I have recently been giving some thought to iron ore and steel, as they have performed well this year during a period of weakened fundamentals. In order to gauge (pardon the pun) the outlook for steel, it is always helpful to look at the components, notably iron ore.

One cannot determine the fundamentals of iron ore without looking East toward China. World demand for iron ore presently exceeds supply, exerting sustained upward pressure on prices. The biggest demand factor is China, which has accounted for 86% of overall demand growth since 2006. China is the largest producer and consumer of iron ore, representing approximately 54% and 35% of global demand and supply respectively. Continuous growth in China's long-term demand means that the world's largest steel producer is an important player in international markets, and will remain strong for some time.

Wednesday night, glued to the talking heads on CNBC, I heard Charlie Gasparino (author of The Sellout) announce that BAC was going to issue $18.8B of preferred securities. Being a preferred investor I thought this might open the market to new issuance. Or not. As the prospectus states (emphasis mine):

Bank of America Corporation is offering $18,800,000,000 of Common Equivalent Securities, consisting of depositary shares representing interests in shares of our Common Equivalent Junior Preferred Stock, Series S (the “Common Equivalent Stock”), and warrants (the “Contingent Warrants”) to purchase an aggregate of 60,000,000 shares of our common stock. Upon issuance of the Common Equivalent Securities, the depositary shares and the Contingent Warrants will not be separable or transferable separately and the Contingent Warrants will not be exercisable. Each Common Equivalent Security consists of one depositary share, representing a 1/1,000th interest in a share of Common Equivalent Stock, and a Contingent Warrant to purchase of a share of our common stock for a purchase price of $0.01 per share. Each depositary share entitles the holder, through the depository, to a proportional fractional interest in all rights and preferences of the Common Equivalent Stock represented thereby, including conversion, dividend, liquidation and voting rights.

It seems that all we hear from the Chairman of the Fed to the talking heads on the tube is that commercial real estate is in horrible shape and has much further to fall. Well, someone apparently disagrees. A research piece from Goldman yesterday morning upgraded the REIT space to Neutral from Cautious.

We are revising our Industry view to Neutral (from Cautious) as we now see a roughly flat total return for REITs as the economic recovery takes shape. As such, we are moderating our negative view on the REIT sector. Our change in sector view is based on several factors: 1) fundamentals should bottom within the next 12-18 months which is consistent with prior downturns; 2) debt funding costs have been better than we anticipated and should keep cap rates at the low-end of our 7-10% forecast range; 3) we expect better positioned REITs to seek out acquisition opportunities as sellers accept market pricing and the pace of transactions increases over the next 12-24 months; and 4) the GS Economics Team expects low interest rates to remain in place for all of 2010 and 2011, a positive for CRE.

On Wednesday morning the Conference Board released the Online Job Demand data for November. Here are some of the findings:

Among the top 10 occupation groups, Computer and Mathematical Science occupations posted the largest November gain, up 35,400. Job demand was up in a wide variety of computer and math functions including web developers, computer systems analysts, and computer software engineers. Sales professions, which experienced the largest October gain, 46,100, rose an additional 16,000 in November. Job demand was up in a wide variety of sales functions including retail sales workers, sales representatives (wholesale and manufacturing), and financial services sales agents.

Remember the term "zombie bank" that was being thrown around earlier this year and late last year, describing those banks that were essentialy dead banks that were allowed to continue operating.

After the extreme rally in financial shares over the last six months (XLF as a proxy has outperformed SPY by a little over 100bps in the last six months), the term seems to have faded into the ether. Well, look no further than Allied Irish Banks (AIB) to fill the void. While the problems with Ireland's second largest lender have been well known (hence the 1.52 euro price), there have been two new develoments which confirm the diagnosis.

Thirty giant financial institutions were selected by the FSB for cross-border systemic-risk oversight and will be asked to write "living wills" that outline wind-down plans in the aftermath of a crisis.

North America: Goldman Sachs (GS), JPMorgan (JPM), Bank of America (BAC), Royal Bank Of Canada (RY).

I have been looking at Thomson Creek (TC), the only pure play molybdenum miner available as a play on the global infrastructure play and an indirect steel play.

Molybdenum is truly a ‘wonder metal’. It is used for making steel strong and corrosion resistant and is required wherever steel faces tough, challenging conditions, such as offshore drilling rigs, power plants, ships, turbine engines, tools, hospital equipment and desalination plants. It plays an important role in environmental protection since it is included in nuclear reactors and oil and gas pipelines to prevent leaks and as a catalyst in oil refining to reduce sulfur in fuels. Molybdenum is also valued as a specialty high-performance lubricant and is a component in fame retardants, fertilizers and even vitamin supplements.

This morning we have seen a couple articles/mentions on the general credit markets. Here is a piece from the WSJ:

U.S. corporate bond sales reached an annual record of $1.171 trillion as borrowers took advantage of low interest rates and surging demand for debt securities following last year’s credit freeze.

This from the WSJ:

Politicians are preparing to give the Fed and Treasury more power to bail out all and sundry companies on an unprecedented scale, and so far without any objection from the Fed chairman.

Campbell Soup Co. (CPB) released earnings yesterday which were considered decent (better than estimated), raised guidance and beat the performance of the broader market by 5bps (+1.41% on the day). Let's take a look at the big news:

Campbell now expects fiscal 2010 sales growth of 4 to 5 percent and adjusted EBIT growth of 6 to 7 percent, up from its original guidance of 3 to 4 percent for sales and 5 to 6 percent for EBIT. The company now expects to deliver adjusted EPS growth of 9 to 11 percent from the fiscal 2009 adjusted base of $2.21, up from its original estimate of 5 to 7 percent. This guidance includes the impact of currency translation, which at quarter-end rates of exchange would be favorable by 3 to 4 percentage points.

People's United Financial Inc. (PBCT) agreed to acquire Financial Federal Corp. (FIF) in a stock-and-cash deal valued at $718.5 million, increasing its presence in the equipment finance sector.

Under terms of their agreement, Financial Federal shareholders will receive $11.27 in cash and one share of Bridgeport, Conn.-based People's United common stock, valuing the transaction as of Friday's close at $27.74 per Financial Federal share, a 35% premium.

Good news for DDR and the CMBS market. DDR has announced their TALF eligible CMBS deal.

This should help DDR with their capital raising program as it follows their equity raise through BNY. While it will increase secured debt and reduce unencumbered assets, they have the head room under their debt covenants and this shouldn't push the limits. Unfortunately for unsecured investors, this does encumber some of their best assets.

I read this morning that news wires are saying that Kellogg's (K) (A3/BBB+) tender offer for 2011 maturity bonds was not well received. The rationale: only $481MM out of $1.4B in notes have been tendered. Should one have looked into it just a little more, they would have seen a cap of $500MM.

Kellogg Company today announced the Early Tender Date results for its previously announced offer to purchase for cash of up to $500 million aggregate principal amount of its 6.60% Notes due 2011. The company has received $481MM in tenders.

From a filing this morning from CIT (CIT):

CIT Financial Ltd., a wholly owned subsidiary of CIT Group Inc., has reached an agreement to amend its $3 billion securities-based financing facility with Goldman Sachs International. Pursuant to the amendment, the commitment amount of the GSI Facility has been reduced to $2.125 billion, effectively eliminating the currently unused portion of the facility, and CFL has agreed to post additional collateral to secure amounts due to GSI under the GSI Facility. In connection with the reduction of the commitment amount of the GSI Facility, CFL made a payment of approximately $285 million representing the proportional termination fee payment to GSI as required for any such reduction under the original terms of the GSI Facility. CFL has initially posted additional collateral in the amount of $250 million, which amount will fluctuate over time pursuant to the terms of the amendment.

It was just announced that Goldman Sachs (GS) would become a Financial Holding Company ("FHC"), swapping out of its Bank Holding Company ("BHC") status. This is interesting as they stated there was a need to address "administrative issues" and that they had been operating under waivers as a BHC.

The act that allows this is summarized:

Another chapter in "How to Make Money on the Governments Dime" has now been written. BB&T's (BBT) acquisition of Colonial Bank (CNB) is complete and the House of Bair ("HOB") has ensured success and a healthy return.

The deal:

Well, as I predicted in my Aug 13, 2009 post "CNB - FDIC Preps the Patient", Colonial Bank (CNB) was taken into receivership and passed to BB&T (BBT). From the house of Bair press release:

Colonial Bank, Montgomery, Alabama, was closed today by the Alabama State Banking Department, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. To protect the depositors, the FDIC entered into a purchase and assumption agreement with Branch Banking and Trust (BB&T), Winston-Salem, North Carolina, to assume all of the deposits of Colonial Bank.

Yesterday, we noted how REITs have been tapping the unsecured debt markets. After FRT announced their deal yesterday, Weingarten (WRI) tried to tap for $100MM but the investor interest wasn't there and it looks like they will carry their deal over to today's business (looking north of 8%).

Prologis (PLD) is tapping the unsecured market today for $350MM at around +450ish (think low 7% range). If you recall, PLD was thought to be on death's door last year (and earlier this year) where their bonds (18s) traded down to the 30s to yield over 25%. PLD has changed the covenant package back to the "old school" covenants by tightening up the unencumbered asset ratio (1.50:1 from the 2005 1.25:1) and the debt incurrence test (60% of total assets from the '05 65%).
In other REIT financing news, Westfield Group received commitments of more than $1.4 billion for a $1.25 billion loan after courting investors in Asia, three people familiar with the situation said. This looks to be a forward start commitment to refinance their 2011 revolver maturity.

REIT euphoria is not limited to the equity market. The REITs have found a new willing participant (not new really, but noticably absent for a while) - the senior unsecured market.

Federal Realty (FRT) announced a debt issue this morning, doing $150MM of a 5 year (talked at +350/5y).

From Bloomberg:

Fannie Mae and Freddie Mac, the largest U.S. mortgage-finance companies, won’t be able to repay all of the $84.9 billion in federal aid they have received since being seized by the government last year, their regulator said. “Some assets and senior preferreds will have to be left behind as they come out of conservatorship, and that means some of those losses will never be repaid,” Federal Housing Finance Agency Director James Lockhart said at a speech in Washington today. “Their book is so large, it’s hard for me to see that they will be able to repay all of that.”