Friday, January 19, 2018

Answering Saudi Arabia Request for Nuclear Proposals

The most recent post “Saudi Arabia Going Nuclear” started a series on nuclear power plant construction.  The Saudi government recently announced plans to prequalify construction companies for a bidding process that will begin before the end of 2018 and result in the signing of contracts sometime in 2019.  Never to undertake anything with moderation, Saudi Arabia plans to build 17.8 gigawatts of nuclear capacity by 2032, requiring about sixteen reactors.  It is an ambitious plan and one that could have a significant impact on the nuclear power construction industry.  There are otherwise about fifty nuclear power plants under construction scattered among at least a dozen countries.

Tuesday, January 16, 2018

Saudi Arabia Goes Nuclear

The world may soon see hourglass-shaped structures of cooling towers rising from the Middle East dessert floor as Saudi Arabia signals its intention to move ahead with plans to building nuclear reactors.  The Saudi government recently announced plans to prequalify construction companies for a bidding process that will begin before the end of 2018 and result in the signing of contracts sometime in 2019. 
Saudi’s nuclear power plan is unfolding at the end of a lengthy deliberation process.  The Gulf Cooperation Council, which is composed of six of the Middle East monarchies, began a study of nuclear power in 2006.   Subsequently, the group teamed up with the International Atomic Energy Agency (IAEA), an international cooperative body seeking to promote peaceful use of nuclear technology, for a feasibility study on regional nuclear power and desalination.  An important factor in electricity requirements in the Middle East is the dependency on desalination plants that are powered by fossil fueled generators.  Finally, in July 2017, Saudi Arabia’s cabinet approved the National Project for Atomic Energy and armed its King Abdullah City for Atomic and Renewable Energy agency with new financial and administrative regulations.
Never to undertake anything with moderation, Saudi Arabia plans to build 17.8 gigawatts of nuclear capacity by 2032, requiring about sixteen reactors.  It is an ambitious plan and one that could have a significant impact on the nuclear power construction industry.  There are otherwise as many as fifty nuclear power plants under construction scattered among at least a dozen countries.  China has eighteen plans in various stages of construction.
Which companies are hoping for a call from King Salman’s representative and a chance to submit bids?   

Friday, January 12, 2018

Reading the GDP Leaves

What trader does not wish for a quick and easy signal for fair valuation  -  the trader’s silver bullet.  Some like a measure used by Warren Buffet that compares Total Market Capitalization to the Gross Domestic Product.  The fact that he is impressively successful as an investor probably adds to the credibility of any measure that he admits using.  
Image result for gdp image
At the heart of the ratio is the view that stock prices and therefore market value revert to mean in the long term.  Profits can be realized in the reversion.  It is quite logical.  If total market capitalization is too low, that is the market is undervalued, the excess capital in the economy be attracted to cheap stocks. The resulting demand will cause stock prices to rise.  On the other hand, when GDP is low, the economy cannot support continued investment in stocks at the prevailing price levels.  This is especially the case if the stock market is priced high.  Investment in stocks will diminish and stock prices will decline as supply from sellers outpaces demand. 

Tuesday, January 09, 2018

BEER: Beguiling or Busted Signal?

Based on the view that government bonds and stocks are regarded as competing assets by investors, a model has developed to extract the information content inherent in the relationship between bond yields and equity yields.  The ratio of Bond Yield to Equity Yield (BEER ratio or BEYR ratio) provides a measure of perceived risk in the bond market versus the stock market.  It has become a popular means to indicate how much the equity markets are expensive or cheap relative to bond markets. 
How it Works
Whenever the equity yield has crossed above the bond yield, it implies that even with no earnings growth, equity will deliver better returns than debt.   The ratio less than 1.00 can be a harbinger of the bottom of the equity market.  Conversely, when equity yields are lower than bond yields, it suggests equities are expensive relative to bonds.  A ratio greater than 1.00 is a call to caution for equity investors.