The two chemical names in my portfolio are both doing well on an otherwise tough day, supporting my broad market portfolio. Lyondell Chemical [LYO] sells its Titanium Dioxide business to the Saudi-owned National Titanium Dioxide Co. This will allow them to focus on petrochemicals and refining, and (what!) reduce debt. Looks like a good multiple on the sale and a good deal strategically.
Dow Chemical [DOW] is a buyout target?! I would have thought that it was too large. Strange times indeed, where any asset with a low EV/EBITDA not only can be bought and refinanced, but are almost required to be so. And, with less leverage and a simpler structure, might not Lyondell be a target also? It’s much smaller.
In the short run, all of this is bullish for the market. Remember, bubbles are financing phenomena. Bubbles pop when cash flow is insufficient to continue financing them. We’re not there yet, but watch for signs of difficulty in these newly levered creations. Private equity is doing these deals at lower and lower IRRs from what I’ve heard, and eventually, that is not sustainable, given the levered up risks taken.
Long DOW LYO
Hi David! You mentioned in one of your prior posts about the comments made by Jim Griffin on the Japan carry trade. If Japan does not begin to raise rates (currently at 50 b.p.) more aggressively to close the gap with other countries, will this increase inflationary pressues? I would assume that the hot money would continue borrowing Yen and continue pouring into oil, copper, gold, wheat, corn? I was wondering if a continuous increase in corn and wheat prices could cause a serious problem for many people in countries such as India or China where they could begin raising their rates without any warning? Am I on the right track and asking the right questions? Thanks…
Hi Paul! Yes, it would raise inflationary pressures, but it would be inflation in the asset markets primarily. So long as it is cheap to borrow in yen, and the Bank of Japan keeps the yen artificially weak, market players will borrow in yen to invest in higher yielding paper with more risk (or, assets with presumed greater total return, as in the commodities that you mentioned). Usually that risk is currency risk, because one day the yen will adjust, and it can’t get much cheaper.
Regarding China, India, and other parts of the developing world, I am seeing an uptick in goods price inflation at present. Also, many developing market central banks are tightening at present, not the least of which is China. There are dangers here if inflation gets out of control, because it will create unrest over the arrangement where these nations send goods to the US and take back our dollar denominated debt. We get goods, and our interest rates get lowered at the same time. Such a deal!
You are asking very good questions, and in a limited time these are my quick answers. I will be posting in my Major Article List in the near term, a series of economics articles that go through these issues in a fuller way.
Long FXY