Glencore IPO: 5 things you don’t know about the world’s largest commodities trader

In the run-up to Glencore’s IPO date, here are five facts you probably don’t know about the world’s largest commodities trader.

Glencore’s IPO date is set for May 19, 2011, when the company’s stock will begin trading on the London Stock Exchange. A week later (on May 24 or May 25) Glencore stock will also start trading in Hong Kong. Here are five facts you probably don’t know about the world’s largest commodities trader:

1) Raw materials = massive profits. Last year, Glencore logged earnings before interest, taxes, depreciation and amortization (EBITDA) of $6.2-billion (per the Globe and Mail). Glencore makes its billions by having its fingers in lots of important raw materials pots from oil to coking coal, rice and aluminum. While it started strictly as a commodity trading firm, the company began acquiring ownership stakes in mines and agricultural producers during the late 1980s. With ongoing global currency debasement, profits at Glencore have mushroomed quickly. One of the company’s biggest assets comes in a 34.5 percent stake in UK miner Xstrata PLC (LON:XTA). Glencore’s proportion of Xstrata’s earnings amounted to $1.7 billion all by itself in 2010 (per the Financial Times).

2) Just how big is the world’s largest commodities trader? Ummm… quite big. Glencore International AG’s revenues hit $145 billion last year. Keep in mind, that’s revenue, not market cap. By comparison, the New York-based Goldman Sachs Group, Inc. (NYSE:GS) generated $49 billion in revenue last year and has a market cap of $79 billion. Pre-IPO, Glencore is one of the largest privately-held companies in the world. Forbes names the agricultural company Cargill as the largest privately-held company in the U.S. at the moment, and they estimate the company generated $109 billion in revenue last year. Glencore employs 57,500 people around the world. In a word, Glencore is massive.

3) Born in a four-room flat. Founded by trader Marc Rich and several colleagues, Glencore had a humble start in a tiny apartment in central Switzerland. The company was called Marc Rich + Co back then, and Rich is often credited with single-handedly founding the spot market for crude oil. The company was successful virtually overnight reaping $28 million in its first year trading minerals, metals and oil, according to Australia’s Sky News. The next year, Marc Rich + Co pulled in $50 million, and its continued growing remarkably ever since.

4) Instant billionaires. After digging through Glencore’s 1,600-page prospectus, Forbes has confirmed that the company will create at least six billionaires overnight when the company goes public. At the top of the list sits Glencore’s current CEO Ivan Glasenberg. Glasenberg will hold 15.8 percent of the company (1.09 billion shares) for a net worth of $9.5 billion. “I can’t think of any other IPO where an individual’s stake was valued this highly,” Jay Ritter, a finance professor at the University of Florida, told Bloomberg. Other instant billionaires include the directors and co-directors of various commodity departments, and Glencore’s CFO, Alex Beard, as well an unnamed mystery shareholder.

5) High risk, high rewards. Part of what’s made Glencore into the massive commodities titan it is today is the company’s propensity to take risks others are unable or unwilling to take. Their stake in Katanga Mining, which operates in the Democratic Republic of the Congo, is a prime example. Congo’s loaded with natural resources, but political instability in the region means some of that metal might never make it to market. Another London-listed mining company, First Quantum Minerals, was recently stripped of its copper mines by the DRC government (per the Financial Times). Katanga could suffer the same fate … or it could help make a fabulously profitable Glencore all the more appealing in the years to come. Investors will decide whether they want to go along for the ride in two short weeks.

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3 signs silver prices are due for a correction

The pessimist in me sees three reasons why silver prices could falter in the coming weeks, even in the face of record highs.

Doggedly rising silver prices have split precious metal investors into two camps: those who see silver taking out the $50 an ounce mark, and those who are convinced a powerful correction is overdue. No one can know for certain where prices are headed, but we could very well be on the cusp of a parabolic move in silver prices – or, perhaps, a frightening correction. The pessimist in me sees three reasons why silver prices could falter in the coming weeks:

1) The close of QE2. The best way to make money investing is by beating the herd to the punch. And there’s a big punch that’s waiting for precious metals investors at the end of June: the end of QE2. The Fed’s loose monetary policies are what kicked up fears of inflation in the first place. Take away those fears (if you can do so in time) and you take away the perception that the dollar’s going to be worthless in a few years. If some modicum of faith in the dollar gets restored, investors won’t necessarily have to stash their cash in metal to protect their assets.

2) A downgrade on commodities. Analysts at Goldman Sachs Group, Inc. (NYSE:GS) are sounding the warning bell. They spent much of last week telling investors that rising oil prices are threatening to suck the air out of the global recovery. “Mounting downside risks to current exceptionally high crude oil prices are leading us to recommend an underweight allocation to commodities on a 3 to 6-month horizon, but we maintain an overweight on a 12-month horizon on tightening fundamentals over the next year,” analysts at the investment bank wrote according to Barron’s. While it’s true that much of the run-up in commodities has been driven by inflation, prices are also dictated by economic growth. Should companies start warning of a wide-spread economic slowdown, silver prices won’t necessarily be immune from a correction.

3) A slap on the wrist from Standard & Poor’s. Silver spot prices briefly surged just shy of $43.60 an ounce yesterday on the heels of a stern warning from Standard & Poor’s. The rating agency warned it could downgrade the coveted AAA rating on U.S. debt in the next two years should politicians fail to address the budget deficit. The wake-up call should jolt politicians into action (if for no other reason than the desire to protect their own portfolios!). If Washington does make reducing the budget a priority, that could make the greenback look more attractive.

All that said, I’m still long silver. The dollar isn’t the only currency that’s getting devalued. Countries around the world are similarly trying to stimulate their economies in the face of high unemployment, geopolitical instability and the ongoing crisis in Japan.

There’s also the chance that the damage from QE2 has already been done. Even if the program were to end tomorrow, inflation won’t disappear overnight. That will make it even tougher for American businesses to compete on the international stage, and the Fed will have few arrows left in its quiver (outside of the mythical QE3).

Until QE3 sets sail, though, the words of the Oracle of Omaha, Warren Buffett, are echoing in my ears: “Be fearful when others are greed and greedy when others are fearful.” It’s hard to deny that silver has investors feeling greedy right now. Perhaps that means a little fear is warranted.

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JPMorgan tries to get in before Twitter IPO (JPM)

Wealthy investors will pay just about anything to invest in Facebook and Twitter. JPMorgan (JPM) and Goldman Sachs (GS) are finding ways to make it happen.

Shortly after Goldman Sachs Group, Inc. (NYSE:GS) announced it was selling $1 billion in Facebook shares to its foreign clients, news leaked that JPMorgan Chase & Co. (NYSE:JPM) was raising cash, too, for its so-called J.P. Morgan Digital Growth Fund LP. A few weeks later, the Digital Growth Fund is sitting on a treasure chest filled with $1.2 billion. And it’s looking to deploy that cash for stakes in late-stage, pre-IPO social media companies.

Twitter sits in the crosshairs. Negotiations are ongoing, but it sounds like JPM’s pushing for a minority stake in Twitter, which could value the site at $4.5 billion, according to the Financial Times.

Talk about a steep valuation. Debra Williamson of eMarketer estimates Twitter could generate just $150 million in revenue in 2011, according to the Wall Street Journal. Compare that to Facebook, which could generate as much as $4 billion.

With a valuation around 100 times the company’s revenues, JPM will probably lobby for Twitter to put itself up for sale. A partnership with a site like Google Inc. (NASDAQ:GOOG) could give Twitter the cash and time it needs to roll out a viable, long-term business model. And no one suggests such a thing will be easy.

While Twitter’s got 175 million “registered accounts,” eMarketer believes that only 16 million or so of those accounts are actually active. Still, it’s difficult to put a price-tag on a site that’s among the Top 10 most-visited Web sites in the world (per Alexa). It shares that honor with Web superpowers like Baidu.com, Youtube.com and Google.com.

Twitter’s reach makes it difficult to slap a pricetag on, even if the site’s “only” generating $150 million a year. The fact of the matter is, investors probably won’t care. The hottest companies in the tech sphere are all privately-owned. And we all want a piece of something the rest of the public can’t touch. Wealthy investors will pay just about anything for that honor, and JPMorgan and Goldman Sachs are finding ways to make it happen.

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After Borders’ demise is Barnes and Noble stock a buy? (BKS)

Is the demise of a major competitor is enough to keep Barnes and Noble (NYSE:BKS) afloat in an industry with declining sales? Here are some key facts to consider when thinking about buying Barnes and Noble shares.

With the bankruptcy of Borders Group, Inc. (NYSE:BGP), Barnes & Noble, Inc. (NYSE:BKS) stands alone as the clear market leader in the brick-and-mortar bookstore business. That’s not without good reason. Barnes and Noble has simply proven nimbler in a rapidly-changing market.

When Amazon.com, Inc. (NASDAQ:AMZN) released its Kindle e-reader in 2007, the device was a phenomenal success selling out in five and a half hours. Barnes and Noble began work on their answer immediately: an e-reader called the Nook that runs on Google’s Android operating system. The Nook hit shelves almost two years to the day after the release of the Kindle.

Still, it’s not clear that the Nook and the demise of a major competitor is enough to keep Barnes and Noble afloat in an industry with declining sales. Here are some key facts to consider when thinking about buying Barnes and Noble shares:

Market share: The Nook currently controls 22 percent of the e-reader market, according to Goldman Sachs Group, Inc. (NYSE:GS). That’s a distant second to the Kindle’s 67 percent market share.

No more dividend: Shares in Barnes and Noble tumbled more than 14 percent yesterday on news that the company is suspending its annual $1 dividend. BKS will also suspend forecasting profits as it negotiates the fallout from Borders’ bankruptcy. The good news? Withholding that dividend will give the company an extra $60 million to use for investments or changes in strategy.

Sales: Barnes and Noble has underperformed analyst expectations for the past four quarters. Investments in the company’s digital platform led to a loss of $14.5 million in the nine months through January, according to Bloomberg.

For sale sign in the parking lot: Barnes & Noble put itself up for sale in August. When the news leaked, shares shot up some 25 percent, but a suitor was never found. “We assign a 30 percent probability to a transaction, recognizing potential challenges in financing a transaction and the potential lack of other bidders,” Goldman Sachs analyst Matthew Fassler told MarketWatch at the time. “We don’t see compelling value in the business.”

Don’t mess with my Nook: At the moment, digital book sales don’t add much to Barnes and Nobles’ bottom line. The company predicts it’ll generate $400 million in revenue this fiscal year from the Nook, and that will amount to 5.6 percent of the company’s $7.1 billion in annual sales expected by analysts, Bloomberg reports. Still, the growth in e-book sales has been phenomenal, shooting up more than 100 percent from $169.5 million to $441.3 million last year. The Nook also has an advantages over the Kindle with its color display and the ability to market its products in the store’s more than 700 locations and college campus bookstores.

The future: It’s clear that Barnes and Nobles’ future remains tied to the company’s success in the digital space. If the Nook can steal more market share from Amazon’s Kindle, it might be enough to keep the chain afloat. Whether Barnes and Noble can do that while still maintaining healthy relationships with publishers, writers and distribution platforms like Apple’s iTunes remains to be seen, though. Not to mention, the company will soon be competing with a leaner and meaner Borders Books. Predicting the outcome is a bit like trying to guess which character dies in a Harry Potter novel, but I do know that the road ahead is going to be bumpy and steep.

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Youku stock crumbles after silent period ends

Youku (YOKU) and China Dangdang (DANG) shed nearly 10 percent each after the mandatory silent period ends on the stocks.

After the mandatory silent period lifted yesterday on Youku.com, Inc. (NYSE:YOKU) and E-Commerce China Dangdang, Inc. (NYSE:DANG), stock analysts were finally allowed to weigh in on whether or not investors should buy into the companies. Despite powerful IPOs, analysts weren’t too enthusiastic on the so-called “YouTube” (Youku) and “Amazon” (Dangdang) of China, though.

Piper Jaffray gave both stocks a neutral rating. Goldman Sachs and Cowen concurred. Goldman’s James Mitchell pointed out that Youku “could get profitable quickly,” though according to CNBC.com, “perhaps as soon as late this year or early next year.”

Still, Mitchell was careful to point out that YouKu faces rapidly rising costs as video content producers demand more money for their product. Licensing fees for the movies that YouKu sells as online streams rose by more than 90 percent in 2010. If that trend continues, Youku has little hope of making money by selling streaming video, and the company will have to rely heavily on some form of ad-supported site content.

The demure reception by analysts seemed to cool investor excitement over the stocks yesterday as Youku fell more than 9 percent to $34.09 a share and Dangdang dropped 8.3 percent.

Still, the story’s complicated by the strange, almost-maniacal outburst Dangdang’s CEO posted on a Twitter-like site in China on Sunday evening. Guoqing Li was apparently miffed that Morgan Stanley (NYSE:MS) bankers talked him into offering Dangdang shares at $16. “I held back a breath and silently cursed you motherf**kers,” Li wrote online.

Even after the substantial drop in price yesterday, though, Dangdang’s shares are up 94 percent since the company’s IPO and Youku’s shares are up 166 percent. Only time will tell if the companies can hold investor interest long enough for them to start making serious money.

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Why’s Altria hitting a 52-week high?

If you’re following the big money, you might see this trend as one that isn’t likely to change. Of the 15 largest holders in the company, only four reduced their position in Altria as of June 30, 2010. The biggest quitter was Goldman Sachs (NYSE:GS), which dumped more than 16 million shares in Altria. Still, other big funds moved in with abandon — a sign that bodes well for Altria.

It seems momentum’s back for cigarette maker Altria Group, Inc. (NYSE:MO). The stock broke out to a 52-week high yesterday, and it climbed even more on three times its average volume today. The biggest news came last week when Altria announced the company would raise its dividend by more than 8 percent to $0.38 per quarter. That’s $0.03 higher than their June 11 dividend, and it marks the second time this year that the cigarette and smokeless tobacco maker has upped their dividend.

The stock got punished in 2008, falling more than 35 percent peak to trough on worries over the economy and the regulatory future of U.S. tobacco. It doesn’t seem to have hurt Altria’s bottom line, though. The company’s trading at a conservative P/E ratio of 13.9 despite hitting a 52-week high, and it’s an integral part of the Mutual Fund Vice (MUTF:VICEX) where it’s the third biggest holding (behind Philip Morris International Inc., NYSE:PM, and Newport-maker Lorillard Inc., NYSE:LO).

If you’re following the big money, you might see this trend as one that isn’t likely to change. Of the 15 largest holders in the company, only four reduced their position in Altria as of June 30, 2010. The biggest quitter was Goldman Sachs (NYSE:GS), which dumped more than 16 million shares in Altria. Still, other big funds moved in with abandon: Fidelity Management & Research picked up 7 million shares, Capital World Investors picked up 6.5 million and Columbia Management Investment Advisers, LLC, bought 5.9 million. If Altria can keep raising their dividend, investors just might be willing to forgive the rather addictive nature of their products. Or rather, it seems they already have.

Earning future looks dim for Goldman (GS) and Morgan Stanley (MS)

If the earnings results from commercial banks are any indication, the investment banking sector could get hammered this week with reports from Goldman and Morgan Stanley.

After some unimpressive earnings from the commercial banking giants, things don’t look great for the upcoming earnings releases from investment banks Goldman Sachs Group, Inc. (NYSE:GS) and Morgan Stanley (NYSE:MS).

On the commercial side, revenues were down at all three of the biggest banks:

  • Bank of America Corporation (NYSE:BAC): Revenue -40 percent
  • Citigroup Inc. (Public, NYSE:C): Revenue -26 percent
  • JPMorgan Chase & Co. (NYSE:JPM): Revenue -24 percent

The good news? The three commercial banks generally beat analysts estimates, but they did it on lower credit losses as consumers hunker down to pay off their debts (another factor that could slow the economy at large).

If the commercial banks are any indication, earnings from the biggest investment banks will be unimpressive, too. Be wary of a sell-off in shares of Goldman and Morgan Stanley. Goldman is slated to report their earnings on Tuesday, July 20, before the market open. Analysts are calling for earnings of $2.04 per share, down $2.89 from a year ago. Morgan Stanley will report earnings Wednesday, July 21, before the market open. Analysts are anticipating earnings of $0.46 per share, up $1.83 from a year ago’s loss of $1.37 per share.