FYI | Jun 22 2007
By Greg Peel
Is this the top of the market?
With private equity buyouts beginning to wane, as caution becomes the side on which to err in the face of rising bond yields and increasingly ominous debt market wobbles, the Blackstone Group – America’s biggest buyout firm – closed the books on its public offering at US$4.13 billion. The stock will list tonight at US$31, which represents the top of management’s target price range. Reputedly, the offering closed significantly oversubscribed. At US$31, the entire firm is valued at US$33 billion.
CEO Stephen Schwarzman may have had a quiet drink last night as he recalled the firm’s founding in 1985 with a US$400,000 investment. Schwarzman is now the US$7.7 billion dollar man. Rumour has it that management decided against raising the sale price above US$31 in order not to draw too much regulatory scrutiny. Executives are pocketing a big slice of the pie.
For those lucky few who managed to land an allocation, Friday will be an anxious day on the bourse. Just how high can the shares open? The extraordinary thing is that Blackstone the corporation now faces the distinct possibility of being taxed at 35% instead of the 15% it’s used to, if a bill before the House of Reps is passed early next year. Given the House has Democrat majority, it is very likely. Blackstone reaffirmed in a regulatory filing on Thursday that taxing the firm as a financial company at a 35% rate would cause its earnings to falter.
This is on top of a previous warning from Blackstone that compensation and other costs related to going public would cause it to “not be profitable for years”. (Associated Press)
Where can I get some?
After the previous night’s market close, Wall Street would have been absorbing the news that a major mortgage market crisis may just have been avoided (or just postponed?). See “US Banks Attempt To Avoid Mortgage Market Collapse” (FYI; late yesterday). There was a clear and present danger that both the stock and bond markets could face a major shake-out in last night’s trade. Was averting the crisis good news? Or was the crisis itself very bad news?
Seems it was good news. Or perhaps Wall Street traders just jumped straight back in the Egyptian river again. US bonds did fall, taking yields to 5.17%. ANZ Economics notes that the spread between the 2-year and 10-year yields is now 21 basis points – the widest in 21 months. However, the Dow shrugged and posted a 56 point rally.
Driving the stock market, besides its current incapacity to be anything other than bullish, was the release of the Philadelphia Fed announcement that regional manufacturing in June has had its strongest growth since April 2005. The bank’s index of regional manufacturing activity jumped to18.0 from 4.2 in May. It would seem the US economy is humming along just nicely thank you. Just don’t mention housing.
Commentators suggested the numbers were nothing to be overly euphoric about, and if anything they only strengthen the argument for a Fed raising at some point hence. But the Street would also have been comforted to hear that jobless claims actually increased slightly last week to a two-month high, suggesting wage inflation is not a major threat. The oil price also fell once more, given a threatened strike in Nigeria may not happen, and so nothing looks too worrying on the inflation front at present.
Why then are US bonds rising in yield? If it’s not inflation, and it’s not net global outflows, it might just have something to do with the perilous state of the debt market – spiking defaults, a sub-prime crisis, and a continuing decline in house prices, along with asupposedly strengthening economy.
Inflation would certainly cease to be an issue if the bond market really does get the wobbles. This would spark a swift reversal of risky positions and effectively suck inflation rapidly out of the system.
This is the scenario presently staring the gold market in the face. Rising bond yields make gold more expensive to hold, particularly for foreign investors. Gold is once again sitting tenuously above the US$650/oz level, closing down US$3.30 to US$651.20, and many commentators would not be surprised with a break down to US$635-640. If US$635 fails to hold, we can still go to US$600/oz before reaching the upward trend line. If US$600/oz fails to hold…
Technical analysts also have their attentions firmly fixed on the base metal markets. Consensus is that only lead looks strong, while copper, aluminium and zinc are “toppy” and threatening to tip over. Nickel has tipped over, but could fall to around US$16/lb before finding its trend line. A strong pullback in base metals would resonate through all investment markets in the short term, even if the long-long term trend still is very much up.
Nickel managed to rally back 2% in New York last night, following three days of falls equating to around 15%. All other metals were slightly weak, except perhaps for zinc which fell over 2%.
The Australian market put a brave face on the previous Dow fall yesterday as the bulk mineral story just seems to get better and better. Rio stepped out of the spotlight to let BHP have a go. Despite the rally on Wall Street overnight the SPI Overnight fell 27 points.
I’m not calling anything.
