Wednesday, July 31, 2013

Market Update From Mike Kuta " The Squawk Trader " Part 2

July 31, 2013
U.S. funds’ equity allocation at six-year low.
U.S. money management firms trimmed share holdings in July to their lowest in more than six years, taking profits after a strong first-half rally, and also shifted out of bonds into cash and alternative assets. Since the start of the year, the average equity allocation in a model global portfolio has fallen 8.5 percentage points to 56.2 percent, the lowest since at least April 2007, a monthly Reuters survey showed. In June, equity took 57.9 percent share. Average bond holdings also fell this month, to 35.4 percent from 36.3 percent in June, while the average cash holding rose to 3.6 percent from 2.1 percent. U.S. bond yields have risen substantially this year partly as a result of the improving economy, and with most analysts convinced that the Federal Reserve will soon start to scale back its $85 billion of monthly bond purchases. Government bond holdings were cut to 45.8 percent from 50.2 percent in June. Firms recommended a bigger share of bond portfolios be in high-yield debt and other credit such as agency debt. This category rose to 13 percent from under 10 last month. The poll of 12 U.S.-based fund firms was conducted between July 17 and 30. Some pegged the latest decline in model stock holdings to shareholders cashing in on an extended rally in both U.S. and Japanese equities. The U.S. benchmark Standard and Poor’s 500 index is up a little over 18 percent so far this year, while the Nikkei 225 index is up more than 30 percent. “The market has moved substantially, and it’s giving investors an opportunity to book some profits, especially at a time when it appears that there is a slowing in overall corporate profits,” said Alan Gayle, director of asset allocation at RidgeWorth Investments, who manages $325 million in four portfolios. Companies in the S&P 500 are expected to post a blended earnings per share growth rate of 4.0 percent in the second quarter, according to Reuters data, down from 4.9 percent in the first quarter.
What Does the Plastics Revolution Mean for Gas Producers?
It looks like the U.S. plastics revolution is upon us. Many observers have been forecasting a petro-chemical boom in America. Driven by cheap natural gas as feedstock for the industry. Last week, two major players in the chemicals space threw their weight behind the idea. Sasol and Ineos announced they will build a 426,000 mt/year plant–likely on the Gulf Coast–to manufacture high-density polyethylene. A major input in plastics-making. The announcement adds more fuel to the fire beneath the burgeoning U.S. chemicals sector. Sasol has previously announced plans for two other Gulf Coast facilities to make low-density polyethylene. All of this added polyethylene capacity could have some interesting effects for natural gas producers. That’s because America is right now experiencing a major glut of ethane–a natural gas liquid that E&P companies sell to end-users like Sasol, as an input for making polyethylene. Because of increased drilling for natural gas liquids lately, there’s been a lot of ethane on the market. To the point where ethane prices have fallen to almost nothing. Developments like the one above thus make a lot of economic sense, able to cheaply source their inputs. But the increased demand could help to bring prices back up to some degree. Which would be great news for producers who’ve seen their profits shrink as ethane has fallen. A number of polyethylene facilities are now planned or being built. As the first ones get completed, we’ll see what effect the plastics revolution has for gas producers.

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