Author: Vincent Fernando, CFA

Something clicked many years back when Singapore suddenly realized that the key to being a world city isn’t just about business… it is about having fun too.

Since then the city has been transforming itself with a focus on both ease of doing business plus quality of life for those who do business.

Thus both prostitution and gambling are legal in by-the-book Singapore. And brand new integrated resorts (casinos) are coming online.

Already, tourist arrivals are spiking, so get ready for the economic boom:

Credit Suisse:

The transformation of Singapore into a cosmopolitan, global city has just reached a major milestone with the opening of the first of Singapore’s two casinos on 14 February. The casino at Resorts World Sentosa (RWS) welcomed 130,000 visitors in its first week of operations. Even before the casino threw open its doors, visitor arrivals in Singapore had grown by 17.6% to reach 908,000 in the first month of 2010, the highest number of visitor arrivals recorded for the island city in the month of January, while the average hotel occupancy rate posted a 13.9 percentage point increase year on year (YoY) to 80.4%. We expect the imminent opening of the Universal Studio theme park, the main attraction at RWS, and the launch of Marina Bay Sands in April, will go a long way in helping to meet the Singapore Tourism Board’s (STB) forecast of 11.5– 12.5 million tourist arrivals for 2010 and 17 million by 2015. To hit the 17 million target by 2015, tourist arrivals would have to grow at a CAGR of 7% between 2011 and 2015, an ambitious but not-impossible target, compared to the historical CAGR of 4.7% between 1980 and 2009 (Figure 1).

Moreover, tourists aren’t the only people more likely to come now. Business people will increasingly consider Singapore as a place to work, given the great weather, work opportunities, easy regulations and now the fun weekends of gambling and ribaldry.

Singapore accounted for more than 25% of meetings held on the Asian continent in 2008, and won the title of Top International Meeting City in the Union of International Associations’ (UIA) Global Rankings for two straight years – 2007 and 2008. The STB aims to generate over SGD 10.5 bn from MICE (meetings, incentive tours, conventions and exhibitions) by 2015, up from SGD 5 bn in 2007, contributing some 40% of Singapore’s total tourism receipts.

Property owners must be pretty happy about Singapore’s transformation:

(Via Credit Suisse, Singapore: Domestic sectors catch the tailwind from new integrated resorts, 12 March 2010)

(Tip via N)

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Excitement is high in the Chinese real estate market and even Chinese insurance companies are jumping into the fray.

Most notably, China Life (LFC US, 2628 HK), China’s largest insurance company by assets, is actively looking for architects:

Caing:

China Life Properties, with registered capital at 254.4 billion yuan, has 2.9 billion yuan of total assets. Besides insurance, its scope of business includes restaurants, building management and real estate agencies.

Despite the regulatory limbo, insurance companies become increasingly involved in the real estate sector since the new insurance law was effective in October 2009. China Life expanded its holdings of Sino-Ocean Land Company Ltd. to 24.08 percent, becoming the largest shareholder of the property developer in January of this year.

China Life isn’t alone:

Wu Yan, chairman of PICC, one of the largest insurance companies in China, told the media in early March during the annual legislative session that his company will invest in the real estate sector once detailed rules made by the insurance regulator are issued. Informed sources told Caixin that PICC is also preparing for the creation of a real estate property company. In February 2010, China Pacific Insurance and Taikang Life jointly bid for a large land plot in Shanghai, drawing attention to the involvement of insurers in the real property business.

And you thought you owned an insurance company when you bought the stock… this is an example of how most analyst research reports are total BS when it comes to companies like this. Detailed financial models are useless when a company can change its industry exposure on a dime.

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• China’s Housing Bubble Is Inflating Faster Than Ever
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Germany is now the third largest weapons-selling nation in the world, after the U.S. and Russia.

Here’s the export boom you might have missed:

Der Spiegel:

According to the 2009 annual report put together by the Stockholm International Peace Research Institute (SIPRI), Germany’s weapons exports have more than doubled in the last five years, to 11 percent of the global total. German submarines and tanks, the report makes clear, have gained a number of loyal customers.

Guess who has been blowing money on toys lately:

Most of German arms sales go to NATO member states, with Turkey and Greece counting among the country’s best customers along with South Africa. Still, Roth said that there is a “powder keg situation” in some regions in the world and the export of weapons to such areas could result in dangerous arms races.

Many Germans are shocked by the rapid growth in military exports, with some wondering whether the nation should be selling such things. Yet to us the greater question is: Why does Greece need submarines? If there’s a war, Europe can surely bail the country out.

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Cheap U.S. shale gas production could deliver massive spill-over benefits to the U.S. chemicals industry.

As Citi analyst P.J. Juvekar highlights, cheap natural gas will make U.S. chemicals companies cost competitive against just about everyone except the Middle East.

P.J. Juvekar @ Citi:

If shale gas proves its promise, the US chemical industry stands to benefit tremendously through: 1). low secular natural gas prices for energy consumption, and 2). low NGL prices relative to naphtha for ethylene feedstocks.

…

Given ample US natural gas reserves and associated NGL production, the current US cost advantage over Europe and Asia is likely to continue. Some European and Asian (Japanese & Korean) capacity would have to be shuttered to adjust for the new Middle East ethylene capacity. The US has been more proactive in capacity rationalization, shutting down ~1.6mmt in 2009 (5.5% of capacity). As a result, US ethylene derivative exports should continue.

…

Given new shale gas innovations and ample US natural gas supply, chemical assets in the US could maintain a production advantage relative to other parts of the world (excluding the ME). Historically the oil-to-gas ratio has been 9x, but has increased to approximately 17x currently due to lower natural gas prices and a recovery in oil prices (see Figure 1) [not shown]. The direct result of the high oil-to-gas ratio is that lighter feedstocks (ethane, propane, and butane) become advantaged. In 2009, the oil-to-gas ratio increased to well above the historical average. As a result, the US chemical industry used an even larger percentage of lighter feedstocks.

Simply put, U.S. producers can use a higher than average proportion of natural gas-derived feedstocks, such as ethane, when producing the chemical ethylene.

There are many ethylene crackers in the US that are “flexi crackers” and can switch their feedstocks based on relative input prices.

This leads to lower production costs vs. other parts of the world where such low cost feedstock isn’t available.

US ethane-based producers remain the most advantaged producers outside the Middle East due to low cost natural gas (see Figure 12).

It’s another example of how efficiency gains can ripple through an economy:

(Via Citi, Shale Gas – A Game Changer for the Chemical Industry?, P.J. Juvekar, 11 March 2010)

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Credit Suisse Standard Securities precious metals analyst David Davis has issued a warning for gold.

Basically, the market experienced a surge of gold ETF buying over the last year, which became the key driver for gold prices. It wasn’t like this back in the pre-ETF days mind you, this is how the gold market has changed dramatically into something far more speculative than it used to be.

Now, should ETF demand dry up, the market’s supply/demand could be horrendously skewed, according to Mr. Davis:

MiningMX:

[Emphasis added]

“We believe that a major problem is looming on the horizon should investment demand remain muted and/or should investment demand start falling away over the next three to five months,” he said in a research note.

“We believe that the possible muted and/or decline in year-on-year investment demand for ETFs will play a pre-eminent role as a swing factor in our supply-and-demand balance for 2010.”

ETF demand was 85% higher for 2009 compared to the previous year at nearly 600 tonnes, driven largely by a strong performance in the first quarter. This demand dropped off sharply by the fourth quarter of the year, coming in two thirds lower compared to the same time a year earlier.

“We are of the view that there is increasing downward risk to the gold price should the pace of sales increase. We estimate that institutional divestment alone has the potential to release between 200 tonnes and 300 tonnes in 2010,” Davis said.

Read more here >

And don’t miss: 20 reasons the economy is dying and never going to recover >

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The chart from Goldman below shows just how weak the Eurozone’s recovery has been so far vs. past economic recoveries. It also highlights Goldman’s forecast that the zone’s economic growth will be rather pitiful going forward.

Nick Kojucharov @ Goldman:

Recent GDP data has confirmed that the Euro-zone recovery, which commenced in the latter half of 2009, has been characterised by a clear divergence in the components of aggregate demand, with domestic demand continuing to languish and net exports stepping in as the main driver of growth. Previous Euro-zone recoveries have featured similar compositional asymmetries, but the outsized declines in private consumption and investment this time around place the current recovery on track to become one of the slowest on record. Barring a rapid acceleration in domestic demand over the next two quarters, external demand will have to continue singlehandedly to sustain the recovery, with only limited support from the inventory cycle. Overall, recent developments are broadly consistent with our existing Euro-zone forecast, and translate into rather muted sequential GDP growth of 0.3%-0.4%qoq throughout 2010.

It looks as if just one slip could make this the worst recovery ever:

The chart above is probably worth taping to your desk, to keep things in perspective. There is little room for error right now given the weak growth prospects already expected as it stands.

(Via Goldman Sachs, European Weekly Analyst, Nick Kojucharov, 11 March 2010)

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Here’s another sign of capacity tightening in the U.S. — According to Rig Zone there are 456 rigs drilling for oil in the U.S. right now, which is more than any time in over a decade. Natural gas drilling activity is up as well, but by less than oil is.

Rig Zone:

The optimistic outlook we highlighted late-last year may have actually been on the conservative side given the pace of the recovery so far. In fact, over the last four months, the U.S. land rig count has increased more rapidly on an absolute basis than in any other four-month period over the past decade. Furthermore, the rig count has only posted weekly decreases four times in the 37 weeks since bottoming. Frankly, the magnitude of the improvement in recent months has exceeded the expectations of many industry observers, ourselves included.

Overall, the number of active rigs has soared 60% from its 2009 bottom, and now stands at 1,313.

Rig Zone believes this surge in activity could moderate, according to their Q1 2010 report, but the massive rebound since mid 2009 probably means that a solid recovery is underway in this space.

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There’s some risk of exaggeration in the following, but it is probably right to a large degree:

Phil Flynn of The Energy Market Report believes that the oil market’s dynamics were forever changed the day the Fed bought $300 billion of U.S. bonds. It caused a monumental rally:

Rig Zone:

It has almost been a year since the day the oil market was changed forever. After collapsing in a heap of deflationary despair, oil was saved by what could only be described as a historic government intervention. It was the day that the US Federal Reserve changed the world by printing more money and therefore, essentially putting a floor under the price of oil.

…

And to this day this government intervention and newly created Fed policy inspired the largest move in crude oil prices there has ever been even when considering geo-political events or even data on supply and demand.

Here’s the specific event in question:

On March 18, 2009 the Federal Open Market committee changed the world when they said that, “the Committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months.” In other words, in one sentence the Federal Reserve basically created $300 billion dollars out of thin air.

Which created a huge oil-hiking carry trade overnight:

This instant money creation had a major impact on oil and how it was viewed. Instead of looking to supply and demand we now had to revalue oil on the perceived value of global current exchange rate. The Fed move helped create what was called the mother of all carry trades. Traders taking advantage of the Fed’s negative interest rates sold dollars and borrowed money to essentially buy oil. The price of oil is now a creation of the Fed.

The author actually believes there is a downturn ahead for oil prices nonetheless, as the U.S. eases back economic stimulus. There’s a floor for oil due to the Fed according to Mr. Flynn, but it is down at $40. So trade it from there, he says. It makes a lot of sense if you simply see it as a medium term effect on the oil market, rather than ‘forever’.

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The world’s excess capacity is tightening…

• The U.S. export revival is threatened by shortage of available ships. (WSJ)

• The International Energy Agency just hiked its oil demand forecasts. (Market Watch)

Note OPEC just increased its oil forecast as well recently, so this is not just the perspective of one organization.

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See Also:

• OPEC Forced To Hike Oil Demand Forecasts Due To A Global Recovery Surprise
• How China And Oil Exporters Will Gouge The World With Current Account Surpluses Over The Next Five Years
• Oil Is A Snooze, The Energy World Is Totally Obsessed With Natural Gas