Category Archives: Spread Trades

Merger Creates Huge US Ethanol Maker

Late Wednesday afternoon, Pacific Ethanol Inc. (NASDAQ: PEIX) announced that it had entered a definitive merger agreement with a Midwest-based producer of ethanol, Aventine Renewable Energy Holdings, in an all-stock deal valued at approximately $190 million. The combination will more than double Pacific Ethanol’s production capacity and create the fifth-largest ethanol maker in the United States.

Aventine, like Pacific Ethanol, was a high-flying, NYSE-traded alternative energy company in the middle of the last decade. In 2009, Aventine filed for bankruptcy protection and began trading in the over-the-counter market. The company emerged from bankruptcy in 2010.

Thin margins due to the falling price of crude have stressed ethanol makers in the second half of 2014, which is probably what made this deal attractive to both parties. Pacific Ethanol got a good price and Aventine survived.

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GM Exodus Puts Australian Car Industry Step Closer to Extinction

According to Bloomberg,

Australia’s century-old automotive industry is stepping closer to extinction after General Motors Co. (GM) joined Ford Motor Co. (F) in deciding to stop making cars in the country.

Seven months after Ford announced it would pull out, GM said yesterday its Holden unit will cease production in 2017. That prompted the last holdout, Toyota Motor Corp. (7203), to say the  move will place “unprecedented pressure” on parts makers and  questioned the merits of remaining in the country. A stronger local currency and falling import tariffs have  driven down  sales of Australian-made cars by almost half since 2007.

The hollowing out of the nation’s auto industry has implications beyond the three companies as carmakers have about 150 suppliers that employ an estimated 42,000 people. The departure of Australia’s biggest carmaker also adds pressure on Prime Minister Tony Abbott, who’s facing rising unemployment and deteriorating consumer sentiment three months after winning an election by pledging to restore confidence in the economy.

“The Australian dollar has claimed an iconic brand of cars,” said Martin Whetton, an interest-rate strategist at Nomura Holdings Inc. in Sydney. “The announcement will be a major blow to confidence in the run-up to Christmas, as job losses will exacerbate an already heightened sense of insecurity.”

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Microsoft, Yahoo Upgrades Shows Snowden Won, Obama Failed

According to Bloomberg,

Former U.S. National Security Agency contractor Edward Snowden succeeded where President Barack Obama couldn’t — getting Microsoft Corp., Google Inc. and Yahoo! Inc. to upgrade computer security against hackers.

The companies are adopting harder-to-crack code to protect their networks and data, after years of largely rebuffing calls from the White House and privacy advocates to improve security. The new measures come after documents from Snowden revealed how U.S. spy programs gain access to the companies’ customer data — sometimes with their knowledge, sometimes without — and that’s threatening profits at home and abroad.

“These companies actively fought against numerous mechanisms that would have mandated far more secure data,” Sascha Meinrath, director of the Open Technology Institute at the New America Foundation in Washington, said in a phone interview. “Now they are paying the literal price.”

While Google, Yahoo, Microsoft and Facebook Inc. provide data to the government under court orders, they are trying to prevent the NSA from gaining unauthorized access to information flowing between computer servers by using encryption. That scrambles data using a mathematical formula that can be decoded only with a special digital key.

The NSA has tapped fiber-optic cables abroad to siphon data from Google and Yahoo, circumvented or cracked encryption, and covertly introduced weaknesses and back doors into coding, according to reports in the Washington Post, the New York Times and the U.K.’s Guardian newspaper based on Snowden documents. He is now in Russia under temporary asylum.

‘Government Snooping’

Microsoft is the latest company considering measures to ensure the protection of customer data and strengthen security “against snooping by governments,” according to Brad Smith, general counsel for the Redmond, Washington-based company.

Microsoft’s networks and services were allegedly hacked by the NSA, the Washington Post reported Nov. 26. Documents disclosed by Snowden suggest, without proving, that the NSA targeted Microsoft’s Hotmail and Windows Live Messenger services under a program called MUSCULAR, the newspaper said.

“These allegations are very disturbing,” Smith said in an e-mailed statement. “If they are true these actions amount to hacking and seizure of private data and in our view are a breach of the protection guaranteed by the Fourth Amendment to the Constitution.”

Smith didn’t provide details about what the company is considering doing.

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S&P 500 Posts for Seventh Weekly Gain as Drugmakers Rally

According to Bloomberg,

U.S. stocks rose, capping a seventh week of gains for the Standard & Poor’s 500 Index, after the pace of hiring increased and drugmakers rallied on favorable decisions by European regulators.

Stanley Druckenmiller on Strategy, Shorting IBM

Health-care stocks in the S&P 500 jumped 1.2 percent as a group, led by Biogen Idec Inc. and Gilead Sciences Inc. Time Warner Cable Inc. surged 10 percent on renewed takeover speculation. United Continental Holdings Inc. (UAL) climbed 3.9 percent after billionaire David Tepper said his “big play in the market” is airlines. International Business Machines Corp. slid 1.5 percent after billionaire Stan Druckenmiller said he’s shorting the shares.

The S&P 500 climbed 0.5 percent to a record 1,804.76 at 4 p.m. in New York. The advance pushed the U.S. equity benchmark to a 27 percent gain for the year, poised to be the biggest annual increase since 1998. The Dow Jones Industrial Average (INDU) rose 54.78 points, or 0.3 percent, to 16,064.77. About 5.6 billion shares changed hands in the U.S., 8 percent below the three-month average.

“I don’t see any reason why the market shouldn’t go up,” Karyn Cavanaugh, a vice president and market strategist at ING U.S. Investment Management in New York, said in a phone interview. Her firm oversees $196 billion. “There’s not really any bad news. We have a little bit of a pullback and then people jump in and say, ’Hey, I want a piece of this.’”

The Dow advanced 0.6 percent this week, finishing its seventh straight weekly gain, the longest streak since January 2011. The S&P 500 rose 0.4 percent during the past five days.

Job Openings

Appaloosa's Tepper Says Stock Markets Not in Bubble

David Tepper, the hedge-fund manager who runs Appaloosa Management LP, said stock markets are not inflated as economies in the U.S., Europe and China are on “firm ground.” He said that while he remains bullish on U.S. stocks, markets may fall 5 percent to 10 percent when the Fed curbs its stimulus program.

“I know there’s talk about bubbles, this is not one,” Tepper said in an interview with Bloomberg Television’s Stephanie Ruhle at the Robin Hood Investors Conference in New York yesterday.

Job openings in the U.S. climbed to a five-year high in September, indicating employers were confident about demand before the federal government shutdown. The Labor Department report showed the number of people hired increased to 4.59 million in September, the most since August 2008, from 4.56 million. The hiring rate rose to 3.4 percent from 3.3 percent in August.

The S&P 500 rallied yesterday after three days of losses as data showed weekly jobless claims fell to the lowest level since September and a confidence survey indicated American consumers became less pessimistic this month.

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Gold Analysts Most Bearish Since June on Fed Taper: Commodities

According to Bloomberg,

Gold analysts are the most bearish since June as the Federal Reserve signaled it may ease stimulus “in coming months” as the economy expands, cooling demand for an investment haven.

Nineteen analysts surveyed by Bloomberg News expect prices to drop next week, nine are bullish and three neutral, the largest proportion of bears since June 21. Gold fell to a four-month low and the dollar strengthened after Fed minutes released Nov. 20 showed U.S. policy makers expected enough improvement in labor markets to warrant slower debt purchases.

The metal is heading for its first annual drop in 13 years as some investors lost faith in gold as a store of value, fueled by concern that reductions in $85 billion of monthly Fed bond buying will ease the risk of accelerating inflation. U.S. unemployment-benefit applications fell to the lowest in two months and October retail sales jumped the most since July, the government said this week. Standard Bank Group Ltd. advised selling gold on rallies amid weaker physical demand in Asia.

“For safe-haven assets, there’s no point because the economy is recovering,” said Andrey Kryuchenkov, a commodity strategist in London at VTB Capital, a unit of Russia’s second-largest lender. “The dollar should remain strong, and that’s what should cap any upside in gold anyway. Consumer demand is slowing down. It will recover, but not at the moment.”

Gold’s Decline

Gold Ingot (Bloomberg)

Gold Ingot (Bloomberg)

Bullion slumped 26 percent this year to $1,244.64 an ounce in London, reaching $1,236.88 yesterday, the lowest since July 9. The Standard & Poor’s GSCI gauge of 24 commodities dropped 3.8 percent since the end of December, while the MSCI All-Country World Index of equities gained 17 percent. The Bloomberg U.S. Treasury Bond Index lost 2.6 percent.

Investors sold 768.9 metric tons from gold-backed exchange-traded products this year through Nov. 20, erasing $67.1 billion from the value of the funds and pushing holdings to the lowest since April 2010, data compiled by Bloomberg show. This year’s sales almost match total purchases in the previous three years.

Billionaire hedge-fund manager John Paulson, the largest holder in the SPDR Gold Trust, the world’s biggest ETP, told clients Nov. 20 that he wouldn’t personally invest more money in his gold fund because it isn’t clear when inflation will accelerate, according to a person familiar with the matter.

Paulson has lost 63 percent this year in the PFR Gold Fund, said the person, who was briefed on the returns and asked not to be identified because the information is private. The fund, which has shrunk to $370 million, with most of that John Paulson’s own money, fell 1.2 percent in October, the person said.

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U.S. Stocks Fall as Best Buy Drops Before Bernanke Speech

According to Bloomberg,

U.S. stocks fell after disappointing forecasts from Best Buy (BBY) Co. and Campbell Soup Co. while investors awaited a speech from Federal Reserve Chairman Ben S. Bernanke to gauge the prospect of continued stimulus.

Best Buy slid 11 percent, the most in almost a year, after saying it will work to keep pace with competitors’ discounts in the holiday season, hurting fourth-quarter profitability. Campbell Soup fell 6.2 percent after cutting its profit forecast. Home Depot Inc. (HD) gained 0.9 percent after boosting its earnings forecast as rising home prices spurred homeowners to splurge on renovations. Tyson Foods Inc. climbed 4.6 percent for a sixth day of gains as sales beat analysts’ expectations.

The Standard & Poor’s 500 Index fell 0.2 percent to 1,787.87 at 4 p.m. in New York. Yesterday, the gauge briefly surpassed 1,800 (SPX) for the first time. The Dow Jones Industrial Average lost 8.99 points, or less than 0.1 percent, to 15,967.03. About 5.8 billion shares changed hands on U.S. exchanges, about 3 percent below the three-month average.

“The economy is not doing badly, and the Fed is remaining very aggressive and very friendly toward the market,” Bruce Bittles, chief investment strategist at RW Baird & Co., said by phone from Sarasota, Florida. His firm oversees $100 billion. “We’ve had a big run. My suspicion is that the market might go sideways now for a little while before we encounter a year-end rally in December.”

The S&P 500 is up 25 percent this year, putting it on track for the biggest annual gain since 2003, as the Fed kept its monetary stimulus to spur economic growth and corporate earnings topped analysts’ estimates.

‘More Hopeful’

BlackRock's Fink on Equities, Regulatory Oversight

BlackRock’s Fink on Equities, Regulatory Oversight

Bernanke is scheduled to speak in Washington today after Fed Bank of New York President William Dudley said yesterday that while he’s “more hopeful” the U.S. economy is strengthening, it’s not enough to warrant stimulus cuts yet.

Chicago Fed President Charles Evans, among the most vocal advocates for additional easing from the Fed, said today that while the central bank is going to deliver highly accommodative policy until it can get the economy where it wants, the biggest challenge is credibility.

The Organization for Economic Cooperation and Development cut global growth forecasts for this year and next as emerging-market economies including India and Brazil cool. The world economy may expand 2.7 percent this year and 3.6 percent next year, instead of the 3.1 percent and 4 percent predicted in May, the Paris-based OECD said in a report today. Growth in the U.S. will be 1.7 percent and 2.9 percent this year and next, broadly similar to the outlook in May.

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