Saturday, June 12, 2010 0 comments ++[ CLICK TO COMMENT ]++

Jim Rogers appears to be close to turning bullish on the Euro... bearish on EM... plus my thoughts on BP

Interestingly, Jim Rogers appears to be on the verge of turning bullish on the Euro. Check out his CNBC interview via GuruFocus.

He is expecting a recovery due to technical and contrarian reasons, but I still find it interesting that a super-bear on the Euro is close to turning bullish, even if it's only temporarily. As for the pound sterling, he is maintaining his bearish views and thinks it will decline. I concur and think the pound will decline because Britain is facing a very bad fiscal situation and isn't competitive (one of the ways adjustments happen under capitalism is through changes in the value of the currency.)

Jim Rogers also says he is short US technology, emerging markets, and one major North American financial institution. His short selling is based on contrarianism (those assets rose sharply in the last few years.)

On the bullish side, Jim Rogers maintains his long-term bullish view of commodities. He says he prefers to own the commodities rather than commodity stocks since governments may target financial assets in the future.

BP & the Oil Spill
When asked about BP, he says it may be worth looking at when it's out of the news. I may follow his suggestion and take a more serious look in 6 months or so. I have been looking at BP recently and although I don't like their poor management in the last decade—they also had a few pipeline spills and refinery explosions in the last few years so their safety and environmental handling appears to be weak—I do think it is a classic contrarian opportunity.

In the last few years, BP has earned around $20 billion (about $30 billion pre-tax; FCF around $10 billion) so it can absorb losses as high as $40 billion, spread out over a few years. BP's debt-to-equity ratio appears to be around 30% and debt-to-EBITDA is under 1 so BP can probably issue another $20 billion in debt to pay the oil spill damages. The real risk is over draconian US government penalties that may be enacted into law in the future (since the British government appears to be defending BP, I suspect the Obama administration will back off.) We should get more clarity in a few months, hopefully when BP has brough the spill under control.

I don't know much about BP's business but anyone contemplating investing in it should also figure out how their worldwide operations are. I know they have had serious problems with their BP-TNK joint venture in Russia in the past—this was supposed to be one of their crown jewels driving their future growth, before the Russian government and various proxies started cracking down on them—and one needs to figure out their risk in their operations.

In addition to all this, one reason I don't find this situation as attractive as otherwise is because I'm bearish on commodities. If oil prices drop to, say, $40, which is probably the marginal cost of production, BP's earnings will probably be around $10 billion, with pre-tax income around $15 billion and free cash flow around $5 billion. The valuation would obviously be much lower in such a scenario.

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