Is the Glencore IPO Signaling a Crash in Commodity Prices?
Commodities / Commodities Trading May 18, 2011 - 07:31 AM GMTBy: Money_Morning
Shah Gilani writes:
Super-secretive Swiss-based commodities trading giant Glencore International AG is going public. The Glencore IPO shares will be priced today (Wednesday) and could begin "conditional trading" in London tomorrow (Thursday).
As currently planned, unconditional trading will begin in London on May 24 and in Hong Kong on May 25.
In spite of all the pre-IPO hoopla, there's actually probably quite a lot that you don't know about Glencore.
If that's the case, don't worry - you're not alone: Columnists and market pundits alike routinely describe the company as "mysterious." To be sure, the Glencore story is a colorful one, and is one of those tales that seems to raise at least as many questions as it answers (For instance, billionaire founder Marc Rich once owned 50% of 20th Century Fox, spent years as a "wanted" man, and was actually pardoned by a U.S. president).
So it's no surprise at all that the Glencore IPO deal raises a whole host of new questions - these two key among them:
•Why is Glencore going public right now?
•And precisely what does the largest IPO in the history of the United Kingdom means for global commodity prices?
On that last question, at least, I can spare you the suspense: Global commodity prices are going to crash before they rally to new highs.
Now I want to show you why...
A Profile of Glencore
When researching a difficult topic, the best place to start is usually right at the beginning.
So let's do precisely that: What is Glencore and what does it do?
Based in Baar, Switzerland, Glencore is a private company that has 485 partners, and employs 54,800 people in 30 countries at its industrial subsidiaries, which consist of mines, farms, production, processing, milling, refining, and storage and distribution facilities. It also employs 2,700 commodities traders in 40 countries around the world.
Glencore owns 34% of mining giant Xstrata PLC. It trades crude oil, oil products, copper, zinc, lead, alumina and aluminum, ferroalloys, nickel, cobalt, coal, coke and agricultural commodities.
Rich, the billionaire founder of Glencore, was also one of the founders of spot-market oil trading. In the early 1980s, Rich was indicted for tax fraud, and for illegally trading with Iran during the 1979 hostage crisis. He was wanted by the United States, but remained beyond its grasp, and refused to return to this country - and ultimately was famously pardoned by Bill Clinton on the 42nd president's last day in office. (The Website of the Marc Rich Group features a "frequently-asked question" (FAQ) section that notes that Rich "was never convicted, or even tried, for any criminal offense.")
If the Glencore IPO is as successful as expected, the resultant public company will have a market capitalization of more than $61 billion. That means that Glencore - despite its freshly minted status - will be instantly bigger than Nestle SA (PINK ADR: NSRGY), Novartis AG (NYSE ADR: NVS) and UBS AG (NYSE: UBS). In fact, it will debut as one of the largest companies traded on the London Stock Exchange (PINK: LDNXF) and it will immediately be made part of the FTSE 100 Index, forcing institutional money managers and index funds to buy its shares as a component of the benchmarks they track.
In order to make Glencore's debut as a publically traded giant a total home run, the company solicited the interest of "cornerstone" investors to commit to purchasing some of its shares. The rich crowd drawn into the Glencore IPO is reported to include:
•Aabar Investments, an Abu Dhabi sovereign wealth fund that says it will invest $850 million as a "cornerstone" investor, and $150 million besides - bringing its total Glencore outlay to a cool $1 billion.
•The Government of Singapore Investment Corp. Pte. Ltd. - Singapore's sovereign wealth fund (SWF) that's more commonly referred to as GIC.
•Hedge fund Highbridge Capital Management LLC (owned by JPMorgan Chase & Co. (NYSE: JPM)).
•And BlackRock Inc. (NYSE: BLK), the world's largest money-management firm.
It seems that investors are lining up - and they weren't doing so in order to read the 1,300-plus page prospectus that Glencore had to use to disclose all the risks that it faced. These investors were trying to get in on the commodities boom that Glencore has navigated for maximum profit - and in which it can be expected to have its corporate hands for many, many years to come.
But are those investors being lured into the ultimate trader's "bear trap?"
Key Questions to Ask
First of all, the company has to come to market by its announced launch dates. If it fails to do so, Glencore will have to go back and crunch some more financials. Analysts and others seem to be ignoring the fact that the financials on which the company's valuations are based were last updated on Dec. 31 - meaning the first quarter is a mystery.
Call me cautious, but wouldn't it be more revealing to see how the company - which supposedly controls about 50% of the world's copper trading, 60% of the zinc market and huge amounts of other commodities that have been, shall we say, somewhat volatile in the most recent quarter - has fared in the face of the bursting commodities bubble.
In other words, is Glencore cashing in at the top? Isn't that what traders do? Sell high and buy low? Isn't selling at the top of its market the same thing that a few other notable (change that to "exceptionally brilliant") trading houses did not so long ago?
For instance:
•Didn't Goldman Sachs Group Inc. (NYSE: GS) go public in 1999, right before the tech bubble popped? And isn't Goldman's stock price currently trading well below its high-water mark?
•Didn't hedge fund giant Fortress Investment Group LLC (NYSE: FIG) go public at $18.50 a share back in February 2007 - right before the markets crashed? And isn't that once-high-flying IPO stock now trading at less than $5.25 a share?
•And didn't Stephen A. Schwarzman take private-equity giant Blackstone Group LP (NYSE: BX) public at $31 a share in 2007 - at the absolute apex of the LBO market cycle - and isn't that stock now trading at less than $17.00? (In another interesting parallel to the Glencore deal, Blackstone also landed a major investment from a sovereign-wealth fund - a $3 billion infusion from the China Investment Corp. (CIC).
China profited handsomely when the stock surged nearly 18% on its first day of trading. But at yesterday's closing price of $16.87, Blackstone shares are down 43% from CIC's purchase price of $29.605 a share - meaning China's SWF is sitting on a loss of about $1.3 billion).
Given that "selling at the top" is what traders do best, the questions to ask here are clear: Does the Glencore IPO signal the top of the commodities bubble? Are the insiders selling out at a perfect time? And, as we saw with Blackstone and CIC, are the new Glencore shareholders coming aboard at the absolute worst moment?
You bet.
Glencore's mystique (there's that word again) and legendary status as a global powerbroker and master trader is part of what the company insiders are selling. Their sales pitch is based more on the past than it is on the future.
After all, Glencore's past reads like a Hollywood script, if not a Tom Clancy novel.
It's a long and fabulous story.
Here's the short version.
Building the Mystique
A young Jewish émigré named Marc Rich escapes Belgium in 1940 - before Hitler's panzer-headed blitzkriegs rolled through - and ends up in America. By 1954, Rich is earning $60 a week at Philipp Brothers (now the Phibro LLC unit of Occidental Petroleum Corp. (NYSE: LLC)), at the time a well-known commodity-trading house in New York.
Rich ends up trading oil, which isn't much of a business when he first gets involved. As it turns out, however, he's in the right place at the right time: By applying his unique genius, Rich basically creates the spot-trading market in crude oil.
In 1973, Rich "accidentally" bumps into his legendary Philipp Brothers boss, Ludwig "Jes" Jesselson, on the ski slopes of Switzerland. When Jesselson asks him what he's doing there, Rich replies "skiing." But in an exchange that's now part of Wall Street lore, Rich mentions his upcoming bonus and suggests that he's earned a $1 million payday. Jesselson reportedly retorted: "We've never paid a trader a million dollars and we never will."
Within 48 hours, Marc Rich & Co. was doing business out of its new offices in New York's swanky Piaget Building.
The timing couldn't have been any better. The 1973 Arab oil embargo was an oil traders dream. Rich's new company made millions. He had quite a run, too. But the fact that oil was the most precious commodity on the planet - coupled with the fact that the countries that controlled the biggest supplies were often at odds with the United States - forced Rich into a precarious high-wire act.
But he was game. Whether he was helping set up a secret oil pipeline that sent so much Iranian oil directly to Israel that the barren Jewish state actually became a net exporter of oil, or trading Iranian oil to apartheid-era South Africa for uranium, Rich wasn't afraid to mix it up with "rogue" states or to do business with dangerous operatives.
It eventually tripped him up, and Rich got caught "daisy chaining" oil for illicit profits. He had allegedly devised a complicated process through which he was able to buy domestic U.S. oil that was controlled to sell at only $6 a barrel and move it around on tankers and reclassify it to sell at the then-hefty price of $40 a barrel.
Despite the American embargo against Iran, that country would ultimately become Rich's key oil supplier for a decade and a half - and according to one source he reportedly earned billions of dollars selling oil for the Iranian ayatollahs.
Not only that, Rich was accused of tax evasion and of "trading with the enemy" by dealing extensively with the Ayatollah Khomeini's Iran during the 444-day Iranian Hostage Crisis. In 1983, Rich was indicted for the illegal oil deals and for evading more than $48 million in taxes, and he was also charged with 51 counts of tax fraud, according to a Time report.
Rather than face charges, Marc Rich fled to Zug, Switzerland, where the Swiss, Spanish and Israeli governments defended and protected him. Commodities trading had made him a powerful man with connections that reached the highest offices in many of the world's governments.
His wife Denise, heiress to the Florsheim fortune, divorced him in 1996 and collected a tidy $365 million. Denise and, it is rumored, former Israeli Prime Minister Ehud Barak, lobbied-then President Clinton to grant Rich a pardon. It was done on President Clinton's last day in office - an act that Time has included as one of the 10 "most notorious" presidential pardons in U.S. history.
(President Clinton also pardoned his half-brother Roger Clinton, and former business partner Susan McDougal. But it was the Rich pardon that seemed to draw the greatest ire from Republicans and Democrats alike. In fact, the uproar over the pardon was so intense that authorities launched an investigation into whether it had been "purchased" by the generous donations that Denise Rich had made to the Clintons and to the Democratic Party. It must be noted here that investigators failed to find enough evidence to indict Clinton, and the matter was dropped.)
But Rich feared what might happen if he once again set foot on U.S. soil. So he's never returned.
The Key Takeaway From the Glencore IPO
That controversial chapter also closed the book on his tenure at Marc Rich & Co. In 1994, Rich was bought out of his interests in what would become Glencore International by its then managers for a reported $600 million. The rumor is that his partners forced him out after a $200 million loss on a bad Zinc trade.
There's little doubt that Glencore continued its secretive ways, while also maintaining the Central Intelligence Agency (CIA) and Mossad connections that Rich had always been famous for.
So, you have to ask yourself: Why would a giant secret society like Glencore, with a dark past, want to come into the light of day and relinquish the private, backroom-dealing business model that made its partners and founder fabulously wealthy?
I'll tell you why. Because the old game is over and commodities prices are about to break down - and in a big way. By utilizing its newly tapped source of capital - its own stock - the partners will eventually be able to cash out (they have a lockup provision of four years to five years). Not only that, the company will also be able to withstand the coming crash in commodity prices and then be perfectly positioned to buy at the bottom, which is what it is planning to do.
The whole Glencore story is amazing. And when you understand the game that's afoot, the story of the Glencore IPO is even more so.
As amazing as this tale is, however, I'm not touching the stock. I'm buying the timeframe the company insiders gave themselves - which is the four years it will take for commodities to fall and then to rise again.
That's when commodity prices will peak again and the partners will cash out, once again at the top. That's the prediction that the Glencore IPO is making for us: Use that insight to your own advantage.
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Source :http://moneymorning.com/2011/05/18/..
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