PGM Capital – Blog

Highlight in the week of September 28, 2015

By Eric Panneflek

Dear PGM Capital Blog readers,

In this weekend's blog edition we want to discuss some of the most important events that happened in the global capital markets, the world economy and the world of money in the week of September 28, 2015:

  • ALCOA to split into 2 separate public companies.
  • Carl Icahn, warns that markets are overpriced.
  • Glencore falls to record low.

On Monday, September 28, metals firm ALCOA (NYSE: AA) said  it would split into two publicly traded entities, separating a faster growing plane and car parts business from traditional aluminum smelting operations as shareholders seek higher returns amid a commodity slump.

Klaus Kleinfeld, Alcoa chairman and CEO, said on Monday that it was the

"right time to split the business."

He also said the right size, strength and scale of the two businesses

"allows us to put both businesses onto their own path independently to pursue their own strategies, which are very distinct."

New York-based Alcoa's traditional smelting business has been hurt by a ballooning surplus of aluminum, which has caused prices to sink and deepened the industry's worst crisis in years.

After the split, one company, which will take the Alcoa name, will have five business units including bauxite and aluminum, while the second company's portfolio will be comprised of engineered products, global rolled products and transportation and construction solutions.

The split is expected to be finalized during the second half of next year. The name of the second company will be determined before the closing of the transaction

On Wednesday, September 30, legendary investor Carl Icahn said in an interview on CNBC, that he thinks that markets look "way overpriced" and many investors have put themselves in "dangerous" positions.

Icahn stressed many of the points he made in a video posted this week titled "Danger Ahead." He said stocks could see a tough run amid the Federal Reserve's near-zero interest rate policy and headwinds like financial engineering for the sake of earnings growth.

On Wednesday, September 30, he said:

"I think earnings are misstated and sort of a complete mirage"

In below video, entitled "Danger Ahead" Icahn also warns about potential problems caused by tax loopholes, stock buybacks and liquidity in the high-yield bond market.

On Monday, September 28, Glencore Plc (GLEN.L), the Anglo–Swiss multinational commodity trading and mining company headquartered in Baar, Switzerland, dropped as much as 17.4 percent in London, as can be seen from below 5-day chart.

The biggest one-day drop since the company started trading in 2011.

The company was created through a merger of Glencore with Xstrata on 2 May 2013. As of 2014, it ranked tenth in the Fortune Global 500 list of the world's largest companies. It is the world's third-largest family business.

The company has lost more than 70 percent of its value this year, as can be seen from the company YTD-chart as commodity prices have slumped, making it the worst performer in the FTSE 100 index.


Alcoa is the latest big materials company to embark on a trip back to the future by proposing to split its so-called “upstream” aluminum making and bauxite mining business, from its “downstream” specialist metals group which makes high-value products for the aviation and automotive industries.

What Alcoa’s doing is a variation on a theme started during this round of the break-up season by BHP Billiton, the world’s biggest resources company, which spun off an assortment of mining assets into a new business called South32.

A global glut of aluminum, which has depressed prices, has battered Alcoa stock, driving the company's market value this year down to about US$12 billion as can be seen from below chart.

Alcoa has faced this problem for decades: No matter what they have done to enhance their product line, their stock has traded based on metal prices.

Carl Icahn:
Billionaire investor Carl Icahn thinks stocks could go down "a lot more" as the market comes to grips with bubbles exacerbated by the Fed's zero interest rate policy.

In an interview he said:

"It's like giving somebody medicine and this medicine is being given and given and given and we don't know what's going to happen – you don't know how bad the end of this is going to be"

He also said

"We do know when we did it a few years ago it caused a catastrophe, it caused '2008, so where do you draw the line here?"

Low rates are one of five major worries Icahn outlines in the video, along with tax loopholes, financial engineering of earnings, balance sheet-weakening stock buybacks, and strains on the high-yield bond market.

Amid his concerns, Icahn said he has hedged his investments much more.

In another stark example of the fact the commodity supercycle is over is the fact that, Glencore shares tumbled almost 30 percent to close at an all-time low on Monday, September 28, on fears that the mining and trading company was not doing enough to rein in its debt to withstand a prolonged fall in global metals prices.

As can be seen from below all-time chart of Glencore, we see that the company's share are almost down 85 percent from their IPO value of May 2011.

Based on the above, Glencore looks like the next big miner heading to the chopping block with shareholders demanding a radical overhaul after the company was savaged on the London Stock Exchange by investors who have become alarmed about falling commodity prices and Glencore’s high levels of debt.

The amusing part about the fear surrounding Glencore is that its problems have been obvious for years and date back to its US$41 billion merger with Xstrata in 2012, a deal which brought together a pure miner in Xstrata with one of the world’s biggest commodity traders in Glencore.

The core problem, which can probably only be fixed by Glencore ejecting Xstata just three years after acquiring it, is that the mining business (mainly Xstrata assets) functions best without high debt levels as they ride the commodity cycle.

Glencore, as it originally operated, needs high debt levels to fund its commodity trading activities.

The core problem, which can probably only be fixed by Glencore ejecting Xstata just three years after acquiring it, is that the mining business (mainly Xstrata assets) functions best without high debt levels as they ride the commodity cycle.

Glencore, as it originally operated, needs high debt levels to fund its commodity trading activities.

Bringing two very different businesses under the same umbrella was an “oil and water” deal; mining and commodity trading could never mix comfortably and a crisis was guaranteed should commodity prices fall sharply, which is what’s happened.

Breaking-up of mining companies:
Breaking up is proving to be the favoured option of mining companies under financial pressure as Alcoa joins BHP Billiton (BHP.AX) in a voluntary division, and with Glencore drifting towards an involuntary split.

Others could follow; Rio Tinto (RIO.AX) and Vale (NYSE:VALE) are under the same pressure to cut costs as low commodity prices destroy profits and shareholders demand action.

Breaking up might be hard to do but sometimes it is essential.

Based on the company's business, model, fundamentals and Swiss roots, we believe that Glencore current share price might be a good entry point for longterm investors.

Last but not least, when analyzing market behaviour, always remember below quote of John Maynard Keynes;

"Markets can stay irrational longer than you can stay solvent."

Secondly before taking any investment advise, always take your investment horizon and risk tolerance into consideration.

Thirdly, remember that we currently are living in the age of turbulence which is very volatile and that sharp corrections may happen at a sudden.

Until next week.

Yours sincerely,

Suriname Times foto
Eric Panneflek


Highlights in the week of September 20, 2015

By Eric Panneflek

Dear PGM Capital Blog readers,

In this weekend's blog edition we want to discuss some of the most important events that happened in the global capital markets, the world economy and the world of money in the week of September 20, 2015:

  • Russian Central Bank bought one million ounces of Gold in August.
  • Caterpillar announced restructuring plans.

On Friday, September 18, the Russian Central Bank announced, that its gold reserves rose to 42.4 million troy ounces as of September 1, compared with 41.4 million troy ounces a month earlier.

The monthly accumulation of 1 million ounces in just one month was one of the more sizeable monthly purchases by Russia and equates to 31.1 metric tonnes in August alone.

According to an announcement by the bank of Friday, September 18, the value of the central bank’s holdings rose to US$47.68 billion from US$44.96 billion a month earlier.

As a consequence of this on April 1st, the country’s gold reserve stands at about 1,318 tonnes or 46.5 million ounces as can be seen from below chart.

As can be seen from above chart, Russia has been steadily buying bullion since 2007 and the advent of the global financial crisis and  has more than tripled its reserves since 2005.

Based on its current reserves, Russia ranks as the seventh largest holder of gold reserves in the world behind the US, Germany, the IMF, Italy, France and China.

On Thursday, September 24, the industrial giant of heavy equipment and DOW-Component, Caterpillar (NYSE: CAT), announced plans for it to cut as many as 10,000 jobs as part of a restructuring plan in the face of what it called "a convergence of challenging marketplace conditions in key regions and industry sectors — namely in mining and energy."

The moves are designed to save US$1.5 billion per year in costs.

The company’s yellow and black dump trucks, loaders, and bulldozers — not to mention turbines, locomotives, generators, and engines — can be found all over the world at mines, ports, construction sites, and elsewhere.

Based on the news shares of the company declined on Thursday with over 7%, to close the week at US$ 64.98 a share a drop of 9.8% compared with its opening price of Monday, September 20, as can be seen from below 5-day chart.

In its announcement on Thursday, Caterpillar noted that 2015 would be its third straight year of sales declines. With sales also expected to decline in 2016 to around US$48 billion, the company could be looking at its first four-year stretch of sales drops in its 90-year history.

Year-to-date, the stock is down about 25% as can be seen from below YTD-Chart.


Russia Buys Gold:
We are not surprised of the Russian government's decision to continue to accumulate gold, as their consistent accumulation since 2008 suggests something more than simple "reserve diversification".

Gold has protected the Russian reserves and acted as a hedge as gold priced in rubles has surged over 60 percent in the last 12 months. The plunge in oil prices contributed to sharp falls in the ruble.

Russia added about 13 tons in July and 24 tons the month before that. As tensions escalate with the U.S., the UK and the EU, Russia appears to be intensifying efforts to diversify out of their large dollar holdings and into physical gold.

Caterpillar Warns:
Caterpillar is seen as a bellwether for the global economy because its equipment is big and expensive and often the kind of investment a company only makes when they feel confident about their prospects and the global economy.

In a statement, Caterpillar CEO Doug Oberhelman said:

“We recognize today’s news and actions taken in recent years are difficult for our employees, their families and the communities where we’re located. We have a talented and dedicated workforce, and we know this will be hard for them.”

As can be seen from below 5-year chart the shares of caterpillar are now at a 5-year low of US$ 64.98 per share.


This news out of Caterpillar follows a warning earlier this week from its UK-based rival JCB that it would cut jobs because of a slowdown in Russia, China, and Brazil.

From the late 1990s until the 2008 financial crisis, most commodities, mainly due to the rising demand from emerging markets such as the BRIC countries, experienced double-digit annual real (i.e., inflation-adjusted) price growth, a period known as the commodity “supercycle.”

This combined with the infrastructure and construction boom in China and Dubai, in the period 2001 - 2008, has created a high demand for heavy equipments, cranes etc.

The situation at Caterpillar can be seen as an other proof that the commodities supercycle and construction boom that started early in this century is over.

A consequence of this might be that countries, which haven't invested the profits from the commodity boom period, in a Service- or Human Capital intensive economic sector, will experience very difficult socio-economic situation in the coming 5-10 years.

Until next week.

Yours sincerely,

Suriname Times foto

Eric Panneflek


Why the FED didn’t raise interest rate in the USA

By Eric Panneflek

Dear PGM Capital Blog readers,

Investors around the world have been closely watching the USA Central bank’s (The FED) decision on short-term rates, which have been near zero since the financial crisis in a bid to stoke growth and borrowing. That stance has helped propel a six-year-long bull market in stocks and bonds.

After keeping the markets on edge in the days and weeks leading up to the Thursday, September 17, decision, the Fed has decided once again to leave interest rates unchanged.

As can be seen from below, charts of the US-Markets, stocks fell sharply on Thursday and triple digit on Friday as investors processed the lingering cloud of uncertainty after the Fed's decision not to raise rates from their record low.

Are things so bad in the world that we can’t get off 0% a whopping seven years after the depths of the credit crisis?

Shouldn’t it concern investors that the Fed is still too worried to raise rates by even a measly quarter point?

How is that long-term bullish for the economic outlook, corporate earnings or stock prices for that matter?

In a press release announcing the decision of the Federal Open Market Committee, the body responsible for setting monetary policy, the central bank said that;

"The economic activity in the United States is expanding at a moderate pace. But while household spending, business investment, the housing sector, and the labor market are all improving, net exports have been soft."

The Fed didn't explain why U.S. exports seemed to be lower than expected, but it's reasonable to assume that it has to do with the strength of the U.S. dollar. A stronger dollar increases the cost of American exports abroad.

Four years ago, it took nearly US$1.50 to buy a single Euro, while on Friday September 18, it takes only US$1.1308 for one Euro, as can be seen in below chart.

Although the Fed's legal mandate, insofar as monetary policy is concerned, is to maximize employment while keeping a lid on inflation, the value of the dollar plays a central role in both. This is because net exports are one of four variables that determine a country's gross domestic product, or GDP. And the expansion or contraction of a country's GDP is the fundamental driver of both sides of the central bank's so-called "dual mandate."

The second issue cited by the Fed for its decision to keep interest rates steady has to do with the dual mandate specifically, as can be read the central bank's press release

"Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term"

In March 2009, the FED act exactly in line of its role when it printed US$1 trillion to buy government-insured mortgage-backed bonds. Fed actions thawed the frozen market, which resuscitated the buy side and helped things return to normal, albeit at a lower level.

The monetary institution is supposed to use interest rates and the printing press to prod businesses into hiring more people. This part of Fed policy has failed, but you wouldn’t know it by looking at employment figures from the Bureau of Labor Statistics (BLS).

Rather than raise interest rates for the first time since June 2006, policymakers opted to sit tight. Not only that, but they also sounded a much more cautious tone on the global economy, the outlook for inflation and more.

Originally, the Fed was built as a lender of last resort. In times of panic when banks needed to sell good assets for cash to meet depositor demands, someone had to be there with the ability to make good.

Gold prices enjoyed an expected bounce on Thursday as the Federal Reserve decided to hold interest rates, to close the week at US$ 1,138.10 as can be seen from below 3-day chart.

Gold finished the week up around 2.7 percent, snapping a three-week losing streak.

The Fed move also sent bond prices soaring, which pushed yields lower. The yield on the 10-year Treasury note fell from 2.30% Wednesday to 2.13 on Friday, September 18, as can be seen from below 1-week chart.

The Fed’s decision to hold off on a rate hike, puts the market back in the will they or won’t they mode, as the Fed meets again in October and December.

Based on this, we believe that volatility will remain in the market until there is a clear sign on the FED next move on interest rate.

Until next week.

Yours sincerely,

Suriname Times foto

Eric Panneflek