Effectively, the CME is lowering the cost to trade crude oil, gold, silver, copper, and a few other commodities. So far this has had no impact on prices of the SPDR Gold Trust (NYSE: GLD), United States Oil Fund (NYSE: USO), iShares Silver Trust (NYSE: SLV), nor in the iPath DJ-UBS Copper TR Sub-Index ETN (NYSE: JJC).

In the past, margin costs were raised on traders as an effort to curb runaway trading to the upside by making it more expensive for traders and speculators to trade energy and metals.  In short, driving up the cost of poker creates fewer gamblers. So what happens when they make it cheaper to trade?

The full details are here.

JON C. OGG

Jon Marino of PEHub.com noted that P.E. firms are hiring and referenced a follow-up report for BDO USA’s third annual private equity “PErspective” report… 57% of private equity executives increased professional staffing and 62% plan to hire again this year.  This is a complete reversal from the layoff waves of prior years.  Here is more detail from that report.

Whether you like millionaires or billionaires or hate them, the one aspect that is so unfairly portrayed about companies bought by private equity firms is as follows: Most businesses bought by private equity firms need to be turned around or need to be run better.  Sure, they get leveraged up and they scrap inefficient operations.  The dirty secret that private equity firms are not defending enough is that many of these companies would have headed for bankruptcy in the long-term if they had not stepped in.  If that results in a liquidation rather than a pure bankruptcy, guess how many jobs get lost at those companies… all of them, rather than some.

The business sector is not just a one-way street.  Companies hire workers in good times and most fire in bad times.  We even ran our own 2011 Layoff Kings.

JON C. OGG

We want to know what you think below.  Look at how much some banks have paid to settle overdraft charges and then decide in our poll below…. Should banks have overdraft fees???

So here are some recent settlements and other overdraft fee news…

J.P. Morgan Chase & Co. (NYSE: JPM) was asked by the U.S. District Court of Southern Florida in Miami to pay $110 million over a class suit for charging of inappropriate overdraft fees to its customers. Zions Bancorp. (ZION) was accused in late 2011 of improper overdraft fees over its policies in place from 2005 to 2010.

Bank of America Corporation (NYSE: BAC) and Commerce Bancshares Inc. (NASDAQ: CBSH) were ordered to make payments over unfair trade practices in overdraft situations: Commerce Banc paid $18.3 million; Bank of America was asked to pay $410 million to settle unfair overdraft fees charges.

Now go back to 2010. Wells Fargo & Co. (NYSE: WFC) was ordered to pay $203 million by a California court to compensate customers suing over unfair overdraft fees.

JON C. OGG

It makes you wonder how far behind a potential blockage of the Medco Health Solutions Inc. (NYSE: MHS) and Express Scripts Inc. (NASDAQ: ESRX) merger is.  Express Scripts is the would-be acquirer and the deal has been heavily criticized by many watch groups and we have noted how wide the merger-arbitrage spread is.  The blocked AT&T Inc. (NYSE: T) acquisition of T-Mobile started (or added to) much of the blocking concerns from investors.

The FTC issued a complaint to block the hostile acquisition of the rival long-term care pharmacy provider alleging that this combination of the two largest U.S. long-term care pharmacies would harm competition and also because the merger would allow Omnicare to raise the price of drugs for Medicare Part D consumers and others.  As noted (full release):

“If Omnicare is allowed to purchase its biggest and only national competitor, it will diminish competition and raise health care costs – leaving taxpayers and patients to foot the bill,” said Richard Feinstein, Director of the FTC’s Bureau of Competition. “The Bureau will continue to be vigilant in our efforts to prevent these sorts of anticompetitive deals.”

JON C. OGG

Producers like Chesapeake Energy Corp. (NYSE: CHK), Exxon Mobil Corp. (NYSE: XOM), and others support increased exports. Large consumers like Alcoa Inc. (NYSE: AA) and E.I. du Pont de Nemours & Co. (NYSE: DD) will see a sharp increase in fuel costs, and generally oppose exporting natural gas in large quantities.

According to the EIA’s summary of its full report, there are four significant impacts of increasing natural gas exports:

1. Increased natural gas exports lead to increased natural gas prices.
2. Natural gas markets in the United States balance in response to increased natural gas exports largely through increased natural gas production [from shale gas deposits].
3. The remaining portion [of increased gas production] is supplied by natural gas that would have been consumed domestically if not for the higher prices.
4. Even while consuming less, on average, consumers will see an increase in their natural gas and electricity expenditures.

It is worth noting that in point 3, the increased gas available for domestic consumption comes from fuel-switching. Electricity now generated using natural gas will be generated in coal-fired plants (mostly) and, to a lesser extent, from renewable sources.

Booming production from shale fields and expected warmer weather is sending natural gas prices lower again today, down more than -6% to $2.32/thousand cubic feet, the lowest level in 10 years.

Under any of the EIA’s scenarios, domestic natural gas prices rise, it’s just a question of how fast and how much.

Paul Ausick

Because we have covered this merger and because we cover financial news, we receive many emails on this topic.  While we have received little to no great emails on how the merger will benefit the public, we have received ample emails from industry watch groups and public outreach groups which have stated their opposition to this merger.  Take a look at the headline summaries from MergerInvesting.com and you can see just how much opposition there is compared to support.

The merger arbitrage spread in this deal today is right at 13% when other normal mergers carry traditional merger arbitrage spreads of 1% to 4%.  Part of the arbitrage is because Express Scripts has offered to buy Medco in cash and stock, but there is a serious degree of approval uncertainty priced in here. 

With a deal that is not expected to receive approvals until the first or second quarter (if then), it sure seems as though the merger-arb community is not overly convinced that this merger will go through.  If the deal does go through, there could be many divestitures or asset sales which are required.

One institutional broker who covers some merger-arbitrage and index-arbitrage accounts gave a bit of a funny quote here when we asked for feedback.  His answer, from one of his clients, about whether or not the merger would be allowed was simply “Give me one second, there is no easy answer.”

The Department of Justice noted as far back as September of 2011 that this merger was going to face an extended review period.  Medco holders will own about 41% of the combined interest after this merger, if it is approved.

The company with the highest degree of flux before and after this deal could be Catalyst Health Solutions, Inc (NASDAQ: CHSI) with a market cap of under $3 billion.  Much of the public (and investing public) is not even aware of it under the name Catalyst Rx.

There is one interesting merger ETF to consider in arbitrage.  It is the IQ Merger Arbitrage ETF (NYSE: MNA).  Unfortunately, it is very thin trading volume.

Keep in mind that there are no assurances that the DOJ, the FTC, nor other agencies will actually try to block this acquisition.  There are no assurances of approval either.  A chart of the spreads from Bloomberg has been shown below.

JON C. OGG

Verizon Wireless, the joint venture between Verizon Communications Inc. (NYSE: VZ) and Vodafone Group plc (NASDAQ: VOD), did not just sit on its hands while AT&T tried to push through the T-Mobile deal. The company paid $3.6 billion for unused spectrum owned by SpectrumCo, a consortium of Comcast Corp. (NASDAQ: CMCSA), Time Warner Cable Inc. (NYSE: TWC), and Bright House Networks.

Other potential AT&T acquisitions include MetroPCS Communications Inc. (NYSE: PCS), Leap Wireless International Inc. (NASDAQ: LEAP), and even Sprint Nextel Corp. (NYSE: S). But none would be as good as a deal for Dish.

AT&T’s main problem is that it would have to pay a premium price for Dish — perhaps as much as $50/share, or about 70% above today’s share price. That would value Dish at around $22 billion, a steep price given that AT&T just paid out $4 billion to T-Mobile in break-up fees. Even Ma Bell can’t afford to pay that kind of money too often for nothing in return, and it’s a sure bet that Dish would want a substantial break-up fee as part of any deal.

A report at Bloomberg News notes that Verizon Wireless owns 56 percent more 4G spectrum than AT&T in the top 10 markets and 46 percent more in the top 100. Verizon Wireless also claims 107.7 million subscribers compared with AT&T’s 100.7 million. Had AT&T been able to acquire T-Mobile, it would have increased its spectrum by 62%, leveling the playing field.

Dish recently acquired wireless spectrum from two bankrupt satellite television companies for about $2.8 billion in a deal that is still awaiting FCC approval. Verizon’s deal with SpectrumCo also needs regulatory approval, and so far there is no indication that either approval is in trouble.

But what does AT&T want with a satellite TV business? Of course it could hive it off once the deal is done, but it might make more sense to go after MetroPCS or Leap, both of which are simply wireless carriers. Or AT&T might be able to get Dish to sell just the spectrum. That would not be the best deal for Dish shareholders, but the company’s management would certainly be able to retire following such a transaction.

Dish shares are trading up more than 2% today at $29.34 in a 52-week range of $20.85-$32.56. Shares of AT&T are up almost 1% at $30.30 in a 52-week range of $27.20-$31.94.

One issue to consider… Dish would have every right in the world to demand another massive deal break-up fee in case the telecom giant could not convince regulators that this is good for consumers.

Paul Ausick

The companies we’ve included are Pfizer Inc. (NYSE: PFE), Merck & Co Inc. (NYSE: MRK), Bristol-Myers Squibb Co. (NYSE: BMY), Teva Pharmaceuticals Industries Ltd. (NASDAQ: TEVA), Amgen Inc. (NASDAQ: AMGN), and GlaxoSmithKline plc (NYSE: GSK).

Pfizer Inc. (NYSE: PFE) trades around $22.00 and the 52-week range is $16.63 to $22.00. With a $168 billion market cap, this one trades at about 15-times expected earnings and 9.5-times expected 2012 earnings. Thomson Reuters has a mean price target objective of $23.76, indicating implied upside of 8%.

Merck & Co Inc. (NYSE: MRK) trades near $38 and the 52-week range is $29.47-$39.00. With a $117 billion market cap, Merck trades at about 28-times expected earnings and 10-times expected 2012 earnings. The mean price target objective is $39.85, indicating a potential upside of 4.9%.

Bristol-Myers Squibb Co. (NYSE: BMY) trades near $34 and the 52-week range is $24.97-$35.44. With a market cap of about $58 billion, this one trades at about 17-times expected earnings and 17-times forward earnings. The mean price target objective is $32.91, indicating that shares are fully valued and upside potential has gone missing.

Teva Pharmaceuticals Industries Ltd. (NASDAQ: TEVA) trades at about $44 and the 52-week range is $35.00-$57.08. With a market cap of $39 billion, Teva trades at about 13-times earnings and 8-times forward earnings. The mean price target objective is $53.15, indicating an implied upside of nearly 21%. The company has also seen gains since disclosing a new CEO.

Amgen Inc. (NASDAQ: AMGN) trades at about $66 and the 52-week range is $47.66-$65.70. With a market cap of $58 billion, this one trades at about 16-times earnings and 11-times forward earnings. The mean price target objective is $65.45, and, like Bristol-Myers, Amgen is fully valued and there is no implied gain at the current price.

GlaxoSmithKline plc (NYSE: GSK) trades at about $44 and the 52-week range is $36.28-$46.50. With a market cap of $221 billion, this one trades at about 44-times earnings and 13-times forward earnings. The mean price target objective is $49.58, indicating an implied upside of 12.7%.

Only Teva and GlaxoSmithKline have double-digit upside potential percentage gains. Of the two, Teva’s upside potential is greater, largely because it just lost a patent dispute (which pushed the share price down) and gained a new CEO, an industry veteran from Bristol-Myers (which pushed the share price back up). The downside on the company is that it is trading down about -18% over the past 12 months, the only one of these six companies to show a loss for the period.

Glaxo is preparing a regulatory filing in the US with a replacement for the company’s Adair asthma drug which loses patent protection next year. Late-stage trials have been promising, and the stock could get a nice boost if the FDA grants approval. Glaxo also received three new drug approvals from the FDA in 2011,

Paul Ausick

Pandit wrote in the Financial Times that:

As practised, the formal banking sector receives by far the highest level of scrutiny. The rest of the field is left open for the non-bank financial system to serve other customers from outside this regulatory umbrella. And it presumes a level of clairvoyance that no regulator can possess.

His solution is that regulators would create a so-called benchmark portfolio, which would not actually exist, but could be utilized when risk is measured.

He writes:

[I]t would be a collection of real investments that stand in for the kinds of assets that most financial institutions actually hold at the time. What is more, its contents would be 100 per cent public.

All financial firms would be required to show their risk profiles against this hypothetical one. Investors and clients of a financial company could thus determine risk profiles, as the model portfolio would be measured against the portfolios in which they have invested.

Government agencies, which would presumably create the model portfolio, would become ensnared in the debate over what a model portfolio should contain. In the U.S., the Federal Reserve might be asked how the portfolio should be structured. Bank agencies might be asked to do the same. Accounting firms that audit publicly traded financial companies probably would be polled. Retired bank executives might even be asked for their opinions. Arguments arising from the process will make any consensus open to question. Whose interest are satisfied when the model portfolio is created?

The solution to Pandit’s problem is a simple one, if any solution is to be taken at all. Financial firms, large and small, public or private, leveraged or not, would be forced to disclose their entire portfolios and balance sheets. The government would collect the data, and it could be put online like SEC filings. Many firms, like hedge funds, and organizations, such as trading desks, would argue that the disclosure of proprietary data would take away their advantages. It would level the playing field. But in the process, advantages that proprietary undisclosed decisions offer would be lost.

There is risk in the financial system. For financial companies that offer reward to investors, there is also some level of secrecy required. Full disclosure of risk measured against a model, flawed by the nature of how it is created, undermines the entire reason for investing. Hidden risk is an advantage just as much as it is a danger.

Douglas A. McIntyre

Propane is an interesting fuel that touches a number of industries. Producers like Exxon Mobil Corp. (NYSE: XOM) and Chesapeake Energy Corp. (NYSE: CHK) extract oil and natural gas that provide the liquids necessary to make propane. Midstream companies like Energy Transfer Partners L.P. (NYSE: ETP) own processing facilities to convert the liquids to propane fuel. Then wholesalers and marketers such as Suburban Propane Partners LP (NYSE: SPH), AmeriGas Partners LP (NYSE: APU), and Ferrellgas Partners L.P. (NYSE: FGP) sell it to end-users.

The propane industry has issued a report supporting a propane subsidy of $0.50/gallon through a fuel excise tax credit for propane-powered vehicles for five years through the end of 2016, as well as an extension of other breaks that were included in the ethanol subsidies but weren’t renewed and have now expired.

The report, as all industry reports do, claims magical benefits if the subsidy is approved. Not the least of these benefits is the creation of 30,000-42,000 net new jobs by 2016

directly related to the production, sale, and utilization of propane vehicles, propane refueling facilities, and propane production and distribution, and between 16,000 and 23,000 indirect and induced jobs in other industries created by the increase in demand for services by the industries directly affected, as well as the impact of reduced expenditures on fuel on demand for other products.

Those jobs are going to be created by the sale of an average of $2-$2.9 billion worth of subsidized propane vehicles between 2012 and 2022. To get to 30,000 jobs by 2016, then, might take sales of $2 billion, the low end of the range. That’s a cost of $666,666 per job. To create 42,000 jobs with $20 billion in subsidies would cost more than $475,000 per job.

Whether or not the propane industry can, in fact, generate that many new jobs is certainly arguable. Whether or not the cost is worth it is an exercise left to the reader.

Paul Ausick