FP Trading Desk

Mexico may not get a lot of attention, but the investment community sure seems to recognize its prospects. The Bolsa Index is up more than 90% since the March 2009 lows and is just shy of its all-time high set in January 2010.

One of the primary reasons for this success is commodities. Mexico is one of the most promising areas to invest due to a renewed wave in exploration investments and a mining sector that is well-placed to profit from both increased global demand for commodities and a relatively investor-friendly regulatory environment.

“Further, the broader Mexican index is made up of solid companies, which should outperform most developed-world stock markets,” National Bank Financial geopolitical analyst Pierre Fournier says in a new report.

In 2009, Mexico’s 7% decline in GDP was among the worst performances in the world, underscoring the country’s dependence on the U.S. consumer. The next couple of years is expected to bring modest growth, but the country’s long-term economic, social and political fundamentals are strong enough to justify a bullish long-term investment perspective for Mexico, according to Mr. Fournier.

“Despite its overdependence on the United States, and strong competition from China and other developing countries, Mexico’s manufacturing sector is becoming increasingly competitive and is beginning to diversify its export markets,” he says. “The overwhelming security and geopolitical interests of the U.S. will also ensure that Mexico’s powerful neighbour will provide a backstop in case of need.”

Jonathan Ratner

It is busy times for Australian lithium explorer Orocobre Ltd.

On Monday, it announced a very high-grade lithium discovery at its Salinas Grandes project in Argentina.

On Tuesday, it announced a $20-million Canadian equity offering and a proposal to list on the Toronto Stock Exchange. Its stock price has run up over at the Australian Stock Exchange.

“We have discovered the finest [lithium-bearing] brines ever discovered in Argentina. It’s not even close,” said James Calaway, Orocobre’s chairman. He compared the discovery to SQM’s Atacama project in Chile, which is considered the gold standard in the industry for both its high lithium grade and lack of contamination.

Orocobre made news in January when it struck a joint venture with an affiliate of Toyota Motor Corp. to develop its Salar de Olaroz lithium-potash project. Like other automakers, Toyota is desperate to secure lithium in anticipation of huge demand once hybrid car production ramps up.

Despite all the recent news, Mr. Calaway made it clear that Orocobre is not a new company -- he said it has been on the hunt for lithium projects for a few years. Since it got in ahead of the current rush, it could be very selective on its projects.

“We’ve been at this a while. We’re not some Johnny-come-lately to this game,” he said.

He added that the goal is not to sell Orocobre, but to build it into a large producer.

Peter Koven

Canada's M&A market continues to heat up, but the number of deals remains well below the frantic pace set previous to the financial crisis.

In the fourth quarter of 2009, there were 254 announced transactions worth almost $33-billion, according to the Financial Post Crosbie: Mergers & Acquisitions in Canada database.

The latest results represented the third consecutive quarter of increasing activity for Canadian M&A markets and the highest level of activity in the last five quarters.

More specifically, the number of announcements in Q4 was 52% above the cyclical low seen in the first quarter of 2009 when there were only 167 announcements.

“Factors contributing to the higher activity included greater confidence in the economic outlook, improving valuations, and greater availability of financing in many market segments,” said Colin Walker, Managing Director, at Crosbie & Company.

Starting in the fourth quarter of 2005, M&A activity was routinely above 350 deals per quarter, reaching a record 416 transactions in the second quarter of 2007. The number of deals dwindled from there, hitting a bottom early last year.

International acquisition activity by Canadian buyers, increased acquisition activity involving government related entities (especially among larger deals),
and strong activity in energy related sectors, have been major themes in the 2009 rebound in M&A activity.

Of the ten largest transactions in Q4, seven were cross border deals, three were energy related, and three involved government related entities.

David Pett

Diamonds have been a bad investment for a very long time. Ask anyone who invested in the sector over the past decade, and they will probably tell you they regret it.

But prospects for the sector are looking up, according to RBC Capital Markets analyst Des Kilalea.

He said that the outlook for diamond prices is “pretty good” as production is declining in the major diamond-producing regions, and demand from China is growing by leaps and bounds.

“Investors are still risk-averse when it comes to diamonds, but they’re more interested than they were a year ago,” he said, adding that junior drilling plays are still of no interest to investors.

Rough diamond prices have bounced back strongly after collapsing during the market meltdown in 2008, and Mr. Kilalea said prices could rise 30% to 40% over the next five years.

“Hopefully people make some money this time,” he said.

A potential catalyst would be improved demand in the United States, which accounts for about 40% of world demand. While there is plenty of growth in China, it is less than 10% of the market, so Mr. Kilalea said it cannot pull the market along on its own the way it does with base metals.

Peter Koven

(Photo by Reuters)

The sun is setting on solar energy companies, at least if you ask J.P.Morgan, which has downgraded several businesses in the sector.

Christopher Blansett, analyst with J.P.Morgan, said in a note to clients Tuesday that demand for solar installations around the world will decline in the second half of 2010.

"Our updated global solar demand model calls for about 7.5 gigawatts of installations in 2010 with our work suggesting 4.5GW of this coming in the first half of the year ... As solar stocks have historically traded in-line with volume demand, we view this as a particularly negative indicator for the group," he said.

He also warned that companies were aggressively expanding capacity to chase market share, which could lead to an oversupply of as much as 3-4GW.

Instead, Mr. Blansett recommends long investors look into LED and wind sectors, which have "better underlying fundamentals" over the next year.

After reviewing the sector, Mr. Blansett has downgraded First Solar Inc. and Energy Conversion Devices Inc. to Underweight from Neutral, and Evergreen Solar Inc. to Neutral from Overweight.

He's also slashed the price target for First Solar  to US$85 from US$140, Energy Conversion Devices to US$6 from US$15, and withdrawn the US$5 target for Evergreen without posting a replacement figure.

Mr. Blansett maintains a Neutral rating on Ascent Solar Technologies (to US$5 from US$9.50), an Underweight on MEMC Electronics Materials (US$12), and an Overweight on Applied Materials, Inc. ($16).

Eric Lam

 
A senior Colombian minister said Canadian miner Ventana Gold Corp. is not likely to lose its rights to the La Bodega project. That has to rank as extremely good news for the company and its shareholders.

Vancouver-based Ventana was the single hottest gold story of 2009 after the company made a potentially huge discovery on its La Bodega property in Northeast Colombia.

But Ventana ran into a major problem last November, when the company owning the mineral rights to La Bodega reneged on an option agreement to sell it to Ventana and took Ventana to arbitration instead.

At the PDAC conference, Hernan Martinez Torres, Colombia’s minister of mines and energy, said he thinks that Ventana has the legal rights to the project and will not lose it.

“I don’t think they are going to lose their rights,” he said in a meeting with reporters. He added that the dispute will simply take time to resolve, “Like any old legal dispute.”

Mr. Torres declined comment on the proposed sale of Colombia’s Frontino gold mine, which is unpopular with some local people.

Peter Koven

Northern Tiger. 

That's what Derek Holt, economist, Scotia Capital Markets, is calling Canada these days, thanks to a long list of strengths that continue to make investing here a solid opportunity. 

"[The Canadian dollar's] 25% y/y appreciation against the USD has generated stellar returns to those who can take the currency risk in their mandates, before even getting into the massive rally in risk-adjusted assets that occurred over this same time frame," he said in a note to clients.

"The case for over-weighting Canada is still compelling," he said in a note to clients.

Even after a 25% year-over-year appreciation in the Canadian dollar against the greenback and the massive rally in risk-adjusted assets over the same time frame, Mr. Holt said Canada continue to have much of what one would want in a global portfolio.

He expects the Canadian dollar will strengthen further against the U.S. dollar and other world currencies. At the same time, it will remain the "poster child" for fiscal health over the next five year. 

Domestically, he expects corporate profits to rise in lockstep with the economic recovery and by 2012, he said Canada will "have a virtually unbeatable global corporate tax regime." Meanwhile, he anticipates productivity to improve and rival the U.S. in the coming years.

Other Canadian advantages cited by Mr. Holt include a best-in-class banking system, a relatively favourable regulatory environment, low political risk, and a highly educated workforce.

David Pett

Fortune magazine reports that fund manager Bruce Berkowitz has bought more than US$700-million of Citigroup shares. Berkowitz, who manages the Fairholme fund and was named Morningstar’s U.S. fund manager of the past decade, told Fortune he thinks the bank is cheap. It trades for less than its tangible book value. And the U.S. Treasury department has allowed Citi to repay its Troubled Asset Relief Program funds, which Berkowitz argues is an indication that regulators must think the bank has adequately recapitalized itself.

Before following Berkowitz’s lead, you should look at the bank’s income statements and cash flow statements for the past few quarters. The bank is losing money and cash flow from operations has turned hugely negative—to the tune of minus US$56 billion over 2009. Berkowitz is betting that the bank’s profits will revert to something like past glories, but that’s by no means certain. A turnaround could be a long time coming.

The strongest argument for an investment in Citi is that the U.S. government has demonstrated that it will not let the bank fail, no matter what. At its current valuations, and with the buffer of an implicit government guarantee behind it, Citi is worth a look for long-term investors—but only if you can handle some serious volatility.

Freelance business journalist Ian McGugan blogs for the Financial Post.

It may be a bit of a cliche, but why mess with a classic? Here's the results of the Financial Post's Annual (sort of) gold price guessing game, conducted Monday.

We asked 14 gold companies at PDAC to give their best guess for the price of gold in a year. The average of all the guesses came in at $1,443.58 (all prices U.S.).

The highest figure came from Capital Gold Corp., which guessed $2,000. The lowest was from Northern Freegold Resources, at $1,100.

The spot price at the time of the quiz was $1,122.

The winner, unfortunately, gets nothing but our admiration. And yes, this reporter was asked more than once how much that was worth on the open market.

Here's the full results:

Tradewinds Venture Inc. $1,250
Brazilian Gold $1,200
Crescent Gold Ltd. $1,550
Vault Minerals $1,327.18
Olympus Pacific Minerals $1,650
Linear Gold Corp. $1,700
Capital Gold Corp. $2,000
Rand Gold Res. $1,500
Wits Gold $1,500
Aurizon Mines Ltd. $1,533
Rainy River Res. $1,200
Northern Freegold Res. $1,100
Golden Band Res. $1,400
Acadian Mining Corp. $1,300

Eric Lam

(Photo by Getty Images)

We’ve outlined Edward Yardeni’s 12 reasons to be bullish, so here are some reasons to be bearish, or at least cautious.

The market’s rebound has been impressive, but even if the S&P 500 edges a little higher in the near term, John Higgins, senior markets economist at Capital Economics expects to see it back down around 1,000 by the end of the year.

The market’s gains this time around have been considerably greater than normal
In the past 12 months, the S&P 500 has risen by nearly 70%. During the previous 13 economic downturns since 1929-1933, it rose by an average of 44% in the first year after hitting a low.

Equities have tended to do less well in the second year after hitting a cyclical low
An average rise of 5% or so has been typical. “There is always the chance that the market will fare better than average this time around... But we doubt last year’s spectacular gains will be sustained for long.”

Valuations are not compellingly attractive
The stock market’s cyclically-adjusted price (reported) earnings ratio is about a third higher than its long-run average based on data provided by Robert Shiller of Yale University. The gradual scaling back of unconventional monetary policy stimulus is likely to curb investors’ appetite for risk this year even if the Fed leaves key policy rates on hold.

The economic recovery is also likely to run out of steam before too long
In the absence of a further increase in margins – which have already rebounded – weak economic growth should weigh on corporate earnings.

Jonathan Ratner