Sunday, October 18, 2009
All the talk about a slow, muddle-through economy in 2010 to 2011 may be rubbish.
Favorite positions to take advantage are still exchange-traded funds (ETFs) with heavy overseas and economic exposure. Right now that includes iShares Global Financial Sector Exchange Traded Fund (NYSE: IXG) and iShares Metals & Mining (NYSE: XME); on dips it includes iShares Emerging Markets (NYSE: EEM) and Vanguard FTSE World Ex-USA Small Cap (VFWIX). And after a brief period of underperformance, tech stocks might be ready to roll again, especially hardware like SPDR Semiconductors (NYSE: XSD).
Bear's argument (from a fundamental perspective) continues to be that weak employment figures will undermine consumer buying during the holidays; consumers are saving more and spending less, and can’t get bank loans; and companies are deleveraging. And then from a technical perspective, bears also harp on the lack of volume in this up move. But there are three key counterpoints:
First, employment is a lagging indicator, and may be in secular decline. We’ve been through this a dozen times so I won’t lay out all the points. But the main idea you may recall is that companies first go overboard in hiring (2004-2007), then they go overboard in firing (2008-2009), then they start to enjoy having fewer employees to pay (2009), and only later do they realize that to grow again they’ll have to start re-hiring (2010-2012). At this point in the cycle, investors give companies bonus points for cutting expenses, and that means reducing headcount. So don’t look for real investors to penalize companies’ shares during periods of reduced employment.
Second, consumer saving is paradoxically terrible for consumers and a boon for banks and businesses, which is another reason stocks have been buoyant. You see, when families start to save a lot they tend to put their money in a bank savings account for safety. They’ll earn 1% if they’re lucky. On the other side of that 1%, laughing like crazy, are bankers who then turn around and loan that money out to big business at 6%-plus, or buy bonds yielding 4% to 12%. The banks are making a killing on consumer savings, which is really sad, but it’s the truth. This is one reason we are overweight banks in our ETF portfolio.
Later on in the cycle, when the Federal Reserve starts to deploy its so-called “exit strategy” and begins to raise interest rates, the “spread” between what banks pay for money and what they can receive in corporate loans will narrow. And only then will banks turn their attention back to consumer loans, giving a new boost of fuel to that leg of the recovery.
Third, the volume is relatively low. I believe that the reason for this is that because the public is just not on board with this new bull cycle – yet. I’m not going to go through the math of all the cash sitting in money market accounts. But all of you reading this today, who care about stocks and are taking matters into your own hands, are in the minority.
Most of the public just doesn’t care. They still feel wounded and abused by the market during the decline last year, and don’t trust their money managers, and don’t trust the recovery. So until the public starts to feel more comfortable again – probably when the Dow Jones Industrials gets back to around 12,500, which is where it was in the summer of 2008 – volume is probably going to stay light. Just ask your friends at work if you don’t believe me.
Thursday, October 15, 2009
Deccan Gold Mines is the first private sector gold mining company and rather the only gold mining company listed on the Indian stock exchanges. The company has got blocks spread across four states. The total area of the blocks is more than 10,000 sq kilometers.
Talking of gold mining business gold mining company has to pass through three stages before they can commercially start mining gold. The first stage is called reconnaissance permit where they seek the approval of the authorities to do exploratory activities on say 200-300 sq kilometer of the block. Second stage is prospecting license wherein they short list about 25 sq kilometer or 30 sq kilometer out of the total area where they would like to do the further exploratory studies and the third stage is called mining lease where in they short list about half a sq kilometer or one sq kilometer where they would actually like to drill and take gold out or rather rock out and then refine it and produce gold.
The company has filed application for about six blocks for mining license. As per the management the actually mining of the company is expected to start in the last quarter of FY10-11 which is January to March of FY11 and if you look at the valuations of this company as of now the company has got zero revenues. It has a market cap of Rs 200 crore but going by what the management has been saying that. Management says that they are able to derive about 4 tonne of gold per annum assuming on a conservative basis that they are able to do only 2 tonne and taking a price of about Rs 15,000 per ten grams this would translate into revenues of about Rs 300 crore. Typically internationally the gold exploration cost is about USD 350-400 per ounce which in this case will translate into Rs 5000-5500 per ten grams. Assuming initial expenses to be high we still believe that on a conservative basis the operating profit of the company could be in the region of 40-50% which means on a revenue of about Rs 300 crore the company can do about Rs 120-150 crore of operating profit so as of now there are no profits but market cap is only Rs 200 crore which is less than 2 years of the companies operating profit.
The valuation is low mainly because of two reasons. One is the uncertainties involved in the business and also the uncertainties with regard to the regulatory clearances for this company. The second relates to the psychology of the investor. Most people do not want to buy these companies now when the production is still one, one and a half years away. Everybody thinks that they are going to buy the company as soon as the company is going to start production but people will realize that smart money would already have accumulated the stock at lower levels.
I am not advocating buying the stock just now at upper circuits. I would not advise doing that but I think one can keep an eye on the stock. I would ideally believe that Rs 25-30 levels would be a good level to get into the stock but one can chose to do staggered purchases for this stock. Rather than thinking that they will buy everything when the production starts, start accumulating at this point of time. I would like to say that this is the one for a very high risk investor because of the uncertainties involved in the business and also somebody with a time frame of about 3-5 years.
Tuesday, October 13, 2009
In the "Executive Decision" segment, Cramer spoke with Dan Dimicco, president and CEO of Nucor (NUE Quote), to get a better handle on the state of the economic recovery. Dimicco came out with guns blazing, saying that all of the demand the economy has seen thus far is inventory-related and not job-related. He said those in Washington are not focus on the real crisis, and that's jobs. The threat of a jobless recovery is much more severe than anyone realizes, he said.
Armed with charts of the past five recessions, Dimicco illustrated that with every recession since 1980, the recessions have been getting deeper and the recoveries taking longer to get back to the original employment levels. And with the current crisis, the numbers are off the charts, as the job losses continue to mount, he said. Dimicco said everyone's top three priorities need to be jobs, jobs and jobs. He said health care and global warming don't hold a candle to the problem of jobs. Dimicco said our country could do itself a great service by cutting off foreign oil and using its own natural gas and oil until alternative energy becomes feasible. This alone would create tens of thousands of jobs and help move us towards the road to recovery, he said. Cramer commended Dimicco for his efforts to get Washington to focus on jobs. He said he's joining in Dimicco's crusade and hopes viewers do as well, as jobs are not a Democratic or Republican issue but an American issue.
The total annual production of black tea globally is estimated at 2.3bn kg. The main producing countries are India (980mn kg), Kenya (350mn kg), Sri Lanka (325mn kg), other African countries (140mn kg), Vietnam (140mn kg) and Bangladesh (60mn kg). Tea production has been stagnant in the last 3 years globally, since area under tea plantation has not increased significantly. Tea plantation has a gestation period of 5 years thereby tea production is expected to remain stagnant / insignificant increase over next 4 to 5 years. Tea consumption growth is estimated at the rate of 2% per annum globally, whereas in India, consumption is growing 3 to 3.5% per annum. Currently, the total production is unable to meet consumption and consumption growth thereby creating shortage in the global markets
India produces 40% of the world's black tea.
What is the size of the Indian tea industry – in value and volume terms?
The total black tea production in India is estimated at 970 to 980mn kg per annum. The average price for the year 2008-2009 was Rs90 per kg, as explained earlier due to mismatch of demand and supply and strong consumption growth tea prices in India are expected to rise further and this cycle should last at least 3 to 4 years.
Comment on the seasonality of the tea industry?
Tea production in North India is seasonal in nature. There is no production from mid-December to mid-March due to winter. July–October period is the peak season of production with approximately 60% of tea being produced. The quarter ending September is the best quarter while the quarter ending March is a negative one.
What are your current realization levels? What are you expectations for FY10?
Our current averages are Rs140 per kg. We are expecting the annual averages to be between Rs130 to Rs135 per kg.
What were your inventory levels in FY09? What levels you expect for FY10? What is the logic behind holding inventory when there is a shortage in the market?
Black Tea Inventory as on March 31, 2009 was 3.2mn kg and estimated to be the same at the end of FY10. There is cycle and seasonality involved in the tea. The major consumption months are the winter months and the production months are non-winter ones, so normally there will always be an inventory. We produce 60% in four months, so it is only when one has to look at from the overall perspective that by the year end what will be the additional shortage. So inventory will always be there as far as tea industry is concerned.
Thursday, October 8, 2009
The PV (photovoltaic) industry has been hit hard during these challenging economic times with demand dropping approximately 50% this year from 2008 levels and a severe oversupply situation occurring, giving rise to fear, uncertainty, and doubt as to the future of the industry.
But there is reason for hope, industry insiders assert.
To set the stage, it helps to understand how the PV industry got to this point. Jim Hines, research director for semiconductor and solar at market research company Gartner Inc explained that three major events coincided to thrust the PV industry into a severe oversupply situation. First, there was a build up of capacity that had been going on for a couple of years and culminated at the end of 2008. Second, overall economic conditions collapsed. And third was the situation in Spain, in which market players got ahead of themselves and local legislation changes altered the PV playing field there.
“The Spanish market was really a surprise last year," said Dr Henning Wicht, senior director and principal analyst at iSuppli Corp Deutschland GmbH. "There was much more installed than anybody could think. In one year, they installed approximately 2 to 2.5GW. This was the largest amount of solar to be installed in one year.
“The consequence was that there was a rush to get hardware to install solar power parks by a very precise date, which was the 28th of September, because every installation put in place after this date would apply to a lower feed-in tariff. So everybody was rushing for this date which led to a continuous strong demand of hardware modules, which made module producers believe that there was close-to-infinite demand. They were ramping every year. It’s not that they were relying on their production but everybody was ramping at 50 to 100% every year, for three to four years," he continued.
"From the supply/demand data we saw that in 2008, there was already more produced than installed, but this didn’t get through to the market because there was such strong demand, and people didn’t realize there was already more modules on the market than could be absorbed. Seeing a market increase by 50% in just one year makes people dream,” he said.
Indeed, iSuppli has reported that there are close to 8GW of modules to be produced but only 4GW to be installed in 2009.
“The question is, how can that happen? That means that every second module is going to the inventory,” Wicht pointed out.
In trying to assess a forecast, Gartner analysts said they discovered that the major drivers for the solar market are starting to realign themselves. “Even though this is a phenomenally horrible market for vendors right now, it has turned into a fantastic opportunity for end users," explained Alfonso Velosa III, research director for semiconductors at Gartner. "There were two things that needed to happen: end users wanting to buy the systems and the financing pipelines starting to loosen up. We are finally starting to see movement on both sides.
“It’s actually really starting to get good in that deals are starting to happen. The complication though is that, whether you are talking about the US or Europe, the sales cycle takes a long time,” he said, noting that European sales cycles usually take between 12 and 15 months, while US cycles typically range from 12 to 24 months.
On a revenue basis, with the excess capacity in the PV supply chain, ASPs (average selling prices) have gone through the floor, leading revenue forecasts to be cut in half for modules.
Gartner estimates that right now the oversupply of polysilicon is on the order of 2.5 to 3 times the demand, and expects this pricing environment to continue for some time – certainly through next year and well into 2011. The situation is the same in the solar cell module market with almost 3X excess capacity, Velosa noted.
“We see excess capacity going through 2012," he said. "We so don’t see prices firming up, either on a polysilicon basis or a module basis until 2012 at the earliest, possibly even 2013 because we continue to hear about more expansion plans.”
Gartner also believes the stimulus money from the Chinese and US governments have the potential to keep the PV ASPs in a degraded state, which, when combined with all of the work going into improvements on technology, efficiency, and processing, will drive the competitive dynamics of the industry, with more attractive products for end users. In essence, the ASP erosion is helping the industry remain competitive.
From a vendor point of view, Applied Materials Inc’s Jonathan Pickering, VP of marketing and business development for solar, said, “2008 calendar year was a banner year for the industry with tremendous growth in the end market. I think there’s still some lack of clarity about what the final numbers look like this year because it got off to a bit of a slow start and then there’s the seasonality effect.
“One of the challenges was that people were seeing pretty rapid declines in module pricing," he continued. "It’s like all of us: If we see prices going down, we tend to wait and see if they go down again the next month. On the flip side of that, for example, in Germany the subsidies are going to be ramped down and adjusted every year. People are watching that."
Pickering said that while it is too early to say for sure, it looks like the end market will be flat to down 10 or so percent this year. "What we are seeing is that several of the big manufacturers, certainly in China, are running pretty close to capacity – so people are really ramped up now, which wasn’t the case in the March-April timeframe,” he added.
Impacts on PV production widespread
In order to realign their businesses with the current market conditions, producers of solar modules and cells are reducing their expansion plans and even their current production, observed iSuppli’s Wicht. “This is why the original production roadmap, which was at 12GW for 2009, is coming down to the 8GW range,” he said.
Further, hardware prices are coming down significantly. “Last year, the average selling prices of modules was around $4 per watt. What we see and what our model forecasts is it in the $2.30 to $2.50 per watt range at the end of 2009, and we see that already now. For 2010, we expect that the market will start to stabilize in the sense that the demand will continue to grow and the supply/demand scissors is likely to come closer again,” Wicht offered.
“We still see that module prices will come down again in 2010 because there is a lot of capacity still ramping. Once the factory is built and the decision is made, the entrepreneurs and CEOs, by a large majority, are forced to continue, otherwise they lose their credibility. If they cannot achieve their announcements, that’s bad credibility. So they try to keep to their plans and try to sell at any point. It’s easier for the entrepreneur to say to his investors, ‘We are not making much profit this year as everybody else, but we continue with our expansion plans and we try to grab market share.’ This is the strategy most companies follow and only in extreme cases, they start to reduce their production,” he added.
Seeing signs of some pretty big orders being put into the system, Gartner is forecasting a stronger business for 2009 because of continued demand in the core German market, as well as the growth US and China markets.
“It really looks like the pipeline is picking up … with 2010 being a sharp recovery on a gigawatt basis,” Velosa said. “However, let’s be clear, this is still lower than the existing capacity, and we still see a 20% reduction in ASPs for next year.”
Since September 2008, there has been a 40% drop in ASPs and Gartner expects that number to fall further.
Applied is seeing a similar trend. “We are seeing signs of life. In Asia, there are continued levels of investment in crystalline and thin-film technologies. That’s encouraging,” Pickering said.
Other programs that many believe could help the PV market recover are certain provisions of the US government’s economic stimulus bill. These include an advanced energy Manufacturing Tax Credit, which is a new 30% investment tax credit to promote the manufacturing of clean energy equipment in the US. As well, a grant in lieu of the Investment Tax Credit or Section 1603 claims to be an alternative for businesses that could otherwise claim the production tax credit or the investment tax credit for certain qualifying renewable energy projects.
Further, Pickering noted that the American Clean Energy and Security Act of 2009 could help the industry. The act was passed by the US House of Representatives in June and contains certain solar provisions, including a national Renewable Portfolio Standard meant to encourage solar and other forms of renewable energy, along with a “Green Bank” to provide rebates, loan guarantees, and other financial mechanisms to finance solar energy technology and demand.
“For the market to recover means margins building up in the market,” Wicht said. “What we have seen in the last years was that the hardware makers had the good margins – from polysilicon up to modules. And the installation and project developer companies they had to reduce their margin because the purchase price was high. What we see right now in the market is that the margin is not disappearing but it is shifting downstream.
"This is the message we try to pass: The market overall is not bad, it is a good market, and it’s very interesting if you’re in the solar installation business or even a solar investor … and can, for example, in the modules segment, buy modules at prices they never believed is possible.”
Q: What’s the story with Assam Company?
A: Everybody is complaining about oil. Prices of oil have risen and people can’t manage the budgets. Everybody’s afraid crude may hit USD 200/bbl. You need a hedge and that hedge is Assam Company. The hedge could well be Cairn, it could well be various other stocks but I like Assam Company because nobody expects it to do anything great in oil so the PE is quite reasonable. I have been tracking this stock for a fair amount of time and they never got beyond USD 150-160/bbl a day, Barrel of Oil Equivalent (BOE).
I think the last quarter or the last few months have actually gone upto USD 1,500-1,600/bbl a day. I suddenly see there is some critical mass happening here. It’s not going to end at USD 1600/bbl a day. The kind of reserves that they have in the Amguri block they can potentially go upto about USD 20,000-25,000/bbl a day for a number of years. So it’s not just a significant spike in one year and thereafter fade down. They can actually move upto about USD 25,000/bbl and stay there for a number of years. The interesting characteristic is that oil prices are high and it could get higher but in this business, the cost of production would not be more than USD 20/bbl even in the worst comes to worst come scenario.
So you are looking at a very interesting delta. You are looking at an average realisation of USD 130/bbl and you are looking at a total all told cost of USD 20/bbl. So you got a delta of USD 100/bbl given whatever happens, in the present circumstances. If you then calculate that, a part of this is going to be gas, and a part of this is going to be the oil. Gas is going to be a lower realisation, oil is going to be a good realisation all things considered you are looking at some humungous numbers.
The interesting part is that this is sustainable because this just keeps coming out of the ground and then there is nothing that the management- even if it were a bad management, there is nothing you can do to stop the money from flowing in. The interesting characteristic of an oil company is, when it comes in, it really comes in. People don’t make money; they get wealthy, just sitting on oil stocks.
Can it happen in this case? Firstly the company is not necessarily cheap at today’s valuation and given the kind of results that they have shown, Rs 900 odd crore valuation. The value of the reserves at today’s levels is at about USD 1.4 billion and that’s a fair amount of money.
Is the company going to get that much of money out onto the balance sheet? I think you will have to start tracking the stock on a quarter-by-quarter basis. You have got to start taking a look at its capex programme. The more the capex increases, the more is the oil starts coming out and the more the money that is transferred to the balance sheet in the P&L account. The management is actually talking about raising its output from about USD 16,00/bbl a day to about USD 3,000/bbl by the end of 2008 and very close to about USD 5,000/bbl by March 2009. Going ahead I would expect it at about USD 8,000/bbl a day by the end of 2009 or 2010. That’s going to be very significant in terms of revenues and more significantly in terms of profits.
Q: What’s a good price target to work with an Assam Company having crunched the numbers?
A: I have not been able to give a discounting to this company. The company comes in with a fairly interesting past, it’s been in tea it and had a number of subsidiary companies. My understanding is tea is going to have a good year but nobody is looking at tea. I think the company is now going to get its act together nad clean up its balance sheet. The company is probably going to have a better quality of Board, a stronger governance initiatives. So once that happens it’s anybody’s guess as to what happens with the PE. Normally I am a safe man, I go with PEs of 5-7.When you look at very humungous Pes, it becomes a little difficult but in this case we are safe. So there are two kinds of upsides that we are looking at; earnings upside and if you get a PE upside that’s going to be a very interesting kicker. Assuming that the sky falls on everybody’s heads and we actually live with a USD 200/bbl in a day scenario, this might be an effective hedge to have.