CRB Commodities Index vs. Brazilian Equities

This picture is one that we often discuss in our morning research meetings. The correlation of the CRB Commodities Index to Brazilian stocks.

For the last month, we've been talking about the breakdown in the Brazilian Bovespa as a leading indicator for inflation. After this week's stiff -7.4% correction in the CRB Commodities Index, this positive correlation proved powerful once again. Brazilian stocks sniffed this correction in inflation readings out well in advance of the crowd.

CRB Commodities Index vs. Brazilian Equities

Cuban Sugar: Will Obama Coat The US With Supply?

Joe Conason' editorial in this Saturday's Chicago Sun-Times laid out a theory gaining traction among U.S. liberals - that lifting the Cuban embargo can help open the floodgates for cheap sugar-based biofuels to alleviate skyrocketing energy costs.

I have zero interest in arguing about ethanol science or having a political debate over lifting trade sanctions against Cuba. What I am interested in is what any thaw in U.S./Cuban relations might mean for global sugar production and how that would impact the markets, which for the past year, have been driven by the sprint between surging Brazilian supply and demand.

It's important to remember that Cuba, today an importer of refined sugar, was the world largest exporter and third largest producer as recently as 20 years ago. Back then, total production on the island averaged as much as 7 million metric tons a year as opposed to this year's official (and probably overstated) 1.5 million. Decades with no reinvestment in infrastructure following the collapse of the Soviet Union have left the island's farms and refineries in shambles.

Since assuming power, Raul Castro has been slowly implementing small economic and social reforms leading many to conclude that he may be more open minded towards overtures from the U.S. than his older brother was. Meanwhile, Barack Obama openly indicated his willingness to consider steps towards normalizing relations with Cuba in recent years (although he has been much more tight lipped on the subject since assuming the role of candidate). Obama's real chance at victory in November, coupled with a new flexibility among Cuba's leaders make the end of nearly 50 years of trade sanctions seem like a possibility for the first time.

Regardless of whether Conason is right about the impact of sugar on global oil dependency, the re-emergence of Cuban Sugar exports to the U.S. would certainly recast the entire world market for Sugar.

Andrew Barber
Research Edge's Sugar Chart

US Market Performance: Week Ended July 18, 2008...

Index Performance:

Week Ended 7/18/08:
Dow Jones +3.6%, SP500 +1.7%, Nasdaq +2.00%, Russell2000 +2.7%

2008 Year To Date:
Dow Jones (13.3%), SP500 (14.1%), Nasdaq (13.9%), Russell2000 (9.5%)

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Restaurant Transactions Over the past three years

How many companies on this list will need to raise equity or file bankruptcy in the next 12-18 months?
  • Some PE firms may have bitten off to much!

Where Did All the Free Access To Capital Go?

There was a great article yesterday by Bloomberg’s Jason Kelly and Pierre Paulden titled, “Blackstone Risks Hedge Funds’ Return as LBO Lending Evaporates.”

I have no edge on this deal in particular (or I wouldn’t be able to write about it!), but it appears that The Weather Channel LBO that we wrote about in a prior posting isn’t the lock that the buying consortium originally thought it to be. We’re not talking about a club deal with marginal players here either – General Electric, Bain Capital, and Blackstone.

Suffice to say, my long held view that Access to Capital Tightening as Cost of Capital increases continues to have far reaching effects. While some believe that this is a short term funding issue, and others brush it off as a “confidence thing”, I think this is structural and will have longer term effects than many would like to accept.

Per the article, the facts continue to play on our side of the thesis. “The $153.9 billion of announced buyouts this year is down more than 70 percent from the same point in 2007, according to data compiled by Bloomberg.”

What a difference a year has made to those depending on levered long investment models.

Eye On Leadership

One word for Merrill's new CEO, John Thain: Accountability.

Part of being a good leader is accepting that ultimate responsibility for the organization rests on your shoulders. John Thain dropped that ball yesterday when he distanced himself from his own firm in the midst of the Merrill Lynch conference call.

Goldman Sachs analyst William Tanona posed the following question:

William Tanona
“I guess in terms of you guys were obviously a big underwriter in both cash and synthetic CDOs, what did you invest the underlying cash collateral in the synthetic CDOs and what type of instruments and how are those reported on the financial statements?”

John Thain
“First of all I take exception to the you guys comment. I did not create any of these CDOs...”

Here is the rest of the quote for context

“……..I think we -it’s probably specific on the deals because whenever there’s one of the synthetics there will be a whole series of requirements as to what the collateral has to look like--in general, when you create a synthetic it will have a whole bunch of criteria about what the collateral has to look like, it had to satisfy a whole series of rating agency test, it had all kinds of diversification requirements in it and I think it’s probably not going to be easy or probably not very useful to answer your question kind of generically because my guess is that it’ll be totally dependent on each individual security. So I think that each one would be different.”

Thain is a rich man. He is also another one of these vaunted Goldman Sachs men who have been given the benefit of the doubt in managing one of America’s most important financial institutions.

Thain has an opportunity to do things differently. I sincerely hope that yesterday’s conference call is does not manifest into a “Trend” and that accountability is part of his new leadership plan.

  • Andrew Barber
Merrill's New CEO - John Thain

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