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Blue Horseshoe didn't buck up for the Weather Channel...

The announcement of a $3.5 Billion NBC Universal/Bain/Blackstone purchase of the Weather Channel today represents several elements of the monumental shift that has occurred in the capital markets this year.

First -Pricing: In January when Landmark Communications initially began shopping the deal, the asking price was $5B, by accepting 30% less than their original number, Landmark has made the same hard acknowledgement that hundreds of Manhattan apartment owners have had to in recent weeks - that no rich US market centric Wall Street buyers are likely to chase bids, anytime soon.

Second -Financing: Three of the four primary financing sources are related companies to the Buyers - Blackstone's GSO, Bain's Sankaty, and GE commercial finance, with deal advisor Deutsche Bank as the fourth. In this market the only people doing deals are those that can finance them themselves. They also set the price.

Third -Attrition: This acquisition is an acknowledgement that NBC Weather Plus has been a bust and that the network has failed in its attempt to organically grow a viable competitor to the Weather Channel. This is the start of an important cycle where large companies that tried to grow for growth's sake (at the top of an economic cycle) are being sent packing. Misallocating capital gets people fired.

If you subscribe to the thesis that the current market shares many similarities with the early 1970's then it might be interesting to recall that the only guys that were able to get deals done in the mid and late 70's were junk bond traders - not bankers or entrepreneurial visionaries. The next couple years may prove to be a less friendly environment than many younger Wall Street professionals fully anticipate.

Andrew Barber
Director

CRUISE DEMOGRAPHICS NOT SMOOTH SAILING

The "buy the demographics" bull thesis on cruiselines is not looking as good these days. Per Cruise Lines International, the average age of cruiser is 49 years old. An analysis of population trends in the core cruiser age group of 47-51 shows decelerating growth from 2007-2014, troughing at negative growth beginning in 2012. On a positive note, contribution from the older set should grow at a healthy clip as population trends are very favorable for ages north of 50.

Is Mao's "Bird's Nest" For A Canary?

BBC news is reporting that Chairman Mao's portrait has been replaced by an image of the Olympic stadium on the new ten Yuan bills.

Although the revolutionary icon becomes less relevant with each passing year, it's interesting to note that the bird's nest is the Symbol that was chosen to replace him.

There is obviously a huge amount of national pride and effort invested in preparing for the Olympics (from shutting down steel mills and factories, to cleaning the air, to reports of hundreds of babies named after the games). This underscores the potential fallout of any unexpected negative event. No one will know why China's stock market has been cut in half in the last 9 months, until we see the Olympic story unfold.

From a Global Macro Risk Management perspective, managing proactively toward possible tail risk is what we have a responsibility to do. We continue to have an eye on developing Chinese trends ahead of the critical August event.

Andrew Barber
Director
Research Edge, LLC

(LINK) http://news.bbc.co.uk/2/hi/asia-pacific/7492896.stm

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DEMOGRAPHIC CHECK: BETTER FOR THE REGIONALS

An age group analysis of the core casino customer yields a generally favorable intermediate outlook for gaming companies. Demographics certainly appear more favorable than other consumer sectors that skew to a younger age group such as casual dining (see Penney) and apparel (see McGough). Per the Harrah's Annual Gaming Survey, overall casino participation peaks in the 51-56 year old age group. However, Las Vegas actually trends younger than the regional gaming markets. This works to the advantage of the regionals as the 56-60 year old group will grow faster than the 46-50 year old segment over the next few years.
  • In looking at the core regional age group of 51-60, population growth accelerates in 2009-2011 and stays positive until 2018. These demographics should be viewed positively at least over the next several years although population growth in this segment will trail the 1 period. The outlook for the core Las Vegas gaming group customer is not as rosy. Growth in population here began decelerating in 2007 and that trend will continue, culminating in negative growth beginning in 2013.
  • I've written about the attractive regional free cash yields, the statistical significance of rising Las Vegas airfares in boosting regional gaming revenues, and the looming margin pressure in Las Vegas from falling room rates. Demographics appear to be one more reason to favor the regional over Las Vegas.

Aluminum Prices Hit A New 4 Month High...

Since mid May, when the devastating earthquake hit producers in the central Chinese province of Sichuan, aluminum has extended its impressive run up (yes, this is inflationary).

In London this morning aluminum prices shot up to 4 month highs. See the charts below.

Here is a quick recap of some of the major data points that have been keeping this market on its toes:

May 11 - Sohar Aluminum's Oman smelter goes operational
May 12 - Sichuan earthquake
May 15 - Rusal announces construction of new 750,000T smelter in Taishet is underway
May 26 - Rusal announces expansion of Irkutsk smelter -170,000T annual increase operational in Q4
June 4 - Varanus Fire
June 19 - China reduces oil subsidies, $50T cost increase projected
June 26 - Chalco indicates problems with Saudi smelter project
June 26 - Rio Tinto postpones new $2.7B smelter start in South Africa indefinitely due to Eskom's inability to support a new facility (Rio's 3 existing smelters there running at diminished levels with blackout interruptions)
June 27 - Tat and Nalco announce plans to build a new $3B plant in South Africa
July 7 - Chalco announces lowered output at two Shanxi facilities due to electricity shortfalls
July 7 - NDRC approves new Yunnan Aluminum facility in Wenshan with annual capacity of 800,000T and expansion to add 700,000T at Chalco's existing Zhengzhou smelter.

Andrew Barber
Director
Research Edge, LLC

Watch What They Do, Not What They Say...

South Korea's new President (Bak) didn't waste any time and fired his minister of finance last night, alongside 3 other cabinet ministers. Why? The -10% decline in the Korean Won...

In conjunction with the change of their lineup, the South Koreans issued explicit rhetoric that the government felt the need to take "stern action" to strengthen their currency.

I'm assuming Hank Paulson took note.
KM

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