Heinz on treasuries and IAMgold/GFI
Date: Tue Nov 30 2004 10:43
trotsky (Aurum, 9:45) ID#248269:
Copyright © 2002 trotsky/Kitco Inc. All rights reserved
absolutely. the correction in bonds and notes may have further to go, but even the last correction was actually quite small compared to previous ones in the course of the secular bond bull since 1980.
currently the market still remains close to its all time highs, but is infested with bears like no other. for instance, in the Rydex bond universe $84 million are invested long vs. nearly $2.9 billion invested short, for a stunning ratio of 34, which represents a bearish consensus of 99.97%.
meanwhile the chart of the t-note since 2000 looks exactly like the JGB chart from 1989 onward - by itself not proof of anything, but clearly a heads-up that it could continue to look similar a few years hence.
the major impetus that will drive yields lower still will be the demise of the housing bubble, which is clearly a work in progress by now ( inventories of unsold homes have soared in all the major bubble locations, transaction volumes have concurrently plunged, and even prices have begun to retreat, which they always do with a considerable lag in property ) .
once the market wakes up to this fact government debt could be back in fashion big time.
there are other reasons to expect a strong bond market in coming years...1. the US economy continues to operate way below capacity - i.e. there's a 'deflationary gap' that suppresses wage growth and keeps end user prices in check ( incidentally, a housing bubble denouement will widen this gap further ) .
2. credit spreads for everything from investment grade corporate debt to the worst junk paper have narrowed to near record lows from their July 2002 record highs - iow, institutions of all stripes ( from insurance companies to hedge funds ) have been chasing yield while apparently remaining completely oblivious to risk - and have thereby vastly increased the risk profile of their portfolios.
this is precisely the situation that obtained shortly before LTCM's collapse - only the size of positions has grown far bigger. it's an accident waiting to happen, and when it does, spreads will widen again via a combination of frantic treasury paper buying and equally frantic selling of everything else.
3. because everybody and his auntie continue to be bearish on bonds, fund managers worldwide are underinvested - they have reduced exposure to USG debt for almost 3 years running now. so there's lots of pent-up demand.
Date: Tue Nov 30 2004 10:21
trotsky (frustrated, 9:44@GFI) ID#248269:
Copyright © 2002 trotsky/Kitco Inc. All rights reserved
"At the time of the IAMGold transaction, you know this is what I find somewhat surprising, you know we struggled to find anybody who didn't like the transaction, now all of a sudden people are saying -- No, it's a lousy deal."
i thought i'd pick up on that.
it is absolutely true, but shouldn't be too surprising. at the time the original GFI/IAG transaction was announced, GFI shareholders grudgingly accepted that while the transaction made little commercial sense ( commercially it rewards IAG shareholders while penalizing GFI's ) , it seemed at least to make some strategic sense and may well lead to the 'rerating' of GFI's stock which was management's major argument in promoting the deal.
but HMY's offer also creates a rerating - in fact, it probably will be subject to a SECOND phase of rerating once the deal is consummated - without GFI's shareholders being forced to accept a way too low valuation being attached to GFI's international assets ( which were painstakingly acquired and nurtured over many years - it seems a pity to have to 'give them away' ) .
as i've mentioned previously, the new GFI ( post HMY takeover ) might still look at a potential consolidation of assets ( IAG and GFI co-own two mines in Ghana ) , but on better commercial terms. IAG shareholders would get a little less out of it of course, but there's no law that says they should get more for IAG's assets than they're worth.
also, the strategic rationale for the IAG transaction has been weakened considerably by a recent relaxation of SA's forex controls ( which are being reformed slowly but steadily ) .
all in all Harmony clearly has the more convincing case ( and i don't doubt for a minute its claim that it can squeeze out a lot of costs from GFI's South African operations - HMY is legendary for its requisite abilities ) . |
