Purge Is On at Banamex

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Purge Is On at Banamex
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THE WALL STREET JOURNAL.
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Monday, October 27, 2014 | C1
10–YR. TREAS. g 21/32, yield 2.273% OIL (new)$81.01 g $1.05 EURO $1.2671 YEN 108.16
Bad Breaks Bite Bond Bears
Darker Global View Leads Investors to Rethink Likelihood of Debt-Market Slump
BY TOM LAURICELLA
AND CYNTHIA LIN
The bond bears may have to
wait a little longer.
A less-rosy global economic
outlook and fading inflation expectations have many investors
believing that the long-predicted
downturn
for
ABREAST OF U.S. Treasury
THE MARKET bonds is still a
while off.
It is a change from just a few
months ago, when many strategists and investors were predicting that a 30-year bull market in
Treasurys was close to an end.
They expected prices would fall
sharply this year, sending yields
higher. But in a pattern that has
become familiar since the financial crisis, the reverse happened.
Ten-year Treasurys are near their
lowest yields in 17 months, and
investors expect they will probably remain there. Not only were
many investors caught off guard
by rising bond prices, but those
with big bets against Treasurys
got burned.
Driving the latest leg of the
rally was a combination of weak
economic data out of Europe and
China, tepid U.S. indicators and
geopolitical strife. The scramble
for safety, which took the yield
on the 10-year note to 1.85% in
intraday trading on Oct. 15, has
forced many market strategists
to lower their rate forecasts,
even though some still see a
strengthening U.S. economy
pressuring yields higher. Yields
have crept up slightly since midOctober, finishing last week at
2.27%, compared with 3% at the
end of last year. When bond
yields rise, prices fall.
“This is not what we expected,” says Jennifer Vail, head
of fixed income at U.S. Bank
Wealth
Management.
“We
thought we’d end the year well
above 3%.” Her team has been
modifying its forecast lower
throughout the year, and now
sees the 10-year note yielding
2.65% at year-end.
This week will bring several
pieces of new information that
will help determine whether
bond bears could pounce. On
Wednesday, the Federal Reserve
will reveal its latest monetarypolicy decision; the central bank
is expected to announce it has
ended the bond-market purchases it has been using to ease
monetary policy.
On Thursday, the first reading
on U.S. third-quarter gross-domestic-product growth is due.
On Friday comes a report on personal income and spending,
Please turn to the next page
Slipping
The price of copper has fallen even as stockpiles in London Metal
Exchange warehouses have declined.
LME three-month copper futures
Warehouse supplies
$8,000 a metric ton
400,000 metric tons
7,500
Friday
$6,696
200,000
6,500
100,000
6,000
0
2014
Illustration by John Ritter
BY ROB COPELAND
Keith Meister takes things
personally.
The burly and at times combustible hedge-fund manager,
tipped off that his expensive
coup d’état of the board of corporate landlord CommonWealth
REIT could be imperiled by a
proposed last-minute tweak to
Maryland state law, didn’t just
send one of his 24 employees:
He flew down to Annapolis himself last April to lobby against it.
Months later, mired in related
shareholder lawsuits there and
in Delaware, Mr. Meister appeared in court himself for
nearly every hearing.
Mr. Meister’s eventual triumph at CommonWealth—as
well as quieter efforts to transform companies ranging from
the energy-pipeline operator
Williams Cos. to lender Fidelity
National Financial Inc.—is earning the former right-hand man
to Carl Icahn a reputation of his
own.
The 41-year-old’s hedge-fund
firm, Corvex Management LP,
bankrolled partly by about $1
billion from George Soros, is also
outperforming nearly all of its
activist-investor peers.
“He’s very competitive, and
he’s very emotional,” said Related Cos. Chief Executive Jeff
Blau, who invested personally in
Corvex after his development
company teamed up with the
firm against CommonWealth,
which has since changed its
name to Equity Commonwealth.
“He treats the capital in the fund
like it’s his own.”
New York-based Corvex has
more than tripled in size over
the past two years to nearly $7
billion, including money from
Mr. Soros and deep-pocketed investors like Blackstone Group
LP, according to investor documents and people familiar with
the fund.
The burgeoning war chest has
the ex-Harvard University strong
safety on the offensive. His latest salvo this month was a public attack on wireless tower operator
Crown
Castle
International Corp., in which
Mr. Meister told the company to
“embrace change now.”
Mr. Meister laid out two solutions for Crown Castle: boost its
Please turn to the next page
Thursday
159,550
2014
Source: London Metal Exchange
The Wall Street Journal
Single Buyer Holds
Mountain of Copper
By Sarah Kent,
Ese Erheriene
and Ira Iosebashvili
Manager’s Combative Style Pays Off
300,000
7,000
A single buyer has snapped
up more than half the copper
held in London Metal Exchange
warehouses, giving it control
over a crucial source of supply
and raising concerns among
traders about the potential for
higher prices.
Keith Meister
See more at WSJMarkets.com
On several occasions in the
past month, this buyer held as
much as 90% of the world’s copper stored in LME-licensed
warehouses, equal to about
140,000 tons, or enough to make
the copper parts of the Statue of
Liberty more than 1,700 times.
As of Wednesday, the buyer
owned between 50% and 80% of
copper held in warehouses, according to the most recent exchange data.
At today’s prices, a 50% to
80% share of LME copper inventories would be worth anywhere
from roughly $535 million to
about $850 million.
Although
the
exchange
doesn’t identify the owners of
metals, eight traders and brokers working for different firms
active on the LME said they believe Red Kite Group, a London
hedge-fund manager that focuses on metals trading, was the
one buying. One of the brokers
said that when he needs to buy
copper for clients, contacts in
the market refer him to Red
Kite, indicating the fund is sitting on a large pile of metal.
Red Kite declined to comment.
Banks often hold large portions of the metal in LME-licensed warehouses on behalf of
clients, but a hedge fund holding
that much copper is less common, traders and brokers say.
The London Metal Exchange,
owned by Hong Kong Exchanges & Clearing Ltd., doesn’t
limit how much metal a single
trader may hold in its warehouses, and says that it has
mechanisms in place to prevent
market squeezes—a situation in
which holders of a large share of
the supplies use their position to
jack up prices. For example, it
requires a company with a dominant position to lend metal for
short periods and it caps the
amount of money that can be
charged for that service.
“The LME constantly monitors its markets to ensure that
trading is orderly,” a spokeswoman for the LME said. The
LME’s “lending guidance” system “is the most effective way to
manage pressure arising from
dominant positions in our market.”
Prices ticked higher last week
in response to positive economic
news from China, the world’s
biggest consumer of the metal.
They remain below their levels
at the start of the year because
demand has been sluggish and
production capacity is expected
to increase. The official price of
copper for delivery in three
months on the LME was $6,696
on Friday.
The metal’s owner could be
wagering that global copper supplies will tighten, causing prices
to shoot up, analysts say. The
price of copper traded on the
LME is used as a global benchmark, and metal users rely on
the exchange’s warehouses for
emergency supplies. If one firm
owns most of that spare supply,
it can charge higher prices to
buyers, analysts say.
“There’s no reason for anyone
to be holding 70% of the stocks
of the commodity,” said Jessica
Fung, head of Commodities Metals at BMO Capital Markets.
Established in 2004, Red Kite
is now run by two of its founding partners, Michael Farmer
and David Lilley, both alumni of
the German industrial conglomerate Metallgesellschaft AG,
Please turn to page C5
AHEAD OF THE TAPE | By Spencer Jakab
Shareholders were
shocked—shocked!—that Cliffs
Natural Resources Inc.’s loss
in the second quarter was twothirds larger than expected.
Not really. Like Captain
Renault, they had seen it all. A
month later, activist shareholder Casablanca Capital LP
installed a new chief executive,
Lourenco Goncalves.
The roller-coaster ride of
iron-ore prices in the last decade has made for wild swings
for the largest U.S. miner of
the steelmaking material.
These days, it takes fairly surprising news to get much reaction from shareholders.
Since 2009, the company’s
average “miss” or “beat” relative to analyst expectations for
earnings has been 28%. The
most recent earnings disappointment at Cliffs in July
caused less than a 3% drop in
the stock price.
The company’s announcement of a $6 billion asset
write-down on Oct. 17
prompted a bit more shock;
the stock fell 8%. It has fallen
64% this year amid a 40% slide
in iron-ore prices.
Not Digging It
Cliffs Natural Resources earnings
$6 a share
5
Consensus
estimates ;
4
3
2
1
0
–1
2012
’13
’14
Source: FactSet
Monday’s release of thirdquarter results has the potential to spark at least a brief
bounce in the shares. Analysts,
on average, see a loss of 7
cents a share, down from a
profit of 66 cents a year ago,
though some still expect a
profit. Costs are coming down,
and volumes may have improved from the second quarter.
More significantly, there
could be word from management on the sale of assets such
as mines in Australia.
Cliffs hired banks to sell
that business and its U.S. metallurgical coal business. A cut
earlier this month in its credit
rating to below investment
grade, or “junk,” by Standard
& Poor’s, and the threat that
the asset write-down could
force Cliffs to violate loan covenants, may hasten a deal.
That is despite Mr. Goncalves’s
insistence there is “no ticking
clock.”
The impact of any pleasant
news will be magnified by a
squeeze on those betting
against the stock. Some 42% of
shares outstanding, equal to
six days of turnover, were sold
short recently by investors
hoping to buy them back later
at a cheaper price.
But noncore asset sales
won’t help if the iron-ore market remains swamped with
supply. Far better would be a
bid for the entire company. For
shareholders weary of gutwrenching volatility, it could
be the beginning of a beautiful
friendship. But that would really be gambling.
Email: tape@wsj.com
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Cliffs Is Still the Same Old Story
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