Don Miller
Three Glencore Xstrata Takeover Targets: TCK, AAL, FCX
The proposed mega-merger of Glencore International PLC and Xstrata PLC will create a global powerhouse with the potential to shake up the mining industry overnight.
If completed, the $90 billion deal will form a mining behemoth with control over one-third of the global market for thermal coal, and make it the world's largest producer of integrated zinc production. It will also rank as the world's third-largest copper producer and fourth-largest nickel producer.
Basically, the merger would create a super-giant that could compete with the industry's heavyweights – BHP Billiton Ltd. (NYSE ADR: BBL), Rio Tinto PLC (NYSE ADR: RIO), and Vale (NYSE ADR: VALE) – the mining industry's "Big Three."
The merger is certain to spark volatility in the sector, according to Money Morning Global Resources Specialist Peter Krauth, an expert in metals and mining stocks who runs the Global Resource Forecast investment service.
"What observers need to understand is consolidation like this concentrates decision making," Krauth said. "The fewer participants in an industry, the more impact they have.
When output is either increased or decreased by one or more mega producers, it will also have a larger impact on world supplies, and therefore prices."
With that kind of power, the Glencore-Xstrata deal will form a goliath with the appetite – and the muscle – to swallow its weaker rivals.
Glencore Xstrata: Hungry for Mergers
Based on estimated 2011 results compiled by Credit Suisse Group AG (NYSE ADR: CS), the new company would have revenue of $211.3 billion and net profit of $7.5 billion. That kind of clout would make its stock valuable currency for more acquisitions.
Plus, both companies are led by aggressive chief executives that have a history of snapping up competitors.
Xstrata has been racking up spectacular growth through acquisitions, although lately it has focused on organic or internal growth to boost production by 50% by 2014.
Glencore, a trader of metals, minerals and oil, has said the main idea behind going public after almost four decades as a private company was to grab acquisitions.
Of course, the new company would have more going for it than sheer size and a forceful management team.
Glencore has a giant global intelligence network of 2,000 employees in about 40 countries. Many of them are traders and marketers that collect extensive data on what commodity buyers want and when.
"Glencore's network makes the CIA look like your grandmother's coffee club," columnist Eric Reguly recently wrote in The Globe & Mail. "It has been adept at forecasting commodity prices based on intimate knowledge of production, demand, regulations, political whims, transport costs and movements everywhere."
Glencore's intelligence network will likely direct it to takeover targets that have iron ore resources, an area where Xstrata currently lacks exposure.
The industry's Big Three control nearly 70% of the one billion-ton annual iron ore seaborne trade, along with contract pricing. Lately they've been dampening prices by flooding the market with iron ore, driving high-cost producers out of the business.
But their mushrooming market shares have triggered more regulatory reviews by concerned governments. That should clear the way for the new Glencore Xstrata entity to target smaller competitors without the Big Three interfering.
The Hunt for Higher Yield: Investors Pour into Emerging Market Debt
The never-ending hunt for higher yield is leading investors to bet record amounts on emerging market debt.
In just the first two weeks of 2012, governments of undeveloped economies from Asia to Africa sold more than $30.6 billion in dollar-denominated bonds according to Bloomberg News.
That's up from roughly $19.9 billion in the same period last year and the most since 1999, when Bloomberg began collecting data.
Typically, investors shun emerging market bonds during times of uncertainty in favor of "safer" assets like gold and U.S. Treasuries.
But that has started to change.
The Big Move Into Emerging Market Debt
In fact, investor demand is overwhelming supplies as orders have outstripped the amount of bonds being sold.
During a recent auction, the Philippines received $12.5 billion of orders for $1.5 billion of 25-year bonds, pushing the yield down to a record-low 5%. Indonesia sold 30-year bonds at a record-low yield of 5.375% and Colombia sold $1.5 billion of 29-year bonds at 4.964%.
Analysts say the debt crisis in Europe, along with record low yields on U.S Treasuries, has investors on the hunt.
They are now buying the debt of undeveloped nations like Indonesia, Mexico and Brazil, even though credit-rating firms rank them as more risky than their European counterparts
"What we're seeing is a re-evaluation of sovereign-credit risk, increasingly being driven more by fundamentals than by classifications," Eric Stein, a portfolio manager at Eaton Vance Corp. (NYSE: EV) told The Wall Street Journal.
According to the J.P. Morgan Emerging Markets Bond Index, investment-grade sovereign emerging-market bonds are yielding an average of 4.7%.
By contrast, Italian 30-year debt yields 7%, while Spanish 30-year debt yields 6.1%.
One reason emerging market bonds are attracting interest is…
Money-Markets, CDs, and Bonds: The Ups and Downs of Stashing Your Cash
In today's volatile markets many investors are faced with the same troublesome question – "Where should I park my cash?"
In fact, investors have withdrawn a net total of $328 billion from the stock market since 2007, according to Strategic Insight.
Ever since, a big portion that cash has been looking for a home.
It seems simple enough, but investors are finding the answer to be more complicated than they imagined…
Thanks to our friends at the Federal Reserve, interest rates are at record lows. In fact, they're so low that most investors are getting practically nothing in returns.
Meanwhile, the stock market has put on a New Year's rally, rewarding those who were willing to jump in while leaving cautious investors wondering if they're holding too much boring old cash.
However, in order to have an adequate safety net, your cash on hand should be enough to cover about a year's worth of expenses, according to Shah Gilani, a retired hedge fund manager and Editor of the acclaimed Wall Street Insights & Indictments newsletter.
"That's a good safety net," Shah says.
But no matter how much cash you hold, you still have to balance your need for higher returns against your risk tolerance.
Because whether you're thinking "safety first" or are tempted to reach for a little more yield, the choice you make might determine whether you're able to sleep at night.
Three Places to Park Your Cash
With that in mind, here's a look at three of the most popular places to park your cash.
What a Little-Known Market Tool Is Telling Us About U.S. Stocks in 2012
If you're a longtime investor, you're no doubt familiar with the Price/Earnings (P/E) ratio – a common measure for valuing the stock market.
But you may not be as familiar with the more-obscure Earnings/Price (E/P) ratio, which some experts refer to as the "earnings yield" on stocks.
If you're not familiar with the earnings yield, it's time to brush up.
While it may be obscure, the E/P ratio is an important tool. It not only tells you stocks' value, it allows you to compare that value to other assets like bonds.
And right now it's telling us a lot about buying U.S. stocks this year.
Basically, the risk/reward in favor of stocks over corporate bonds has never been this high…ever.
Let's take a look.
How to Use the Earnings/Price Ratio
We can get a pretty good handle on the value of stocks if we look at the E/P ratio of the Standard & Poor's 500 Index.
In 2010, the earnings for the S&P 500 came in at $83.77. According to Standard & Poor's, the earnings estimates for 2011 are at $97.81 and will climb to $111.73 for 2012.
Taking the 2011 S&P 500 earnings estimate of $97.81 and the current S&P price of about 1,290, you come away with a multiple of 7.5% (97.81/1290). Simply put, this means that the expected earnings of the S&P 500 are 7.5% of the price of the index.
By the same token, if earnings come in at the expected $111.73 in 2012 and stock prices remain the same, the earnings yield jumps to 8.6%.
Why should you care? Because you want a higher rate of return for the risk of investing in stocks when compared to the rate of return of other asset classes.
Generally, the earnings yields of equities are higher than the yield of risk-free treasury bonds, reflecting the additional risk involved with stocks. But right now the difference is extreme, with 10-year government bonds yielding a paltry 2%. Meanwhile, corporate bonds are paying about 5%.
Now let's compare the return on stocks to the rate of inflation.
Over the past 50 years, the average earnings yield for the S&P 500 has outpaced inflation by 2.4%. When the market is above that mark, equities are considered attractive. When it's below, they're expensive.
Subtract the current core inflation rate of 1.5% from the 2011 S&P 500 earnings estimate of 7.5%, and we end up with 6% – well above the 50-year average. Even if we use the 3.4% consumer price index rate, you're left with a difference of 4.1%. Compare that to bond yields and you're still way ahead.
So that's where we are, but how about where we're headed?
The Boeing Co. (NYSE: BA) Wins Controversial $35 Billion Contract for Refueling Tanker
In a deal expected to spark an economic boon of more than 50,000 jobs, The Boeing Co. (NYSE: BA) last week was awarded a $35 billion contract to build a fleet of U.S. Air Force aerial refueling tankers.
After 10 years of controversy and haggling in Washington, Boeing was declared the "clear winner" over European Aeronautic Defense & Space Co. (EADS), the company that builds Airbus planes.
"We're honored to be given the opportunity to build the Air Force's next tanker and provide a vital capability to the men and women of our armed forces," Boeing CEO Jim McNerney said in a statement.
Deputy Defense Secretary William Lynn told Politico that Boeing won the contract on the strength of its bid price, how well each of the planes would meet military needs and the cost to operate them.
"This is one of the happiest days of my professional life," said Rep. Norm Dicks, D-WA, the ranking Democrat on the House Appropriations Committee. He added that a change he suggested to the method the Air Force used to evaluate the bids might have made the difference.
The Pentagon considered the cost to operate the planes over 40 years rather than 25 years, he said, and since Boeing's NewGen Tanker will burn 24% less fuel than the EADS A330 plane, Boeing had a big edge.
Hot Stocks: General Motors Co. (NYSE: GM) Marks Turnaround With First Full Year of Profits Since 2004
After suffering through years of enormous losses and one of the biggest bankruptcies in U.S. history, General Motors Co. (NYSE: GM) yesterday (Thursday) posted its first annual profit since 2004.
The Detroit automaker said it earned $4.7 billion in 2010, compared with a $21 billion loss posted by the current GM and its pre-bankruptcy predecessor in 2009.
"Last year was one of foundation building," Chairman and Chief Executive Officer Dan Akerson said in a statement. "Particularly pleasing was that we demonstrated GM's ability to achieve sustainable profitability near the bottom of the U.S. industry cycle, with four consecutive profitable quarters."
Nasdaq Mulls Offer for NYSE in Bid to Survive Flurry of Exchange Mergers
With a global wave of consolidation sweeping over stock exchange operators, Nasdaq OMX Group Inc. (Nasdaq: NDAQ) is considering a counter-offer for New York Stock Exchange parent NYSE Euronext (NYSE: NYX), buying another exchange or even putting itself up for sale.
The deal-making gathered momentum last week when Deutsche Boerse Group announced a $10.2 billion takeover of NYSE/Euronext. The pressure then grew last week when upstart BATS Global Markets, snapped up rival Chi-X Europe.
Chief Executive Robert Greifeld is leading a team of Nasdaq officials assessing whether it can compete against Deutsche Boerse to buy NYSE, people familiar with the matter told The Wall Street Journal.
If Nasdaq determines it can't put together a stronger bid, the New York company will scour the exchange landscape for another partner or put itself up for sale to ensure it can remain a viable competitor against the combined NYSE/Deutsche Boerse.
Oil Prices Surge to Two-Year High on Middle East Turmoil
Protests in the Middle East drove oil prices to a two-year high yesterday (Tuesday) as anti-government violence spread in Libya, threatening the nation's oil industry and raising the possibility the contagion could soon affect larger producers in the region.
Oil jumped more than $7 a barrel, breaching $98 for the April contract of West Texas Intermediate (WTI) crude on the New York Mercantile Exchange. Meanwhile, Brent crude climbed as much as 2.7% to $108.57 on the ICE Futures Europe Exchange.
"Oil is being bought on the risk that this contagion will spread through the Middle East," Jonathan Barratt, managing director of Commodity Broking Services in Sydney, told Bloomberg News by telephone. "This effect is a knee-jerk reaction to the fact that this could spread."
Libya is the latest chapter in a saga of unrest that began in Tunisia in January and has raced through North Africa and the Middle East in recent weeks.
Iran added to the tension in the region yesterday by entering two of its naval ships into Egypt's Suez Canal headed toward the Mediterranean. Israel considers the presence of Iranian warships sailing through the canal "a provocation," Foreign Ministry spokesman Yigal Palmor told Bloomberg.
Fears of massive disruptions in the market have oil traders on edge and the energy markets are now braced for an even sharper run-up, according to Dr. Kent Moors, a noted energy expert and editor of the Oil and Energy Investor.
"That traders do not regard this as a short-term problem is seen in the futures contract curve. We have an escalating and contango market, one in which each month further out has a higher price than earlier months," said Moors. "The volatility will now kick in big time, and that will further unnerve the trading environment."
Libya's importance as an oil producer is more symbolic than anything else.
Gold Fever in China Sparks "Global Phenomenon" of Demand for Yellow Metal
Inflation risk is driving "explosive" buying of physical gold in China, putting the country on a path to becoming the world's number one gold consumer and driving demand for the yellow metal to a 10-year high.
Chinese demand for gold bars and coins reached 180 tons in 2010, up a whopping 70% from 2009, Albert Cheng, the World Gold Council's managing director for the Far East, said at a news conference last Thursday.
Chinese demand for gold jewelry hit an all-time high of 400 tons in 2010, the WGC said.
China was the "strongest market for investment demand" in gold last year, Cheng said while discussing findings released in the 2010 Gold Demand Trends Report. He added that Chinese gold demand nearly tripled in the last 10 years to around 600 metric tons – and that it may double again in less than a decade.
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