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Higher Chinese Iron Ore Imports Are Not Necessarily Green Shoots

06/11/2009 by Research Reloaded

I pulled an interesting point from Citi's latest June 10th Iron Ore piece by Alan Heap regarding BHP, Rio Tinto, and CVRD. It is a warning signal for those who see a higher BDI and higher Chinese iron ore imports as a "green shoot".

At one point he explains in the piece, that while Chinese imports of iron ore have been up 25% YTD, Chinese steel production has only been up 3%. What makes up the difference? Falling domestic iron ore production plus some inventory build. Note I have provided links to online sources with similar numbers to what Citi has, just to give some verification beyond the report. 

My addition to the Citi point is that it shows that an increase in Chinese demand for seaborne iron ore doesn't necessarily mean an increase in total Chinese demand. You would want to see steel production increasing in a similar fashion in order to claim that higher Chinese ore imports were a sign of growth. So while other green shoots may exist in the world, higher Chinese seaborne iron ore imports YTD isn't one of them. This also sheds some light on the recent BDI rally and why it may be a fake-out.

European Banks In No Hurry to Pay Back "European TARPs"

06/10/2009 by Research Reloaded

While ten major US banks will be paying back US$68bn in TARP funds, something they have been eager to do, for banks in Europe it's a whole different story. As Goldman Sachs pointed out in a June 10th note by Jernej Omahen, European banks are in no hurry to pay back their public funds, ie. their "European TARPs".

And boy do they have public funds. Goldman says that the banks under its coverage have sourced a combined 156bn euros in public funds for Tier 1 capital. Why aren't they scrambling to pay it back?

Well Goldman points out that in Europe there is a long history of public sector involvement in banks and thus the current situation is much more culturally acceptable. In the US, the public uproar and negative sentiment towards public funds recipients has been much more harsh. The market stigma, for being government supported, is also far less. Nevertheless, Goldman does still believe that in the long term public involvement in European banks could restrict banks' operational flexibility, compensation policies, and ability to attract talent. So long term, one would hope that eventually they follow the path of US banks and try to payback their "European TARP's", but for the near term maybe it's prudent to hang on as long as the public is satisfied.

Caterpillar Reloaded

06/10/2009 by Research Reloaded

A summary digestion of Caterpillar's recent 1Q09 earnings and conference call. For those who want to get an understanding for what is happening, but using less time.

The result in brief

Caterpillar (CAT) earned $0.39 per share, excluding redundancy costs of $0.58 per share, down from an adjusted US$1.44 per share in 1Q08. Revenue fell 22% to US$9.225bn. Nevertheless, operating cash flow was actually up, to $895m vs. $706m in 1Q08, due to substantial inventory reductions of US$764m vs. an inventory gain of US$864m in 1Q08. Research Reloaded Free cash flow for 1Q09 was $450m vs. only US$61m in 1Q08. Thus on a cash flow basis, CAT remained strong due to effective management into the down cycle.

Guidance was for 2009 revenue of US$35bn +/- 10% and 2009 profit of $1.25 per share excluding redundancy costs expected to be $0.75 per share.

Baltic Dry Index as a Reliable Forward Indicator? Nonsense.

05/18/2009 by Research Reloaded

In finance, be cautious of anyone who uses historical correlation to back up their argument. In shipping, just flat out run from them. Shipping's notorious Baltic Dry Index, which is an index of spot rates for shipping dry bulk commodities such as coal and iron ore around the world, achieved deathdefying heights and then, well, death-causing lows, in the course of 2008, falling 90% from its peak, and attracted a lot of attention in the process both on the way up and down. The BDI meme is still alive, especially given a recent rally, and we have quite a few people claiming it as a quality indicator, or even the best indicator (sheesh) for the direction of stock markets or the world economy. Unfortunately, a lot of smart people misunderstand what the BDI represents.

Not a Reliable Leading Indicator - The BDI

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