Author: Vincent Fernando, CFA

India’s richest man Mukesh Ambani is looking to invest in US shale gas through his enormous conglomerate Reliance Industries according to Rigzone.

Reliance is in talks with Atlas Energy, who has 584,000 acres of Marcellus Shale assets, for a $1 – $1.5 billion joint-venture stake.

If closed, this deal would make Reliance the first major Indian investor in U.S. shale. It should be noted that this isn’t the first time Reliance has tried to enter the North American energy space according to Rigzone.

Barring some kind of ridiculous environmental blockages, cheap U.S. shale gas is coming. Increasing numbers of major investors know it, ranging from energy majors to foreign tycoons. Yet we doubt the market hasn’t fully recognized the vast implications this will have for U.S. energy a few years forward. Take the spill-over effects into the chemical industry we highlighted, for example.

For more details of the deal, continue at Rigzone.

Now see: The 20 emerging market billionaires wiping Americans off the map >

The author owns shares in Chesapeake Energy (CHK), a shale play.

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• U.S. Shale Gas Won’t Just Revolutionize Energy, It Will Also Make The U.S. Chemicals Industry Ultra-Cost Competitive
• A Huge Recovery Is Coming To U.S. Drilling
• America’s Massive Shale Gas Revolution Hits Canada Threatening LNG Glut

Poor, beaten down hedge fund managers forced to live off of paltry management fees… your day in the sun is returning:

FINAlternatives:

Deutsche Bank, which estimates hedge funds’ assets to total about $1.5 trillion, expects the industry to add $222 billion in new money this year, based on its eight annual alternative investment survey. That would leave the industry less than $200 billion short of its 2007 peak of $1.9 billion.

Some 73% of survey respondents expect hedge funds to see inflows of more than $100 billion this year. Almost no one—less than 2% in the survey of 606 investors with more than $1.07 trillion in hedge fund assets—expects a third consecutive annual outflow.

The same goes for under-hyped Asia… get ready for the liquidity surge:

Much investor attention is focused on Asian hedge funds. Almost half of investors say they’ll pour money into Asia ex-Japan funds this year, while the number of those who do not allocate to the region fell to just 13% from 38%. Three-quarters of investors expect to allocate to China this year, and more than one-quarter say they’ll add to their Chinese hedge fund investments this year.

The money, if indeed it comes, will have to go somewhere.

So think Asian big caps, of which in many smaller markets, there are too few to accommodate major surges of liquidity… which means blind buying could easily happen because funds will need to deploy capital into their assigned markets as investor inflows pour in. We’re not saying this is smart, but it’s happened before (2007), and if Deutsche Bank’s survey plays out, it can happen again.

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• Fitch Freaking Out About A Sovereign Crisis In Vietnam
• It Surely Matters… Euro Getting Murdered By Bernanke’s Hike As Asian Markets Rout
• Asian Development Bank: Bernanke’s Move Is Awesome For Asia

It turns out that, in the end, Dubai World looks like it will make good on its $26 billion of debt after all.

The troubled conglomerate reportedly is planning to repay all of its debt in full with a consortium of 97 creditors including heavy weights such as HSBC, Standard Chartered, and Royal Bank of Scotland, in addition to regionally important entities such as Abu Dhabi Commercial Bank.

Which means that if anyone had the opportunity to pick up this debt during the crisis, they will probably make a killing when all is said and done.

Read the full details at Reuters >

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• This Year, The Dubai Moguls Are Absent From Davos
• Dubai Saved From Financial Armageddon By Lucky Oil Discovery As Sheik Twitters With Joy
• Is Dubai’s Debt Actually $170 Billion, Twice As Much As Previously Believed?

Everyone sees the signs of a bubble after the fact, but here’s a chance to see one ahead of it.

Municipal bonds have become the favorites lately for yield-hungry investors, to the extent that many fear the asset class has already become a bit of a mini-bubble. 

Investors might have become too enthusiastic about the tax-exempt yields on offer, forgetting that muni bonds can indeed default. Some issuers are in bad shape already, so things could already be starting to crack as it stands.

That’s why it’s just plain scary how Moody’s is now being pressured by politics to loosen their credit standards for munis:

Bond Buyer:

Moody’s Investors Service plans in mid-April to move to a global scale for its municipal bond ratings so that they are more in line with its corporate debt ratings, after postponing the initiative during the height of the financial crisis.

The rating agency’s announcement of the move came a day after Senate Banking Committee chairman Christopher Dodd, D-Conn., unveiled a redrafted financial regulatory reform proposal that would mandate such changes, similar to the reform bill the House passed in December.

…

Moody’s said yesterday that it will take about four weeks to fully replace all of its 70,000 “sale-level” ratings for outstanding muni bond issues of 18,000 issuers.

While Moody’s has been criticized for having a muni bond  ratings system that was unfairly more strict than that for corporate bonds, shouldn’t they be adjusting their corporate bond rating methodology up to match their more strict muni bond methodology? That’s the prudent way to bring everything in line under one system.

Rather, they are taking the easy way out, adjusting their muni standards down to meet the more lax level of corporates, making everything equally loose and pleasing politicians who want muni issuers to pay less interest rates during hard times (through better credit ratings, if markets believe the new ratings). Yet this kind of self-reinforcing ‘everybody wins’ laxness just seems eerily familiar.

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See Also:

• Muni Bond Market Begins To Burst With Defaults
• Momentum Builds For Big Muni Bailout
• Bill Coming This Week To Guarantee Entire Muni Market

Producer Price Index (PPI) just came in at -0.6% which was a more severe price drop than the -0.2% expected by consensus.

—

“The Producer Price Index for Finished Goods declined 0.6 percent in February, seasonally adjusted, the U.S. Bureau of Labor Statistics reported today. This decrease followed a 1.4-percent advance in January and a 0.4-percent increase in December. At the earlier stages of processing, prices received by producers of intermediate goods moved up 0.1 percent and the crude goods index fell 3.5 percent. On an unadjusted basis, prices for finished goods advanced 4.4 percent for the 12 months ended February 2010, their fourth consecutive 12-month increase. (See table A.)”

PPIFeb2010

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• The Chinese Central Banker That Loves To Scare America Tells Obama Not To Expect A Yuan Hike To Save Him
• Feldstein: Forget The Euro, I’m Nervous About The Dollar
• SENTIMENT BACKFLIP: S&P Now Saying The Euro Could Threaten The Dollar As Reserve Currency

An anonymous delegation member has told the Associated Press that OPEC won’t increase its production quota, in reference of an announcement that should be officially coming out soon.

VIENNA (AP) — A delegation member at an OPEC oil ministers’ meeting says the gathering has agreed to keep output targets unchanged.

OPEC has left its members’ production quotas unchanged since December 2008, when it announced the last of a series of cuts aimed at bringing their output down by 4.2 million barrels per day. The cuts helped engineer a rebound in crude prices, which had collapsed to the low $30s from a mid-2008 high of almost $150 per barrel.

The delegation member spoke on condition of anonymity before the formal announcement later Wednesday. He said members also were asked to curb overproduction, now at nearly 2 million barrels a day.

With that overproduction, OPEC now is pumping about 27 million barrels a day.

Keep in mind this is despite the fac that they recently increased their 2010 oil demand forecasts.

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• CIBC Analyst Rubin: OPEC Doesn’t Have Enough Oil To Feed Us Anymore
• Falling Oil Demand Terrifies OPEC, Spurring It To Restrict Production
• Cash-Hungry Iraq Quadrupling Oil Production, OPEC Fears Price Collapse

It looks like Bill Ackman could make even more money off of his astute General Growth bet on commercial real estate.

He’s already made past skeptics look pretty foolish as shown by the chart to the right.

Now it’s just becoming overkill:

Associated Press:

Simon sent a letter to General Growth this week saying it anticipates boosting its offer above that of a proposal put forth by General Growth and three of its largest stakeholders, the people said on condition of anonymity because they were not authorized to discuss the matter publicly.

That means a new Simon offer would have to value General Growth above $15 a share. Simon’s initial offer valued the Chicago-based company at about $9 a share.

Keep in mind he picked up his shares at $1.31, which means that if he gets more than $15, then he’s looking at more than a ten-bagger. Hope Hovde Capital covered their short already.

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See Also:

• Bill Ackman: You Small Investors Are Lazy
• Bill Ackman’s General Growth Killing Signals A Huge Rebound Ahead For Commercial Real Estate
• See How Bill Ackman Made Complete Fools Out Of Commercial Real Estate Bears Like Hovde Capital

The U.K. was just blessed with a rare piece of good news on the economic front — on Wednesday the U.K. office of national statistics said that “the number of Britons claiming unemployment benefits fell unexpectedly in February by the biggest amount since November 1997.” according to Alphaville.

The resulting pound spike was sharp and sudden. The euro was slammed:

As was the dollar:

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• Merrill Lynch Trader Banned From Markets By UK Regulator
• Moody’s: The US And UK Will Be Fine, It’s Just That The Coming Spending Cuts Will Start Riots In The Street
• What It Means That The UK Pound Is Directly Correlated To Election Polls

Jim Rogers calmly states that the Euro will not exist in 20 years:

CNBC:

The euro is unlikely to still exist as a currency over the longer term, the pound will fall substantially in the next few years and US Treasurys and some real estate in China are the world’s two current bubbles, legendary investor Jim Rogers told CNBC.com Wednesday.

“The euro will probably break up in the next 15 to 20 years,” Rogers said in an interview. “Don’t get me wrong, I own the euro.”

“We’ve had currency unions in history, they didn’t survive, this one won’t survive either,” he explained.

Read more here >

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• Euro Bulls Suffer A Near Miss As IMF Suggests Europe Target Higher Inflation
• We Are All Dollar Bulls Now
• Did We Just Get The First Sign That The Surging Dollar Is Killing Job Growth?

Treasuries and foreign developed nations are back on Bill Gross’s buy list.

In February, he hiked his foreign developed-nation bond holdings to the highest percentage since May 2004 according to Bloomberg.

Bloomberg:

Gross raised the proportion of the securities in the Total Return Fund to 19 percent of assets in February from 18 percent in January, according to a report placed on the company’s Web site.

Yet what’s more striking is the fact that he made a big move into U.S. treasuries. 4% is a lot for just a month… and the first increase in a long time.

He increased U.S. government debt to 35 percent from 31 percent, the first increase since October 2009, and lowered net cash to 2 percent from 9 percent.

Which means he perfectly timed yesterday’s dovish Bernanke words.

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• Idealab’s Bill Gross Talks Innovation, Presented By Mercedes-Benz S400 HYBRID Sedan
• Bill Gross: Man Of A Hundred Startups Now Hellbent On Saving The World (With A Revolutionary Solar Energy Project)
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Today the Bank of Japan just doubled a key bank loan program used to inject liquidity into its economy.

Bloomberg:

Governor Masaaki Shirakawa and his board increased the three-month loan facility to 20 trillion yen ($222 billion), the bank said in a statement after its meeting in Tokyo. Miyako Suda and Tadao Noda opposed the decision. The board also held the overnight rate at 0.1 percent by a unanimous vote.

Thus Japan is loosening monetary policy while essentially the entire world is tightening. It’s appearing as if the Bank of Japan has caved the intense political pressure.

Prime Minister Yukio Hatoyama’s administration, restrained from adding to fiscal stimulus by a record debt load, has been pushing the central bank to do more to bolster growth.

The credit expansion “could implant a strong impression among the government that the stronger it presses, the more it can get from the BOJ,” said Mitsuru Saito, chief economist at Tokai Tokyo Securities Co. The expansion “is highly unlikely to shore up the macro-economy, while having only a limited impact on liquidity,” he said.

Read more here >

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See Also:

• Japan’s Slashed 4Q GDP Means Hyperinflationary Policy Is Now Far More Plausible
• Bush, Drugs, And A Recession Caused The Deficit — But Don’t Worry, We’ve Got It Under Control
• Banks Just Ignored $3 Of Commercial Real Estate Losses For Every $1 They Reported

The latest March 2010 World Gold Council data serves as a nice reminder of where the gold is. Note how tiny gold is as a percentage of Chinese foreign reserves. If paper money is meaningless, then the U.S. is king.

World Official Gold Holdings Mar 2010

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• Why Has Gold Been Such A Dog? It’s As Simple As Supply And Demand
• Metals Struggle As Gold, Silver Dip
• Dow Squeezes Out Modest Gains On High Volume

PIMCO’s Mohamed El-Erian has issued an important reminder for anyone who thinks Bernanke isn’t tightening monetary policy just because he plans to keep interest rates flat for an extended period.

There are other fed actions, beyond the interest rates, that will tighten policy.

At the end of March, the Fed’s $1.25 trillion mortgage-backed security purchasing program will end.

That’s a huge form of credit tightening, says El-Erian, since it removes massive liquidity from this market.

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• What On Earth Is The Fed Doing? They Should Wait Another Two Years Before Tightening
• PLAYBOOK: Watch Out For This Indicator If China Tightens Lending Tonight
• SENTIMENT BACKFLIP: S&P Now Saying The Euro Could Threaten The Dollar As Reserve Currency

Citi strategist Tobias Levkovich notes that U.S. corporates are building up massive amounts of cash and investors are starting to notice. S&P 500 companies, excluding financials, have remarkably strong balance sheet positions. They aren’t going anywhere and have build themselves up to withstand economic pressure.

Here it is, corporate America deleveraging:

Yet as this pressure eases and the world recovers, the cash on their balance sheets will be put to action. Whether via share buy backs , dividends (note Pepsi just did this), M&A, or hiring and capex, this historically delevered position means that U.S. companies now have massive capacity to invest in growth opportunities or simply paying their investors handsomely with cash.

At this stage, Mr. Levkovich seems to believe that we could see an uptick in M&A, but this could be muted. More likely in his view, is a structural shift towards higher dividend payments to investors in order to win back the market’s love for stocks:

Tobias Levkovich @ Citi:

Dividends may be needed to woo back a “burned” investor base seeking income. After two 50%+ declines in the past decade, the individual investor may need to see some upfront money in the form of increased dividends to get attracted once again to the allure of equities. As a reminder, the dividend yield was above the Treasury bond yield for years after the Great Depression and dividends historically have provided about half of stock market returns. With aging demographics, one could assume a new dividend trend may have to emerge to compete with fixed income products as investor demand some upfront money and not just long-term appreciation potential.

(Via Citi Investment Research, Tobias Levkovich, Pondering The Cash Conundrum, 16 March 2010)

Add my twitter for more like this: @vincefernando

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• See Traders Front-Run China Mobile’s Pudong Buy
• Banks Just Ignored $3 Of Commercial Real Estate Losses For Every $1 They Reported
• Buckets Of Blood On The Streets Of Bangkok… It’s Time To Buy

Read the news about Bangkok protests these days and you’d think all hell was breaking loose.

Reports tell of protesters literally pouring their own donated blood onto the streets in a vivid display of anger. Some protesters say they’d give their life for a return of the former ousted prime minister Thaksin Shinawatra.

An M79 grenade was even fired at an army barracks by unknown parties, wounding two soldiers, and as we write this we can see streams of protesters marching on the house of the current prime minister, Abhisit Vejjajiva, demanding a new election.

Yet step back for moment says Andrew Stotz, the 25-year Thai veteran and former #1-rated head of Thai research for Citi Investment Research and CLSA.

In a fresh piece of analysis, Mr. Stotz lays out his case for why, despite all the media hype and domestic consternation, Thailand may be far more stable than it appears.

In our personal view this rings true and means one thing… investors should take a very hard look at Thai assets right now, whether they be stocks or even better yet… property.

Here’s the deep dive from Mr. Stotz, a must read for anyone who follows Asia:

Thai Politics Andrew Stotz

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• BHP: China Commodity Strength Will Tear Even Higher
• It Surely Matters… Euro Getting Murdered By Bernanke’s Hike As Asian Markets Rout
• Asian Development Bank: Bernanke’s Move Is Awesome For Asia

Venezuela is nearly tapped dry for oil-majors investors after years of treating them as political scape goats.

“They are desperately inviting people back in, but no one’s going there,” Shell’s Chief Financial Officer Simon Henry said in London according to Reuters.

Shell, BP, ConocoPhillips, and Exxon Mobile have all decided that Venezuela just isn’t worth it anymore. Thus the nation is forced to look for low hanging fruit when it comes to partnerships, which is hurting.

Welcome to Venezuela 2010:

WSJ:

The Isla refinery on the Dutch island of Curacao, which is operated by Venezuela’s state oil firm, entered its third week without production and an official said Monday it will be at least until April before production returns.

“When it will re-start, I can’t tell you because I don’t know,” said the official at the refinery, who asked not to be identified. “But it definitely won’t be until at least April. For March, there will be no production.”

…

The plant has a capacity to process 320,000 barrels a day of crude, but over the past year has averaged closer to 220,000 barrels a day, the refinery official said.

Maybe that’s why they’re shipping crude oil to be refined in Belarus.

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While U.S. banks reported a whopping $59 billion in bad-loan charge-offs in the fourth quarter of 2009, research firm Audit Integrity believes they conveniently ignored another $3 – $4 dollars of further loan losses for every dollar loss they reported.

That’s because most of the $59 billion reported came from losses on home loans, not commercial real estate.

Yet nearly 3,000 commercial banks are classified as having a high commercial real estate concentration according to the Congressional Oversight Panel, and AI believes that there’s a lot of commercial real estate loans out there which are in trouble.

So why so few losses reported?

It could be that modified accounting rules allow problematic loans to be ignored in the hope that they eventually end up performing:

Audit Integrity:

I refer to our recent INSIGHT, “Financial Institutions and Commercial Real Estate Risk” (attached), that directly addresses the reality of “Extend and Pretend.” Commercial banks hold over $1.7 trillion of commercial real estate, and are reluctant to write down their holdings. In fact, FASB has changed its interpretation of FAS 115-2 and FAS 124-2, making it extremely easy to avoid recognizing loss in value.

…

A charge-off rate that more accurately reflects commercial real estate values would drive banks into a substantial negative earnings position.

A selection of banks who AI suspects are representative of the problem is shown below.

(CRE = Commercial Real Estate, Tier 1 Capital = Their reserve capital, similar to ‘shareholder’s equity’ for non-financial companies (basically))

The firm believes that if banks had been forced to report a more realistic amount of charge-offs, many would have shown negative earnings in Q4. Thus you probably want to be extra skeptical of any banks with high commercial real estate exposure when it comes to their earnings or Tier 1 capital. These financial numbers probably don’t mean much right now, and won’t until we see the full extent of how loan losses play out. Some could even be insolvent already, if forced to show the real value of their portfolios. So try and pick out the zombie banks from the table above. Good luck.

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See Also:

• China’s Housing Bubble Is Inflating Faster Than Ever
• It Begins: China Cracks Down On The Shadow Banking System That Is Inflating Its Real Estate Bubble
• 10 Banks With The Most Exposure To The CRE Time Bomb

A few weeks back we highlighted shipping industry anecdotes that indicated idle container ships being put back into service in response to the global rebound. Now we have hard proof, thanks to data from Fearnley Fonds and Alphaliner:

Fearnley Fonds, 16 Mar 2010:

According to AXS-Alphaliner, the idle fleet has been further reduced over the last two weeks, from 495 vessels of 1.24m TEU to 474 vessels of 1.22m TEU (9.3% of fleet capacity) currently. AXS-Alphaliner expects lower idle count going forward, as new services will be launched on the Asia – Europe trade (capacity on this route expected up 7%) and there is also a pickup in demand for smaller ships to service intra-regional trades.

Ship owners could be wrong, they surely have been in the past, and this kind of data can be volatile. Yet they won’t be wrong about the global recovery they are seeing right now. They just could be wrong about how sustainable the recovery will be.

But should this trend continue, we’ll put more trust in these guys than most. Keep in mind container ship owners were just hit extremely hard by the downturn, they are far from giddy with enthusiasm these days. Yet they are starting to regain confidence in the world economy.

Add my twitter for more like this: @vincefernando

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See Also:

• Shippers Rattled By Shortage Of Ships Due To Trade Surge
• China’s Premier Toughens Stance On Currency, Blasts US Dollar Policy As "Protectionism"
• Rumor: Flood Of Idle Ships Coming Out Of Lay-Up Because They See A Sustained Global Rebound

Huw McKay of Australia’s Westpac Banking Corp said on Monday that other metals such as aluminum, copper, nickel, lead and zinc will rise faster than gold this year.

It’s because these productive commodities will benefit from higher demand caused by the rebound in global growth, while gold won’t.

Hellenic Shipping News:

“The gold price is not going to do as well in relation to other commodities as it did in 2009. “That doesn’t mean the gold price is going down, it is just that the relativities to other commodities which are much more leveraged to the industrial cycle are going to start catching up. “So gold is going to lose some relative ground … there is some modest downside risk in the short term and then a very slow grind higher.”

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• Credit Suisse: The Upcoming ETF Unwind Will Pummel Gold
• Metals Struggle As Gold, Silver Dip
• Rick Bookstaber: Hedge Funds Are Pumping The Gold Bubble And Luring Investors Off A Cliff

More U.S. mortgages are becoming delinquent than are being fixed, still, according to latest January data from Lender Processing Services.

Nearly 7.5 million home loans are either delinquent or in foreclosure and despite the approximately 2 million loan modifications in the U.S. from January 2009 to January 2010, the number of new delinquencies across the period was 25% higher than this.

Lender Processing Services:

While deterioration is slowing to a degree, the current to 30 day roll rate for January 2010 was still the highest of any prior comparable period with the age of loans going delinquent sitting at almost 4 years (up from slightly over 2 years in 2007).

Some might say that this could be the worst it gets, certainly the above chart looks to be peaking. Yet the rate of deterioration looks pretty bad when looked at in detail, as shown below. So it seems hard to be too optimistic here so far.

See the full report from LPS >

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See Also:

• S&P: The Alt-A Market Is Freaking Out About Default Again, As The Reset D-Day Approaches
• SENTIMENT BACKFLIP: S&P Now Saying The Euro Could Threaten The Dollar As Reserve Currency
• Moody’s: U.S. And U.K. Debt Scaremongers Will Be Proven Completely Wrong