Friday, October 28, 2011

Qatar to Invest $10 Billion into Gold Stocks

There was an announcement earlier in October which was bullish for gold mining stocks, but was ignored by Wall Street.

Qatar Holding, a part of the Gulf state's sovereign wealth fund, is planning to create a separate investment vehicle – Qatar Gold – to buy stakes in, or take over, gold companies.

According to sources familiar to with the fund's plans, it will invest about $10 billion in metals and mining companies overall, with more than $5 billion to be invested specifically into gold equities. The stocks would be of companies owning producing gold mines.

The new fund's first deal involved a financing deal for Aim-listed European Goldfields to help it to fund the company's gold mines in Greece in exchange for a 30 percent stake.

The Gulf emirate is launching this fund in an effort to diversify its assets away from both natural gas and the U.S. dollar.

Gold mining stocks have underperformed the price of the precious metal over the past year. Most of them have barely budged while the price of the yellow metal is about in excess of 25 percent.

The CEO of Qatar Holding, Ahmad al-Sayed interest in gold pre-dates the metal's and he has been working on an entry strategy for the past two years.

A banker who advised on the European Goldfields deal, Ken Costa, said “[Qatar Holding] is of the belief that the gold price over time will continue to establish new highs and that the constraints on supply will be outstripped by demand.”

The move by Qatar may make the Market Vectors Junior Gold Miners ETF (NYSE:GDXJ) a very interesting play.

Thursday, October 20, 2011

Disney Strikes Movie Treasure in Russia

The global movie industry is in a state of flux.

North America is the world's largest film market, but is also the most mature market. Box office revenues for 2010 were basically flat from the prior year at $10.6 billion, about a third of the global total, according to a report earlier this year from the Motion Picture Association of America.

The global picture, however, is more encouraging according to the Motion Picture Association. Growth in emerging markets lifted total box office revenues to $31.8 billion in 2010, a 13 percent increase from 2009.

One of the emerging markets showing tremendous growth is Russia.

Box office revenues in the country have soared over the past decade to more than $1 billion. Revenues have been rising at a compound annual rate of 27 percent since 2006, according to Russian investment bank Renaissance Capital.

Five years ago, 90 million people went to the cinema in Russia. By 2010, the number leaped to 165.5 million and the number of screens across the country rose from 1,300 to 2,400.

One of the companies benefiting from this boom in Russia is Disney (NYSE: DIS). That market has become a top-five tier market for the company.

Disney's executive vice-president for theatrical exhibition sales and distribution, Dave Hollis, said “Russia's growth has outpaced established markets and emerging markets like China.”

Mr. Hollis added “there's a cultural revolution under way there in terms of people embracing cinema.”

Disney is attempting to take advantage of this cultural change by adapting its approach to the country.

The company has a vast consumer products business in Russia, selling all sorts of products from movie-related items to Mickey Mouse lunch boxes.

But it is now shifting from an import-led model to a local one by trying to strike licensing deals with Russian manufacturers. Andy Bird, chairman of Walt Disney International, said “We want to develop an internal market...retail in Russia is growing at a fantastic rate.”

Disney “gets it” as far as the industry rapidly turning into a global one, led by incredible growth in the emerging markets.

Look for other companies to soon follow in Disney's footsteps in Russia.

Wednesday, October 19, 2011

Pharma Sales Curing Irish Ills

Most investors are aware of the ills affecting the Irish economy...after all, it is one of the PIIGS nations.

But most investors are unaware that Ireland is beginning to recover. Figures released several weeks ago showed the Irish economy grew 1.6 percent between the first and second quarters of 2011. This is the eurozone's second fastest rate of economic growth, behind only Estonia.

It was the first time Ireland achieved two consecutive quarters of economic growth since the property crash and banking crisis hit the country in 2007.

A surge in overseas sales is behind the country's turnaround. Net exports soared nearly 24 percent to $2.6 billion from the second quarter of 2010 to the second quarter of 2011.

This upturn in the Irish economy is prompting some economists and investors, like Wilbur Ross, to reconsider Ireland's ability to repay its debt without a second bail-out. Mr. Ross, a famous distressed asset investor, has recently purchased shares of the Bank of Ireland ADR (NYSE: IRE).

About three-quarters of Irish exports are driven by foreign multinationals, many of them pharmaceutical companies.

So it seems that Ireland is being helped through its economic 'illness' by strong pharmaceutical sales from companies such as Pfizer (NYSE: PFE). It became of the first global drug companies to set up an Irish operation way back in 1969.

IDA Ireland, the state agency whose task is to attract overseas investment, says the country hosts eight of the world's top 10 pharmaceutical companies.

Of course, it is not just pharmaceutical companies. According to IDA Ireland, the country is also host to 15 of the top 25 global medical device companies and seven of the world's top technology firms.

All of these firms are attracted to Ireland by favorable tax rates and a superb, highly skilled, English-speaking workforce.

The export sector, which is worth more than 100 percent of GDP, will be the driver for the Irish economy, helping it overcome its financial crisis.

For investors looking to buy into Ireland, ala Wilbur Ross, while assets are still selling at distressed prices, should look into an exchange traded fund which offers broad exposure to Ireland.

The only ETF currently available is the iShares MSCI Ireland Capped Investable Market Index Fund (NYSE Amex: EIRL).

Friday, October 14, 2011

China May Ease Soon

History does not repeat, but it does have a way of 'rhyming'. This perspective may be an interesting way of looking at recent actions taken by Chinese policymakers.

China seems to have stopped letting the renminbi appreciate in recent days. It had permitted its currency to rise by 7 percent versus the U.S. dollar from June 2010 to August 2011 in an effort to rein in inflation.

But this may not be bad may be a signal. It could be a signal that Beijing is getting ready to turn towards an easier monetary policy to support domestic economic growth.

The Chinese economy has held up very well so far. Government estimates are for the country to enjoy economic growth this year in excess of 9 percent.

Investors should recall that the last time China “locked” their currency against the dollar was in August 2008. This was just three months before China launched a $586 billion economic stimulus which was crucial to the global economy.

There are other signs too of a softening policy stance coming from Beijing.

China's central bank had raised interest rates roughly every two months and banks' required reserves monthly. But it hasn't raised rates since July or requirements since June.

There have also been stories in China's state-run media about the struggles of small companies due to a noticeable slowing in bank lending. Addressing this matter, China's premier, Wen Jiabao, asked banks to lend more to small businesses and at lower rates.

Stephen Green, an economist at Standard Chartered, believes an easing of policy could come this year: “It seems they are preparing the ground for something called directed easing. The ambition is more credit for small- and medium-sized enterprises.”

Jun Ma, an analyst at Deutsche Bank, agrees saying that in the fourth quarter “...we are likely to see some easing in credit”.

More decisive moves may be just a bit further down the road. Shen Jianguang, an economist at Mizuho Securities, forecasts that other monetary loosening such as cutting banks' required reserves may have to wait the arrival of the new year.

However, signs from Beijing are that investors should not look for a huge stimulus from China ala 2008. China is less dependent on exports today. A move to more domestic-led growth is giving Chinese policymakers confidence that China can weather the global economic storm in relatively good shape without a huge new stimulus.

So the parallels with 2008 are not perfect. But they do seem to be rhyming.

Wednesday, October 12, 2011

The New Oil Dynamics

The oil market changed back in 2009, but most Americans did not notice.

That was the year, for the first time, China temporarily surpassed the United States as Saudi Arabia's biggest and most important customer.

At the time, Saudi oil minister Ali Naimi said “Ten years ago, China imported relatively little crude oil from us. Now, it is one of our top three markets, and is the fastest growing market for us globally.” He added that this showed the increasing “depth of Saudi-Chinese relations”.

Today, when oil tankers leave Saudi ports with their load of crude oil, they increasingly travel eastward to the rapidly growing economies of Asia rather than to the established markets of western nations.

When looked at historically, this new trend is significant. Remember that the most of the oil industries in the Middle East were originally set up by western companies with the sole aim of providing oil for western economies.

The day when Saudi oil exports to China permanently overtake those to the U.S. has not arrived yet. But it will soon.

Saudi Arabia is also selling more oil to that other Asian economic giant, India. Saudi crude exports to India grew sevenfold between 2000 and 2008. The desert kingdom now provides about a quarter of India's oil.

Meanwhile, total demand for oil in the U.S. and Europe is flat at best.

The changing oil dynamics, however, is not a simple story. It's getting more complicated.

Look at Saudi Arabia. It has its own rapidly growing economy and is consuming more of its own oil. The kingdom consumed 3.18 million barrels of oil per day in the third quarter of 2011. This is only a bit less than the 3.25 million barrels of oil per day used by India during the same time frame.

Bottom line...roughly a third of Saudi Arabia's 9.8 million barrels of oil per day production last month was absorbed by domestic consumption. This means less and less oil is available to sell overseas.

Taken together with increased demand from Asia, it means higher prices for oil down the road for American consumers.

Wednesday, October 5, 2011

Shale Gas Boom Helps U.S. Manufacturers

Most investors are well aware of the current shale gas boom which has transformed the U.S. natural gas industry.

But many investors are not aware that the shale gas boom, with its lower natural gas prices, is also beginning to have an effect on U.S. manufacturers.

The price of natural gas in the United States is now half what it was just three years ago, thanks to new drilling technology. In comparison, Asian natural gas prices are three times higher.

A lower natural gas price is helping turn the fortunes of energy-hungry U.S. manufacturers around. Factories mothballed as natural gas prices hit record highs a few years ago are now re-opening. Some manufacturers are even opening new plants.

One such business is the fertilizer industry. Natural gas is the main input for nitrogen fertilizer, such as urea. High prices led to a shut down of half the North American nitrogen fertilizer production capacity early in the last decade. So today, North America imports half of its nitrogen fertilizer needs.

But lower gas prices are changing that dynamic. Stephen Wilson, CEO of CF Industries (NYSE: CF), said “For the first time in decades, American manufacturers of nitrogen fertilizer and other energy-intensive products are in position to contemplate building new plants and hiring new employees.”

Gas is also a key feedstock for the petrochemical industry. Cal Dooley, CEO of the American Chemistry Council, stated “It's probably the single greatest factor for the US petrochemical industry in terms of our competitiveness internationally.”

American companies using cheap natural gas have a definite edge over their overseas competitors with oil trading near a historically high multiple to natural gas. International chemical companies use naphtha, an oil derivative, to make basic chemicals.

With the recent decline in the stock prices of U.S. industrial companies, investors should be looking for bargains in the fertilizer and chemical sectors.