Kinder Morgan: Review by Valuentum

Understanding Valuentum’s President Nelson’s Call on KMI


Image published June 18, 2015. © Valuentum Securities

The image above was taken from Valuentum’s President Brian Nelson’s article published June 18. If you’re interested in learning more about how to identify mispricings in the stock market such as that with Kinder Morgan when it was trading at $40 per share (now ~$15), please consider becoming a member to You’ll gain access to Brian Nelson and the Valuentum Team. Click here to subscribe today!

Updated December 11, 2015 for the “Leverage Across the MLP Space Is Not Contained!” section that follows.


By The Valuentum Team 

Revisiting the 10 Reasons Why Valuentum Thought Kinder Morgan’s Shares Would Collapse, released June 2015 when shares were trading at ~$40 each

1) The valuation paradigm has changed.

2) Kinder Morgan’s dividend growth endeavors will disappoint.

3) The company’s net debt load is $40+ billion.

4) The company is trading at 40+ forward earnings.

5) The natural reaction from shareholders will be skepticism and disbelief.

6) Kinder Morgan’s dividend is in part organic, in part financially-engineered.

7) The traditional “blind” use of the dividend discount model does not apply to Kinder Morgan.

8) The company’s implied leverage is 19 times after considering all cash, debt-like commitments, at least in the eyes of shareholders.

9) Bondholders will start to care. Equity holders will start to care. They will – and then it all unravels.

10) Highly-publicized insider purchases are not a sign of support, in the case of Kinder Morgan, but an admission of vulnerability.


On June 11, Valuentum’s President Brian Nelson wrote ‘5 Reasons Why We Think Kinder Morgan’s Shares Will Collapse,” removing the company from Valuentum’s Dividend Growth Newsletter portfolio that day at $40 per share.

The piece was highlighted by Barron’s in ‘The Bear Case Against Kinder Morgan’ later that evening. The controversial call did not go unnoticed. Shares of Kinder Morgan (KMI) and most of the master limited partnership arena fell ~2% on the opening the following day. Credit Suisse’s John Edwards released a rebuttal to Valuentum’s “5 Reasons” piece point by point June 15, reiterating Credit Suisse’s Outperform rating and $52 price target at the time, quipping that his team had agreed that the ‘natural reaction from shareholders would be skepticism and disbelief.’

Valuentum’s President Brian Nelson then countered June 18 with ‘5 More Reasons Why We Think Kinder Morgan’s Shares Will Collapse’ defining how Valuentum’s thesis was separate and distinct from Barron’s and Hedgeye’s February 2014 piece, which focused primarily on the MLP and a questioning of the MLP’s measure of sustaining capital expenditures, something that the company had already refuted. Shares of Kinder Morgan, the corporate, had peaked at nearly $45 per share in April 2015, up from the low-$30s range in February 2014 when the Barron’s piece had been released.

Barron’s said Nelson was back as the “Kinder Morgan Bear: 5 More Reasons to Worry,” released June 19.

Unlike the traditional “short case,” which searches for a “fire” within a company’s accounting or some other tragic situation, Nelson’s 10 reasons, published in June 2015, were based purely on a valuation and credit assessment of the corporate, which he felt was severely misaligned in the context of the entity’s fundamentals. The Kinder Morgan MLP units, formerly trading under the symbol KMP, the security which Barron’s and Hedgeye’s February 2014 piece had primarily focused on, had since been retired after the closing of the deal November 2014. KMP unitholders benefited from a 12% premiumthe day of the deal announcement.

Nelson then publicly released his $29 per share fair value estimate of Kinder Morgan on June 30, “Kinder Morgan’s Fair Value: $29 Per Share, with shares of the third-largest energy company in North America trading in the high $30s.” On Kinder Morgan’ssecond-quarter conference call July 15, investors continued to confuse Mr. Nelson’s 10 reasons with the previous thesis on the MLP outlined in 2014, with an investment management firm proclaiming that shares were being punished by “the timely or untimely resurrection of what I thought was a wholly discredited bear attack by a tabloid claiming that your investment grade debt is not serviceable.” Mr. Nelson’s thesis was genuine and unique.

Valuentum agrees that the “short thesis” published on February 2014 by Barron’s had been “discredited” once Kinder Morgan had rolled up its MLP structure. After all, the security KMP had ceased to exist. Nelson’s thesis had only focused on the Kinder Morgan corporate, the ticker symbol KMI, shares of which were trading at $37.50 in mid-July. Nelson then took the show on the road, presenting his concerns about Kinder Morgan and MLPs, in general, at the AAII chapters in Cleveland, Silicon Valley, Milwaukee, and Madison in the subsequent months, hoping to help investors avoid any further collapse in shares that was to come.

As his concerns grew, Nelson then published, “Warning: The Master Limited Partnership Model May Not Survive” in late September and shared it with Barron’s as a follow up to the Kinder Morgan call, published as “Why the MLP Business Model May Be a Goner.” By September 29, shares of Kinder Morgan, the corporate, had collapsed to ~$26 each. Shares of the Alerian MLP ETF (AMLP) had collapsed from $16.15 per share on June 11 to $11.51 over the same time frame.

Nelson thesis was then validated. On October 22, Kinder Morgan revised lower its dividend growth plans and detailed how it would engage in sophisticated financing needs to stay afloat. Shares of the corporate fell even further. Credit Suisse’s John Edwards downgraded the rating of Kinder Morgan from Outperform to Neutral and reduced the price target to $39 per share, noting “in the 13 years of following KMI, we don’t recall management having to reduce guidance…ever.” That day, Nelson reiteratedthe low end of his fair value estimate range for shares of $23 each.

Even more downgrades followed.

Argus subsequently cut Kinder Morgan’s price target to $35 per share from $50 per share November 10, still rating the company a “buy.” (The rating was subsequently lowered to hold shortly thereafter.) On December 2, Moody’s then downgraded Kinder Morgan’s credit rating outlook, an integral part of Mr. Nelson’s thesis and what he described as “the circular flow of unsubstantiated support” on Kinder Morgan’s shares, the corporate, trading under the symbol KMI. Even more downgrades followed. Shares of Kinder Morgan are now exchanging hands in the mid-teens, at the low end of Valuentum’s fair value range, updated following Kinder Morgan’s 75% cut in the dividend just this week – something that was unimaginable by most market participants.

Note: Moody’s revised Kinder Morgan’s credit outlook to stable after the dividend cut, but still-collapsing energy resource pricing, and net leverage approaching 7x on an annualized reported basis (see calculation below) does not warrant investment-grade marks, in our view.

Leverage Across the MLP Space is Not Contained!

The Securities and Exchange Commission performs a vital function when it comes to truth in reporting, helping investors sort through what’s true and what’s not. The Form 10-K (annual) and Form 10-Q (quarterly) can be used to compare what a company’s reported, actual net leverage is to what management says it is – in their presentation slide deck or on some of the more popular business channels. Investors in midstream equities have long been “pitched” the idea that leverage is contained, but from our perspective, it is not. Bondholders deserve to know the actual, reported net leverage of companies in the midstream space because they won’t hear it from management, at least it seems.

Let’s take Kinder Morgan (KMI), as an example. In its slide deck presentations and in most communications, the midstream giant notes that its leverage as measured by net debt to EBITDA is under 6 times. However, a close examination of the company’s Form 10-K and Form 10-Q suggests that such a measure is far from reality. Through the first nine months of the year, Kinder Morgan has generated ~$2.7 billion in operating income and ~$1.73 billion in depreciation and amortization, amounting to roughly ~$4.43 billion in EBITDA through the first nine months of the year. Generously, let’s annualize that measure to arrive at annualized reported EBITDA of ~$5.9 billion. At the end of 2014, Kinder Morgan had total short and long-term debt of $43 billion and at the end of the third quarter of 2015, it registered total short and long-term debt of $44.6 billion. Kinder Morgan’s cash is negligible.

Kinder Morgan is more than 7.6x leveraged on the basis of its total short and long-term debt load at the end of the third quarter, relative to its annualized EBITDA mark for this year. If we were to back out the company’s loss on impairments and dispositions of assets, we could assume ~$6.54 billion in annualized EBITDA, but that’s quite the optimistic case, in our view, in light of still-collapsing energy-resource pricing. Importantly, even if we give credit for these “one-time items,” which may end up recurring in nature, Kinder Morgan is still 6.8x leveraged ($44.6/$6.54). We understand that the executive team and the credit rating agencies are doing some non-GAAP “massaging” with the numbers, but bondholders should know the truth. We encourage all stakeholders to look at the data that we are looking at in Kinder Morgan’s Form 10-Q, which can be downloaded here (pdf).

The situation with Energy Transfer Equity (ETE) is even worse. We were letting this issue go to rest, until we noticed that Energy Transfer Equity had stated emphatically that its measure of net debt to EBITDA was 4.5x, a level it believes to be “sacrosanct.” We were in disbelief. The SEC requires that companies disclose their financials for a reason, and we pay very close attention to what’s submitted in the 10-K and 10-Q far and above what we see in slide deck presentations or hear on television. In the nine months ended September 30, Energy Transfer Equity’s operating income was $2.16 billion, while depreciation and amortization was $1.53 billion, good for $3.69 billion in EBITDA, or $4.92 billion in EBITDA on an annualized basis.

The company noted short and long-term debt of $36.3 billion and cash and cash equivalents of $1 billion, resulting in a net debt position of $35.3 billion. Please download its 10-Q here (pdf). By our calculations, Energy Transfer Equity is nearly 7.2x leveraged ($35.3/$4.92). Say what you will just how far the company should be rated in “junk status,” but we think there may be a large number of investors that believe Energy Transfer Equity is ~4.5x leveraged. This just simply isn’t true, in our view. The SEC filings tell a completely different story.

We encourage management teams in the midstream space to disclose actual, reported measures of leverage and non-GAAP free cash flow, as measured by cash flow from operations less all capital spending. The degree of “misinformation,” in our view, has become egregious. Investors should continue to use a wide variety of information in the investment-decision making process, but the SEC filings are a great place to find the most accurate and unbiased information.

Kinder Morgan is ~6.8x leveraged. Energy Transfer Equity is nearly 7.2x leveraged, and this is before its tie-up with Williams Co (WMB). Please be careful out there. The bondholders will eventually care when they get a hint of the recent SEC filings. There’s too much non-GAAP “massaging” going on. Pasted below is the link to the video that implies Energy Transfer Equity’s leverage is 4.5x:

Please stick to the SEC filings. They are there to protect investors.

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Gold price falls due to stronger dollar and rates speculation

Industry analysts predict further drops in the run-up to next month’s meeting of the Federal Reserve

Half of Gold Output May Not Be ‘Viable’ as Price Sags: Randgold



USD/t oz. 1,056.40 -13.30 -1.24% FEB 16 11:20:11
JPY/g 4,148.00

Gold prices fell yesterday in response to the dollar’s bounce after healthy US economic data raised expectations of an interest rate rise next month.

Prices hovered just above their lowest level in nearly six years, as spot gold fell 0.4 per cent to $1,070.46 an ounce, perilously close to the near-six-year low of $1,064.95 it hit last week.

The latest drop came after it was announced that manufacturing output rose well above economists’ expectations last month. A gauge of business investment plans in America also painted an optimistic picture.

“The orders number is surprisingly positive and that’s what’s weighing on the market,” Rob Haworth, the senior investment strategist for US Bank Wealth Management in Seattle, told Reuters.

Gold has been put under pressure by increasing speculation that the Federal Reserve will raise US rates next month for the first time in nearly a decade. Such a move would increase the cost of holding non-yielding bullion, having a knock-on effect on prices.

But Commerzbank analyst Daniel Briesemann said geo-political issues had played a part and predicted further falls for the precious metal. “The Turkey-Russia tension has only had a limited impact and now gold is back on its downward trend mainly due to the dollar and rate hike expectations,” he said.

“Uncertainty before the next Fed meeting will remain high and prices could head even lower in the next couple of weeks.”

Traders said dealings were relatively quiet ahead of America’s Thanksgiving holiday today.

Gold price resumes downward trend

23 November

With speculation mounting over a possible Federal Reserve interest rate rise over the next few weeks, the gold price has resumed its downward trend after a brief rally at the end of last week.

Having fallen as low as $1,062 an ounce during trading last Wednesday, gold rallied on Thursday and was at one point a few dollars above $1,080. But after a dip back to below this level on Friday, the precious metal dropped again to below $1,070 in Asia overnight, where it remains rooted this morning.

Gold has fallen for 13 consecutive trading days out of 16 in Asia, while for each of the last five weeks in both London and New York it has closed lower than it started. The precious metal’s short-lived recovery last week now appears to be little more than a relief rally in a bear market.

The latest fall follows comments on Saturday from San Francisco Federal Reserve chief John Williams, who the Wall Street Journal reckons is a good barometer of wider monetary policy opinion. Williams says that if nothing happens to derail current economic trends, “there’s a strong case to be made in December to raise rates”.

Rate rises hurt gold and other non-yielding commodities relative to income-generating assets. More importantly, Williams’s statement has boosted the dollar – against which gold is typically held as a hedge – to a seven-month high.

Where is the gold price likely to go from here? OCBC Bank analyst Barnabas Gan has told Reuters that the current price ­– in fact any price around $1,080 – indicates that investors are “sitting on the fence as they await the [Fed] meeting in December”. As a result, he believes the downward trend in the price of gold is likely to persist over the next couple of weeks.

Almost all traders appear to be united in their view that the gold price will fall further if the Fed does decide to raise rates in the forthcoming weeks. Even Jason Hamlin, a self-designated “gold stock bull” who reckons that gold is currently “oversold”, writes on Seeking Alpha, the financial website, that the recent price drop is a sign that the metal “will test $1,000 in the near future”.

Hamlin says that if support for gold holds up in the event that the Fed decides to keep rates as they are – or makes it clear that the rates rise is a “one and done” increase (i.e. a modest rise that will be the last for some time) – then it is not unthinkable that a rally could push gold towards a substantially higher price of $1,200 an ounce.

Rangold Update

The more we continue to produce unprofitable gold, the more pressure we put on the gold price,” said Randgold Resources Ltd. Chief Executive Officer Mark Bristow. “In the medium term, it’s a very bullish outlook for the gold industry. The question is, how long are we going to supply it with unprofitable gold?”

Gold fell to a five-year low on Friday as a rising dollar and speculation that U.S. policy makers will boost interest rates next month curbed the appeal of bullion as a store of value. While industrial metal producers have promised output cuts, “we don’t have that psyche in the gold industry, we just send it off our mine and somebody buys it,” Bristow said in an interview in Toronto.

Gold miners buffeted by the drop in prices are shortening the life of mines by focusing only on the best quality ore, a practice known as high grading, which will restrict future output and support higher prices, according to Bristow. He said in a presentation to bankers in Toronto that the industry life span is down to about five years because companies have been aggressively high grading at the expense of future production.

“The industry has moved away from looking at optimal life of mines because everyone is trying to demonstrate short-term delivery,” he said. “Where is all this value that people promised in the gold industry? It’s not there.”

Traditionally, the industry would address this through “survival consolidation and mergers,” Bristow said.

He said earlier this month that Randgold continues to look for projects to buy, but has been frustrated by companies excessively pricing assets.

London-listed Randgold’s 10-year annualized return of 19 percent is the best performance among major producers tracked by Bloomberg.

Gold futures for February delivery declined 1.2 percent to $1,056.60 at 10:12 a.m. on the Comex in New York. Earlier, the price fell to $1,051.60 an ounce, the lowest since February 2010.



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Oil Prices May Plunge : ‘Super Contango’

It looks to be a volatile final few weeks for crude oil prices. So far, the low for WTI oil prices (WTI) in 2015 of $37.75 a barrel set in August stands as the low price point — but not for long.

There is a global supply glut, not just of crude oil, but, increasingly, refined products that will likely break the back of price support in the market, sending oil prices into a holiday plunge. So much so, land based storage tanks are filling up and increasing numbers of volumes are being stored on tankers.


In a recent report, the International Energy Agency highlighted the fact that global inventories of all petroleum products were at 3 billion barrels, which was a record. And just over 2 billion of those barrels are resident here in the U.S.

Read More Contango explained

Each week, in the summary page of its petroleum-status report, the U.S. Energy Information Administration references the fact that U.S. crude-oil inventories are at levels not seen in over 80 years. Inventories of gasoline are well-above their average and diesel fuels are also well-supplied.

The vast crude oil glut or mega-glut is manifest in the West Texas Intermediate (WTXR) and Brent crude oil price curves, which have moved into a “super-contango.” (Yup, there are lots of superlatives needed to describe the current state of the market.)

Contango refers to when the front-month or near-term futures contract are trading less than or at a discount to longer-dated futures contracts.

The difference between Brent crude-oil contracts, one year apart, recently hit a record $8 a barrel. The January 2016 WTI futures contract is trading at a hefty discount of $1.50 per barrel to the February contract. In tightly-supplied markets, when crude oil prices are strong, that spread value is the complete opposite.

Oil prices have gotten some support this week from the heightened military action and worry over the situation in Syria and Northern Iraq , especially withthe downing of the Russian fighter jet by Turkey. How Russia responds could plunge the region into deeper turmoil, putting a great deal of oil infrastructure and supply in the cross hairs. But these fears simply do not haunt the market for very long last these days.


The market also got a taste of Saudi Arabia ‘s power this week, when a flip comment by the Saudi oil minister at a cabinet meeting was taken to signal a change in production policy by the Kingdom, as a way of “cooperating” with the other OPEC and non-OPEC producers. With the OPEC meeting looming next week, the comments were seized upon.

The reality is that nothing will come of the OPEC meeting. The Saudis are set to hold their ground. They see little to gain in assisting their oil market and regional rivals, Russia and Iran , by helping to “stabilize” the oil markets. In fact, the Saudis don’t see a market that needs stabilizing.


The lone bright spot for the oil market has been the strong demand for gasoline. The demand in October in the U.S. was the highest in eight years. But, once the holidays pass, that demand will drop off, too.

The downward pressure remains intense on the petroleum complex from the mega-glut and the hit to demand from the economic softness in China and Europe. The strengthening dollar is also a negative for prices.

U.S. motorists will be filled with glee this holiday season, as they buy sub-$2.00 per gallon gasoline, courtesy of $30 crude oil.

Commentary by John Kilduff, a partner at Again Capital, an investment-management firm that specializes in commodities. Follow him on Twitter @KilduffReport.

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Opko Health’s New Era Begins : Motley Fool

Following massive investments over the past two years that have swelled spending on research and development and included a slate of acquisitions, Opko Health (NYSE:OPK) could soon be on its way to delivering consistent quarterly profit to shareholders.

Bigger is better
Opko Health’s billionaire founder, Philip Frost, is legendary for orchestrating acquisitions that add value. After acquiring IVAX Pharmaceuticals in the 1980s and then growing it through M&A, he sold the company to TEVA Pharmaceuticals for $7.4 billion in 2005.

Frost could do even better than that with Opko Health.

After inking a slew of deals in the past to boost Opko Health’s drug pipeline, Frost bought the specialty laboratory company Bio-Reference Labs for $1.5 billion this past summer.

Because Bio-Reference Labs is the third largest laboratory services company, with roughly $200 million in pre-acquisition quarterly sales and $0.24 in quarterly pre-deal earnings, the acquisition significantly increases Opko Health’s sales while also giving it valuable cash flow to advance its pipeline and the potential for ongoing profitability.

Delivering on deals
One of Opko Health’s first acquisitions was rolapitant, a phase 3-ready drug that treats chemotherapy-induced vomiting and nausea, that Frost bought from Schering-Plough in 2009.

In 2010, Opko Health turned around and licensed rolapitant to Tesaro (NASDAQ:TSRO) for up to $121 million in milestone payments and tiered double-digit royalties and in September, the FDA-approved rolapitant for use under the brand name Varubi.

Since Tesaro was founded by Lonnie Moulder, the guru who helped launch the successful chemotherapy nausea drug Aloxi, and antinausea drugs like Merck’s Emend generate hundreds of millions of dollars in sales annually, Opko Health could start seeing meaningful revenue from Varubi soon.

Opko Health is also about to find out whether its acquisition of Cytochroma to get its hands on the vitamin D prohormone Rayaldee pays off.

Rayaldee is under FDA review for approval as a therapy to boost vitamin D in patients suffering from chronic kidney disease.

Stages 3, 4, and 5 CKD patients often suffer bone loss tied to imbalances in vitamin D that require treatment and that treatment typically consists of supplements that can deliver vitamin D inadequately or medicines that aren’t all that effective. If approved, Opko Health believes that Rayaldee could offer a better alternative in a market it estimates to be worth $12 billion.

Of course, no one knows how much of that market Rayaldee can capture, but investors should get a better idea next year given that the FDA’s decision on Rayaldee is expected on March 29.

Opko Health’s long-acting human growth hormone, hGH-CTP, which can be dosed once weekly instead of daily like current therapies, is also nearing the finish line.

The company acquired hGH-CTP when it bought Prolor for $480 million and earlier this year, Pfizer (NYSE:PFE) inked a deal that could be worth hundreds of millions of dollars to Opko Health, plus royalties and potential profit sharing.

Specifically, to protect the market share for its human growth hormone Genotropin, Pfizer paid Opko Health $295 million in up-front cash and agreed to pay another $275 million in potential milestones, plus royalties, to license hGH-CTP. Pfizer also agreed to split profit on Genotropin with Opko Health if hGH-CTP notches approval for use in children.

Results from hGH-CTP’s phase 3 trial are anticipated in the second half of 2016 and if those results are good and hGH-CTP eventually wins the FDA go-ahead, then it will compete in a market worth over $3 billion annually.


Looking forward
Opko Health’s C-suite is packed with former IVAX leaders, including Jane Hsiao, who is vice chairman and worked at IVAX with Frost for more than a decade, and Steven Rubin, Opko Health’s executive vice president, who worked at IVAX for five years.

That team appears to have cobbled together an intriguing mix of drugs, products, and services and their efforts could soon pay off.

Given Opko Health’s upcoming catalysts including Varubi royalties, Rayaldee’s FDA decision, and hGH-CTP late-stage trial results, 2016 is shaping up to be a critical year for Opko Health that investors shouldn’t ignore.


Baltic Dry Index Keeping Iron OreMiners Afloat

AS OF 08:03 EDT

These are nervous times for iron ore producers.

Fortescue Metals, the fourth-largest miner of the steel-making material, starts to lose money if prices at Chinese ports fall below $39 a metric ton. After a 37 percent drop this year, Metal Bulletin’s benchmark is now just 16 cents above its record-low $44.59 a ton.


So it’s no surprise the Australian company’s chief executive officer, Nev Power, is pulling every lever to keep his red dirt in the black. He’s reducing the cost of mining, processing and then hauling the ore to port to $15 a ton from its current $18 a ton, according to a presentation last month. Interest expenses add another $4 a ton, so Fortescue announced Nov. 10 a tender offer aimed at paying back as much as $750 million ofdebt early.  Beyond that, he’s looking at developing a joint venture with Baosteel and Formosa Plastics to produce magnetite, according to Bloomberg’s David Stringer. That variety of iron ore requires costly processing but attracts a higher price and a lower government royalty tax than the hematite Fortescue mines at present.

One unexpected benefit comes from the Baltic Dry index, a benchmark for the cost of hiring freight ships that dipped below 500 on Friday for the first time since it started in 1985. When China’s industrial demand was strong, the cost of both raw materials and the ships used to transport them soared. Now that it’s slumping, commodity prices and ship rates will have to fall to clear supply gluts built up during the boom.

Looking at the cost of hiring a Capesize ore carrier gives you a sense of the benefit:

Flat Iron
The cost of hiring a large ore carrier has been slumping
Source: Baltic Exchange

Fortescue probably pays more than the current spot rate so as to reserve its cargo space and lock in prices for months at a time, but the benchmark is a good guide to the general direction of its expenses. A Capesize vessel carrying up to about 170,000 metric tons of iron ore will spend some 30 days making the round trip to deliver its cargo and get back to port, judging by the last voyage of the Bulk Prosperity, a bulker owned by China Development Bank that anchored off Australia’s Port Hedland on Monday after returning from Qingdao.

At current rates of $4,713 a day, transport on the spot market for the whole voyage would come to about 83 cents a metric ton on a fully laden ship. 12 months earlier, the day rate was $22,192, and transport was $3.92 a ton. When you’re only making $5.75 a ton of profit, as Fortescue is now, that’s a significant difference.

There’s potentially a virtuous circle here for iron ore producers. With operating costs for a capesize vessel averaging about $7,400 a day, according to consultancy Moore Stephens, shipowners are mostly losing money at current rates. But the alternative is less attractive these days, too. Thanks to that glut of iron ore, breaking up a ship and turning it into steel scrap only nets about half what it did a couple of years ago:

Breaking Up Is So Very Hard to Do
Low scrap prices are making it more difficult to remove ships from the market
Source: Metal Bulletin

That may keep more vessels on the market and ensure shipping costs stay lower for longer, helping iron ore miners stay in the black.

Don’t get too comfortable. Companies only book a ship if they have real cargo to move, so there’s no speculative activity in the Baltic Dry to take the edge off price swings. The index almost doubled during June and July and Capesize rates were above $14,000 a day as recently as September. Fortescue’s cushion is thin enough now that even a small spike could leave investors feeling sore.


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Baltic Dry Index At New Low : Shipping Sector Sinking Lower

LONDON, Nov 20 (Reuters) – A slump in dry bulk shipping is set to worsen as the meltdown in global commodities and too many ships free for hire rock the sector used by investors to gauge the health of world trade.

Slower coal and iron ore demand from China – the world’s biggest industrial importer – have battered the dry bulk sector, already in the midst of its worst ever downturns that is expected to extend well into next year.

This week the Baltic Exchange’s main sea freight index , which tracks rates for ships carrying dry bulk commodities and seen by investors as a forward-looking indicator of global industrial activity, plunged to an all-time low.

A slump in oil and other commodity prices, due to slowing Chinese demand, has widely been seen as one of the reasons for U.S. Federal Reserve hesitancy in tightening policy.

“Dry bulk demand is very much dependent on the world economy,” said Symeon Pariaros, chief administrative officer of Athens-run and New York-listed shipping firm Euroseas.

“The slowdown in the world economy has caused both dry bulk and container shipping to suffer a lot lately. Euroseas, having exposure in both these sectors, is facing the consequences of this very low rate environment.”

There have already been casualties. In September, Japanese bulk carrier Daiichi Chuo Kisen Kaisha filed for protection from creditors. This followed private equity backed Global Maritime Investment Cyprus Ltd, which filed for Chapter 11 bankruptcy protection in the United States.

While prospects for commodities markets are shaky, the dry bulk freight players will also need to contend with more ship deliveries hitting the water in coming months.

“More vessels have to be scrapped, no additional newbuildings (new ship orders) and further delay deliveries – all these take time, more than one year, implying that in the interim the market will be ugly, and a great number of shipowners will not have the cash to bridge the weak market,” said Basil Karatzas, head of New York consultancy and brokerage Karatzas Marine Advisors & Co.

“Some may be flexible to get money from funds for working capital … and otherwise sacrifice some equity to save the business, but many small shipowners will be washed out.”

Gaga Over Amazon’s Blockbuster Earnings Report

Amazon Readies Kindle Fire Update to Keep Up With Apple, Google

Shares of Inc. spiked in the after-hours session on Thursday, with the firm reporting a surprising third-quarter profit on better than anticipated sales.

The more than double-digit gains propelled Jeff Bezos, chief executive officer of the e-commerce and cloud computing company, to third on the list of America’s richest people.

The strength of Amazon’s quarterly results can be judged not only by the jump in Bezos’ net worth, but also by the effusive praise these numbers inspired.

Commentary from analysts show that they believe the company’s performance and growth prospects are robust, as well as increased faith that Bezos’ intense expansion plans, which crimped on profitability in the past, will continue to bear fruit going forward:

Morgan Stanley‘s Brian Nowak (Overweight, Price target to $750 from $740)

Amazon’s 3Q results reinforce our view that the company’s business is inflecting around the globe as YoY ex FX revenue growth in all 4 of its main retail segments accelerated…for the 3rd straight quarter. Retail gross profit dollars per customer – which we view as a proxy for retail same store sales – accelerated to 27% growth…the fastest growth in company history and 2.5X higher than the long-term ~11% average rate… In effect, we see AMZN’s accelerating SSS growth leading to a period of sustained, rising profitability.

Stifel‘s Scott Devitt (Buy, Price target to $750 from $700)

Winning in All Facets of the Game. We believe the company has emerged from its recent investment cycle well-positioned to extend its competitive advantages through the Prime platform, enhanced logistics and AWS services. The rapid adoption in Prime membership has been a boost to NA retail and is in the early stages of driving international retail… Overall we believe this quarter’s results indicate that Amazon has reached a critical level of scale which allows it to build a robust global ecosystem while maintaining profitable top-line growth.

Goldman Sachs‘ Heath Terry (Buy, Price target to $760 from $680)

We believe this quarter is further evidence that Amazon’s investment in infrastructure, logistics, and web services is accelerating market share gains, cash flow growth, and continued high returns on invested capital.

Nomura‘s Robert Drbul (Buy, Price target $700)

We do not expect investment spending to abate, especially in Prime and AWS, but believe the company has proven that profits can be realized regardless. We expect AMZN to simultaneously focus on cost reduction and efficiency, and believe that continued strong revenue growth (~20% in FY15-17) will support the profit equation.

Barclays‘ Paul Vogel (Overweight, Price target $700)

Although margin outperformance was the center of attention, Amazon’s core retail business out performed expectations as well, led by continuing acceleration of International revenue and aided by Prime. Both North American and International EGM growth, on an fxneutral basis, have accelerated in each quarter this year, with EGM now comprising 79% of North American Revenues and 71% of International Revenues.

Jefferies‘ Brian Pitz (Buy, Price target $730)

After speculation for about 1.5 years that Amazon might in-source last-mile fulfillment, it seems the company is getting serious about this. According to media reports, Amazon has hired an executive search firm to build a management team to lead the effort. We believe this is Amazon’s next major step in its evolving fulfillment strategy which is focused on reducing friction for shoppers by offering better selection, product availability, & high service levels…As the company enables a mix of all these expedited delivery services into the top 50 US markets, traditional retailers with slower and more expensive shipping options should be feeling increasing pressure and start losing market share.

Raymond James‘ Aaron Kessler (Strong buy, Price target to $745 from $640)

Amazon reported strong 3Q revenues driven by accelerating retail sales (in part driven by Prime Day) and continued AWS outperformance (78% y/y). Additionally, Amazon continued to see significantly improved margins for North America retail and AWS (non-GAAP OM increased ~400 bp y/y ). Given the strength, we are increasing our 2015/2016 non-GAAP operating income by ~11/6% and believe estimates could prove conservative.

Macquarie‘s Ben Schachter (Outperform, Price target to $740 from from $660)

The bottom line is that AMZN continues to deliver against the long-term bull thesis: increasing share, rising margins. Finally, something notable this earnings season thus far is that EBAY, AMZN, and GOOG have all highlighted growth in India (AMZN has tripled fulfilment capacity y/y). While not quantified, these companies are all seeing an uptick meaningful enough to highlight.

Deutsche Bank‘s Ross Sandler (Buy, Price target to $725 from $665)

Retail is charging into 4Q with 75m+ prime members globally (DB est). We think shares can drift higher in the near-term, but admittedly are due a breather as margins level out a bit in 2016, which we don’t think will come as a surprise…Try as we might, we struggle finding anything to nitpick. The obvious point would be that 4Q guidance was below Consensus, but this was largely expected by the buy side.

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