Monday, December 14, 2009

M&A Lives, FDIC Dying, Obama Busts "Fat Cats" and More!

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5 Min Forecast

December 14, 2009

  • One deal makes for several forecasts… how you can profit from the Exxon/XTO buyout
  • Abu Dhabi bails out busted Dubai… Rob Parenteau on the next nations at risk of default
  • President Obama curses "fat cat bankers"… the very ones that paid for his campaign
  • How the FDIC is breaking its own law… and why taxpayers might have to pay for it

Plenty of drama in the banking business today (as usual), but first… something that will likely be lots more profitable for investors in 2010:

Exxon Mobil agreed to buy XTO Energy this morning for $31 billion in stock. Exxon, the world's biggest oil company, paid a 25% premium for XTO, a big player in domestic energy, especially the shale oil and shale gas that has garnered so much attention lately. Exxon certainly isn't hiding what it's going after… in a report last week, the company forecast energy demand to rise 35% by 2030, with over half of that new demand met by natural gas.

"If there is one prediction I feel confident about for 2010," writes Chris Mayer, "it's that the M&A market is going to get going again. Companies have lots of cash -- more, as a percentage of assets, than at any time since 1960. There are fewer opportunities to invest that cash and fewer opportunities to grow, so you buy competitors. Also, the M&A market has been dead since the Lehman bankruptcy, and it's not a market that stays dull for long.

"I've also specifically pointed out that the energy sector was ripe for such deal making because the cost of buying proven oil and gas reserves in the stock market is cheaper than creating them from scratch by drilling and exploring for oil and gas.

"Today, we got a big signal that the feeding frenzy is on. Exxon Mobil is taking out XTO, America's largest natural gas producer, for a 25% premium. It's a stock deal, but it illustrates the ideas above.

"For investors, it means we could see more of these deals, which could provide nice payoffs. (I have a bunch in MSS -- we got one already last week where MSS readers could've made as much as 350% on ROY, which rose 50% in one day.) Second, I think it's also bullish for natural gas. Exxon is no dummy. They see the carbon emission stuff coming down the pike, and cheap clean-burning natural gas is going to be good asset to own."

We think Chris is no dummy, either. Last week, his Special Situations readers got a fat payday -- up to 350% gains -- when one of their mining companies got a similar buyout offer. There are many more worthy buyout targets in this portfolio… you should really check it out.

The XOM/XTO deal gave markets a nice boost at the open. Major indexes turned positive in the pre-market and opened to small gains.

Oil and gas are rising too. Light sweet crude is looking to end its nine-day losing streak today, up about a quarter, to $70 and change. Natural gas just got a big vote of confidence from Exxon Mobil, so it's no surprise to see it up. It's also been pretty damn cold in the U.S. lately, especially in some of the big gas-consuming regions in the East. Thus, nat gas is up to around $5.30 today, its highest level in 10 months.

The dollar and gold can finally enjoy a day out of the spotlight. At 76.4, the dollar index is just below its two-month high from last week. And gold is back above $1,120 an ounce, $10 shy of the one-month low it set Friday.

As we forecast two weeks ago, Abu Dhabi came to Dubai's rescue today. Nakheel PJSC, a real estate company owned by the Dubai government, had a couple billion in bonds due this morning. Abu Dhabi swooped in with the cash, and then some, to prevent default. Dubai has cost Abu Dhabi $10 billion so far in this crisis… we suspect it'll cost more still.

But with Dubai having the implicit backing of its rich brother to the south, "The spotlight has shifted to Greece and Ireland," notes Rob Parenteau of The Richebacher Letter. "Global bond investors are demanding higher yields over German bonds until credible plans for reining in outsized fiscal deficits have been delivered and adequately executed. Since Greece's fiscal deficit as a share of GDP is not that much larger than the U.K. or U.S. deficits, professional investors are also probing these governments' bond markets as possible next fault lines.

"If we follow the financial balance approach that Dr. Kurt Richebacher employed, then we have to anticipate Greece and Ireland will face challenges on two fronts.

"First, the strength of the euro is making it more difficult for nations in the eurozone to run trade surpluses. Indeed, on a trailing 12-month basis, the improvement in the U.S. trade balance has been a detriment to Europe… What was once a $150 billion leakage of income out of the United States into Europe is now closer to a $70 billion flow. Those are only the direct effects -- no doubt they are multiplied through foreign economies, as businesses in the tradable goods sector have faced weaker revenues and weaker profits…

"Second, in the case of the so-called peripheral states in the eurozone (Spain, Italy, Ireland, Greece and Portugal), we must add the increasing pressures to rein in fiscal deficits on top of the weaker trade balances. Unlike the United States and the United Kingdom, none of these states has a sovereign currency. They cannot use currency depreciation to regain global market share. None of these states has an independent monetary policy. They are beholden to the decisions made at the European Central Bank, which will reflect the political compromises judged adequate for the region as a whole…

"We see a recipe for increasing social conflict and political instability to arise in the peripheral states of the eurozone. This is not something we state lightly, but the only other way we can see out of the quandary is if global growth takes off in early 2010 and lifts some of the pressure."

"I did not run for office to be helping a bunch of fat cat bankers on Wall Street," President Obama told 60 Minutes last night, capturing mainstream headlines left and right. Never mind that those fat cats pay their taxes like everyone else (more than everyone else in many situations). But we'd like to make one distinction: Our President might wag his finger at Wall Street when the cameras are on, but it's never stopped him from bailing them out… or cashing their checks. According to, the "Securities & Investment, Miscellaneous Finance and Commercial Banking" sectors donated over $26 million to his presidential campaign.

But in all fairness to Mr. Obama, his biggest campaign financiers were of a far more noble and respected profession than bankers: "Lawyers and Legal Firms" gave him over $45 million for the election, more than any other sector.

The "fat cats" at Citigroup announced today they will soon pay back $20 billion of borrowed taxpayer money.

Three more banks failed late Friday, bringing the '09 total to 133 and taking a $126 million bite out of the FDIC's bankrupt deposit insurance fund.

"The FDIC must follow the "Prompt Corrective Action" law that was passed in the wake of the 1980s S&L crisis in order to minimize the Deposit Insurance Fund's losses," Dan Amoss suggests. "But the FDIC is not following this law. As we see in every politically influenced organization, it's putting off the pain as long as possible, and ultimately transferring the pain to parties of an ever-waning voice: taxpayers that stand behind the FDIC Deposit Insurance Fund. Instead of imposing credit losses onto the appropriate parties -- bank shareholders and debt holders -- the FDIC is gambling that enough banks will be able to 'earn their way out' of their insolvent positions.

"This issue of regulatory forbearance is important for REITs because we know that many regional banks face credit risk on commercial real estate loans that amount to multiples of their equity capital. The sooner these institutions are resolved by the FDIC, the less likely the FDIC will ultimately have to be bailed out by taxpayers (and depositors, who will suffer from lower rates as banks pass on the cost of rising FDIC insurance premiums).

"By rolling over the maturing bubble-vintage loans made to underwater, but cash-flowing properties, the banking system, if allowed to by its regulators, would establish a temporary price floor under commercial property. Price floors lead to unhealthy supply gluts. This supply glut will prevent the very recovery in property values that underwater lenders and borrowers are hoping for. 'Extend and pretend' is a strategy that sows the seeds for its own demise."

Last, we're not saying it's right or wrong, sincere or overblown, or that this is really about Obama or Bush or whoever… but just that it's happening:

That's a tent city just outside Colorado Springs.

"The number of government employees earning six-figure salaries doesn't surprise me." A reader writes. "I live in Stamford, Conn. Every year, the local newspaper publishes the names and salaries of the 100 highest-earning city employees. You'd be shocked to see how many policemen and firemen earn $150,000-plus with overtime -- not to mention the generous pensions and benefits that accrue with these salaries."

"What shocks my conscience," another reader writes, "is not the six-figure salaries going to executive-type jobs in the federal sector, but the excessive millions being paid to top CEOs in all areas of private businesses. Not to mention the many in this group who have been caught with hands in the till. You might try to be somewhat more 'fair and balanced.'

The 5: The percentage of six-figure salaries in government has risen from 14% to 19% since the start of the recession. If you can find another sector with this kind of compensation growth during such a lousy employment environment -- especially one that considers itself a "public service" -- honestly, we'd love to write about it.

And we'll leave "fair and balanced" to Fox.

"I love reading your newsletter," a reader writes from Scotland, "but the whining London banker complaining about the super tax really got my goat. I would like to point out a few facts to these people:

1) Without the taxpayer there would be no banking system as we know it.
2) The 'profits' they generated were earned by lending our money back to us via the purchase of government bonds, not lending to business, and by shafting taxpayers on everything from loans to overdraft charges. Any fool without a banking background could have achieved these profits with government money at nearly 0%.
3) The extra tax will be used to keep the infrastructure of the country together -- you know, the country where these bankers live and 'earn' their bonus.
4) As a majority shareholder, I say it is time to break up these 'private clubs' and the rules applicable to their bonuses and to stop the practice of fattening the figures by moving liabilities in and out of balance sheets amongst themselves. The system is rotten and deserves to be overhauled.

"You may disagree with how governments spend or in the U.K. waste money, but taxes are required to keep the country going. Perhaps he would rather that the poverty-stricken 80% WHO PAY THE MOST TAX should pay more so that the bankers can trouser their bonuses.

"Finally, where are these geniuses going to relocate to? They have damaged or closed most of the banks in the Western world, and I doubt many of them speak Mandarin, Portuguese, German, Russian, Urdu or Japanese."

The 5: Thanks for writing. In short, we don't see a point in taking 50% of the bonus pool from any sector to support a government that has proven its ineptitude… over and over and over again. Bill Bonner summed up our defense of this sorry lot in Friday's Daily Reckoning:

"How does this work again? The bankers lent too much money to too many people who couldn't pay it back, so you insist that they offer more credit, right?

"Everyone is mad at bankers. Not us, of course. We pet underdogs. We champion lost causes. We stand by die-hards.

"As far as we're concerned, the bankers stole their money fair and square."

Be well,

Ian Mathias
The 5 Min. Forecast

P.S. Here's the brutal truth: The Agora Financial Reserve is the best product we offer, period. It is also the best value of all our products, period. To say otherwise would simply be a lie. If this interests you, details are here.

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