
- Pretium Resources Inc. had its biggest drop ever after a company hired to evaluate the bulk sample from its high-grade project unexpectedly quit the project. Strathcona Mineral Services Ltd., which was hired for an independent assessment of a 10,000 metric-ton ore sample, resigned, citing a disagreement with Snowden Mining Industry Consultants Ltd., another company hired to examine the ore. CEO Robert Quartermai was quoted as saying there was a disagreement in the model used to test the sample. Regardless, the program will continue with an official bulk sample report expected in the fourth quarter. Pretium also took the opportunity to release additional results from exploration drilling in the Valley of the Kings, including seven intersections grading greater than 1,000 grams per ton of gold.
- The nomination of Janet Yellen as the new Federal Reserve Chairmanship could mean more dovish Fed policy. Jim O’Neill, the retiring Goldman Sachs Asset Management Chairman who first coined the “BRIC” countries term, believes Yellen represents the dovish wing of Bernanke. In fact, he says she “out-doves” Bernanke. The implications for emerging markets are imminent according to O’Neill, given the more accommodative nature of the Fed under Yellen’s leadership. A more accommodative Fed policy will likely be accompanied by a weakening dollar, which could bode well for gold prices going forward. With this in mind, consider Goldman Sachs’ second-quarter regulatory disclosure, which showed the addition of a significant portion of gold to its holdings. However, the Bank’s commodities research analysts issued a recommendation to sell gold into 2014. Upon such a statement by the analysts, Seeking Alpha’s Real Estate contributor Dave Kranzler asked, “Which side of Goldman Sachs is right about gold? As an investor, do you follow the guy selling research or do you follow the money?”
- The Moscow Exchange will introduce trading of gold and silver as early as this month, as part of plans to make metals more accessible to smaller banks by reducing transaction costs, Bloomberg reports. The exchange will set minimum trades starting at 10 grams of gold and 100 grams of silver, while platinum and palladium contracts will start trading in the first half of 2014. The Moscow Exchange is following the path of the Shanghai Gold Exchange by listing precious metals. It is doing so in order to add liquidity, broaden the range of instruments available for hedging, but also to increase the availability of precious metals to non-traditional market participants. We believe this market should be able to build on the experience of the Shanghai Exchange, and will offer a greater degree of actual physical trading volume, helping to increase the transparency of gold demand and supply factors.
- An article in Canada’s National Post this week discussed mergers and acquisitions within the mining sector, saying activity is brewing under the surface. According to the daily newspaper, M&A activity was red hot in the mining space during 2010 and 2011 before slowing to a crawl over the past 18 months. The reasons behind this behavior are numerous and include volatile commodity prices, plunging stock valuations, a challenging financing environment, the expectations of asset write-downs, and the resultant CEO firings. According to PricewaterhouseCoopers, M&A activity in the mining sector during the first half of 2013 was down 31 percent from the same period a year prior. The second half began timidly as well. However, in the last six weeks the volume of activity has increased noticeably. The fact that stock prices across the sector have been decimated is finally getting major producers serious about acquisitions again. Many on the street believe that the next wave of M&A is underway, even if everyone isn’t quite aware of it yet.
- The belief that the U.S. will extend the recovery soon after lawmakers resolve the stalemate, led Goldman Sachs’ head of commodity strategy to recommend selling gold for the next twelve months, with a target price of $1,150 per ounce. However, as GoldCore director Mark O’Byrne reminds us, Goldman’s reputation in forecasting gold prices is less than stellar. The bank, among much fanfare and media attention, recommended to its clients to sell gold into 2008 and named the recommendation as one of its top ten tips. Gold rose more than 12 percent from the time of that recommendation and into December 2008. The closing price for 2008 was nearly 20 percent higher than Goldman’s price forecast, costing its clients and the public a lot of money. Perhaps that is why Kevin Norrish, head of commodity research at Barclays, issued a note of caution against selling gold despite any weakness.
- The Reserve Bank of India (RBI) appears to be moving ahead with its plan to get current gold holders to place the metal on deposit for the bank, developed to reduce import demand. Under the program, gold owners would receive interest and have the security of a guarantee backed by the central bank, while the RBI would lend the gold to the jewelry manufacturing sector, thereby reducing demand for imports, says Credit Suisse. What is worrisome here is that at least one western bank is in talks with one of the leading jewelry federations about the creation of a similar deposit scheme. This type of mechanism could result in the creation of an unregulated paper gold trading market, subject to manipulation.
- We recently learned that 95 percent of transactions in the futures and options markets are terminated before they reach the date on which gold has to be delivered. This means that only one out of every 20 transactions involves physical delivery, and 19 are simply paper gold trades. Our trading desk has observed some odd market activity that we have deemed the “gold flashing” trade, and appears biased toward the paper trading side. For instance, this past Wednesday morning, our traders witnessed a high frequency trader offer 47,000 contracts for sale for only one second, before cancelling 45,000 of them. Naturally, markets react negatively to sudden large offers, sending the markets into a downward spiral.
Energy and Natural Resources Market
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- North American oil production is showing no signs of slowing down and will likely continue growing even if prices fall to around $60 a barrel, more than $40 below today’s price, an analyst said at a Houston conference Tuesday. Tony Scott, manager of oil and gas analysis for Bentek Energy, said the $100-plus price means high returns for oil companies. With companies cutting their costs and improving their production methods, their work probably will remain lucrative at far lower prices, he said. U.S. benchmark light, sweet crude ended up 46 cents at $103.49 a barrel Tuesday on the New York Mercantile Exchange. “We’ll see a slowdown at $80, but it’s not going to be a dramatic slowdown,” Scott said at the Platts Commodity Week conference held at the Hilton Americas in downtown Houston.
- Costs for European chocolate makers have jumped almost a third in the past year because of a surge in key ingredient prices, raising prospects of a further squeeze in margins in a supply scramble ahead of Christmas, Valentine’s day and Easter. Cocoa butter, which provides the melting quality in chocolate, surged almost 70 percent in the year to August, while milk powder jumped 50 per cent, leading to a 31 percent rise in the cost of making a bar of milk chocolate, according to commodity data specialists Mintec.
- Copper prices slipped to $3.27 per pound, down 3 cents on the week, as reports from LME week in London indicate the copper market will move into a slight oversupply situation in 2014.
- At its investor day last week, Michelin presented its expectation for a flat global market for giant mining tires in 2014 and 2015. Michelin cited excess mining tire inventory levels, with a destocking cycle set to last until 2015. This highlights again that mining companies are underspending in sustaining capital at the present time as they look to cut costs.
- LNG-powered locomotives could be in widespread use on North American railroads as early as 2016 or 2017, according to Railway Age, one of the industry's leading technical publications. This is far sooner than most energy analysts expect. Burlington Northern Santa Fe (BNSF) railroad, owned by Warren Buffett's Berkshire Hathaway, made headlines earlier this year when it announced it would begin experimenting with an LNG-fuelled locomotive and might, in the future, switch a large proportion of its train fleet from diesel to cleaner-burning and cheaper natural gas. In 2011, the railroads consumed just over 3 billion gallons of distillate fuel oil, almost 5.5 per cent of the total diesel consumption in the United States.
- The World Steel Association released its Short Range Outlook for 2013 and 2014. It forecasts that global apparent steel use will increase by 3.1 percent to 1,475 million tonnes in 2013 following growth of 2.0 percent in 2012. In 2014, it is forecast that world steel demand will grow further by 3.3 percent and will reach 1,523 million tonnes. Worldsteel Economics Committee Hans Jürgen Kerkhoff said “The key risks in the global economy - the eurozone crisis and a hard landing for the Chinese economy - which we identified in our last SRO issued in April, have continued to stabilize through the past six months. Our underlying assumption remains that the U.S. will resolve its fiscal constraint soon.”
- An energy firm run by Aubrey McClendon, the former Chesapeake Energy Corp. CEO, has raised $1.7 billion to drill on shale acreage in Ohio's Utica Shale, the firm said on Wednesday. Proceeds will initially be used to acquire and drill on about 110,000 acres in the southern portion of the Utica Shale. Drilling operations will begin with one rig in the fourth quarter of 2013, and the firm plans to increase drilling activity to at least 12 rigs over the next 2 to 3 years, the firm said. McClendon, who co-founded Chesapeake in 1989, left in April after clashes over spending with the company's board and a series of Reuters investigations led to civil and criminal probes of the company.
- Commodities traders who buy and sell as much as $5.67 trillion of raw materials a year say the benchmark prices for everything from oil to iron ore to gasoline are wrong as often as 27 percent of the time. In a Bloomberg News survey conducted during the past eight weeks, 85 traders and analysts said they have little confidence in the assessed prices of crude, metals and iron ore. Regulators, including European Union Competition Commissioner Joaquin Almunia, may examine commodities markets, having already increased investigations of manipulation of benchmarks for interest rates, derivatives, foreign exchange and oil. Five years after the global credit crisis prompted more regulation of banks, benchmark prices for hundreds of commodities are determined through surveys of anonymous traders who may have a stake in the outcome of the assessments. Unlike stock prices, available in real time at regulated exchanges for all investors to see, many raw materials that go into food, clothing and power are bought and sold in private.
- Indian automakers and consumer companies rose this week following the government’s announcement that state-run banks will increase lending to selected industries. Similarly, the central bank lowered one of its target rates, easing liquidity curbs imposed in July after the rupee rebounded from a record low. Towards the end of the week, data showed that the nation’s trade gap narrowed to the lowest level in 30 months, helping the rupee advance. The Asian nation’s currency has appreciated more than 10 percent from its September low.
- Polish banks rose to the highest level in almost six years after Moody’s Investors Service raised the outlook for the local banking industry to stable from negative. According to Moody’s, the upgrade comes on the expectation that the recovery in economic growth will bring about a recovery in interest income, Polish banks’ main revenue source, and consequent stabilization in bank profitability.
- The number of mainland Chinese visitors to Macau grew 11 percent during the six-day Golden Week holiday, beginning in early October. Gross gaming revenue was up a record 35 percent.
- Over the Golden Week holiday, Chinese travel to Hong Kong was up 17 percent year-over-year, while up 51 percent to North America. Chinese visitors to Thailand, South Korea and Japan were also up on a year-over-year basis.
- New home sales rose 72 percent during the first week of October, the Golden Week, throughout the major cities in China.
- China’s Securities Regulatory Commission is drafting an implementation plan for A-shares companies to issue preferred stocks, the Shanghai Securities News reported.
- Indonesia’s foreign reserve rose to $95.7 billion in September from $93 billion in August. The Indonesian stock market was up 6 percent during the week in U.S. dollars, half of which was from rupiah currency appreciation. Bank Indonesia (BI), the central bank, left the policy rate unchanged at 7.25 percent as expected after improving economic statistics was released last week. China said it will continue to support ASEAN financial stability in case of turmoil as it did in the 1997 Asian financial crisis.
- The Philippines’ manufacturing index rose 18.3 percent in August for a fifth straight month of upbeat gains, benefiting from growing business process outsourcing to that country. Exports soared to 20.2 percent in August, while car sales were up 15 percent in September, showing a robust economy.
- The Bank of Korea, the central bank, left the policy rate unchanged at 2.5 percent this week and kept its view that the global economy is continuing to recover, along with slight signs of recovery within China.
- Turkey’s industrial output dropped surprisingly in August for the first time this year. A Bloomberg analyst survey deemed output was expected to rise 4.1 percent, but the actual reading unexpectedly fell 4 percent from the previous month on a seasonally-adjusted basis. However, September economic data showed that the purchasing managers’ index (PMI) rose to 54 in September, up from 50.9 in August. Exports also rose 11.1 percent from a year ago, driven by the acceleration in external demand, particularly in the euro area, suggesting a strong rebound in activity last month.
- South African Reserve Bank Deputy Governor Daniel Mminele was quoted saying the weaker rand will limit efforts aimed at narrowing the current account deficit because of the inelasticity of imports needed to sustain the country’s infrastructure investment. On a similar note, central bank Governor Gill Marcus said South Africa’s foreign reserves are low in comparison to its emerging market peers, leaving the nation’s economy highly vulnerable to sudden large outflows of capital.
- September exports in Taiwan fell 7 percent versus the market consensus of a 1.2 percent drop. Exports to Europe were up 4 percent on a year-over-year basis. Exports to Japan, the ASEAN nations, the U.S., China and Hong Kong were down 10.9, 9.9, 8.5 and 8.4 percent, respectively. Tech and non-tech exports were also down.
- Total container throughput growth in China’s top eight container ports slowed to 1.5 percent in September after good July and August data, signaling weaker trade volume.
- China’s National Development and Reform Commission (NDRC) announced on-grid tariff cuts averaging 3.1percent for PRC coal-fired power plants, effective September 25, 2013. The announcement removed an overhang on IPP stock prices which had priced in the cuts since the news broke out during the summer.
- Hong Kong Exchanges & Clearing (HKEx) raised the discount, or “haircut,” from 1 percent to 3 percent for some Treasuries for margin cover requirements. This was done because of a possible default by the United States.
- Janet Yellen's nomination to head the U.S. Federal Reserve is offering emerging markets an opportunity to narrow current account gaps before a reduction of Fed stimulus roils markets and capital flows. The news of the nomination was quickly welcomed by a large number of emerging market central bank heads and policy makers. A deputy Indonesia central bank chief described Yellen as the right pick for local and global financial markets, while she was also described as a well experienced policy maker with an impressive resume, by a South Korean finance ministry official.
- European recovery has been gaining momentum, as economic confidence in the eurozone increased more than economists forecast in September. However, on a valuation basis, emerging Europe stocks may be more attractive. Stocks in the Czech Republic, Hungary, Poland, Russia and Turkey have, on average, a lower price-to-book ratio and a lower forward price-to-earnings ratio than the largest industrialized nations in the world. Additionally, emerging Europe countries offer higher dividend yields.
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- As shown in the chart below, passenger vehicle sales are rising in China. Sports utility vehicle sales are even stronger due to popularity in third and lower tier cities where small business and families prefer more space.
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- Brazil’s slow growth and mounting corporate financial leverage may prompt credit rating downgrades over the next 12 months, according to Fitch Ratings. The average total debt-to-earnings before interest, taxes, depreciation and amortization for Brazilian companies now stands at 4.2 times and rising at a rapidly-worrisome pace, according to Fitch. In addition, the International Monetary Fund (IMF) cut Brazil’s 2014 growth forecast from 3.2 percent to 2.5 percent yesterday. The IMF argued that the slowdown in investment, resulting from the central bank’s interest rate hikes, is necessary to contain inflation.
- A recent report by Poland’s financial market regulator KNF, shows that as much as 30 percent of Polish credit unions' loan portfolios, at the end of the first half of 2013, were composed of non-performing loans. The concern comes at a time when legislators have begun to look into the risks and potential liabilities that foreign-currency denominated mortgages could have on banks and borrowers. Foreign denominated mortgages represent 54 percent of Poland’s mortgages. An estimated $16 billion in losses would have to be assumed should they be converted to zloty.
- There is a possibility that the Chinese government can lower the GDP growth target to 7 percent next year, which is regarded as high growth by the government, although lower than the market consensus.
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