Industrials

Not Just Banks Face Further Potential Write-Downs

12/01/2009 by Research Reloaded

In an email note, Charles de Trenck of research firm Transport Trackers highlights how shipping companies could face substantial write-downs. In a similar fashion to banks right now, some of their assets are being carried on the balance sheet at far higher values than the current market value. So expect their balance sheets to be far worse than they look right now.

Transport Trackers: Brokers have highlighted a new all-time low for container charter rates this week (and the BDI traded back below 4,000...psychology playing its role here both on up and down sides...though some tankers did better this week).

One of our main worries for 2010 is impairments of value on balance sheets for many ship classes delivered in recent years -- ONCE ACCOUNTANTS perform their duty-bound functions. Many banks, often European, will face same/similar issues on their loan books as well.

The damage will likely be to containers first, but some bulk will likely also take a hit. ... Another way to slice the distribution of troubles is by geography. In some geographies there are total bailouts, while in others there are few. Japan is getting hard hit at the moment.

Wholesale impairments on B/S have not happened in many decades. In the 80s it was bankruptcies after sometimes long drawn out dramas. ...How will it play out this time? Over the last year the HR index has declined some 74% -- and from peaks the declines are still a bit more.

China Can't Cool Down Its Steel Bubble

10/22/2009 by Research Reloaded

 Still going... we're still waiting to see the massive value destruction that overcapacity could realize.

Highlights From The Money Game

09/18/2009 by Research Reloaded

As stock markets kept rallying, the consensus has increasingly been forced to accept the fact that the global economy has indeed improved. Still, dollar weakness and gold strength shows that the US government's massive monetary stimulus comes at a cost. Check out recent highlights from The Money Game below.

-Vincent

Maersk: We're Losing $300 On Every Box We Ship

08/24/2009 by Research Reloaded

Maersk's latest results show that the company lost about $145 for every twenty-foot-equivalent unit of containers shipped during the first half of 2009, which comes to almost $300 if we think in terms of a 40-foot box as per Transport Trackers (TT). Amazingly, they are actually doing better than most on this front.

TT: We looked at loss comparisons briefly to see that Maersk performed generally better than the middle of the pack on per TEU basis. A little horrifying was Hanjin at $368/TEU unadjusted (ex some derivatives and equity method losses we can adj to about $315/TEU). Also quite poor was Hapag at $251/TEU, while Maersk came in at about $145/TEU. OOIL did a little better at about $116/TEU, owing to a range of reasons (on a core EBIT basis it fared a little worse)

These losses added up. YTD it appears Maersk has lost nearly US$1bn. Much smaller Hanjin has lost almost half a billion due to their relative inefficiency explained above. How long can the largest players bleed so much cash? Should a double-dip recession for the US and Europe become reality, expect a lot more red from these names.

Container Data Shows Drastic Change in World Trade Pattern

08/05/2009 by Research Reloaded

Might China finally be moving into a larger consumption role? There has been a massive shift in the ratio of Chinese exports vs. imports, in just one year. It could be just a temporary result of the downturn in the US & Europe, but it appears MDS Transmodal believes we're seeing a long-term change in trade patterns.

“In Q2 2008 there were only 56 tonnes of Chinese imports for every 100 tonnes exported. One year later, that figure has grown to 80 tonnes. If that trend continues, container lines will have to seriously address their strategies.” He says that Chinese exports drive the overall demand for global shipping capacity. “Here the picture is bleak. A year on year fall of 23% for Q1 2009 has been followed by a 22% decline in Q2 2009. The best that can be said is the decline has been arrested. Q2 2009 results are 24% lower than in Q3 2008, the peak quarter of all time.”

The consultancy has also examined the destination of Chinese exports and concluded that the decline in the ability of the West to consume Chinese goods is widespread. Ranking destination countries by their container tonnages received in 2008, growth cannot be found for Q2 2009 until China’s 22nd ranked export destination is reached (Saudi Arabia).

The 2nd quarter Chinese trade data, coupled with the announcement that US GDP continued to fall over the same quarter leads MDS Transmodal to one conclusion. “Our analysis of the trade data provides tangible evidence of a restructuring of the economies of the Far East and the Western world,” says Mr Garratt. “China, and probably the rest of the Far East except Japan, is sucking in the exports it needs to support its domestic economy that continues to expand – without needing to export in the same quantities it used to.”

Goldman: Please Keep Trading the China Bubble

08/04/2009 by Research Reloaded

 Sometimes "professional" investment research resembles little more than a day trader rag with nicer charts and fancier wording to make the reader feel less guilty and more professional about the kind of "investing" he or she is actually performing. Thus we point to Goldman's recent China "Portfolio Strategy" dated July 31st where they tell us to basically keep buying the Chinese market based on government support for the economy and a "favorable liquidity setup". We're told to buy on dips, "stay engaged" (ie. keep generating commissions), and trade earnings suprises. Is this professional investing or what your college roommate was doing during the dotcom bubble? It's hard to tell the difference.

Market view: Stay invested; buy on dips for new money A-share market gained 12.4% in July despite a 5.3% correction, which was provoked by concerns regarding credit tightening, on July 29. We maintain our positive market view on A shares and think the government’s pro-growth policy stance, which should ultimately lead to macro/earnings recovery and a favorable liquidity setup, will continue to bode well for equities.That said, we see price volatility nudging higher as uncertainties revolving around interim earnings and the government’s monetary policy stance intersect with an above-mid-cycle multiple (24x). We would stay engaged in the market and look for opportunities to accumulate positions on dips.

Strategies: Domestic demand exposure; Trade earnings surprises We recommend investors to focus on the following themes to gain exposure to the A-share market: (1) Laggards with valuation buffers and reasonable EPS growth; (2) Pro-cyclical domestic demand, which includes banks, insurance, property, and selected consumer and materials names; (3) Stocks that are potentially subject to positive earnings surprises.

That's the front page: trust the government to support the market, trust dumber investors to follow you (liquidity) and try to make little earnings trades hoping for pops. Oh wait. What about valuations?

Valuations: Above mid-cycle, but may persist CSI300 is now trading at around 23.9x I/B/E/S consensus P/E and 3.2X P/B on a 12-month forward basis against an average of 18.9x and 2.0x since April 2005, respectively (see Exhibits 1 and 2). On the basis that FY09 EPS growth for the aggregate market could be lower than the 15% that I/B/E/S consensus is currently forecasting, the forward P/E for CSI300 would be even higher at around 26.6x using our FY09 EPS growth assumption of - 5%. July 31, 2009

So valuations are sky high and earnings estimates might be missed. But we should hang on, because high valuations may persist. That's our upside investment case. High valuations may persist... and actually need to go higher or have upside earnings surprises to really give us upside on stock prices since they are already stretched as it is. Also, note that they compare recent valuation multiples to the average since... only 2005.. which was still a pretty bullish period for Chinese equities. So valuations are stretched even above what we saw during a pretty bullish time for China, but we should just have confidence in the government and liquidity to keep pushing things higher. This is what we are made to believe is "professional investing" rather than a gambler's punting.

China's Manufacturing Could Outstrip the US Sooner Than Expected

08/03/2009 by Research Reloaded

We often forget that the US is still the largest manufacturer in the world even though the percentage of people working in manfucaturing has shrunk. It's made possible by leveraging each manufacturing worker with tons of high tech capital equipemt (ie. machines). And just to quell the people who bemoan more efficient manufacturing as a threat to jobs, it actually means that our manufacturing workers can earn substantially more than say China because each man can create much more value due to the higher amount of machinery leveraged to his manual labor.

If you want manufacturing workers to earn high salaries, they will need to have lots of machinery backing them up. Physical strength only creates so much value (almost none) without the help of machines. Anyhow, it appears that the recent downturn in US manufacturing plus the effects of Chinese government stimulus (it's grow employment at all costs to avoid social unrest), means that China could overtake the US as the world's largest manufacturer sooner than expected.

Dr. Doom Nouriel Roubini Going Bullish on Commodities?

08/03/2009 by Research Reloaded

 I like how they plainly say in this article that Mr. Roubini predicted the financial crisis. Not quite, if timing or calling the actual cause correctly matters to anyone, but we'll let this go for the sake of focusing on his commodities view... because optimism seems to have infected even Dr. Doom himself. (Actually, he's one of five Dr. Doom's out there.)

“As the global economy goes toward growth as opposed to a recession, you are going to see further increases in commodity prices especially next year,” Roubini said today at the Diggers and Dealers mining conference in Kalgoorlie, Western Australia. “There is now potentially light at the end of the tunnel.”

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