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Lubrizol Corporation (NYSE:LZ) — Fallout From the Lost Cognis Bid

Jul 7th, 2010
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Lubrizol Corporation (NYSE:LZ), a specialty chemical company for the industrial, transportation, and consumer markets, recently failed in its bid to buy Cognis, a chemical manufacturer headquartered in Germany. Agora Financial editor Dan Amoss explains what the lost attempt tells us about Lubrizol’s current prospects.

From his recent reader update:

“The Wall Street Journal reported that Lubrizol (NYSE:LZ) lost in its bid to acquire specialty chemical maker Cognis GmbH.

“BASF, the German chemical giant, is the reported winner, with a €3.1 billion bid. This bid was considered superior to Lubrizol’s bid — a reported €3.3 billion — because BASF’s huge balance sheet ensures closure of this deal. Plus, Cognis’ owners probably didn’t want to assume the risk of getting paid partially in the form of new LZ shares that likely would have been issued in a secondary offering.

“Cognis makes raw materials for the pharmaceutical, food and beverage, cosmetics, and cleaning products industries.

“The fact that Lubrizol bid so highly for Cognis should concern Lubrizol shareholders. Lubrizol’s enterprise value is just .6 billion, so a Cognis acquisition would have been a huge financial and operational risk. Plus, the history of buying from private equity sellers — in this case, Goldman Sachs and Permira — usually isn’t pretty for the acquiring company. Companies sold by private equity typically have very lean operations, assumed too much debt, and scrimped on capital programs.

“We know that Cognis’ balance sheet is highly leveraged because BASF’s bid consists of €700 million for Cognis equity plus the assumption of €2.4 billion of net debt and pension obligations.

“My guess for the reason Lubrizol management bid for Cognis: It wants to diversify away from the boom-and-bust business of making oil additives. Management probably wanted to use Lubrizol’s very expensive stock — now priced at a peak multiple of unsustainable earnings — as a currency to expand its better, more stable specialty chemicals business.

“Now that Cognis is out of reach, Lubrizol management will probably look to spend dry powder on smaller deals. On the latest earnings conference call, the CEO specified that he’s looking for ’several high-quality bolt-on acquisitions in the 0-500 million range.’”

Dan Amoss expects LZ to break below its current “very expensive stock” price, and has in mind a specific range it will hit within the next six months. Out of fairness to his current subscribers, you’ll have to sign up for his newsletter, the Strategic Short Report, to get his exact recommendation. It’s available through the Agora Financial reports page, which can be found here.

Best,

Rocky Vega,
The Daily Reckoning

[Nothing in this post should be considered personalized investment advice. Agora Financial employees do not receive any type of compensation from companies covered. Investment decisions should be made in consultation with a financial advisor and only after reviewing relevant financial statements.]

Lubrizol Corporation (NYSE:LZ) — Fallout From the Lost Cognis Bid originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”


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US Learns Nothing from Japan’s Economic Mistakes

Jul 2nd, 2010
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“Data raise fears over faltering economy,” says this morning’s Financial Times.

What a surprise! What happened to the recovery?

The Dow fell another 41 points. Gold got hammered for a loss.

Why would gold go down so much? Because people are finally realizing that deflation is the real risk, not inflation. Gold could continue to slip and slide for a long time now… It’s hard to say. It can rise in a deflation. But it depends on how volatile and uncertain the markets appear. In a stable, Japanese-style slump, gold could go down and stay down for many years.

But you know our thoughts on the subject. We’ll see all kinds of ‘flation’ before this crisis is over. Deflation. Inflation. Stagflation. Hyperinflation. You name it!

The latest news tells us that jobs are down. Treasury bonds are trading at their highest point in 14 months. A 10-year Treasury note yields just 2.93%.

As dear readers know, the feds can’t really make bad debt go away. All they can do is move it around. The parties to the transaction – creditors and debtors – usually decide among themselves who bears the losses. Typically, if the debtor can’t pay, the creditor loses his money. But when the feds step in almost anything can happen. But nothing good.

The general government plan is to collectivize losses – either by moving them onto the taxpayers or by moving them onto the general public. When the government borrows money to fund its bailouts and boondoggles, for example, it is taking losses away from the people who deserve them and sticking them on the taxpayer.

If they can manage to boil up a little consumer price inflation that is even better. Then losses seem to disappear into the air…like noxious fumes. The entire public breathes them in and gets a little lightheaded. It doesn’t know what to think or who to blame.

In the present case, some economists favor sticking taxpayers with the losses. Others are squarely against it, preferring to force the losses on the general public by means of inflation.

The trouble is, these cockamamie plans tend to have unanticipated consequences.

The Japanese feds really pulled a fast one, in this regard. They borrowed from their own people in order to fund a 20-year bailout/boondoggle program. The idea was to provide “counter-cyclical stimulus.”

Naturally, the stimulus never seemed to stimulate anything but more stimulus. The program went on for two decades…and, as far as we know, the Japanese economy is still limping along.

The effect economists did not anticipate was that the economy did not take off. Instead, there followed two decades of on-again, off-again slump. Which is why it would have been better to let the creditor and debtors work out their problems on their on…let them take their losses back in 1990…and be done with it!

Another unanticipated result has not yet been fully realized. The government took savings from Japanese households and spent it. Now, a whole generation of Japanese old people looks to government bonds as the source of its retirement wealth. Trouble is, there is no wealth there. The feds took credits and turned them into debits. They took the surplus wealth of an entire generation and squandered it. Now, instead of looking to stored-up wealth for their retirements, the Japanese have to hope that the next generation will be kind enough – and able – to keep up with the debts laid upon them.

Trouble is, the next generation has too much debt to carry. Government bonds outstanding equal nearly 200% of GDP. At zero interest rate, it’s not too hard to keep up with the interest payments. But even the Prime Minister is beginning to wonder how those debts will ever be repaid. And interest rates will not stay low forever.

Imagine that inflation rose…and that investors got nervous. Imagine that the carrying cost of that debt rose in Japan as it did in the ’70s in the US. At 10% interest, the cost would be one fifth of GDP – or about as much as the entire government budget.

Obviously, the system will fall apart first…leaving Japanese retirees with a lot less money than they thought they had.

Bill Bonner
for The Daily Reckoning

US Learns Nothing from Japan’s Economic Mistakes originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”


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Phony Choices From a Bogus Profession

Jun 25th, 2010
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We got a look at how the world really works last week. Bloomberg ratted out Sophia Constantinidou:

“The 52-year-old gets 400 euros (6) a month from the Greek government, part of her late mother’s state pension. Under the current system, Constantinidou qualifies to receive the payment for life as the only surviving child of a deceased civil servant, provided she doesn’t tie the knot.”

Ms. Constantinidou is on lifestyle support, thanks to the generosity of the Greek government, which is on lifestyle support itself, thanks to the generosity of the European government, which is only able to pay its own bills thanks to creditors who may or may not know what they are doing. The big debate among economists is when to pull the plug.

‘Austerity!’ insist the Germans and Canadians. ‘Growth!’ promise the English and Americans.

Several things have become obvious: first, a ‘recovery’ is not going to happen; second, after 60 years of credit expansion, the world has entered a long period of financial adjustment and debt destruction; third, most economists should be put to work picking up trash along national highways. Not that they would do a very good job of it, but at least they would be kept out of mischief.

Imagine poor Pharaoh… 7 lean years and only the advice of a slave to help him through. And think of how the Dark Ages might have been brightened up if Charlemagne had had an economist at his right arm. But now we have thousands of economists. And they offer us a stark choice: Austerity or growth?

Advocates of austerity say they have no choice. They have to cut public deficits. Besides, deficit cuts will lead to more private spending and investing.

Canadian Prime Minister Stephen Harper, in a letter to his G-20 counterparts, said world leaders should agree to reduce their deficits by half by 2013. “Nobody can seriously dispute that excessive public debts, not only in Europe, are one of the main causes of this crisis,” added German Finance Minister Wolfgang Schaeuble. “That’s why they have to be reduced.”

Not so says Martin Wolf howling at The Financial Times.

“What we are seeing is an epidemic of private sector frugality,” cries Wolf, warning that “cutting public spending will not automatically raise private spending.”

Both positions are claptrap.

Through no fault of her own, Ms. Constantinidou has become a leech. Resources are being diverted from savers, investors, and householders so that she can get something for nothing. Economists on the one side pretend that giving her the money increases ‘demand’ and helps the economy grow. On the other, they pretend that taking away her unearned income would impose a hardship on the whole economy.

As to the first proposition, if you could really make people better off by robbing Peter to pay Paul, Peter would already be penniless. There is no shortage of people willing to take away his money. As to the second, too bad for the leech. Paul will have to give up something he had no right to in the first place. But where is the austerity? Resources don’t disappear. Ms. Constantinidou may have to say goodbye to her unearned transfer payments. Someone else will say ‘welcome home’ to their long-lost money.

But in last Wednesday’s Financial Times, Mr. Wolf slipped another ace up his sleeve. Instead of larceny or usury, he suggests trickery: why rob Peter or borrow from him, in other words, when you can scam him with phony money? “Why it is right for central banks to keep printing,” is his headline.

Cut off from reality by their own conceits and fantasies, it is as if economists were describing the perfect woman: how pretty she is…how perfect her little nose turns up and how she never needs make-up…how she always does what she is told and never talks back. Then, you turn and you see the woman herself. She is no lady; she’s an inflatable doll! Like a simpleton’s economy, she resembles the real thing – except in the ways that really count.

A mannequin can be programmed to say what you want her to say. Raise government spending enough and you may be able to get her to say the GDP growth is positive. Pay enough people to do enough make-work jobs and she will tell you the employment rate has gone up. Get the software right and she will spend when you want her to spend, and save when you want her to save…and pretend that you are the smartest economist who ever lived.

But a real woman has her own ideas. Sometimes she is lighthearted and spendthrift. Other times she is anxious…such as when she sees too much debt or too much money-printing. There are times when she will look lovingly upon her husband and do as she is bid…and times when she sighs, realizing the economist she married is a hopeless jackass.

Bill Bonner
for The Daily Reckoning

Phony Choices From a Bogus Profession originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”


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Russia’s Veers Huge Reserves Away From Major Currencies

Jun 16th, 2010
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At nearly a half-trillion dollars, Russia has the world’s third largest international monetary reserves and it’s decided it’s time to shop for currencies outside of the usual suspects. Specifically, Russia has begun adding the Canadian dollar to its mix and is now also looking at the Australian dollar.

According to Bloomberg:

“U.S. dollars account for 47 percent of Russia’s reserves, while euros make up 41 percent, British pounds 10 percent and Japanese yen 2 percent, Ulyukyaev said in November. The central bank has reduced dollars from 50 percent in 2006, when euros accounted for 40 percent and the remaining 10 percent was in yen and pounds. Russia’s international reserves, the world’s third biggest, reached 8.2 billion on June 4.

“President Dmitry Medvedev last year suggested Russia would reduce its use of the U.S. dollar as a reserve currency after the greenback lost 34 percent of its value against the euro in 2 ½ years. The euro fell to a four-year low of .1877 on June 7 and has dropped 22 percent since Nov. 25 on investor concern policy makers may fail to contain Europe’s debt crisis.

“Russia’s push to diversify reserves ‘is more a result of their desire to do something in response to the extreme volatility of the dollar and the euro,’ said Elena Matrosova, a Moscow-based economist at BDO International, the financial consultancy that lists the central bank among its clients. The Canadian or Australian dollar ‘can’t be truly called international reserve currencies because of their very limited liquidity,’ she said.”

This announcement comes after a recent statement by the world’s .5 trillion reserves leader, China, that it would “improve its [foreign-exchange reserves] diversification strategy.” It’s becoming a more common theme to look outside the currency majors and, in Russia’s case, at two commodities-driven economies. Perhaps we’ll see China take a similar approach.

You can read more details in Bloomberg’s coverage of Russia buying Canadian and Australian dollars for the first time.

Best,

Rocky Vega,
The Daily Reckoning

Russia’s Veers Huge Reserves Away From Major Currencies originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”


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Moving Away From Fiat Currency Dependency

Jun 14th, 2010
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Culture, politics, and economic matters are always intertwined. The rise of relativism, secularism, and socialism will continue to shape the attitudes of central bankers, whether or not they as individuals subscribe to these modern liberal doctrines.

Pedigreed from the large institutions that they protect and manage, and ultimately exposed to a media that is also very influenced by shifting cultural values, tolerances for pain of any kind are so reduced that support for moving to any other system of money is nil.

Moreover, trading off some added inflation for maintaining high employment is a political winner, so hopes for heightened consideration of controlling monetary aggregates look dim.

Indeed, it took double digit readings in the CPI-U before Fed Chairman Volcker, appointed in August 1979, took strong action and abandoned interest rate targeting despite political attacks and protests such as the blockading of the Eccles building on C Street by indebted farmers.

In fact, as undersecretary of the Treasury for international monetary affairs, Volcker had played an important role in suspending gold convertibility in 1971.

There is a human and moral problem with operating a faulty system and legitimizing it at every turn. Academic studies embolden market participants to invest their life savings, only to see these vaporized either through a collapse of asset prices, inflation, or even more dangerously, through putting in place a cure that accomplishes both in sequence.
It is like imposing slavery — after the fact, because a life’s worth of labor is lost.

Inflation of the money supply is the electricity of relativism and this modern brand of socialist capitalism, for it courses through our circuitry and transfers the energy of producers and savers to consumers and borrowers, lights the darkness of business depressions, sparks bubbles and purportedly economic growth also, discounts looming entitlement liabilities through sleight-of-hand CPI measurement, and negates the theism of rewarding prudent institutions and citizens.

To move away from fiat currency is to reject socialism.

Like the mighty Mississippi River, which periodically through nature’s wrath breaks free of government’s dikes and levies, once again gold, the natural money of the millennium, might freely meander through commerce and stop the erosion of the rich delta soil lost each year to corrosive incursion of the salt water of socialism.

Regards,

Bill Baker,
for The Daily Reckoning

[Editor's note: This passage is reprinted from William W. Baker's book, Endless Money: The Moral Hazards of Socialism, with the permission of John Wiley & Sons, Inc (©2010). You can get your own copy here.]

Moving Away From Fiat Currency Dependency originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”


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