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It is official, everything online is hot. Indeed, it is not only so hot that companies like Amazon (AMZN) and Google (GOOG) do not need to pay any tax, and even Ocado which had to be rescued in November is now worth over £1.5bn after the tie up with Morrison Supermarket (MRW).
What a tie up it is, given that in 2010 Ocado (OCDO) lost £12m, in 2011 it lost £2..4m, 2012 £0.6m and this year should lose £6m. Next year was forecast to be different - a profit of £1.09m. So how does all this work for a company on a PE of 700 plus? Very well, apparently. £170m will be paid by Morrisons to Ocado to buy the Dordon “Customer Fulfilment Centre” (a warehouse?) with an additional nearly £50m to integrate the centre within Morrisons systems.
I cannot help thinking however that rather than coughing up the better part of a £0.25bn for the Ocada deal that it would have been better for Morrisons to have simply set up their own “Customer Fulfilment Centre” and then waited for Ocado to go bust! I understand fully that buying into an existing business enables Morrisons to hit the ground running in the online grocer space, and that it has bought into the “expertise” of a company which has managed to serve up a flat / losing profits profile for the best part of a decade (sarcasm). But the fact of the matter is that as things stand, online is literally a loss leader to grab market share at a time when margins are being squeezed for supermarkets. It may make sense for the 7 Day MBA brigade, it does not make sense to me apart from being something of a panic move on the part of Morrisons.
Onto another company on the High Street which has also pulled back from the jaws of death like Ocado, and that is Dixons Retail (DXNS). What is interesting here is the way that while the recovery in the share price from below 10p at the end of 2011 has not only been welcome, but relatively easy to catch on a technical basis, there does seem to be material fundamental problems to me - which is right - the chart or the story? Have the fears and reasons associated with the 2011 collapse really gone away? I would say that they have not. Even with Dixon’s going online – so that you do not have to interact with their delightful shop assistants (!), there is still the issue of every man and his dog being able to sell you the latest iPad or tablet at a cheaper price. Presumably such minor details will not prevent the shares heading higher in the run up to the Q4 update, sales should be up 10%, but what of margins and profits in the long term?
Finally, I was intrigued by the news flow accompanying the collapse of Gold last month. If you followed the logic, the metal was due to rebound on the basis that while it was being sold, on “paper” in the futures market / ETFs etc, that in the real world the Indians, Chinese and central banks were all buying up truckloads of the stuff. Well, they might have been, but all this has not so far been enough to prevent another sub $1,400 dive following a failure well below $1,500. This was a failure below the former 2 year support at $1,522.
The May failure below March support echoes the March $1,620 failure below $1,626 January support. Such breakdowns with no resistance / support overlaps are only seen in the most bearish of situations, and I would suspect that is precisely what the Gold price is actually serving up right now. The conspiracy theory I heard at Master Investor is that Gold is being shorted deliberately to undermine its “store of value” appeal, and save the U.S. Dollar and / or the T Bond. All of this is to prevent the U.S. going bust. That said, this conspiracy came from the same source which suggested that the second Iraq invasion was designed to prevent the Euro replacing the U.S. Dollar for Oil pricing in the Middle East… I’ll leave the conspiracy theorists to it!
We’ve been keeping a close eye on John Paulson’s recent fund management woes, brought about in large part through his holdings in gold and related stocks….
In our May edition of SBM we published an article (see page 18) about Paulson’s holdings based on his funds’ 13F filing with the U.S. SEC, relative to the fourth quarter of 2012. Unlike Louis Bacon, for who risk management is everything; John Paulson is more of the bet-the-ranch style trader, in contrast to his early years managing funds when he was more risk aware and was principally involved in arbitrage bets. But, as portfolio funds grew into the billions, he started taking more chances. It is clear that he became more emboldened following the billions he reaped in betting against the subprime market but, it’s fair to say, that hubris has also played a part in his recent difficulties…
With more than 20% of Paulson’s entire portfolio committed to gold & gold related assets, the question is will he blink as the price slides lower and more importantly, is he right? Let’s take a closer look at what he’s doing.
Firstly, we must disclose here that we need to simplify and make some assumptions in order to analyse his 13F filings. These filings report the hedge funds holdings at the end of each quarter and are released around 45 days after that quarter ends and so means that we only have an historic picture of what they’re doing. At the time the funds fill in the form they may actually own a completely different portfolio.
In order to compare Paulson’s holdings, we assume that any changes occur just at the end of the quarter. For example, Paulson increased its holding in Sprint during 1Q2013. For our computations we assume that only happened at the end of the quarter, precisely at the end of March. For simplification purposes we only look at top 10 holdings too instead of the whole portfolio. These holdings represent more than 50% of Paulson’s total portfolio however.
Let’s then look at holdings at the end of 4Q2012.
Assuming he held all the above investments until the end of March 2013, he ended the quarter with a profit of around $194 million on his top 10 holdings. His bets, apart from gold, have all been winners. But, the part which concerns us is gold. He lost $165 million in SPDR Gold Trust and an extra $220 million in Anglogold, a senior gold miner, for a total loss of more than $385 million. Do you remember those two black sessions on April 12th and 15th, when gold declined more than 10%? Well, Paulson certainly remembers it as he lost more than $500 million over those two sessions!
Let’s now look at his holding as reported in the latest 13F filing.
Again, we assume the holdings at the end of March are kept over the second quarter. This way the profit/loss column refers to the current quarter potential gain/loss. Paulson is revealed as having trouble with gold once again. The SPDR Gold Trust wiped out $445 million from his portfolio and AngloGold an extra $170 million, for a total gold-related loss of $614 million. If we add the Q1 loss of $385 million, Paulson has lost $1 billion with his gold bet this year.
In general terms, we believe that the thesis behind Paulson’s team to bet on gold is actually sound and reasonable. With central banks, in particular in the United States and Japan, printing money as never before, there’s a sound basis to his expectation that the US dollar is being steadily debased,that inflation will ultimately pick up and that the gold prices will explode. That has happened in the past.
Unlike under the gold standard (which we write about extensively in the latest edition of our magazine), and when there was no real way to generate inflation, the ability to print at will by central bankers will always ultimately act as a depressant on a currencies value - just look at what the Japanese are now doing. Problem is the inflation pipeline is clogged and it’s taking its time to make its presence felt…
Inflation hasn’t picked up yet and the FED is in fact now making noises about decreasing or even put an end to QE3. If that happens before the end of the year, gold may suffer further and thus Paulson’s portfolio will be at risk again. For someone willing to risk everything on gold, it may just be better to buy the SPDR Gold trust instead of investing in Paulson’s portfolio’s and paying a 20% fee on profits!
If you want to know more about the risks of inflation and the gold standard, make sure you read the next edition of our magazine out soon. Stay tuned!
Update from the Independent Committee of the Board of
Eurasian Natural Resources Corporation PLC (the “Company” or “ENRC”)
Statement regarding request for Rule 2.6 Extension and Indicative Proposal
The Independent Committee of the Board of ENRC (the “Independent Committee”), consisting solely of independent non-executive directors of the Company, received a conditional, indicative proposal (the “Proposal”) on 16th May 2013 from the consortium consisting of Mr Chodiev, Mr Ibragimov, Mr Machkevitch and the Committee of the State Property and Privatisation of the Ministry of Finance of the Republic of Kazakhstan (acting on behalf of the Government of the Republic of Kazakhstan) and JSC Sovereign Wealth Fund “Samruk-Kazyna” (together, the “Consortium”) in relation to a potential offer to acquire all of the issued and to be issued share capital of ENRC not already held by the Consortium.
The Independent Committee believes that the Proposal materially undervalues ENRC.
The Independent Committee requested the Panel on Takeovers and Mergers (“The Panel”) to extend the deadline set under Rule 2.6 of the City Code on Takeovers and Mergers (the “Code”) to Monday 3rd June 2013 at 5pm BST, which the Panel has consented to. By such time, the Consortium must either announce a firm intention to make an offer for the Company in accordance with the Code or announce that they do not intend to make an offer.
The extension will allow the Consortium sufficient time to submit a revised proposal that may be capable of being recommended by the Independent Committee to ENRC’s minority shareholders. There can be no certainty that an offer will be made nor as to the terms on which any offer might be made.
The Chairman of the Independent Committee, Dr Mohsen Khalil, said: “The primary role of the Independent Committee is to safeguard the interests of all minority shareholders and ensure that their rights are properly protected.”
He added, “We believe the current proposal materially undervalues ENRC, and we will use the extension to seek an improved and formal proposal. The Independent Committee is committed to serving the best interests of minority shareholders through a professional, transparent and rigorous process, which incorporates the highest standards and principles of independence and integrity.”