March 25, 2008

Poised to Benefit

According to a 2005 infrastructure report by the American Society of Civil Engineers, the U.S. power transmission system is in urgent need of modernization. Growth in electricity demand and investment in new power plants has not been matched by investment in new transmission facilities. Over the coming decade, investment in transmission assets is expected to average $3 billion to $4 billion per year, up from $286 million as recently as 2003. Regulated utilities are poised to benefit from higher capital investment in transmission assets. Utilities earn return on invested capital that is set and guaranteed by state public utility commissions. Higher capital investment results in greater guaranteed income for utilities.

March 20, 2008

A Bidding War Possible

Xstrata (LONDON: XTA.L) recently confirmed that it is in talks to be acquired by Brazilian iron ore giant Companhia Vale do Rio Doce (CVRD) for as much as $100 billion. A combination of the two firms would create the world's largest thermal coal exporter, the largest iron-ore producer, and a leading copper, zinc, and nickel producer. With the field of big mining companies narrowing sharply, a bidding war for Xstrata is possible.

March 12, 2008

Stricter than Swiss Law

The economic picture in Singapore offers the patient investor much promise. Singapore is transforming itself into a world-class knowledge-based economy. Biomedical research and private banking are at the forefront of the country's march up the value chain. Output of drugs and medical devices is up fourfold since 2000. Over the past two years, medical travelers are up 28% to 410,000. And more than 100 foreign drug makers and biomedical companies have set up factories in Singapore. These firms are likely attracted to the city-state's strict patent enforcement, highly educated workforce, and friendly business climate.

On the financial services side, Singapore is fast becoming Asia's offshore financial center. Assets under management in the country's private banking industry are growing at rates of up to 30%. In a recent Barron's article, Justin Ong, a partner at PricewaterhouseCoopers, notes that China is creating 30,000 new millionaires every year, with India, Indonesia, and Taiwan not far behind. This newly minted group of millionaires is attracted to Singapore's low rate of corruption, rigorous legal system, and secrecy laws that are now considered stricter than even Swiss laws.

March 6, 2008

Play ball!

Let's quickly focus on the Electoral College math. It takes 270 out of 538 Electoral College votes to become president. In the last four elections, the GOP won all four elections in 16 states for a total of 135 Electoral College votes. The Democrats won all four times in 19 states (including D.C.), tying up a monster 248 ECVs. Darn scary if you are on the GOP train.

The Democrats must capture only 22 ECVs from the remaining 16 in-play states to win the presidential brass ring. From the 16 in-play states (states that split ECVs over the last four elections), the ones that count the most are Florida (27 ECVs), Ohio (20), Georgia (15), Tennessee (11), Missouri (11), and Arizona (10). If recent presidential election math runs true to course during the 2008 election and the GOP and the Democrats snare the normal 135 and 248 ECVs, respectively, from the in-the-bag states, the Democrats need only Florida to move into the White House. The Democrats last won Florida in 1996. But even if they lose Florida, the Democrats could take the White House by instead grabbing Ohio and any one of the other states on my short list above. Some nasty math for the GOP.

February 26, 2008

A Tasky Snack

Did you know that sales of hummus in the U.S. have doubled over the last four years? Me neither, until PepsiCo (NYSE: PEP) bought a 50% stake in Sabra, the fastest-growing hummus seller in the U.S. PepsiCo will help Sabra expand the brand beyond its stronghold in the Northeast. Hummus will add a nice complement to PepsiCo's salty snack portfolio. Hummus and a bag of blue corn Tostitos make a tasty snack--and a much healthier alternative to the oil- and sodium-packed Lay's potato chips.

February 21, 2008

Offshore Drilling

General Electric (NYSE: GE) made its first foray into offshore drilling with a $54 million investment in a drillship named the Peregrine I. The ship will be used to drill for oil off the coast of Brazil to a depth of up to 25,000 feet in up to 5,200 feet of water. The Peregrine is currently under contract with Brazil's state-owned oil company, Petrobras. Brazil's deepwater ocean became a focal point for exploration in November when Petrobras announced what is believed to be the second-largest oil and gas find in 20 years! The new offshore field, named the Tupi Field, will produce an estimated 500,000 barrels of oil a day at full capacity.

February 13, 2008

Recession-Flashing Breakdown

U.S. consumers are now getting the message. The housing slump, along with the sub-prime write-off mess, has nowhere near run its course. My charts on Young Research's Moving the Goods Index and the Dow Jones Transports vs. the Dow Jones Industrials indicate a recession-flashing breakdown.

Manufacturing employment holds the key. If shop floors are busy, recession can be fended off. As an indicator of a still-cooking environment, I'd like to see the indicator for manufacturing hours worked per week hold above 40.7 hours. Last month, it fell by two ticks, to 41.1 from 41.3 hours. A decline below 40.7 hours to, say, 40.1 hours will usher in a broad-based U.S. recession.

January 31, 2008

The Right Focus

Illinois Tool Works (NYSE: ITW) owns 750 business units in 49 countries. But, to stay focused, ITW uses the "80/20 Rule." This rule focuses the company's efforts on the 20% of its businesses that generate 80% of its revenues. The company works to streamline operations for the 20% of top revenue-generators. Of the 80% of companies that produce the remaining 20% of revenues, those with potential are nurtured by management, and those without are eliminated. ITW's 80/20 Rule is also applied to supplier and customer relationships, favoring key suppliers and customers that do the most business with ITW. This process keeps margins high, new ideas in the pipeline, and management focused in the right direction.

January 23, 2008

Blue Chips or Start-Ups

Credit-market jitters are back. Investors are scared and panicked. Fear and emotionalism are prevalent. The stocks of some of the largest banking institutions in the world are being treated like start-ups.

But the volatility in financial stocks signals the end of the credit cycle. When the credit cycle ends, banks start to clean up their balance sheets. Bad loans made during good times are written off, and the focus shifts to rebuilding capital. The actors in every credit cycle change, but the story is always the same. In the last cycle, the write-downs were on technology and telecom loans; in the previous cycle, it was emerging market debt; prior to that, commercial real estate; and in the early 1980s, energy firms were the culprits.

In the current credit cycle, structured finance is the linchpin -- think collateralized debt obligations (CDOs), asset-backed securities (ABSs), and structured investment vehicles (SIVs). The Ph.D.s on Wall Street were once again wooed by the elegance and cleverness of their own inventions -- and, of course, by the piles of cash these vehicles generated for their employers. As is often the case with this crowd, common sense and business savvy were lacking -- "simple is sophisticated" is absent in the Ph.D. finance curriculum.

January 14, 2008

Merger Talk

On November 8 Rio Tinto (NYSE: RTP) rejected a bid from BHP Billiton (NYSE: BHP). The rejection did not kill the idea of merging the companies, but Rio maintained that the offer was too low. As Rio mounts a defense against BHP, it will be looking to return value to shareholders in a variety of ways. Rio vowed to raise dividends, pay down debt, find more savings in its recent Alcan deal, and increase production. While these goals may not be immediately achievable, Rio is putting pressure on BHP to up its bid. A combination of the two companies would create synergies in operations and in the use of port and rail facilities. The combined company would be the world's largest iron ore producer, aluminum producer, and coal shipper; a producer of 6% of the world's copper; the third-largest diamond producer; and a leading producer of many other materials. The anti-monopoly hounds are already barking at this merger and, if it does happen, some assets will probably have to be sold -- most likely in iron ore. Either way, Rio's shares will likely increase in value as a result of this offer.