Author: Pamela Heaven

Despite falling short of first-quarter earnings expectations, the stock of wood panel maker Norbord Inc. is poised to rise, according to Desjardins Securities.

Citing a fortuitous price surge in oriented strand board (OSB) and blaming the Toronto-based company’s underperformance on bad weather, Desjardins analyst Pierre Lacroix pegged Norbord stock at $20.50, up from $17.25, while maintaining a hold rating.

On Tuesday, Norbord posted first-quarter EBITDA of US$9 million and loss of US12¢ per share, compared with market consensus of US$16-million and EPS of US0¢.

Mr. Lacroix attributed those results to weather conditions which impaired shipments and raised costs.

The company should show “material improvement” in the second quarter, he said.

Since the beginning of April, OSB prices have soared, reaching the highest levels in five years, which the company expects to produce EBITDA of US$17-million in April alone.

“Over the longer term, management believes prices are not sustainable at these levels, and should decline later this year until a more solid U.S. housing recovery takes place,” Mr. Lacroix said.

Rising supply should also put downward pressure on prices, he said.
“We expect volatility will return as soon as pricing pressure resurfaces in the coming weeks.”

For the time being, Norbord will capitalize on inflated commodity prices, but into 2011, a normalized OSB market will put downward pressure on earnings.
Tim Shufelt

Few people have been as prescient about investing over the past decade as Jeremy Gratham of GMO, the money management firm in Boston. Grantham warned early and often about both the dotcom bubble and the U.S. housing bubble.

In an interview with the Financial Times, he defines a bubble as an overvaluation so large that it would occur only once in 40 years. He and his research team found 34 cases of such overvaluations within the past few decades — and 32 have already moved back to their long-term trend. Only two remain outstanding: the UK and Australian housing markets.

Grantham is confident that UK and Australian home prices will eventually fall back to their long-term trend. That is likely to be painful. The one piece of good news for Canadian investors? At least our real estate market doesn’t appear out of whack by enough to make Grantham’s short list.

Freelance business journalist Ian McGugan blogs for the Financial Post.

 Want a new villain to blame for the financial crisis? Try central bankers — or, more specifically, their commitment to be boring.

According to Francis Yared and Abhishek Singhania of Deutsche Bank, central bankers were so predictable during the 2004 to 2007 tightening cycle that their actions became easy for economists to forecast.

The Deutsche Bank duo argue that the increased predictability encouraged borrowers and lenders to take more risk since they could safely assume that they knew what central banks would do next. According to the Financial Times, the implication seems to be that central bankers should become less predictable. This would encourage everyone to play it safe.

But is that really wise? It seems just yesterday that central bankers were talking up the benefits of rule-based approaches to monetary policy that would prevent shocks. We’re not sure if the world is ready for surprising central bankers.

Freelance business journalist Ian McGugan blogs for the Financial Post.

Julie Dickson, Canada’s superintendent of financial institutions, doesn’t think much of many of the ideas that people have put forward to regulate the world’s banks. She believes that concepts such as capital surcharges, systemic risk funds and bank taxes are needlessly complicated creations. In an essay in the Financial Times, Dickson argues that a better way forward is to require banks to carry “embedded contingent capital.”

While that’s a term that only a banker could love, the idea is rather simple. Each bank would be required to issue large amounts of securities that would act as bonds during good times, but would automatically convert into shares if the bank ran into serious trouble. The converted funds would be capable of replenishing the bank’s common equity without using a penny of taxpayers’ money.

As Dickson points out, such a system would encourage market discipline. It would motivate bondholders to keep an eye on bank management, since buyers of the embedded contingent capital would fear being involuntarily turned into shareholders.

Dickson’s idea is a fascinating notion with wide ranging implications. It could force bank management to be more conservative. It could also force managers to be far more transparent about risk. But one suggestion? Please, Ms. Dickson, find a better name for the concept. Somehow we can’t imagine a crowd of voters chanting “What do we want? Embedded contingent capital!”

Freelance business journalist Ian McGugan blogs for the Financial Post.
 

For 25 years, the yield on U.S. Treasuries has marched steadily downward. But no longer. Kit Juckes of the Ecu group says that the yield on the 30-year Treasury bond has moved above its 100-month average. “This suggests the long post-Volcker period of declining yields has finally ended,” writes the Economist’s Buttonwood column. Buttonwood continues: “Investors are starting to demand a premium for the risk that fiscal and monetary policy will eventually generate higher prices.”

Other commentators are chiming in and making similar sounds of distress. The Abnormal Returns blog notes that “if that trend [of declining rates] has changed it affects nearly every aspect of portfolio management. For instance, equity valuations would have to reflect higher discount rates and borrowing costs. Equity-centric investors would soon be faced with competitive yields on fixed income securities. The list goes on.”

While all of this sounds worrisome, especially for stock market investors, let’s remember that 30-year yields are still under 5%. And rising rates aren’t all bad news. They’ve been kept at record low levels over the past couple of years by fears that the world might slip into depression. The trend to higher rates is a vote of confidence that the global economy is now healthy enough for investors to start demanding a more ample reward for tying up their cash. Smart investors should be far happier to see gradually rising rates than never rising rates.

Freelance business journalist Ian McGugan blogs for the Financial Post

 Bankers are private people, but do they have to be quite so private? As you read this, anonymous financial types are scurrying around Basel, hammering out new rules that will govern how banks confront the next financial crisis.

Particularly contentious are proposals that would raise liquidity levels. If these proposals become part of the so-called Basel accords, banks worldwide would have to increase the amount of cash and unencumbered assets on their balance sheets so that they couldn’t be caught short if the financial system seized up.

While this sounds perfectly sensible, Yalman Onaran of Bloomberg makes clear that protecting banks with an extra level of liquid capital would involve costs as well. The liquidity rules under discussion would reduce the annual profit of Bank of America Corp. by US$1.5-billion and of Citigroup by US$1.2-billion, according to a JPMorgan report.

All of which suggests that more public input would be useful as regulators try to strike a balance between doing what’s best for financial stability and doing what’s most profitable for banks. But as Felix Salmon of Reuters points out, the Basel rules are “hammered out slowly, behind closed doors, by mid-level central bankers you’ve almost certainly never heard of.” A more public discussion of the pros and cons would ensure that industry lobbying doesn’t dilute the proposals.

Freelance business journalist Ian McGugan blogs for the Financial Post.
 

Has the financial crisis made us more sober? More cautious? It would be nice to think so, but the evidence suggests otherwise.

One way to measure the giddiness of the financial markets is to look at the price of risk. For instance, compare the yield on 10-year U.S. Treasury bonds with the yield on junk bonds. A big gap suggests investors are very cautious and want lots of extra compensation for holding risky assets. A small gap shows that investors are in a gambling mood and are content with little extra payoff for taking on assets that could blow up at any moment.

According to the Financial Times’ Alphaville blog, the gap between the two classes of bonds is closing rapidly. The yield spread is a mere 5.08 percentage points, close to the record low it hit in the early days of 2007, when ebullient investors were willing to buy just about anything.
 
It appears that investors have not only bounced back from the dark days of last year, but are now just as optimistic as they were in the years leading up to the crisis.

Freelance business journalist Ian McGugan blogs for the Financial Post.

Judging from how the market is reacting to earnings announcements, it seems that there is a growing gap between the results that the stock market expects and the results that companies are delivering. As a result, companies that deliver strong results may actually fall on the good news.

One example is Winnebago Industries Inc., which on Thursday reported a small profit in the second quarter after six straight quarters of losses. Revenue tripled from a year earlier. So what did shares in the RV maker do? They tumbled 6%.

The case of FedEx Corp. wasn’t quite so dramatic, but it too beat analysts’ expectations only to see the market shrug its shoulders. The package shipper said its third-quarter profit more than doubled and its revenue rose more than 7%, but despite beating forecasts on both counts, its shares budged barely 2%.

As Matt Phillips of the Wall Street Journal notes, the market is clearly pricing in some rosy scenarios when companies that exceed expectations no longer see their share prices jump as a result.

Investors seem to be counting on a V-shaped recovery. Instead, several sectors have bounced off their lows, but are still fighting to get back to what used to be considered normal activity. Look at hotel room occupancy in the United States. It’s running at just under 58%, a solid increase from a year ago, but still well below the 62% that was common in the good old days.

Winnebago’s return to profitability and FedEx’s swelling bottom line demonstrate that a recovery of some size is taking place. The problem, for investors, is that share prices already seem to have built in a sizzling recovery and then some.

Freelance business journalist Ian McGugan blogs for the Financial Post.

If you believe that stock trading is all about riding short-term waves of sentiment, you have good reason to be fully invested. One of the simplest market-timing systems calls for traders to be in stocks when the market is trading above its 200-day moving average and in cash when it’s trading below. With today’s market well above its average level of the past 200 days, investors should be bullish about the short-term outlook for stocks, says Mark Hulbert, founder of the Hulbert Financial Digest.

But is this market getting a bit too frothy? Bespoke Investment Group points out that 89% of S&P 500 stocks are trading above their 50-day moving averages. It seems that investors are turning so ebullient that they’re driving up the price of every major company.

Bespoke has compiled a list of the most overbought stocks in the S&P 500 and it includes AIG, Office Depot, Citigroup and Whole Foods—all stocks that got hammered in last year’s downturn and for good reasons. The surge of this diverse and motley crew seems to reflect, among other factors, a growing belief that near zero interest rates must mean good news ahead for stocks.

If only it were so. As David Rosenberg of Gluskin Sheff points out, low interest rates don’t always translate into gains for shareholders. “If O% rates were a cure-all then Japan’s Nikkei index would not still be 70% lower than it was in 1989.” For now, it seems that the best investment policy for aggressive traders is to ride the upswing — but to be ready to get off at a second’s notice.

Freelance business journalist Ian McGugan blogs for the Financial Post.
 

There’s something of a fad among intellectuals for inventing imaginary countries. Niall Ferguson, the Harvard historian, likes to talk of Chimerica — the combination of the U.S. and Chinese economies that he sees dominating the global economy. Jairam Ramesh, an Indian politician, counters with Chindia, a term he’s invented to describe the combined might of Asia’s two biggest countries.

Now Martin Wolf of the Financial Times strikes with Chermany, “a composite of the world’s biggest net exporters.” China and Germany are forecast to have a combined current account surplus of nearly half a trillion dollars this year.  

While the two countries are hugely different, they do share some features. Most notably, when they’re not busily exporting manufactured goods, they like to lecture the rest of the world on how it needs to rein in government deficits and runaway private spending.

As Wolf points out, this position is incoherent. The only thing that allows Chermany to maintain its massive trade surplus is the willingness of other countries to run trade deficits. Those deficits require either the governments or the private sectors of the deficit countries to go deeper into hock.

Does Chermany even understand what it is suggesting? “If I understand China’s declared position correctly,” says Wolf, “it wants the U.S. to deflate itself into competitiveness…via fiscal and monetary contraction and, presumably, falling domestic prices. That would be dreadful for the U.S. But it would be dreadful for China and the rest of the world, too.”

Freelance business journalist Ian McGugan blogs for the Financial Post.
 

In all the to-and-fro about how best to regulate the financial sector, one fact tends to get overlooked: regulators get paid less — a lot less — than the people they’re supposed to oversee. According to Dennis Berman of the Wall Street Journal, bank examiners at the Federal Reserve of Philadelphia get paid between US$40,000 and US$140,000 a year.

“Just to put things into context, the best-paid examiners which the Federal Reserve of Philadelphia relies upon to audit, inspect and guide the financial institutions under its charge gets paid less than a good personal assistant at an average Wall Street firm,” according to the investment banker who writes The Epicurean Dealmaker blog.

The Dealmaker has a suggestion: why not make regulators just as well paid as the people they regulate? In other words, hire a bunch of investment bankers to oversee investment banks and pay them market rates, with the proviso that they can’t take positions in the private financial industry for at least three years after they step down.

This could work, especially if regulators had their pay tied to the long-term stability of the banks under their supervision. But perhaps there’s an even simpler notion that could offer the same benefits. Why not turn back the clock and force investment banks to operate as partnerships? This would turn every investment banker into both a banker and a watchdog, since a partner has his or her own wealth at stake if the firm stumbles. It’s not a coincidence that Wall Street’s worst excesses began at about the same time as investment banks trashed their old partnership structures and began operating as publicly traded corporations.

Freelance business journalist Ian McGugan blogs for the Financial Post.

Official forecasts may be underestimating the future demand for oil by 30 million barrels a day, according to a research paper by Joyce Dargay of the University of Leeds and Dermot Gately of New York University. If so, the next oil crisis is going to be a whopper.

Dargay and Gately base their logic on the observation that the demand for oil no longer appears to respond to price. While price increases in the 1970s hammered worldwide demand for the fuel, the heftier oil prices we’ve witnessed over the past decade had no such effect. Instead, worldwide demand for oil increased by 4% during that time.

The professors say the 1970s fall in demand was the result of taking advantage of simple, obvious economies such as moving away from using oil to generate power. But they caution that those successes can’t be repeated.

If per-capita oil demand grows at the modest rates that Dargay and Gately project, rather than falling as most forecasters believe will happen, total oil demand will be 138 million barrels a day in 2030, about 30 million barrels higher than OPEC or the U.S. Department of Energy foresee.

Does this mean the world is headed for a peak oil apocalypse? Not necessarily. If we begin using more natural gas as a transportation fuel, a crisis may be averted, says James Hamilton, an economics professor at the University of California, San Diego. “If not, the challenges of 2007-2008 will return with a vengeance.”

Freelance business journalist Ian McGugan blogs for the Financial Post.
 

Finally, someone has found a good use for toxic assets. Planet Money, a program on NPR in the United States, has decided there is no better way to follow the financial crisis than to own a tiny piece of it. So it’s paid US$1,000 for a slice of a collateralized debt obligation (CDO). Planet Money’s new pet toxic asset holds a piece of 2,000 mortgages in California, Arizona, Florida and other hard-hit states.

About half the mortgages are behind on their mortgage payments and 15% of the homes are already in foreclosure. Back in the bubble years the CDO fetched US$2.7 million. These days the whole shebang went for US$36,000.

If nothing else, owning a piece of the U.S. housing disaster introduces a certain sporting element into watching the evening news. Every month, the program stands to collect a tiny bit of cash from people paying off their mortgages. But as losses mount, its pet toxic asset could die. On the other hand, if its pet toxic asset can make it to November, the program doubles its money.

How long can it be before some entrepreneur decides that what we all need is one of these things? We can already hear the boasts: “Mine’s more toxic than yours!”

Freelance business journalist Ian McGugan blogs for the Financial Post.

On this side of the Atlantic, the solution to the financial crisis in Greece seems obvious. Greeks must reduce their wages and export more. But that easy remedy overlooks a big obstacle.
 
For Greece to export more, someone else must import more. The problem? There is a distinct lack of candidates for the job. China wants to increase its exports, not imports. Much the same goes for Brazil, India and Russia. The U.S., Britain, Spain, Ireland and Portugal are in the middle of their own financial woes. France already has a substantial trade deficit.

So that brings us to Germany, a country that prides itself on its financial rectitude and hefty trade surplus. At the moment, both factors combine to push down German demand for goods — but without increased demand from the eurozone’s wealthiest country, it’s difficult to see how Greece, as well as Spain and Portugal, can export enough to dig themselves out of their holes.

To make matters even worse, Germany is demanding that other eurozone countries reduce their budget deficits. Unless balanced by a huge wave of private-sector borrowing, balanced budgets would mean the destruction of even more appetite for imports.

“Germany is in a trap of its own devising,” writes Martin Wolf of the Financial Times of London. “It wants its neighbours to be as like itself as possible. They cannot be, because its deficient domestic demand cannot be universalized … Ironically, Germany must become less German if the eurozone is to become more so.”

Freelance business journalist Ian McGugan blogs for the Financial Post.

 The PDAC conference always ends with a luncheon presentation by an industry expert. In 2009, the PDAC went way out of left field and selected doomsday economist Marc Faber to do the speech. His speech will be remembered for his comparison of Ben Bernanke to Robert Mugabe.

It was a much more traditional approach this year, as the presentation was made by investment strategist and commodity bull Don Coxe. In a speech titled Two Bets for Mining Growth: The Base Metal Bet on Asia, and the Precious Metal Bet on Obama, Mr. Coxe made the case that the commodity bull market has a long way to run.

He spent a great deal of time talking about how China and India are re-establishing themselves as economic powers and how badly base metals will be needed in order to allow that to continue.

 “You are absolutely necessary for what’s to come,” Mr. Coxe told the crowd.

But things got really fun when he started talking precious metals. He got into the US$14-trillion in government deficits and said something is almost certainly going to go wrong as they get bigger and bigger. Gold is seen as the logical safe haven.

“There’s nothing to equal the excesses of government and the bad behavior of Wall Street,” he said.

He concluded by saying that he could not think of a better career to be in for the next 25 years than geology. “This is going to be where it’s at,” he said.

Peter Koven

It is one of the more remarkable turnarounds in recent memory. Shares of Amazon Mining Holding PLC, which bottomed out in penny-stock territory during the market crash, have staged a massive rebound as the company has put together an innovative potash development strategy and taken some crucial steps towards development.

Amazon completed a $16-million IPO in late 2007 and went looking for mineral deposits in Brazil. After not getting anywhere, it decided to stop drilling and try to source new opportunities.

Then the credit crisis hit. Since the company was not actively drilling at the time, it was an easy one to sell and many investors liquidated their positions. The result is that it traded at a laughable discount to its cash.

Meanwhile, chief executive Cristiano Veloso and VP of corporate development Jed Richardson decided to focus on the Cerrado Verde project, an unusual thermal potash opportunity in Brazil.  Put simply, the company plans to heat the rock to almost 1,100 degrees Celsius, which releases the potash nutrients into the rock. The end product is a slow-release fertilizer.

This technique has never been attempted in potash, largely because it is very energy-intensive and potash prices were too cheap for a long time. But now it makes sense.

Amazon has worked hard to gain political support for the project, and has maintained a lot of core institutional support. Letter writer John Kaiser is also a big fan, and his support has drawn in the retail crowd. As the story started to come together, the stock turned around.

“We faced our weakness up front and were left with a lot of good shareholders,” Mr. Richardson said.

This week, Amazon reported an initial resource at Cerrado Verde of 105 million tones of potassium oxide with a grade of 10.3%. The grade is significantly higher than other known projects of this nature, and Mr. Veloso is confident that there is much more geological potential.

“We’ve been able to assemble a strong technical team,” he said.

The plan is to release a scoping study in the spring and a pre-feasibility study by the end of the year.

Peter Koven

The reputation of U.S. Treasury Secretary Tim Geithner is undergoing a major renovation, courtesy of adoring profiles this week in the New Yorker and the Atlantic.

Both profiles laud Geithner for his brains, his decisiveness and his courage in resisting calls to nationalize the largest U.S. banks. He’s credited with being the brains behind the stress tests and various bailouts that have been successful in getting the U.S. financial sector off the ledge and back to some semblance of normality.

I’ve long thought Geithner was the victim of a lot of silly criticism and I’m glad to see him get fairer treatment. But I’m suspicious. It’s an amazing coincidence that two major magazines beloved of policy wonks should decide to profile Geithner in the same way on the same week. The coincidence smells like a coordinated campaign by Geithner’s press people.

Could it be that what we’re witnessing is a Washington power struggle? Perhaps Geithner is seeking to improve his position in the Obama administration. Or maybe he’s trying to grab credit while the grabbing is good.

For a caustic account of Geithner’s work, turn to Mike Konczal, the former financial engineer who writes the Rortybomb blog.

He’s highly skeptical of the stress tests performed on the large U.S. banks last year and believes losses may be far deeper than even the worst-case scenario of the stress tests would suggest. Though, as he says, the U.S. government will never admit it — “they’ve already unrolled the Mission Accomplished banner when it comes to these tests.”

Freelance business journalist Ian McGugan blogs for the Financial Post.

(Photo by Getty Images)
 

After coming close in 2008, Ron Little is once again on the cusp of developing a gold mine in West Africa.

Mr. Little, the chief executive of Orezone Gold Corp., spent many years working on the Essakane project in Burkina Faso. And then, just as he was getting ready to move into construction, the financial crisis struck and he was forced to sell it to Iamgold Corp. at a disappointing price.

“It was disappointing when you’ve been there 15 years and you’re about to see the mine built, but it was the best course of action,” Mr. Little said.

He has quietly stayed very busy. Once Iamgold bought Essakane, a new Orezone was spun out that holds the company’s other exploration properties in Burkina Faso.

Things are now looking promising at its Bomboré property, where the company hopes to mine surface oxides. A pre-feasibility study is due early next year, and Orezone hopes to get to 1.5 million ounces of indicated resources and another 500,000 ounces of inferred resources from the surface oxides.

“This one will be a lot less complicated than Essakane, where we had to move a village,” Mr. Little said. “Putting a mine in there will be very well-received.”
The plan is to make a construction decision on both the Bomboré and Sega deposits next year, and spend about US$100-million to develop both.

Peter Koven

It is busy times for Australian lithium explorer Orocobre Ltd.

On Monday, it announced a very high-grade lithium discovery at its Salinas Grandes project in Argentina.

On Tuesday, it announced a $20-million Canadian equity offering and a proposal to list on the Toronto Stock Exchange. Its stock price has run up over at the Australian Stock Exchange.

“We have discovered the finest [lithium-bearing] brines ever discovered in Argentina. It’s not even close,” said James Calaway, Orocobre’s chairman. He compared the discovery to SQM’s Atacama project in Chile, which is considered the gold standard in the industry for both its high lithium grade and lack of contamination.

Orocobre made news in January when it struck a joint venture with an affiliate of Toyota Motor Corp. to develop its Salar de Olaroz lithium-potash project. Like other automakers, Toyota is desperate to secure lithium in anticipation of huge demand once hybrid car production ramps up.

Despite all the recent news, Mr. Calaway made it clear that Orocobre is not a new company — he said it has been on the hunt for lithium projects for a few years. Since it got in ahead of the current rush, it could be very selective on its projects.

“We’ve been at this a while. We’re not some Johnny-come-lately to this game,” he said.

He added that the goal is not to sell Orocobre, but to build it into a large producer.

Peter Koven

Diamonds have been a bad investment for a very long time. Ask anyone who invested in the sector over the past decade, and they will probably tell you they regret it.

But prospects for the sector are looking up, according to RBC Capital Markets analyst Des Kilalea.

He said that the outlook for diamond prices is “pretty good” as production is declining in the major diamond-producing regions, and demand from China is growing by leaps and bounds.

“Investors are still risk-averse when it comes to diamonds, but they’re more interested than they were a year ago,” he said, adding that junior drilling plays are still of no interest to investors.

Rough diamond prices have bounced back strongly after collapsing during the market meltdown in 2008, and Mr. Kilalea said prices could rise 30% to 40% over the next five years.

“Hopefully people make some money this time,” he said.

A potential catalyst would be improved demand in the United States, which accounts for about 40% of world demand. While there is plenty of growth in China, it is less than 10% of the market, so Mr. Kilalea said it cannot pull the market along on its own the way it does with base metals.

Peter Koven

(Photo by Reuters)