Tag - Cic

Today, I start by offering my condolences. It’s tax day, never a pleasant time of the year.   

Yesterday, I noted that the recent rally lacked enthusiasm. Low volume and small daily gains were the hallmarks. Did all that change yesterday after Intel (Nasdaq:INTC) posted blowout numbers?   

Maybe. Volume posted its best totals since February. And the S&P 500 made its biggest gain since March 5.   

But more importantly, we’re seeing money come out of money-market funds. iMoneyNet reports that U.S. money market mutual fund assets fell by $31.49 billion to $2.908 trillion in the week ended April 13.   

Clearly, there’s still a lot of cash sitting on the sidelines. Some would say that this money belongs to individual investors who don’t want to be burned by another market crash. And cynics would say that the recent rally has been engineered to attract this money back into the stock market.   

Unfortunately, the individual investor has a tendency to get bullish right at the top of a rally.  

Now, just because anecdotal evidence suggests that the retail investor may be getting bullish is not a definitive sign that the stock market has peaked. Still, if the advance for prices continues like yesterday, we should be on our guard.   

China’s economy surged 11.9% in the first quarter this year. And that’s despite efforts by the central bank to slow growth and head off inflation in the real estate market. 

Analysts are saying this gives China even more incentive to let its currency appreciate in value. The irony here is that China’s yuan is pegged to the U.S. dollar. The Fed could guarantee the yuan appreciates by simply raising interest rates.   

Of course, that defeats the purpose. We want our currency to be the weakest in the world.   

I’ve been following the General Growth Properties (NYSE:GGP) buyout scenario closely. It’s fascinating to a stock market geek like me.   

If you’ve been following my narrative, you know that the #2 shopping mall owner in the U.S., General Growth, is attempting to emerge from bankruptcy. #1 shopping mall owner Simon Property Group (NYSE:SGP) tried to buy GGP out for $10 billion a few months ago.   

GGP and some of its big hedge fund investors (including China’s sovereign wealth fund, the CIC) believe this offer is too low, and so they set up their own plan to inject the needed capital into GGP and emerge from bankruptcy as a stand alone company.   

Part of this plan required GGP to issue a boat-load of warrants that could be converted to stock. The purpose of the warrants is a direct response to Simon’s $10 billion bid. If Simon wants to buy GGP, it needs to do so before a bankruptcy judge approves the capital-injection plan, or there will be some massive dilution to the stock.  

Pretty savvy move to turn the heat up on Simon. And investors have been waiting to see what Simon’s next move would be. The hope was that Simon would panic and make a much sweeter offer for General Growth.   

Not so fast. Simon has some tricks up its sleeve.   

Yesterday, Simon offered to match the capital injection offered by the hedge funds, except Simon won’t ask for warrants. That makes Simon’s offer more attractive and more likely to be accepted by the bankruptcy judge.   

Neither of these players wants to be a GGP shareholder. The hedge funds want a better buyout number, and Simon wants to own the company. But Simon doesn’t want to be in a bidding war, and it also doesn’t know who else has its eye on GGP.   

So this move by Simon is brilliant. For one, the company bought time for itself. And it may force the hands of any other GGP suitors who may be panicking at the thought of Simon becoming a big shareholder. Brilliant.   

Now, the General Growth buyout saga has implications for other beaten down commercial real estate companies. Because these companies own valuable assets. It’s just that their cost structure is all out of whack due to the financial crisis. Rents are down, but commercial mortgage debt is not, nor can it be refinanced in the current environment.   

That means the people with cash – hedge funds and sovereign wealth for instance – are in the cat-bird seat because they can pick up valuable assets on the cheap. Daily Profit readers shouldn’t miss the fact that the former CEO of Maguire Properties (NYSE:MPG) has offered to take a few problem buildings off Maguire’s hands.   

The increasing interest in the assets of commercial real estate companies has helped them rally recently. And that rally isn’t done. These stocks will continue higher until the buyouts actually start. And depending on buyout terms, they will likely continue to rally.   

If you haven’t seen TradeMaster Jason Cimpl’s video report of commercial real estate stocks breaking out to higher prices, you can do so HERE .  

The stock market rally that started on February 5^th, 2010 appears to be absolutely unstoppable. Bullet-proof. However you want to say it, there seems to be very little downside to stock prices, even after a strong rally.   

Now, we are not surprised. I’ve been relentlessly bullish here in Daily Profit. Sure, I may point out some discrepancies once in a while, maybe even shoot a few holes in the financial media’s neat and tidy explanations, but I’ve had us focused on upside targets for a year now, and there’s one main reason: earnings.   

This time last year, it was brutally obvious that analysts were seriously underestimating the earnings potential for bank stocks, even after the government changed the accounting rules to encourage profitability.   

And in subsequent months, analysts continued to lowball earnings estimates. Companies kept beating them, and the market kept rallying.     

How did we know estimates were too low? Well, partly because stocks kept rallying. It was one if the worst-kept secrets in history.

Of course, common sense tells us that, eventually, analysts will get estimates right, or <gasp> overshoot. How will we know when that time is at hand? Ironically enough, hiring will need to pick up.  

Corporate expenses were trimmed to the bone during the financial crisis and recession. And since payroll additions have only recently started to be noticeable, that means corporations haven’t noticeably adjusted their cost structure for the single biggest expense they face – workers.   

So until we see some true, meaningful gains in employment, stocks will move higher.   

Or, the Fed could start raising interest rates. That would sure give us some quick downside for stock prices.   

But getting back to earnings, Barron’s ran an interesting earnings table this weekend showing earnings growth by sector, based on analyst estimates. 

Three sectors are expected to show triple-digit earnings growth in the 1^st Quarter. Those sectors are Consumer Discretionary (115%), Financials (194%) and Basic Materials (179%).   

Now, we must remember that the 1^st Quarter last year was absolutely dismal. Poor earnings helped drive the S&P 500 to 20 year lows. Last year at this time the S&P 500 was trading with a P/E of 32, and it was below 850.   

Today, it has a P/E of 23, but the forward P/E based on estimates is a reasonable 15. 

Things get interesting if analysts have once again lowballed 1^st Quarter earnings. And judging by the stock market action, investors seem to believe another quarter of beaten expectations is in the works.   

The minutes from the last FOMC meeting were released yesterday. Aside from re-committing to low rates for an extended period of time, there wasn’t much worthy of comment, so I’m just going to re-print the headline from Bloomberg: “Fed Officials Saw Recovery Curbed by Unemployment”.   

You don’t say, Ben.   

I started following the commercial real estate sector last September when I noticed breakout moves from Maguire Properties (NYSE:MPG) and a few others.  

Daily Profit readers have had a couple opportunities to make nice gains from Maguire. In fact, it looks like it has started another move yesterday when the former CEO and founder offered to buy a few buildings from Maguire.   

Maguire’s not the only one running. And April 16 may mark a launching point for commercial real estate stocks.   

That’s the day shopping mall REIT General Growth Properties (NYSE:GGP) is expected to present its plan to exit bankruptcy as a stand alone company, thereby rebuffing the buyout offer from rival Simon Property Group (NYSE:SGP).   

Now, many people think Simon will make a better offer between now and the 16^th. And if so, we may see a bidding war for a bankrupt REIT break out. On one side will be Simon, and on the other will be a group of hedge funds that has backing from the Chinese Investment Corp (CIC).   

The presence of the CIC is significant for a few reasons, but none are as important for our purposes than the fact that it has $300 billion to invest and it’s looking at U.S. commercial real estate. That much investment capital could certainly re-price a lot of impaired assets.   

To learn more about the CIC’s involvement in commercial real estate, click HERE. 

The AP is reporting that China has trimmed its holdings of U.S. Treasury’s by $5.8 billion in January. I’m sure members of the doom and gloom economic faction will point to this as solid evidence that the U.S. is losing its ability to fund spending and is inching ever closer to default.   

In my opinion, this line of thinking is completely unrealistic.  

China still holds $889 billion in T-bills. It’s clearly not “dumping” American debt. And as I discussed last week, there is evidence that China is moving to more direct investments in the U.S.   

China’s state-run investment company, the China Investment Corporation (CIC), is already involved in a buyout offer for shopping mall owner General Growth Properties (NYSE:GGP) through Brookfield Asset Management (NYSE:BAM).   

And according to a Financial Times article from this morning, China’s not the only country who’s getting involved. Sovereign wealth funds from Qatar, Canada, Australia and Abu Dhabi may be getting in on the bid for General Growth Partners.   

I find the burgeoning interest in U.S. commercial real estate fascinating. It’s clear that foreign investors are helping support the economic recovery. China may sell some U.S. Treasuries, but a direct investment in commercial real estate will help cash-strapped companies restructure their debt and lift a major overhang off the market.   

Still, the news that inflation is picking up in China is a bit worrisome. China has been an important driver of economic growth for the last year. As China moves to slow its economy, it’s possible that global growth will suffer.   

One option for China is to revalue its currency higher. That would have the net effect of making it more expensive to do business with China and help offset inflation. But China never signals anything, so we have no way of gleaning any clues about a potential Yuan revaluation.   

On the subject of China, it appears that Google (Nasdaq:GOOG) may be close to a decision as to whether it will continue to stay in China. You may recall in January, Google accused China of hacking into its systems and stealing information. Google threatened to leave the Chinese market if China didn’t stop censoring search results.   

China appears to have made its stance to Google clear. The ball is now in Google’s court. And judging from the 7% move from Chinese Internet and search company Baidu (Nasdaq:BIDU), investors seem to think that Google will follow through on its threat.   

Such a move is potentially bad news. The last thing we need right now is an even more contentious trade environment with China than we have now.  

But on the other hand, it may be overvaluing Google’s importance to think that it could significantly impact trade between China and the U.S.   

Merger and acquisitions have been an important catalyst for stock prices. Today, CONSOL Energy (NYSE:CNX) said it would buy Dominion Resources (NYSE:D) Marcellus shale natural gas assets for $3.4 billion. And Phillips-Van Heusen (NYSE:PVH) will buy Tommy Hilfiger for $3 billion.   

A steady stream of merger and acquisition deals is important for several reasons. It suggests that companies see attractive valuations, it suggests companies see growth ahead and it suggests that companies are able to get financing.   

All three are good signs for economy and a continued advance from the stock market.  

Also, the amount of deals taking place in the energy sector is particularly interesting. It’s easy to see why companies would want to acquire natural gas assets. My question is: why would any company want to sell?   

I’m about to add two companies to the Energy World Profits portfolio. One is a $500 million oil company in the Gulf of Mexico that has a forward P/E of 6 and generates nearly $100 million in free cash flow. Currently priced around $12 a share, I expect this company will be fetching $18 a share in the not-too-distant future.

For the past year, the fate of commercial real estate in the U.S. has been a popular talking point for economic bears. Something like $1.4 trillion in commercial real estate loans comes due in the next 3 years.   

Given that a good portion of these properties are underwater, and the fact that banks are still reluctant to lend, the concern that many of these loans won’t get refinancing seems valid.   

Already, we have seen companies simply walk away from properties that are losing money, turning the keys over to the banks that hold the mortgages. Maguire Properties (NYSE:MPG) has done it. And we’ve seen BlackRock (NYSE:BLK) and Tishman Speyer Properties abandon Manhattan’s Stuyvesant Tower when the value fell from $5.4 billion to $2 billion.   \

For shareholders, these moves make sense because it’s better than throwing good money after bad. For Maguire, it was a matter of life or death for the company.   

Still, it’s a concern because someone has to step up and buy the impaired real estate from the banks. Otherwise, bank balance sheets are saddled with even more toxic assets, capital bases fall, lending dries up and the whole financial crisis gets repeated again.  

Interestingly, it may be the Chinese who help the U.S. out of this commercial real estate problem.   

General Growth Partners (NYSE:GGP) is the second largest mall owner in the U.S.  It owns over 200 of them. Obviously, malls are in bad shape. General Growth has 13 malls that are underwater and another 24 that are labeled “non-income producing.”   

A $44 stock in May of 2008, General Growth fell below $0.50 a share as it declared the largest property bankruptcy ever in the U.S. when it filed in April 2009.   

General Growth has managed to restructure $11.6 billion of $14.9 billion in property related debt and is reportedly close to a deal for another 24 loans totaling $1.5 billion. It’s trying to emerge from bankruptcy.  

There is value in General Growth’s assets. Simon Property Group (NYSE:SPG) recently offered $10 billion, or about $9 a share for General Growth. Not bad for a company that’s stock was under $1 a few months ago. Not bad, but also not good enough. One of General Growth’s biggest investors, Brookfield Asset Management (NYSE:BAM), has offered to purchase $2.63 billion in equity to help General Growth stave off the Simon bid and emerge from bankruptcy as a stand alone company. Pershing Square Management and Fairholme Capital Management (who run the Fairholme Fund (FAIRX) which is a core holding of my Recovery Portfolio) have pledged an additional $3.93 billion.   

The plan is for General Growth to raise additional funds, bringing the entire deal to $15 a share for General Growth. It’s clear that General Growth’s investors believe the company is worth more than the $9 a share that Simon Properties offered.   

So, what’s this got to do with China? Glad you asked…   

In 2009, Brookfield put together a $5.5 billion fund to buy impaired commercial real estate. The fund was dubbed “Real Estate Turnaround Consortium”. And one of the investors in this fund is none other that the China Investment Corp (CIC), the state-owned investment company that helps China invest its $2.4 trillion of foreign reserves.   

The CIC currently has $300 billion to invest. It’s reported that it may have made $10 billion last year. That’s pretty good, compared to the results of other sovereign wealth funds, like Dubai’s.   

So successful, in fact, that Reuters is reporting that China may give the CIC another $200 billion to manage.   

CIC recently filed its first ever 13-F form with the SEC. the 13-F is a disclosure form required of any investment with over $100 million in assets. The CIC’s biggest U.S. investments are $3.4 billion in Teck Resources (NYSE:TCK), $1.7 billion in Morgan Stanley (NYSE:MS) and $700 million in Blackrock (NYSE:BLK).   

The point here is not so much what the CIC is buying, but the fact that it is openly disclosing its holdings. That’s more transparency than we get from middle-eastern sovereign wealth funds, which don’t disclose their investments, but rather let their investment managers handle the disclosure, thereby masking who the ultimate investor is.   

I suspect that China is trying to play above board on their investments to avoid the issues that arose when it tried to buy Interoil a couple years ago, and also the political fallout when United Arab Emirates bought Dubai Ports World, which owned the British company that ran the Baltimore ports.   

Transparent filings may help China if it intends to invest in U.S. commercial real estate.   

China has recently pledged that it will continue to buy U.S. Treasuries, even though it knows the investments will likely lose money as the dollar depreciates.   

We also know that China wants to diversify investments. And like Japan in the 1980s, it’s easy to imagine that U.S. commercial real estate is a possible target.   

And so it could be, in fact I think it is highly likely, that the strength we’ve seen from Maguire Properties and other commercial real estate entities is related to growing interest from China.   

This will take a while to fully play out. And I will be watching any developments with interest. I’ll let you know what I find out…