E( U
1100 13th Street NW, Washington, DC 20005 • Special Issue
Dear Client:
Cash-rich companies are on the prowl,
seeking to gobble up smaller firms that can add
to earnings quickly, provide key technology
and/or open up some new markets for them.
E 4
Washington, February 2012
Crude oil
(WTI, per bbl.)
Look for more mergers and acquisitions
this year than in any since before the recession,
Natural gas
though still more than a third under the 2007 peak.
(per MMBtu
BUSINESS With commercial credit easier to come by
at wellhead)
TRENDS and available at rock-bottom interest rates
(and likely to remain quite low until 2015 or so),
publicly traded firms don’t even have to dip
(per gallon)
into record-high cash stashes to go shopping.
But expect fewer private equity buyouts.
Diesel fuel
Investors’ more cautious approach and the volatility
(per gallon)
of stock markets have private funds pulling back a bit.
Feb. 10,
Suitors are likely to do more spadework,
(per gallon)
following the Federal Trade Comm.’s unexpected veto
last year of a proposed AT&T and T-Mobile merger.
They fret about regulatory muscle flexing
(per kWh)
both here and abroad. So they’ll spend more time
and money to ward off any potential objections...
for example, divesting themselves of operations that result in overlapping markets.
Keep an eye on Express Scripts’ bid for Medco. If the deal goes through,
it will make Express Scripts the largest U.S. drug benefits manager. It’s a test
of how far federal antitrust watchdogs believe they need to go to protect consumers.
Leading the pack in M&A activity: Tech firms, again. Bigger fish are eager
to make their mark on cloud computing, mobile and social networking businesses,
and see swallowing smaller fish as the best way to do so. On the menu: Netflix,
NetSuite, LinkedIn...eyed by the likes of Microsoft and IBM after Oracle’s bid for Taleo.
Energy bigs such as Chevron want to increase their resource portfolios.
And leaner subsidies for installation spell consolidation of solar energy firms.
As health care reform takes hold…more streamlining of that industry, too.
But regulators likely will be particularly vigilant guardians of consumer interests.
Financial firms won’t see much activity as new regulations are rolled out.
They’ll want to see how the regs pan out for them before expanding their empires.
Agribusiness companies are looking overseas, hoping to capture growth.
In fact, emerging market companies will likely attract a lot of attention.
Mature firms in mature markets are looking for faster growth in Brazil, China, etc.
Interested in selling? Tidy up that balance sheet and peel back to the core.
Corporations are mostly interested in acquiring lean, sharply focused businesses.
And keep in mind that in this environment, sellers are in the driver’s seat.
Order online at or call toll free 1-888-532-6789.
ECONOMY Expect long-term interest rates to stay low for much of the rest of the year,
with 10-year Treasuries stuck near 2%. One reason: The European debt mess.
As long as there is fear that the euro zone crisis will spread to U.S. financial markets,
buyers will flock to the relative safety of U.S. debt, even though inflation erases gains.
Before Europe became a worry zone in 2011, yields on 10-year notes neared 3.8%.
Despite low rates, more easing by the Federal Reserve can’t be ruled out.
Officials are eager to see a more robust economy by spring, but housing price declines
are bringing renewed concern. To keep mortgage rates low and encourage purchases,
the Fed may buy another round of mortgage debt sometime in the next few months.
When rates do rise, it could happen fast…half a point or more in a few weeks.
The biggest risk to the U.S. isn’t default by Greece, even if contagion spreads
to Portugal and Ireland. That would have a minimal…and manageable…effect here.
The more serious threat to the American economy: The recession in Europe.
Exports will be hurt, and sales will likely dip for firms with a European presence.
The euro zone economy will contract by half a percentage point in 2012.
U.S. firms are already seeing an impact on sales. Alcoa’s European business
was off 16% in the last quarter of 2011. The company will shut some operations there.
Some S&P 500 companies report that as much as 40% of their sales are from Europe.
But opportunities exist for U.S. lenders as European banks cut back credit
available to businesses and try to shed up to $3 trillion in assets during the year.
Franchises will see a rebound this year, with the number of them
BUSINESS up 2% or so, following three years of decline in the face of a sour economy.
Even in tough times, though, franchises that provide vital services continue to thrive.
Start-up costs, fees and profits vary widely, of course. But franchising remains popular
among those eager to run their own show, with the benefit of a proven business model.
Among franchises on a fast track: JumpBunch, offering fitness programs
for young children at schools, day care programs and camps. Signal 88 Security,
which provides building security services such as virtual monitoring and foot patrols.
FocalPoint advisers for entrepreneurs and small to midsize firms.
Vacation marketers Expedia CruiseShipCenters. Synergy HomeCare, a care provider
for senior citizens and folks of all ages. MaidPro, a home-cleaning service provider.
And U.S. Lawns, which does landscaping for office parks, shopping centers and so on.
The outlook for investing in commercial property is brightening, bit by bit.
ESTATE Expect $35 billion in bonds to be issued…a slight improvement over 2011,
when $33 billion in mortgage debt was sold. The peak was $250 billion in 2007.
Stirring the activity: Stronger jobs numbers and an uptick in other indicators,
though worry that Europe’s financial crisis will grow brings some downside pressure.
Insurance companies are among those spending more than they did last year.
Investors are looking beyond top-tier properties when making decisions.
Class B offices, for example, are less expensive but still likely to beat inflation
with their yields…provided the economy continues to improve and jobs numbers grow.
Demand for apartments will stay strong for a year or two, perhaps longer,
driven by would-be buyers who aren’t yet convinced home prices have hit bottom
or can’t get a mortgage. The vacancy rate is heading to 4.8%, down from 5.2% in 2011.
Rents will edge up by 4% nationally…twice that in New York and San Francisco.
Builders are gung ho to get a piece of the action. Expect apartment starts
to grow by 15% or so this year. Though a far cry from the 78% increase during 2011,
it’s enough that some market followers are starting to watch for signs of overbuilding.
By year-end 2013, vacancies will be climbing, as an improving economy
shakes loose more mortgage lending, turning a slew of renters into homeowners.
Order online at or call toll free 1-888-532-6789.
Most of President Obama’s budget proposals will die in Congress this year.
And that’s OK with him. He will use GOP opposition as political fodder,
with his Feb. 13 spending plan serving as a road map of sorts for his reelection bid.
Obama’s counting on the GOP to block any tax increases on the wealthy.
He’ll take the issue to voters and claim Republicans are waging class warfare.
Ditto, GOP resistance to worker training, tax incentives for manufacturing,
more natural gas development and ending tax breaks for oil exploration projects.
The political calculus also factors into what’s left out of Obama’s budget:
Reform proposals for entitlement programs, such as Social Security and Medicare,
and specific recommendations for how to cut billions of dollars from defense.
Congress must approve the big defense cuts, so Obama won’t waste political capital
targeting specific weapons or programs instead of making lawmakers choose.
A road funding bill faces the equivalent of a rush-hour backup in Congress.
CONGRESS But it will eventually travel up Pennsylvania Ave. for Obama’s signature.
Even in a highly partisan environment, transportation spending gets broad backing
because the money from Uncle Sam funds projects in every congressional district.
A House version of the two-year legislation includes some political gambits:
Linking passage to White House approval of the Keystone pipeline from Canada
and using domestic oil revenues to fund the highway bill. They’re dead in the Senate.
Instead, money will come from gas tax revenues and the general treasury, as usual.
But Congress will slam the brakes on a number of other issues this year:
A big emissions reduction measure, tax reform and immigration overhaul.
They’re doomed by the harsh partisan environment and pressures of an election year.
Still, lawmakers can’t stop work on everything. Among bills that will pass:
A one-year extension of the payroll tax reduction. Republicans took heat
when they blocked this measure late last year, then backed a two-month reprieve.
They’ll get on board…after a fight in the GOP-led House over paying for the cuts.
A four-year reauthorization of the Federal Aviation Admin., clearing funds
for airport maintenance and expansion, along with navigation system upgrades.
Some budget bills. But stopgap funding measures will again be necessary
to keep the government open when the fiscal year starts Oct. 1…just before elections.
ENERGY A reassessment of earthquake risk will prompt a new look at nuclear reactors
in the East and Midwest, long assumed to occupy safe ground. It turns out
that those regions are more prone to seismic events than was previously realized.
At least a handful of plants will require safety upgrades of some sort...
anything from using more steel and concrete to improving electronic control systems.
No final verdict on plant safety for about four years. Meanwhile, new nukes
are on track. Models OK’d by regulators feature more-advanced safety systems.
Rules from Calif. will alter the future makeup of the U.S. auto fleet.
By 2025, state regulators say, about 15% of new cars there must be electric
or run on hydrogen. Ten more states, mostly in the Northeast, will also adopt the rule.
Those states combined represent about one-quarter of the U.S. automobile market.
The mandate will be a heavy lift for car dealers, who worry that consumers
won’t shell out for the clean but costly technologies. Hybrid cars account for 2%
of sales, with most buyers opting for thrifty conventional models to save at the pump.
But some wrinkles in the rules will soften their impact a bit. Automakers
will get extra credit for beating future mileage targets, effectively lowering the quotas.
And participating states will likely offer sweeteners, such as subsidies to boost sales.
Order online at or call toll free 1-888-532-6789.
METALS Expect plenty of volatility in metals commodities over the next few years.
The prospect of weakening economies abroad recently sent prices plunging,
only to rebound when the Federal Reserve promised low interest rates deep into 2014.
Investors hedging against a soft dollar promptly piled into copper and other metals.
Figure on prices falling over the next few months, as declining demand
wins out over traders’ fears of a sinking dollar. Though the Fed’s easy-money stance
seems like a classic recipe for commodity inflation, the worsening global economy
that prompted the move is the real story. And that’s not bullish for industrial metals.
Likely to ease in the short run: Zinc, as supplies build and demand wanes.
The current price of about $2,100 per ton could fall as low as $1,800 this quarter.
And maybe copper, as global supply and demand finally come into balance.
Today’s price of $8,400 a ton could drift a bit lower as Chinese manufacturing cools.
Holding fairly steady: Steel, with not much change from today’s $510 a ton
for ingots. The slowdown in European auto production and China’s building sector
ought to keep demand for most steel products muted during the first half of 2012.
And aluminum. Oversupply is prompting producers to curb mill output.
But in the longer term, some sharp price spikes loom as global demand
comes back and supply chain problems for certain metals crimp mine production.
Copper has the most room to grow because of the declining quality of ore
at large, established mines and the high cost of opening new ones. Plus labor strife
at mines in developing countries is bound to jack up producers’ extraction costs.
In 2013, expect prices of the red metal to threaten the peak recorded in early 2011
and then keep climbing in 2014. Copper scrap will be in particularly high demand.
Nickel will also see big gains. Anticipated major infrastructure build-outs
in the oil and gas sector will require high-grade stainless steel. Ditto for future cars,
as automakers looking to cut vehicle weight increasingly rely on high-strength steel.
CURRENCY Harder-to-forge greenbacks are coming. Uncle Sam is going to war
against counterfeiters using new technology to produce more phony bills.
The G-men are mulling new inks and paper, bigger watermarks and the like.
The feds say about $2.6 billion of funny money is in use, prompting the push
for easier detection. It’s bad news for crooks but good news for honest merchants.
Yours very truly,
February 2012
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