In talks to merge international ice cream operations with Pai's R&R in €3B deal
*GE SAYS ON TRACK CLOSING $100B GE CAPITAL ASSET SALES IN 2015
*GE ON TRACK FOR INDUSTRIAL OPER EPS YEAR GOAL
*GE ON TRACK FOR GOAL GIVEN IN 2Q EARNINGS
*GE 'ON TRACK' TO REACH YEAR INDUSTRIAL OPERATING EPS GUIDANCE
What’s that sucking sound?
Billions of dollars in tax-deferred 401(k) retirement savings plans are flying out of the market at an unprecedented rate.
That dynamic has been created by a surge of baby-boomer retirees — coupled with volatile markets and a shortage of younger and more-affluent savers landing jobs that afford saving for retirement to help fill in the growing gap, according to analysts.
The smart money held by the richest Americans is also a leading indicator of the macro trends spooking this retirement market.
Last month, millionaire investors started to show “uncharacteristic caution about the overall investing environment,” according to George Walper Jr., president of market research firm Spectrem Group. This fear factor, he said, may be the cause of a reallocation in many retirement funds.
“In addition to troubling indicators on the domestic and global economic fronts, millionaire investors indicate growing concern over their household assets and income,” Walper said. Spectrem research indicated that almost 50 percent of US millionaire investors do not plan to invest in the coming month.
And that comes as the latest University of Michigan Consumer Sentiment Index shows a drop from 91.9 in August to 87.2 in September — its lowest level this year.
With the Dow and S&P 500 off 7.6 percent and 5.2 percent year-to-date, respectively, as of Friday, more investors — many nursing ulcers over the economy — are either tapping into their retirement plans, not saving or are not replenishing the overall 401(k) and separate “defined contribution” slices fast enough.
And depressed market returns are trimming the value of 401(k)s and defined contribution plans for retirement.
Assets in 401(k)s have certainly skyrocketed — to $4.7 trillion in the second quarter, a huge jump of more than 170 percent from $1.7 trillion back in 2000, according to the Investment Company Institute.
But a growing wave of withdrawals threatens to rapidly eat into that nest egg, a trend reflected in data gathered in 2013 and 2014 and projected to continue into the coming years.
In 2013, withdrawals from 401(k) plans eclipsed new contributions by a net $11.4 billion, according to BrightScope, analyzing Department of Labor data.
Analysis for last year is still incomplete, but a recent report by Cerulli Associates notes that distributions outpaced contributions in 2014.
And cash-outs and loan defaults accounted for $81 billion in “lost retirement assets” in 2014, according to Cerulli analysts.
Anecdotal evidence says the last quarter saw more withdrawals as fear gripped global markets from China to Greece. Instead of slowing down, the trend is forecast to pick up steam into the next four years. And, according to a note this year from JPMorgan, it’ll last through 2030. A Cerulli study suggests the net outflows will continue through 2019, when investors will pull an estimated $60 billion, a higher tab than JPMorgan’s projected $40 billion, for 2019.
Either way, the drawdown is a worry in the huge US retirement industry, which managed total assets of $24.8 trillion as of June 30. Massive withdrawals will crimp the lucrative fee income for administrators. And another concern is market performance, with fewer US buyers and sellers available to potentially prop up assets.
“As the baby boomers retire and de-risk their portfolios, there isn’t enough money following them into the market to support share prices — that’s the theory,” said former financial adviser Norman Pappous, president of portfolio analysis service GradeMyAdvisor.com.
Robbie Hiltonsmith, a senior policy analyst at Demos, added that the US needs to face up to the stark savings challenges ahead as US baby boomers — more than 25 percent of the US population — now increasingly entering retirement and millennials not picking up the slack. “We could have an even worse retirement crisis than we are already projecting,” he said.
Jerome Golden, a financial adviser in New York specializing in retirement planning for boomers, cautions about an overly pessimistic outlook. “I’m not concerned about a ‘run on the bank’ in the 401(k) space,” said Golden, president of Golden Retirement.
“You will find that IRAs will become the largest component of retirement savings as 401(k) participants retire, or leave employment,” added Golden, referring to the popular Individual Retirement Accounts.
But that does not allay fears of economic recession, a wholesale market rout and the impact of boomers, other analysts say. “We really don’t know what is going to happen,” Hiltonsmith said. “At some point in the market [cycle], we will have a big sell-off too.”
Deutsche Bank cuts S&P 500 2015 year-end target to 2050
European earnings revision trend worsens….
The 3-month European EPS Revision Ratio (ERR) fell to 0.77 (77 stocks upgraded per
100 downgraded) from 0.86 last month, remaining near the long-run average. This has
been driven by worsening sentiment towards EM-exposed stocks, and downgrades
following from EM FX devaluation (Chart 2). In contrast, ERR trends for domesticoriented
stocks continue to improve on a relative basis, again highlighting the
decoupling of European ‘Recovery’ from the global slowdown. Equity market
performance is recoupling with ERR trends (cover chart), indicating the recent
downgrades are likely priced in.
Winners and losers on EPS revisions
Following earnings revisions has, in the long-run, generated superior returns. In the past
three years, stocks with the strongest ERR have outperformed by 16%, while those
with the weakest ERR have underperformed by 30% (page 18). The current macro
backdrop should continue to favour momentum strategies. Top stocks on ERR are
Vestas, KBC, Daimler, Prosieben, and Deutsche Boerse.
Expecting more upgrades on European macro
Our Composite Macro Indicator (CMI) improved last month, with not a single input down.
As a result, the Style Cycle stays in ‘Recovery’. The combination of macro improvement
and base money supply growth should enable the European ERR to rally. The current level
of ERR is consistent with an EPS Beats ratio of 50%; an improving ERR can be a catalyst
as the market waits for further ECB easing or stability in EM growth and FX.
Key Takeaway
We initiate on Technip with a Buy rating and €51/sh price target. Our forward
estimates for revenue and margin are conservative, leading to below consensus
estimates for 2016/17/18, and while that implies consensus de-rating ahead
we are confident that Technip's proprietary technology and manufacturing
capability, particularly in Subsea, provides valuation support and can soften
the impact of Subsea slow down.
Subsea - Brazil still needs pipe. Subsea clearly dominates the bottom line of the
company and with a “high” floor margin possible, renewal of Subsea revenues/backlog
in the coming years is key. In order to hit our FY16e Subsea revenue estimate of €5bn
(€4,958m) we require €0.8bn (€875m) new Subsea awards in the next 18 months. This
amount of awards is 32% lower than the previous low (18 months leading up to FY10).
Technip's position as a supplier of flexpipe as well as an installer, particularly in Brazil, helps
our confidence of delivery.
Onshore/Offshore - The Arctic Convoy. Successful execution of the €4.5bn Yamal LNG
Lump sum EPC, in order to maintain (or at least not take away from) the Onshore/Offshore
~3% OIFRA we estimate out to FY17 and ahead of the US$4bn reimbursable construction
phase (yet to be booked), is both an opportunity as well as being a key risk. Modular
fabrication in Asian yards followed by shipment to Yamal is the risk mitigation method
employed, and we back the project engineers on this one.
Cash flow cycle - Possible to pay shareholders organically. While holding significant
cash (>€3bn on average) Technip has grown drawn debt almost exactly in line with total
shareholder distributions over the cycle. However, moving out of a significant capital
investment program, Technip is better placed than most to pay dividends or enter the A&D
market from organic free cash flow.
Valuation/Risks
Our $51/sh PT is derived from the average of four valuations (EV/EBITDA, P/E, DCF and SoP)
ranging from €38-65/sh. We see the 5yr average 5.8x FY+1 EV/EBITDA as a fair metric for
Technip. However, which EBITDA? We arrive at €58/sh on our €893m FY16 estimate, but
€46/sh using the same metric on our €603m FY17 estimate. Both show upside, and taking
all the competing questions into account we choose to use an average of the four valuation
methods and initiate with a Buy and €51/sh PT. Risks to our thesis include poor execution/
cost over runs on the multi-year Yamal LNG project and a continued slowdown in offshore/
subsea developments.
Indebtedness is hurting Glencore - what must Ivan Glasenberg do to ensure it survives?
The collapse in commodity prices has delivered a devastating blow to the mining company
After a week that saw its shares plummet spectacularly and then recover following a slew of warnings from bank analysts about its high levels of debt and the collapse in commodities prices, it is little wonder than some in the market have likened the problems besieging Glencore as similar to those that beset Lehman Brothers ahead of its collapse in 2008.
• Glencore teeters on the edge as commodities rout deepens
• Hedge funds blamed as Glencore slides back into negative territory
If the London-listed commodities trader and miner is to avoid the same fate as the infamous Wall Street bank, it will require the unwavering support of its largest shareholder, Qatar Holdings.
The Qatari sovereign wealth fund is this weekend understood to be feeling “raw” about the billions of dollars in paper losses it is carrying on Glencore, which listed its shares in May 2011 at 530p each.
The shares – which closed on Friday night at 95p – were trading at one point last week as low as 71.10p amid a frenzy of speculation that the commodities giant was in danger of defaulting on debt covenants and that its equity value could be worthless should the prices of key commodities continue to fall.
More worrying was that the rout in its share price came just a few weeks after its chief executive and second largest shareholder, Ivan Glasenberg, announced a bold plan to shore up its balance sheet.
The Telegraph has learnt that Glasenberg sought the backing of the Qatari sovereign wealth fund before last month unveiling the hastily drawn up scheme to cut $10.2bn (£6.7bn) from the company’s gargantuan $29.5bn debt pile.
The South African mining mogul – who has been chief executive since 2002 – believed it was necessary to “bullet proof” Glencore’s balance sheet in the event that the already sharp downturn in commodities prices deepened further.
China’s economic slowdown has seen the price of key commodities, which Glencore produces and trades, plummet over the last year. Copper prices hit a six-and-a-half-year low last week below $5,000 per tonne and Australian thermal coal loaded in Newcastle Port, New South Wales, is hovering near historic lows well below $60 per tonne.
Against this backdrop, Glencore’s earnings have collapsed. The company posted a net loss of $676m in the six months to the end of June, compared with net profit of $1.72bn in the same period last year. Revenue fell 25pc to $85.7bn. The cost of insuring its debt has also surged by 60pc to more than $850,000 per year, which is a level normally associated with distressed assets on the brink of default.
The key economic pillars which made mining groups so attractive to investors five years ago and allowed companies to borrow billions of dollars cheaply on international markets have almost entirely crumbled. Commodities companies now account for eight of the 10 worst- performing stocks on the Standard and Poor’s 500 Index and some analysts even fear that the sector could be the source of the next financial crisis.
Glasenberg and Glencore have found themselves at the centre of this crisis in confidence partly because of the strategy that made the Swiss-based company such a success during the boom years following the last financial crisis. Glencore is almost unique in the mining sector because it is both a global-scale commodities trading house and a physical producer of resources such as copper and coal.
Up until this year, trading normally accounted for around a quarter of its earnings and it was hoped this would provide it with a thick revenue stream regardless of the collapse in the commodities business because of falling prices. Trading requires Glencore to hold a significant inventory of resources, which were worth around $19.5bn as of the end of June. The catch is that these stockpiles have to be financed with short-term debt on a 30 to 40-day cycle.
Up until August, Glasenberg had maintained the view that markets would rebound in the second half of the year but he has been forced into an embarrassing climbdown following a roadshow with investors.
The Sunday Telegraph understands that Mr Glasenberg, who has remained bullish on the prospects for China, was surprised by the sudden downturn in the world’s second-largest economy and biggest consumer of sea-borne commodities.
Against the bleak outlook, Glencore’s management decided that the company had no alternative but to strengthen its balance sheet following the meetings with in investors in New York and London. The message was clear: more had to be done urgently to prepare Glencore for the “Armageddon scenario” of copper prices falling below $4,000 per tonne. Although Glasenberg doesn’t share the view that copper will decline to these record low levels, he is understand to be concerned by the unpredictability of the Chinese market.
At these price levels it would be difficult for the credit rating agencies to maintain an investment grade on Glencore’s debt, which many analysts and investors consider to be vital for the funding of its increasingly important trading business.
But before going ahead with the debt reduction plan, which was intended to restore confidence in the mining giant, Glasenberg would first require the support of Qatar. However, the South African and the Qataris haven’t always seen eye to eye.
In 2012, Qatar Holdings was a thorn in Glasenberg’s side as he battled to force through a $30bn deal to buy the coal miner Xstrata. The Qataris held a 15pc stake in the Australian-focused coal mining company and initially rejected Glencore’s offer. Eventually, Glasenberg was forced to increase the original takeover bid, offering 3.05 of its shares for each Xstrata share when it had initially offered 2.8 of its shares in exchange for the same Xstrata stock.
However, with the wolves at the door last week after $48bn was wiped off the company’s value in a year, having Qatar’s $170bn sovereign wealth fund on board may have been just enough to save Glasenberg from complete disaster. Although unhappy about their losses on Glencore, the Qataris are unlikely to walk away and watch the value of their near 9pc investment be entirely destroyed by debt speculators.
“Glasenberg can’t afford to have the Qataris wobble on this at any cost,” said Jeremy Wrathall, head of natural resources at Investec, the fund manager that partly sparked the current crisis after issuing a damning report on the mining sector last week.
Representatives for the secretive Persian Gulf sovereign wealth fund declined to comment on its investment in Glencore, or the nature of any discussions that may have taken place with Glasenberg.
The presence of such a significant sovereign wealth investor on the company’s share register didn’t prevent the slide in Glencore’s stock price, or the blowout in the cost of insuring its debt after Investec slammed its strategy.
Investec’s shocking assessment was that Glencore’s equity value could be wiped out should commodities prices fall further. According to the broker, in this scenario Glencore would be forced into even more drastic measures to raise capital.
Early last month, in response to what Glasenberg described as a possible “Doomsday” in commodities markets, Glencore said that it would slash its debt by a third by suspending its dividend, raising $2.5bn through an equity placing, selling assets and cutting some of its high-cost copper production in Africa. However, the ploy has so far backfired with Glencore’s shares losing 30pc of their value at the start of last week.
Glencore had originally forecast that it would reduce its net debt to $27bn by the end of 2016 but that will now be closer to $20bn depending on its ability to raise more cash. Regardless of the significant reduction in debt which Glencore now plans, analysts from Jefferies have still argued that the company “does not have the luxury of time” when it comes to reducing its debt levels.
Last week, Carlos Perezagua, co-head of corporate finance and Paul Smith, head of strategy and communications, moved forward a meeting with bond holders in London that had been planned for later this month as part of a vigorous charm offensive in the City. Contrary to the belief of some analysts, the message was that Glencore does not have debt covenants and its credit facilities are not dependent on maintaining its current credit rating.
On the morning of the meeting, Glencore issued a rebuttal to some
of the criticism it has faced and stressed that its balance sheet was “robust” enough to survive the downturn. Barclays, which hosted
the meeting, later sent a note to investors saying that Glencore’s existing $10.2bn debt reduction plan should “deliver a business capable of withstanding the worst of commodity downturns”.
According to Barclays, Glencore is already half way there in terms of raising the capital it needs to reduce its debt burden. The lender estimates that $5bn has already been delivered through its capital raising and the decision to suspend its dividend on top of cutting 400,000 tonnes of copper production from its mines in Africa.
Its next priority will be to complete its proposed gold streaming deal and to offload a minority stake in its $12bn agricultural commodities business. Several parties are understood to be interested in the agri business including sovereign wealth funds from the Middle East and Asia.
This alone could bring in a further $2.5bn on to of the $2bn which can be raised from other asset disposals.
However, one problem Glencore faces is that there are few buyers willing to put capital into anything other than low-cost high-quality mining assets at present. Mining rival Anglo-American has been marketing unwanted mines for over a year now with little success, while assets that do sell are at a significant discount.
“We would question whether Glencore can still raise the full $10.2bn in cash in such a bear market. This is the toughest market I have seen in 25 years as a broker,” said Wrathall.
One potential buyer for some Glencore assets could, ironically, be Mick Davis and his X2 Resources mining investment vehicle, which has around $10bn available for acquisitions. However, Davis – the founder of Xstrata – was effectively forced out by the Glencore takeover and is unlikely to come to his former adversaries’ aid now.
Although Glasenberg privately acknowledges that the company he transformed from a trading house into an integrated commodities giant is staring at a major crisis, there is also a conviction internally that the company can survive without having to be either be taken private, or broken up piece by piece.
The company is also not alone in a sector, which is being battered by the slowdown in China’s economy. BHP Billiton, Anglo American and Rio Tinto are all nursing sharp declines in their equity value over the last year as investors have bailed out of miners.
“We stick 100pc by what we have said about Glencore, but they are not the only ones in this sector with some big problems,” said Wrathall.
Should the share price continue to fall below even the most bearish estimates of around 60p per share, one option would still be to take Glencore private. However, The Sunday Telegraph understands there is little enthusiasm internally for that at present. Alternatively, it could find itself the target of a larger rival.
Just over a year ago the boot was on the other foot when Glasenberg floated the idea of an audacious $150bn merger with its larger rival Rio Tinto. The deal was dismissed out of hand by the Mebourne-based iron ore and copper mining giant. If it had happened, it would have allowed Glencore to bury its debt on to a much larger balance sheet.
Although Glasenberg is understood to take a philosophical view that everything has a price, there are unlikely to be any buyers willing to take the risk for anything other than a fire sale. This leaves him fighting against the odds to save the company, which, despite the slight revival in its share price towards the tail end of last week, could yet be the first high-profile victim of the bursting commodities bubble.