Archive for March, 2011

Video: Libyan Jet Shot Down by Rebel Artillery, Brent Crude Oil Futures Unchanged

Saturday, March 19th, 2011

The video below (LA Blog Only) shows Rebel artillery taking out a Libyan fighter, after the ceasefire was announced and crude fell $2.00 on Friday.  It is not surprisingly that Qaddafi did not honor the ceasefire after killing thousands of his own people in the weeks prior to the incident.  According to UN Ambassador Susan Rice, “Qaddafi’s attacks on Benghazi will not be tolerated by the Western community.”

A warplane was today shot down outside the opposition stronghold of Benghazi, as international leaders including David Cameron gathered in Paris to make final preparations to impose a no-fly zone over Libya.

The jet was observed over the city for some time before reportedly going down in flames, amid the sound of artillery and gunfire.

[youtube]http://www.youtube.com/watch?v=XvwISqREkaU[/youtube]


But Libyan authorities insisted that their forces were holding to a ceasefire announced yesterday and repeated an invitation for international observers to enter the country today to monitor it.

Deputy foreign minister Khaled Kaim told BBC Radio 4′s Today programme: “The ceasefire is real, credible and solid. We are willing to receive observers as soon as possible, even today.”

Rebel sources claim that military assaults by forces loyal to Muammar Gaddafi on cities including Benghazi, Misrata and Ajdabiya continued even after the ceasefire announcement.

US ambassador to the UN Susan Rice last night said the Libyan leader was already in violation of the United Nations Security Council resolution 1973, passed on Thursday, which called for an immediate end to hostilities and authorised “all necessary measures” short of foreign occupation to protect civilians.

Ms Rice told CNN that Gaddafi would face “swift and sure consequences including military action” if he ignores demands for a ceasefire.

Mr Cameron was today meeting US Secretary of State Hillary Clinton, French President Nicolas Sarkozy, UN Secretary General Ban Ki-moon and representatives of Arab states in Paris for talks on the implementation of the resolution.

RAF fighter jets were deploying to the Mediterranean to join the international effort to protect Libya’s people from aerial assault by Gaddafi’s forces.

Neither the Ministry of Defence nor Downing Street would last night confirm whether any RAF planes had set off on their mission, codenamed Operation Ellamy, or where they would be based in the Mediterranean.

Mr Cameron yesterday said that Typhoons and Tornados, together with surveillance and air-to-air refuelling craft, would be ready to leave within hours.

France’s ambassador to the UN, Gerard Araud told the BBC that today’s summit would be “a good moment to send the last signal” to Gaddafi.

“I guess that after this summit, in the coming hours we will go to launch the military intervention,” said Mr Araud.

In a joint statement last night, Britain, the US and France – supported by a number of unnamed Arab states – spelt out exactly what was expected from the long-serving Libyan tyrant.

“All attacks against civilians must stop. Gaddafi must stop his troops from advancing on Benghazi, pull back his troops from Ajdabiya, Misrata and Zawiyah, and re-establish water, electricity and gas supplies to all areas,” said the statement.

“Humanitarian assistance must be allowed to reach the people of Libya.”

And the allies warned: “These terms are not negotiable. If Gaddafi does not comply with the resolution, the international community will impose consequences, and this resolution will be enforced through military action.”

Speaking in the White House after conferring with congressional leaders yesterday, US President Barack Obama stressed that Britain, France and the Arab League would take a “leadership role” in enforcing the no-fly zone and said that there would be no use of US ground troops in Libya.

While he did not say what forces the US would be committing to the operation, he suggested some American military assets would be deployed in an “enabling” role in support of the Europeans.
“We will provide the unique capabilities that we can bring to bear to stop the violence against civilians, including enabling our European allies and Arab partners to effectively enforce a no-fly zone,” he said.

Mr Cameron insisted Libya would not be “another Iraq” and there would be “no foreign occupation”.

“The central purpose of all this is clear: to end the violence, protect civilians and allow the people of Libya to determine their own future, free from the brutality inflicted by the Gaddafi regime,” he told the Scottish Conservative conference in Perth.

Britain was committing itself to military action “at a level that matches our resources, in alliance with other countries, with the full authority of the United Nations Security Council and in accordance with international law”.

“We will provide the unique capabilities that we can bring to bear to stop the violence against civilians, including enabling our European allies and Arab partners to effectively enforce a no-fly zone,” he said.

But Libyan authorities insisted that their forces were holding to a ceasefire announced yesterday and repeated an invitation for international observers to enter the country today to monitor it.

Deputy foreign minister Khaled Kaim told BBC Radio 4′s Today programme: “The ceasefire is real, credible and solid. We are willing to receive observers as soon as possible, even today.”

Rebel sources claim that military assaults by forces loyal to Muammar Gaddafi on cities including Benghazi, Misrata and Ajdabiya continued even after the ceasefire announcement.

US ambassador to the UN Susan Rice last night said the Libyan leader was already in violation of the United Nations Security Council resolution 1973, passed on Thursday, which called for an immediate end to hostilities and authorised “all necessary measures” short of foreign occupation to protect civilians.

Ms Rice told CNN that Gaddafi would face “swift and sure consequences including military action” if he ignores demands for a ceasefire.

Mr Cameron was today meeting US Secretary of State Hillary Clinton, French President Nicolas Sarkozy, UN Secretary General Ban Ki-moon and representatives of Arab states in Paris for talks on the implementation of the resolution.

RAF fighter jets were deploying to the Mediterranean to join the international effort to protect Libya’s people from aerial assault by Gaddafi’s forces.

Neither the Ministry of Defence nor Downing Street would last night confirm whether any RAF planes had set off on their mission, codenamed Operation Ellamy, or where they would be based in the Mediterranean.

Mr Cameron yesterday said that Typhoons and Tornados, together with surveillance and air-to-air refuelling craft, would be ready to leave within hours.

France’s ambassador to the UN, Gerard Araud told the BBC that today’s summit would be “a good moment to send the last signal” to Gaddafi.

“I guess that after this summit, in the coming hours we will go to launch the military intervention,” said Mr Araud.

In a joint statement last night, Britain, the US and France – supported by a number of unnamed Arab states – spelt out exactly what was expected from the long-serving Libyan tyrant.

“All attacks against civilians must stop. Gaddafi must stop his troops from advancing on Benghazi, pull back his troops from Ajdabiya, Misrata and Zawiyah, and re-establish water, electricity and gas supplies to all areas,” said the statement.

“Humanitarian assistance must be allowed to reach the people of Libya.”

And the allies warned: “These terms are not negotiable. If Gaddafi does not comply with the resolution, the international community will impose consequences, and this resolution will be enforced through military action.”

Speaking in the White House after conferring with congressional leaders yesterday, US President Barack Obama stressed that Britain, France and the Arab League would take a “leadership role” in enforcing the no-fly zone and said that there would be no use of US ground troops in Libya.

While he did not say what forces the US would be committing to the operation, he suggested some American military assets would be deployed in an “enabling” role in support of the Europeans.

Mr Cameron insisted Libya would not be “another Iraq” and there would be “no foreign occupation”.

“The central purpose of all this is clear: to end the violence, protect civilians and allow the people of Libya to determine their own future, free from the brutality inflicted by the Gaddafi regime,” he told the Scottish Conservative conference in Perth.

Britain was committing itself to military action “at a level that matches our resources, in alliance with other countries, with the full authority of the United Nations Security Council and in accordance with international law”.

Donald Trump Runs for President – Obama, “You’re Fired!”

Saturday, March 19th, 2011

Donald is more of a media mogul today than an astute businessman.  He has declared bankruptcy over three times, and like most failed businessmen is now trying to take a stab at the political world.  In 2012, Mr. Trump plans to run for the U.S. presidency.  It looks like ratings on Celebrity Apprentice are going to his head.  Governor Arnold made it in California, so what can keep Trump from the White House?  We all know that California is basically a bankrupt state; I wonder what the U.S. will potentially look like in 2016, by the end of Trump’s first term?

According to AP, “Donald Trump boots contestants off his TV show with a famous two-word catch phrase: “You’re fired.” He may want the chance to say the same to President Barack Obama.

The real estate tycoon with the comb-over hairdo and in-your-face attitude plans to decide by June whether to join the field of GOP contenders competing in 2012 to make the Democratic incumbent a one-term president.

Trump insists he’s serious. He rejects skeptics’ claims that he’s using the publicity to draw viewers to “Celebrity Apprentice,” the NBC reality program he co-produces and hosts.

“The ratings on the show are through the roof. I don’t need to boost the ratings,” Trump told The Associated Press in a recent interview. “But the country is doing so badly. I wish there was someone in the Republican field I thought would be incredible because that’s what we need right now.”

If he runs, Trump would follow a well-worn path of wealthy businessmen who have sought the White House before. Recent examples include Christian Broadcasting Network founder Pat Robertson in 1988, tech mogul Ross Perot in 1992 and publishing executive Steve Forbes in 1996.

Michael Bloomberg, the billionaire New York City mayor, also has hinted at national political ambitions even as he says he won’t enter the race.

Trump is prepared to spend as much as $600 million of his personal fortune on the race. “Part of the beauty of me is that I’m very rich,” he told ABC’s “Good Morning America.”

He flirted with presidential campaigns in 1988 and 2000, but never did run.

So what makes the 2012 race any different?

Several political operatives in Washington and elsewhere say privately that Trump has reached out to them repeatedly in recent weeks to learn about the mechanics of running a campaign, asking questions about how much money he would need, what type of an organization he would have to build — and whether he could win.

Publically, Trump has taken several steps to suggest he’s not joking.

He delivered a well-received speech to the Conservative Political Action Committee conference last month in Washington. He’s done interviews with reporters in Iowa, the first-in-the-nation caucus state, and is planning a trip in June to leadoff primary state New Hampshire for a presidential candidate’s rite of passage — appearing at a political breakfast series called Politics and Eggs. Last week, Michael Cohen, one of his top business advisers who is running a draft-Trump website, met with GOP activists in Iowa.

Some people close to Trump also say they think he just might take the plunge this time.

“I think he’s looking at it fairly seriously, and he has the money and liquidity to do it. He’d make a very strong candidate,” said Dick Morris, a Democrat-turned-Republican strategist whose father was Trump’s lawyer for many years. “He’s kind of sui generis, in his own category. He’s someone who’s accomplished things and won’t take any crap.”

Republican pollster John McLaughlin said the themes Trump is stressing would find a receptive audience among GOP primary voters.

“He has a message that’s resonating: American decline, China rising, and that America needs to turn things around,” McLaughlin said. “It’s not a politically correct message and it will appeal to Republicans … and could put him in major contention.”

Famously brash, Trump minces few words when talking about his beliefs:

–China “has taken all of our jobs.” The Organization of Petroleum Exporting Countries, the Mideast oil cartel, “is ripping us right and left. … You’re going to see $5 a gallon gas pretty soon.”

–Japan, recovering from an earthquake and tsunami and trying to avert a nuclear disaster, has “ripped us off for years” as a trading partner.

–Obama should be pressed to disclose the original birth certificate. “When you look at what happens today, you look at the misconduct, the fraud and forgeries, you really want to see proof,” Trump told the AP. Obama was born and grew up in Hawaii, and his 2008 campaign issued a certification of live birth — an official document from the state.

–The “birther” movement has legitimate concerns, Trump told ABC. “The reason I have a little doubt, just a little, is because he grew up and nobody knew him.”

Trump certainly has the strong opinions of a candidate.

But would the thrice-married billionaire known for his extravagant hotels and golf courses brave the mundane rituals of retail campaigning and the intense examination his business empire and personal wealth would draw?

“People thinking of running have to file a personal financial disclosure within 30 days of registering with the FEC. Does anyone really think that Donald Trump, under penalty of perjury, would file such a document?” campaign finance lawyer Jan Baran asked.

A candidacy also could present legal troubles given Trump’s web of business interests.

While Trump is not formally connected to Cohen’s draft effort, he allowed Cohen to use a Trump corporate jet for the trip. Trump booster and billionaire pharmaceutical executive Stewart Rahr paid for the trip, which led to a Federal Election Commission complaint from a supporter of Texas Republican Rep. Ron Paul.

Trump, 64, insists he’s prepared for the scrutiny.

“I always heard if you’re very, very successful, you can’t run for high political office — too many victories, fights and enemies,” Trump told the AP. “And yet that’s what this country needs. We can’t have any more of what we’re having.”

Trump’s past could dog him.

His divorce from first wife, Ivana, over his affair and subsequent marriage with actress Marla Maples made him a New York tabloid staple in the 1990s. He’s been married since 2005 to Melania Knauss, a former model from Slovenia who is 24 years his junior. His three marriages produced five children, and he has two grandchildren.

He is known for finding ways to inject himself into news of the day. Last summer, for example, he offered to buy the building set to be turned into an Islamic center near ground zero in New York City.

His politics are all over the map.

He mulled an independent White House bid in 2000. He’s made political contributions to many Democrats over the years, including New York Sens. Chuck Schumer and Kirsten Gillibrand and Senate Majority Leader Harry Reid of Nevada. Last year, Trump gave $50,000 to American Crossroads, a GOP-aligned group that spent millions to defeat Democrats nationwide.

The biggest question facing Trump may be not whether Republican voters will overlook all that. It may be whether he even wants to ask them to.”

Japanese Market Plummets 20% in 2 Days on Radiation Threat

Tuesday, March 15th, 2011

The Nikkei slid 14% last night (3/15/11), and recovered 3% to end net 11% down for the day after the Japanese government banned brokerages from selling.  This was after a 6% down day on 3/14 and a poor prior week.  Both the TOPIX and the Nikkei are now down more than 20% for the year on the risk that nuclear radiation will pose a threat to Tokyo.  Traders in Tokyo and Hong Kong said hedge fund selling of Nikkei futures, especially the Singapore-listed contracts , was behind the deepest drop in Japanese shares. Cash volumes on the Tokyo Stock Exchange hit a record for a second day running.

These equity sales were triggered by the explosion of a fourth nuclear reactor 130 miles away from the city, leaking lethal amounts of radiation.

An explosion and fire at the Fukushima Daiichi nuclear plant at 6: 10 am local time prompted officials within a 30-kilometer radius to stay indoors.  This was the message released (translated):

“Please do not go outside. Please stay indoors. Please close windows and make your homes airtight. Don’t turn on ventilators. Please hang your laundry indoors,” Chief Cabinet Secretary Edano said to the residents in the danger zone. “These are figures that potentially affect health. There is no mistake about that.”

According to the Associated Press, about 140,000 people were impacted by the warning.

Soon after the explosion, heightened levels of radiation were detected in Tokyo, 175 miles away.  Radiation levels in Tokyo were 23 times the normal level in the city.

According to ABC News, “The Japanese government formally has asked the U.S. Nuclear Regulatory Commission for help in stabilizing its troubled nuclear reactors in the wake of the country’s massive earthquake and tsunami.  The NRC sent two boiling water reactor experts to Japan as part of a team of aid workers to help in the recovery efforts.”

With this explosion at Fukushima, since the roof did not fall off the rod casing, the pressure is trapped within the vessel around the core, which will allow radi0active material to seep out.  The real risk here is the risk of a meltdown, which could affect the health of millions in Japan and nearby nations.  The fuel rods in all three of the reactors at the Fukushima plant appear to be melting.

The Japanese government reacted hours ago by adding $98 million in liquidity to the market, but this did not alleviate the stress in the market as U.S. 10 year yields jumped and DAX fell 4.5% in Europe. Hong Kong’s Hang Seng Index tumbled 2.9%, China’s Shanghai Composite lost 1.4%, Australia’s S&P/ASX 200 shed 2.1%, Taiwan’s Taiex skidded 3.4% and South Korea’s Kospi fell 2.4%. India’s Sensex shed 0.9% in afternoon trading.  Brent crude fell more than 2.2% to below $112, while U.S. crude dropped to almost $98 a barrel.

$364 billion in Japanese wealth was just evaporated in a matter of 4 hours.   Relying on the Japanese private insurance system is now out of the question.

The document below (LA Blog) shows an overview of the earthquake insurance system in Japan, which certainly cannot cover this mess.

NIRO Japan Eqarthquake

Icahn Capital Returning All Investor Funds

Friday, March 11th, 2011

Weeks after Shumway and Level Global returned capital to shareholders, Carl Icahn has decided to liquidate the outside investor interests in the hedge fund he started in 2004.  Icahn currently runs the $7 billion fund, of which $1.7 billion is outside capital.  He has asserted that he simply does not want to be responsible for losing other people’s funds if there is another financial crisis.  As the end of quantitative easing nears, Icahn could be dreading the worst.  Recently, Oaktree also returned about $3 billion from a large distressed fund and Baupost announced that it would be returning 5% of capital to investors.  On the other hand, Appaloosa just announced that it will be investing in other hedge fund strategies. Many managers are worried as the market has rallied 95% over the past two years, a remarkable rally.

Icahn’s fund rallied 33% in 2009 and 15% in 2010.  The fund was up 8.7% in the first two months of 2011.

According to Marketwatch, Carl Icahn is returning all outside money from his $7 billion hedge-fund firm because the activist investor doesn’t want to be responsible for losing other people’s money if there’s another financial crisis, according to a letter he sent to clients.

“While we are not forecasting renewed market dislocation, this possibility cannot be dismissed,” Icahn wrote in the letter, a copy of which was obtained by MarketWatch Tuesday.

Bargains for stock investors
Value-stock investors can find buying opportunities in any market climate. Michael Scanlon, co-manager of John Hancock Large Cap Equity Fund, talks about three stocks he sees as bargains: Microsoft, Sirius XM and Lazard.

“Given the rapid market run-up over the past 2 years and our ongoing concerns about the economic outlook, and recent political tensions in the Middle East, I do not wish to be responsible to limited partners through another possible market crisis,” he added.

“After careful consideration of all relevant factors, we have determined to return all fee paying capital to investors,” Icahn also said.

Appaloosa, Baupost

A strong rebound in equity and credit markets over the past two years has left fewer investment opportunities, encouraging several hedge-fund managers to return cash to outside investors.

David Tepper is planning to return money after his Appaloosa Management generated big gains in 2009 and 2010.

Reuters

Carl Icahn
“The point is we’re not an asset gatherer,” Tepper said in a MarketWatch interview last week. A final decision partly depends on what happens in the markets, he noted.

“The world could blow up and we won’t return money because there’ll be more opportunities,” Tepper said. Read about his tentative plans to back other hedge-fund managers.

Baupost Group, a top value investing hedge-fund firm run by Seth Klarman, said in November that it planned to give back about 5% of its capital to investors because rising markets have reduced the number of profitable opportunities. Read about Klarman’s decision here.

‘High note’

Icahn’s hedge funds returned 33.3% in 2009, before fees, and 15.2% in 2010. In the first two months of 2011, they were up 8.7%, he noted in his letter to investors.

“Based on the past 2 years and 2 months we are ending on what I consider to be a high note,” Icahn wrote.

Icahn has been an activist investor in his own right for many years. In 2004, he launched a hedge-fund business, just as activist hedge funds were hitting their stride.

A low point for Icahn’s hedge-fund foray came in 2008, when the funds lost money in the global financial crisis.

“While it may sound ‘corny’ to some, the losses that were incurred by investors in our funds in 2008 bothered me a great deal more, in many respects, than my own losses,” Icahn wrote. “Perhaps this is because over the years I have become inured to dealing with large ‘paper’ losses for myself.”

In the midst of the crisis, many hedge funds limited investor withdrawals or froze redemptions completely. Icahn didn’t do that and his investors pulled a lot of money out.

“Rather than liquidating positions that we believed in, we infused our own new capital into our funds which provided cash for withdrawing investors,” Icahn explained.

That meant Icahn’s own money and money from other partners of the firm made up a lot more of the capital in his hedge funds.

Fee-paying assets now total $1.76 billion, about a quarter of total assets of roughly $7 billion, Icahn noted.

Alistair Barr is a reporter for MarketWatch in San Francisco.

Please visit http://www.leverageacademy.com/curriculum_investing.php to sign up for our intensive investment banking, private equity, and sales & trading courses in Boston & New York.  Classes will also be held online, live through video feeds at these locations.  The discount code Merger34299 will be activated until April 15, 2011.  Questions?  Feel free to e-mail thomas.r[at]leverageacademy.com with your inquiries or call our corporate line.

Angry Bird Creator (Android) Raises $42mm in Seed Capital

Friday, March 11th, 2011

The latest phone app craze is the game “Angry Birds,” a popular pastime for android users across the globe.  It was developed by Finnish company, Rovio, and is played by over $40 million users per month. The game description on the Android app website reads: “Use the unique powers of the Angry Birds to destroy the greedy pigs’ fortresses! The survival of the Angry Birds is at stake. Dish out revenge on the greedy pigs who stole their eggs. Use the unique powers of each bird to destroy the pigs’ fortresses. Angry Birds features challenging physics-based game-play and hours of replay value. Each of the 225 levels requires logic, skill, and force to solve.”  Is this Company the next Zynga?  Who knows…I questioned Farmville when it came out as well.

Rovio, the tiny Finnish company behiind the iPhone, iPad and Android app Angry Birds, says it has raised $42 million from investors.

The game, consisting of angry birds shot at bewildered-looking pigs, is played by 40 million users every month, the Wall Street Journal said today. its fans, according to Daily Mail, include UK prime minister David Cameron, and Aussie leader Julia Gillard.

The funding round was co-led by venture capital firm Accel Partners, known for working with fast-growing companies such as Facebook. Also involved was the venture capital firm Atomico Ventures, created by Skype co-founder Niklas Zennstrom.

It is part of an “aggressive expansion mode” that Rovio’s co-founder and chief executive Mikael Hed said will make the company an “important entertainment media company for the future”.

Although he would not say what projects the company was working on, or how big of a share of the company was sold, Mr Hed reportedly told TV-industry website C21media.net that Rovio was looking at plans to make a broadcast cartoon version of Angry Birds.

“We will strengthen the position of Rovio and continue building our franchises in gaming, merchandising and broadcast media. Our next big thing is to execute superbly well on our strategy,” Mr Hed said in the article today.

Rovio has all ready been building on Angry Birds’ success with franchise products such as soft toys, which have sold more than 2 milion units.

Check out our intensive investment banking, private equity, and sales & trading courses! The discount code Merger34299 will be activated until April 15, 2011. Questions? Feel free to e-mail thomas.r[at]leverageacademy.com with your inquiries or call our corporate line.


HCA IPO Rises 4% on Day Dow Falls 228 Points

Friday, March 11th, 2011

HCA Holdings rose about 4.0% in its first day of trading.  This was very impressive, considering the Dow Jones Industrial Average fell 228 points in the same day (3/10/11).  The Dow fell in response to increasing jobless claims, a larger U.S. trade deficit, a larger Chinese trade deficit, and a lower GDP revision in Japan on 3/9/11.  Luckily, HCA was unaffected, which reflects both the strength of the company and its balance sheet.  HCA represents such a large share of the U.S. hospital industry, that institutional money managers probably could not refuse to purchase the security for their portfolios.  HCA’s public competitors include CYH – Community Health Systems and THC – Tenet Healthcare Corp.

According to Bloomberg, “HCA Holdings Inc., the largest publicly traded hospital chain in the U.S., rose 3.9 percent on its first day of trading after completing a record $3.79 billion, private equity-backed initial public offering.

Nashville, Tennessee-based HCA increased $1.15 to $31.15 at 1:16 p.m. in New York Stock Exchange composite trading, even as rising U.S. jobless claims drove the Dow Jones Industrial Index down 137 points. HCA’s offering sold more than 126 million shares at $30 each, the top of the proposed price range, the company said yesterday in a statement.

The IPO’s performance on a day when the market is falling reflects both the strength of HCA’s balance sheet and the momentum in favor of private equity-backed deals being brought to market, said Josef Schuster, founder of IPOX Schuster LLC in Chicago. There’s “plenty of liquidity available” for large U.S. deals like this one, he said.

“The deal underlines the level of confidence among large- cap managers about these type of private equity deals and the for-profit hospital space,” Schuster said in a telephone interview today. “Even with no dividend, investors like the level of cash with this company.”

For-profit hospitals will benefit as last year’s U.S. health overhaul forces consolidation and cost cutting that may leave non-profit competitors at a disadvantage, said Les Funtleyder, an analyst at Miller Tabak & Co. in New York. Investors are also expecting HCA to be added to stock-trading indexes and buying ahead of that, he said.

Blue-Chip Name

“People look at HCA as a blue-chip name in a space they want to get involved in,” said Mark Bronzo, who helps manage $25 billion at Security Global Investors in Irvington, New York, in a telephone interview today. “There just aren’t a lot of names to choose from there.”

For-profit hospital chains such as HCA depend more on commercial payers and less on government beneficiaries than do nonprofits, which have already seen their revenue reduced by government cutbacks, particularly in Medicaid.

HCA competitors among for-profit hospitals include Community Health Systems Inc. (CYH) in Franklin, Tennessee, and Tenet Healthcare Corp. (THC) in Dallas.

HCA’s offering exceeded the Feb. 10 initial stock sale by Houston-based energy-pipeline company Kinder Morgan Inc., which raised $3.3 billion. Private equity-backed IPOs in the U.S. have gotten a boost this year as the Standard & Poor’s 500 Index rallied to the highest level since June 2008, raising investors’ interest in companies acquired through debt-fueled takeovers.

‘Warmer Climate’

“We have a market that’s more willing to take on risk,” said Alan Gayle, senior investment strategist at RidgeWorth Capital Management in Richmond, Virginia, which oversees $52.5 billion. “This is a much better, much warmer climate for this type of offering.”

The underwriters may exercise an overallotment option to buy as many as 18.9 million additional shares within 30 days, the company said. HCA sold 87.7 million shares, while existing investors sold 38.5 million.

Companies owned by private equity investors have accounted for 80 percent of the funds raised in U.S. IPOs since the beginning of the year, and the shares have gained 10 percent on average through yesterday, compared with 4.8 percent for companies not owned by leveraged buyout firms, Bloomberg data show.

KKR and Bain

KKR & Co., Bain Capital LLC, Bank of America Corp. (BAC) and other owners invested about $5 billion in equity in the $33 billion takeover of HCA. Including debt, it was the largest leveraged buyout at the time.

In acquiring HCA, KKR and Bain chose a company with steady cash flow and a business that’s protected to a large extent from swings in the economy. Cash flow from operations was $3.16 billion in the year before the 2006 buyout, according to data compiled by Bloomberg. As of Dec. 31, 2010, that number was little changed at $3.09 billion.

The company offered as many as 124 million shares at $27 to $30 apiece, according to a filing with the U.S. Securities and Exchange Commission. Charlotte, North Carolina-based Bank of America and Citigroup Inc. and JPMorgan Chase & Co. of New York led HCA’s sale. HCA said it will use the proceeds to repay debt.”

The following links will take you to previous articles we wrote on HCA:

http://leverageacademy.com/blog/2010/04/11/hca-could-have-3-billion-ipo-4-years-after-kkr-bain-buyout/

http://leverageacademy.com/blog/2011/03/04/2310/ – KKR & Bain to IPO HCA at $30/share

Check out our intensive investment banking, private equity, and sales & trading courses! The discount code Merger34299 will be activated until April 15, 2011. Questions? Feel free to e-mail thomas.r[at]leverageacademy.com with your inquiries or call our corporate line.


Deutsche Bank Discriminates Against Indian Rainmaker

Thursday, March 10th, 2011

It is March 10, 2011, and today I read that a German bank is discriminating against a top banker, a “rainmaker,” because he is Indian.  Anshu Jain is a 48 year old head of investment banking at Deutsche Bank and has generated hundreds of millions of Euros in fees for the bank since 1995.

Anshu was born in 1963 in the humble town of Jaipur, India and later studied economics at Shri Ram College of Commerce at Delhi University.  He earned a bachelor’s degree with honors in 1983 and then pursued a Masters in Finance at UMASS Amherst.  He then started as an analyst in derivatives research at Kidder Peabody (now UBS), from 1985 to 1988.  Anshu joined Merrill lynch in 1989, where he started the first hedge fund coverage group.

By 1995, Anshu joined Deutsche’s markets business and stared a unit focusing on hedge funds and institutional derivatives, later becoming the head of fixed income sales and trading and global head of derivatives and emerging markets.  In 2002, he joined the Deutsche Bank Group Executive Committee and became the head of Global markets and joint head of the Corporate & Investment Bank in 2004.  Anshu’s segment of Deutsche Bank’s business generates 80% of the Company’s revenues, and he still may be passed over for CEO.

Mr. Jain has been in the media under speculation that he could succeed Josef Ackerman, but the Company’s Board of Directors won’t have it.  Key members of the bank’s supervisory board are not in favor of an Indian born banker at the helm.  They want to see the bank under more “traditional” leadership.  The bank also wants to diversify revenues away from the profitable investment banking segment.  Is this just an excuse to pass over Mr. Jain?

The next CEO of the 141 year old bank needs a 2/3 majority vote and approval by the 20 member advisory board.  The board has 10 German labor representatives and 10 shareholder representatives.

According to Reuters, “In a written statement Deutsche Bank said selecting the CEO is a task which the “supervisory board is pursuing in an orderly and professional manner. A decision will be taken when the time is right. There is no urgency, given that Dr. Ackermann’s contract runs for another two years.”

BARCLAYS SOLUTION?

Investors, though, are sure to worry that the move could alienate the hard-charging Jain. Supervisory board chairman Clemens Boersig knows this, according to two people familiar with the supervisory board’s thinking, and is working on ways to retain Jain and his colleague, Chief Risk officer Hugo Baenziger. In the end, however, “the supervisory board believes everybody is replaceable,” a member of the supervisory board said on condition of remaining anonymous. The board feels it is too dangerous for the bank to rely on any one person. “You cannot be held to ransom,” another person, who is familiar with the supervisory board’s thinking, said.

Jain, who would not comment on the issue of succession, could well stay. He has had a hand in hiring most of the key staff at the investment bank, and his considerable stake in Deutsche in the form of shares and options gives him a vested interest in the place. But if he does walk, the bank hopes one of his proteges will step up in the same way that Jain himself emerged after his mentor Edson Mitchell died in a plane crash in December 2000. Most of Deutsche’s top 15 investment bankers have been with the firm for more than a decade, something that should instill loyalty toward the firm and not only its leader, the person close to the supervisory board said.

In private conversations between supervisory board members and Deutsche Bank executives, there has been talk of a “Barclays” solution, named after a recent arrangement at British bank Barclays where John Varley, a Briton with connections to the political establishment, took the title of chief executive, while Robert Diamond, a powerful American investment banker, held de facto power in the background. Diamond finally took the reins from Varley two months ago.

“Perhaps one could whet Jain’s appetite for a similar solution,” one of the people close to the supervisory board said. “In the end we may have to divide up the role among different sets of shoulders,” a supervisory board member said adding. “But we’re not yet at that stage.”

A decision on succession won’t be made this year, another supervisory board member, who declined to be named, said.

The German establishment has long been skeptical of investment banking, a conviction that has hardened since the subprime debacle and the ensuing financial crisis. When the German government stepped in to bail out a raft of lenders including Hypo Real Estate, IKB and Commerzbank, many Germans pointed to “casino” style investment banks as the main culprits. Deutsche Bank, Germany‘s biggest, did not require a bailout itself, but had long been a lightning rod for criticism as Europe’s largest economy moved away from old-fashioned “Rhineland Capitalism,” in which a close-knit clique of bankers, politicians and company executives fostered business and dictated change in corporate Germany, toward a more cut-throat “Wall Street” model where shareholder return is the main driver of change.

A raft of supervisory board members believe Deutsche should focus solely on providing simple financial services to corporations and the “real economy,” rather than dabbling in more complex and higher margin financial products. “Wall Street style capitalism doesn’t have many friends on the supervisory board,” a person close to the supervisory board said.

The opposing camp believes that Deutsche should be a place where gifted and risk-hungry bankers can make outsized bets to generate profits for themselves and shareholders. That view is often associated with Jain, who oversees some of the world’s most talented bankers.

Perhaps crucially, members of the board’s four person chairman’s committee, which is formally tasked with drawing up the shortlist of CEO candidates, consists of only Germans: two labor representatives, chairman Boersig, and Tilman Todenhoefer, former deputy chairman of the board of management at Robert Bosch, an engineering company that specializes in high-tech automotive technologies and is known for its skeptical view of Wall Street-style capitalism.

Although not bestowed with formal powers to appoint the next leader, chief executive Ackermann and shareholder representatives on the supervisory board will have considerable influence over who makes it on to the shortlist, a person close to the supervisory board added.

A PILLAR OF THE GERMAN ESTABLISHMENT

For decades the system that helped steer Europe’s largest economy was controlled by Deutsche Bank and insurer Allianz. Working with large German corporations in which the two financial institutions held stakes, the network of bankers and executives formed what became known as “Deutschland AG”.

The system worked, in its own way. By holding large stakes in companies like Daimler-Benz, Siemens and Thyssen, Deutsche protected German industry from foreign takeovers and provided a system of mutual support in the event of large-scale bankruptcies. Market forces were an afterthought. When German Chancellor Helmut Schmidt decided Germany’s aerospace companies needed to consolidate to stay competitive, he simply talked to then Deutsche boss Alfred Herrhausen, who promptly nudged Daimler-Benz to absorb the big aerospace and defense companies and form German aerospace company DASA.

Deutsche Bank’s seats on corporate boards meant it could win mandates for bond and stock issuances and force changes when it saw the need. In one infamous incident, in 1987, Herrhausen dismissed Daimler-Benz chief Werner Breitschwerdt and installed another executive, Edzard Reuter in his place.

But by the 1990s, as German companies pushed more aggressively into global markets, they needed more sophisticated products even to meet simple needs such as currency or oil price hedging. When Ackermann joined Deutsche in 1996 he was tasked with transforming Germany’s corporate fixer into a “global champion”.

“Joe,” as Ackermann is known by colleagues, had worked at SKA — later to become Credit Suisse — and liked to use tactics and strategy he learned as a Swiss army officer. He decided to accelerate a selloff of industrial stakes — which made up half of Deutsche Bank’s market value as late as 1998, and were proving a drag on the company’s share price — and use the proceeds to build up its core business of banking. The last significant holding — a stake in Daimler — was sold in October 2009.

GLOBAL EXPANSION WEAKENS LOCAL TIES

When Ackerman became the first non-German in the top job in 2002, his academic background and gentle demeanor masked an ambition to shake up the lender. He embarked on a radical program to boost the profitability of bread-and-butter corporate loans, even if that meant alienating established customers.

In early 2003, Ackermann, together with investment banking co-chiefs Jain and Michael Cohrs, and Baenziger, then head of credit risk, introduced the “loan exposure management group” to ensure that each loan to be approved was priced in accordance with international market standards, rather than traditional German ones, and to guarantee that the “overall customer relationship” was generating a 25 percent pre-tax return on equity. The move helped lift Deutsche’s pre-tax return on equity to 14.7 percent today from just 1.1 percent back in 2002.

Competitors like Commerzbank also quietly introduced profitability targets for corporate loans. But it was — and still is — Deutsche that attracted the most criticism for abandoning the old system. Ackermann remains unrepentant. “As a bank with global operations that conducts more than 75 percent of its business outside of its home market, we have obligations to numerous stakeholders around the world,” he told shareholders at Deutsche Bank’s annual general meeting last May. “We have to carefully weigh up these obligations. Sometimes, in Germany, this can lead to criticism by the political community. We have to be able to take it.”

One of Deutsche’s key stakeholders is internal: golden boy Jain. A keen cricket fan, he built up what has become known within Deutsche as “Anshu’s Army” from the original core of mostly American bankers who defected from Merrill Lynch in 1995. The defectors had followed Edson Mitchell, a brash American who demanded fierce loyalty from those who served under him.

Mitchell’s team was instrumental in introducing a more aggressive Anglo-Saxon style of management which sacrificed long-term job security for eye-popping pay packages. Ackermann later cemented the new culture by transferring decision-making power away from the German “Vorstand”, or management board, to a new committee known as the Group Executive Committee, dominated by London-based investment bankers.

The power of the investment banking arm became clear in 2000, when its senior officials sabotaged a signed 30 billion euro merger deal with Deutsche Bank’s main rival, Dresdner Bank, because of overlaps in investment banking. Following a strategy meeting in Florida, Deutsche told Dresdner that of the 6,500 investment bankers at its investment banking unit Dresdner Kleinwort Wasserstein, Deutsche could only take 1,000, a person familiar with the conversation said.

Another clash between the Deutsche’s management board and the supervisory board came in February 2004, when it emerged that Ackermann and senior executives had met Citigroup’s chairman Sanford “Sandy” Weill, and chief executive Charles Price a few months earlier to discuss a takeover of Deutsche Bank. When Ackermann raised the possibility of a sale, members of the German-dominated supervisory board blocked the deal, arguing that Deutsche would be reduced to a local branch office of a New York bank.

As the investment banking arm has grown more powerful, Deutsche’s center of gravity has shifted to London, where key staff including Baenziger and Jain spend most of their time, and where the company now employs more than 8,000 staff. Their London base helps Jain and Baenziger remain close to key clients. But has it also hampered their ability to build up a network of political and corporate contacts in Germany.

CASINO BANKING?

A sign of potential trouble emerged two years ago, when the supervisory board chose to dodge the issue of succession by extending Ackermann’s contract until 2013. Some inside the bank blame that in part on Ackermann, who has not successfully nurtured a clear successor.

Tensions between the supervisory board and Deutsche’s management have grown since 2008, when the global financial system went into meltdown. Deutsche was under extreme pressure to help rescue failing rivals. In mid-March 2008, while Ackermann was in New York, U.S. treasury secretary Henry “Hank” Paulson called him and tried to get Deutsche to buy Bear Stearns, a person familiar with the matter said. Later Deutsche was pushed to buy parts of Lehman. In both instances, Ackermann declined. Deutsche also turned down offers to buy parts of UBS in the second half of 2008, two senior executives familiar with the lender’s thinking said. The Swiss bank was looking for fresh leadership and mulling a sale of its investment bank, but Deutsche preferred its wealth management assets, these people familiar with the talks said. Deutsche walked away when it couldn’t get sufficient detail on balance sheet risks. Regulatory approval may also have been a hurdle, a senior Deutsche banker said.

Only months earlier the bank had been giving its traders a remarkable degree of leeway to place large directional bets, a strategy that had proved extremely successful, current and former employees of the global markets division said, also declining to be named. Proprietary traders — small teams that bet with a bank’s own money — made up to 15 percent of revenues at the sales and trading division between 2002-2007, a senior banker familiar with Deutsche’s strategy told Reuters.

At the sales and trading division, managers such as Boaz Weinstein, a former head of credit trading North America and Europe, and Greg Lippmann, global head of asset-backed securities trading and syndicate and collateralized debt obligations (CDOs), were particularly aggressive. Lippmann made a $1 billion bet against the subprime market, a gamble that started to come good in the second half of 2008 when global markets fell. Weinstein — a chess fanatic known for taking teams of traders to Vegas for poker tournaments — also had large positions running into the billions, a person familiar with his business said.

Single bets could be very large. One left the bank with 600 million euros of rates exposure, a former colleague who worked at Deutsche’s credit trading division at the time told Reuters. This sort of extreme trading led The Economist to describe Deutsche as a “giant hedge fund” run by an “Indian bond junkie” in 2004, a view some could argue was not justified by the investment bank’s relatively consistent performance over the past decade.

Things were less rosy at the proprietary and credit trading divisions during the financial crisis: they fueled Deutsche’s 4.8 billion euro loss in the fourth quarter of 2008 and prompted its management board to abandon proprietary trading the same year — months before regulators discussed a move in that direction.

Despite shedding almost a third of its risky assets between 2009 and 2010, Jain has managed to retain his top staff and win market share in key areas of investment banking. Research firm Greenwich Associates last year ranked Deutsche Bank No. 1 in U.S. bond trading. Profits from the corporate and investment bank have jumped from almost 4 billion euros in 2000, to a near record level of 6 billion euros in 2010, a testament to Jain’s ability to deliver profits in extremely challenging market conditions, analysts and rivals say.

GERMAN REQUIRED

Ackermann’s recent language indicates how difficult it has become to defend risk-taking. In countless speeches to the German business community and politicians, he has said the country “needs to decide whether it wants a globally successful investment bank or not.”

But the son of a doctor from the village of Mels in Switzerland has also tried to ease tensions between business and politics. “Especially here in Germany where those responsible in business and politics live and work further apart geographically than in other countries, we must make a greater effort to listen to one another,” he told the company’s annual general meeting in Frankfurt in May. “Verbal attacks on so-called speculators and political rhetoric about a ‘war’ between governments and markets is not conducive to such a dialogue,” he said.

Bundesbank president Axel Weber’s name has surfaced as a potential candidate though critics on the supervisory board highlight his lack of experience running a commercial bank, as well as his recent clash with Merkel as weak points for such a candidacy.

Helmut Hipper, a fund manager at Frankfurt-based Union investment, thinks Deutsche should not leave it until the last minute to reveal who will take over: “For an institution like Deutsche it is important to announce a successor. Designating a candidate will provide security and predictability.”

Also in the race with an outside chance are internal candidates such as Deutsche’s Germany chief Juergen Fitschen, retail chief Rainer Neske or Chief Financial Officer Stefan Krause.

Whoever does get the job will need to be able to mediate between Berlin and Germany’s financial players. That became clear during the credit crisis. In September 2008, Ackermann was involved in rescue talks for German lenders IKB and Hypo Real Estate. Discussions involved the then finance minister Peer Steinbrueck, regulator Jochen Sanio and representatives from the German banks.

“You need to speak German, period,” a senior German financial figure who was familiar with these talks said. Ackermann himself, asked if the next chief of Deutsche Bank needs to speak German, said, “That’s for the supervisory board to decide.” He had found speaking German “helped.”

Although Jain has been with the Frankfurt-based bank since 1995, he has never spoken a word of German in public and relies on a translation service during press conferences. Late last year when Jain made an appearance at a banking conference in Frankfurt he was asked “Sprechen Sie Deutsch?” a question designed to find out whether he had been brushing up his German. Jain dodged the answer with a smile and said, “I’m not going to go there,” before walking away.”

Check out our intensive investment banking, private equity, and sales & trading courses!  The discount code Merger34299 will work until April 2011.


Saudi Day of Rage – Fri., March 11th

Thursday, March 10th, 2011

We have seen riots in Tunisia, Algeria, Egypt, Libya, Bahrain…and now Saudi Arabia?  All of these countries have fallen victim to internal unrest because of both their lack of basic freedoms, and wealth disparity between the rich and the poor.  All of the countries above are known to be wealthy oil nations, but more than 20% of the youth in each are unemployed.  Grain prices in these areas have more than tripled, and food inflation is causing unrest.  Shiites in Saudi Arabia have also claimed discrimination, as almost all senior businessmen and officials are Sunni Muslims, despite qualifications and experience.  This has helped drive Brent crude prices to as high as $118, crippling both emerging and developing economies.  Some are calling for a “day of rage” on March 11th, while others claim it will be delayed…

According to CNN, protesters in Saudi Arabia called for a “day of rage” Friday, though longtime observers of the kingdom remained skeptical that it would make a major impact. ”I don’t think any protests that happen tomorrow will be destabilizing to the country,” said Christopher Boucek, a Saudi expert with the Carnegie Endowment for International Peace.

Prominent blogger Ahmed Al-Omran said the Saudi government remains unresponsive to the streets. ”I don’t think they’re really in touch with the people,” he said. Still, he said, Friday’s planned protests could set the tone in Saudi Arabia for the next few months.

The Saudi government prohibits all kinds of public demonstrations. But more than 100 Shiite demonstrators defied that ban and rallied Wednesday in the eastern city of Qatif, calling on authorities to release Shiite prisoners. A sprinkling of women were among the protesters, said Ibrahim Al-Mugaiteeb, president of the Human Rights First Society. Police kept a watchful eye but did not intervene, he said. Earlier, Saudi authorities had authorized its security forces to “take all measures against anyone who tries to break the law and cause disorder.”

Last week, about 24 protesters were detained in Qatif as they denounced “the prolonged detention” of nine Shiite prisoners held without trial for more than 14 years, Amnesty International said. Police kicked and used batons to beat three protesters in what was an apparent peaceful demonstration, Amnesty said in a statement. ”The Saudi Arabian authorities have a duty to ensure freedom of assembly and are obliged under international law to allow peaceful protests to take place,” said Philip Luther, deputy director of the human rights group’s Middle East and North Africa program. ”They must act immediately to end this outrageous restriction on the right to legitimate protest.” There was no immediate reaction from the Saudi government to the Amnesty statement.

The protests in the majority Sunni kingdom have followed similar demands across the Arab world for more freedom and democracy. Rights activists have been advocating the right to protest for months in the kingdom but they have been denied permission to assemble. Lately, grass-roots ferment mirroring the unrest across the Middle East and North Africa has emerged, with a Facebook group calling for days of rage and Shiites taking to the streets. Activists have been calling for reform and the release of people jailed without charge or trial.

Amnesty said the recent detentions came a week after a prominent Shiite cleric, Sheikh Tawfiq Jaber Ibrahim al-’Amr was arrested after a sermon calling for reforms in Saudi Arabia. He was released without charge Sunday. Most of the protesters are believed to be held in a police station in Dhahran, an eastern city. Among them are activists who have protested arrests and discrimination against the minority Shiites.

“The Saudi authorities must investigate reports of beatings of protesters by security forces. They should also ensure that those detained are either charged with recognizable offences and tried fairly or released,” Luther said. ”While in detention they must be protected from torture and other ill-treatment and given regular access to their family, lawyers and medical staff.”

The Shiite activists in “prolonged detention” have been held in connection with the deadly 1996 bombing of a U.S. military complex in Khobar in which 20 people were killed and hundreds injured. ”According to reports, they were interrogated, tortured and denied access to lawyers together with the opportunity to challenge the legality of their detention,” Amnesty said.

Check out our intensive investment banking, private equity, and sales & trading courses!  The discount code Merger34299 will work until April 2011. Feel free to e-mail thomas.r[at]leverageacademy.com with questions.


Understanding The Basic Elements of Forex Trading

Thursday, March 10th, 2011

Understanding The Basic Elements of Forex Trading

The foreign exchange market is finally beginning to garner mainstream attention.  The Bank of International Settlements estimates that the average daily volume in the fx market is around $4 trillion, which makes it by far the largest financial marketplace in the world.  Surprisingly, however, many novice investors and traders have never even heard of this market.

Until the late 1990’s, the only players allowed to execute trades in the foreign exchange market were investment banks, hedge funds, and very wealthy private investors.  Since the minimum contract size was generally $1,000,000, smaller traders were effectively denied entrance into the market.

In the late 90’s, however, this all changed.  The advance of the internet and technology led several online forex brokers to open shop and begin catering to smaller investors and traders.  This led to the birth of the retail foreign exchange market.  In this article, we are going to discuss three key elements to forex trading:  Leverage, Margin, and Equity.

Leverage

The idea of leverage in the fx market has been under intense debate over the last several years.  Since the market is decentralized and worldwide, regulation was largely absent from the fx market until recently.  In 2010, the National Futures Association instituted some major changes, one of them being a cap on leverage at 50:1.  This means that an fx trader in the United States can trade on leverage at a ratio of 50:1.  Thus, if a trader has $1,000 in his account, then he is able to leverage that $1,000 into $50,000 and trade much larger positions in EUR USD.  Until the National Futures Association passed this regulation, some brokers were offering traders up to 400:1 leverage, which means that with a $1,000 account, traders were able to control a $400,000 position in the market. Note that leverage is a two-edged sword. It will increase both losses and profits.

Margin

Margin is the life of a trader.  If a trader does not have enough margin, then he cannot open a trade.  Furthermore, if a trader has an open position moving against him, he may eventually not have enough money to act as margin, which means his account would suffer a “margin call.”

Margin is the amount of money required to open a leveraged position.  For example, if Broker ABC offers 50:1 leverage, and Bob the Forex Trader wants to open a position of $100,000, then Bob has to put up $2,000 of margin.  If Bob’s trade begins to move against him to the point where his account equity becomes less than $2,000, Bob will suffer a “margin call,” which basically means that his broker will call for more margin if Bob wants to keep the position open.

Equity

Everyone knows that one of the leading causes of business failure is a lack of initial capital, and trading is no different.  If a trader opens an account with a few thousand bucks and trades heavily leveraged positions, his chances of success are nominal.

Equity is essential to trading success.  The question many new traders have is, how much money do I need to open an account?  Well, the answer to that question is different for everyone, and it largely depends on what your goals are.  If you simply want to get some trading experience, but still have a full-time job, then a person can open an account with a few thousand bucks.  However, if you are trying to generate enough capital gains to sustain a living, then the initial account balance should be much, much higher.

Leverage, Margin, and Account Equity are three essential aspects of fx trading that every trader must be familiar with.

Check out our intensive investment banking, private equity, and sales & trading courses!  The discount code Merger34299 will be activated until April 15, 2011. Feel free to e-mail thomas.r[at]leverageacademy.com with questions.


Oil Should Spike Higher Following Saudi Riots and Nigerian Elections in April – Report Attached

Thursday, March 10th, 2011

The following special report on oil (LA Blog Only, leverageacademy.com/blog) discusses the oil market, providing reasons to be bullish  on the commodity given unrest in the Middle East, Nigerian elections in April, and rising domestic consumption in oil producing countries, including Venezuela, Nigeria, and Iran.  According to the article, the rise of oil prices could easily cause the next recession.   In 2010, soft commodities outperformed energy, but that will certainly change given the political headwinds abroad and continued monetary easing in the developed world.  Therefore, the Bernanke “Put,” combined with political unrest will be to blame for continued sharp price increases in the energy commodity sector.

Emerging market demand, especially in China, which now consumes nearly 10mm barrels of oil per day, will also be driving the demand side of the equation.  Money supply in China was also up 19.7% in 2010, because of the rapid credit growth the country has experienced over the past 2 years.

On the supply side, Middle Eastern youth continue to riot, causing political unrest across the globe.  In Egypt, Libya, Morocco, Saudi Arabia, Tunisia, and Bahrain, youth unemployment is over 20%, which is a severe concern, given the oil wealth of these nations.  The Iran crisis could also re-emerge as the country continues to develop nuclear weapons.  As Iran is mostly Shiite, it poses a great threat to its Sunni neighbors, including Saudi Arabia.  Major risks in the area include that the Straights of Hormuz and Malacca could be blocked in the Middle East if major riots break out.  These two passages account for 32 million barrels of crude transport per day.  The Straight of Hormuz alone carries 33% of oil transport by sea.  Furthermore, one should question how much Saudi Arabia can increase supply, as the country overstated its oil reserves by nearly 300 billion gallons in 2010.  Even if it does increase supply, how will this supply be transported to the West if passages are blocked?

There has not been one year in recent history where Nigerian elections have not posed a threat to the country’s oil supply.  Elections are often bloody, and there is no reason for the upcoming 2011 elections being held in April to be different.

To make things worse, the IEA increased its oil demand forecast by 1.6%.

On December 6th, Brent futures were traded in backwardation for the first time in two years, which means that futures with shorter maturities are more expensive than those with longer maturities (similar to an inverse yield curve).  Backwardation occurs in tight markets, whereas contango occurs when there is oversupply.

What will be the effect of these changes in the oil supply/demand equation?  Well, an increase in oil price tends to affect the economy with a time lag of at least 4-6 months.  An increase an oil price of $10 would cause GDP to fall by 25 bps and S&P earnings to fall by $3.00.

According to the IEA, 4.1% of GDP was spent on oil consumption in 2010.  A sustained price above $100 would mean that the percentage would increase to 5%.  Oil at $120 would mean a percentage increase to 6%, which would be devastating.

Special Report Oil March 2011

Check out our intensive investment banking, private equity, and sales & trading courses!  The discount code Merger34299 will be activated until April 15, 2011. Questions? Feel free to e-mail thomas.r[at]leverageacademy.com with your inquiries or call our corporate line.