Highlights of the Week of February 3, 2014


Puerto RicoBB+

Dear PGM Capital Blog readers,
In this weekend’s blog edition, we want to discuss some of the most important events that happened in the global capital markets, the world economy and the world of money in the week of February 3, 2014.

  • On Tuesday, February 4th 2014, Standard & Poor’s cut Puerto Rico to Junk.
  • Jobs, SMI and other figures in the USA keep on disappointing Investors in 2014.
  • TEVA Pharmaceutical reported better than expected earnings on, Thursday, February 6 2014.

Weak economic growth and elevated unemployment have put pressure on the Puerto Rican government’s finances. So have long-term pension obligations. As a result, Standard & Poor’s cut the island’s rating to BB+ from BBB- on last Tuesday, February 4th,  putting it in junk territory.

That could reportedly exacerbate Puerto Rico’s cash crunch by forcing it to front an additional US$1 billion in collateral and swaps payments.

If unable to borrow, the island will have to cut spending aimed at juicing growth. And that could turn into a vicious cycle, especially since Puerto Rico’s economy has been contracting for seven years running (a total contraction of roughly 15% since 2006), as can be seen from below chart.

Puerto Rico, a U.S. commonwealth, faces US$70 billion in debt and has been teetering on the edge of default in recent months. The government currently has limited access to new financing, S&P said.

The interest rates on Puerto Rico’s bonds, which trade in the municipal debt market, spiked to 10% last year amid a slump in the bond market sparked by concerns that the Federal Reserve would cut back on its stimulus program.


About the SMI Index:
The ISM index is compiled from a survey of executives who order raw materials and other supplies for their companies. The gauge tends to rise or fall in tandem with the health of the economy.
The closely followed ISM index on Monday showed that U.S. manufacturers expanded in January at the slowest rate in eight months as the pace of new orders sharply decelerated. The Institute for Supply Management index sank to 51.3% from 56.5% in December. That’s the lowest level since last May of last year.

The decline was much bigger than Wall Street expected, analysts and economists expected the index to slip to 56%. January decline was also the biggest one-month reversal in the new-orders index since December 1980. The new-orders index plunged 13.2 points to 51.2%, also the lowest reading since May. Production also fell sharply.

The ISM’s inventories index dropped 3 points to 44%, the lowest rate in a year.

The January 2014 ISM report.

After a big miss in December of last year, the January 2014, ADP Private sector employment increased by 175,000 jobs from December 2013 to January 2014, the lowest rate in six months, which down 50,000 from previous month and the lowest since August last year.

Below chart shows the ADP employment figures during the last 12 months.






As can be seen from below chart, the U.S. economy, according to the government added 113,000 jobs in January 2014  That’s an improvement from December 2013, but was far weaker than hoped. Economists had been expecting an addition of 178,000 jobs.

Many economists had also been hoping that December’s weak job gains would be revised much higher, as many experts were quick to write off the December report as a fluke. The number was revised higher, but only by 1,000 jobs to 75,000.

About TEVA:
Teva Pharmaceuticals (NYSE: TEVA), based in Israel and is the leading company in the world of generic drugs.


It manufactured more than 73 billion tablets and capsules in 2012 in 73 facilities around the world. One of out every six generic prescriptions in the U.S. is filled with Teva products, more than 1.5 million. In the European Union, more than 2.7 million prescriptions are written each day. It had 1,103 general approvals in Europe at the end of 2012.

The company has over 46,000 employees in 60 countries.

Highlights of Q4-2013 financial report:

  • Net income attributable to Teva increased to US$380 million from $320 million. Earnings per share rose to US$ 0.45 from US$ 0.37.
  • Net revenues increased to US$ 5.430 billion from US$ 5.249 billion in the prior year.
  • The Board of Directors, at its meeting on February 4, declared a cash dividend for the fourth quarter of 2013 of NIS 1.21 per share, a 5 percent increase from the third quarter 2013 dividend of NIS 1.15.
  • The company reaffirmed its financial outlook for 2014.

Puerto Rico debt cut to Junk:

While working on this article on Friday, February 7th, the news hit the wire that, Moody’s Investors Service downgraded Puerto Rico’s general obligation debt rating to junk status on Friday, days after S&P made the same move on the island commonwealth’s debt.

In a statement Moody’s said:

The problems that confront the commonwealth are many years in the making, and include years of deficit financing, pension underfunding, and budgetary imbalance, along with seven years of economic recession,” Moody’s said, adding that the island’s challenges meant it no longer merited an investment-grade rating.

Moody’s justified the downgrade by citing concerns about the fiscally challenged Puerto Rico’s weak growth and ability to access capital markets.

Without wanting to mingle into internal politics of Puerto Rico, the downgrade of its bond to junk really touched us.

As can be seen from below chart, Puerto Rican bond prices have been plunging since late 2012 .The latest streak of injuries will only send them further into the abyss.

As a born Caribbean citizen, we were taught in the sixties, that Puerto Rico was the wealthiest Caribbean Nation followed by the (former) Netherlands Antilles as the second wealthiest.

Today, 40 years later, both Aruba and Curacao have a A- credit rating with stable outlook and good economic growth, while Puerto Rico has been downgrade to Junk status with a negative outlook.

Puerto Rico can’t go bankrupt, but it can default, which means missing timely interest or principal payments. Those payments would ultimately have to be made up.

Debt of States and nations aren’t directly comparable, since a nation has enormous advantages over states in terms of borrowing power and raising revenue. The U.S., for example, issues its own currency and borrows in dollars. The country also has enormous leeway to raise revenue as well as cut expenses.

Currently, the U.S. has US$17.3 trillion in public and intergovernmental debt, but also has US$16.2 trillion in gross domestic product, or national income. S&P downgraded the U.S. for the first time, to AA-, primarily because of the USA’s inability to agree on budgetary matters.

Based on the above again we want to warn investors of the risk of holding bonds in this current time of low interest rates, combined with high public debt. It is not IF, but WHEN, bond investors, will start demanding higher rates on the bonds they hold and when that happens, it could trigger a chain reaction sending bond-yields through the stratosphere.

USA January 2014, data disappointments:
It really amazed us how quickly the economic data of the USA has changed direction for Q4-2013, to January 2014. The big question most people, who -based on the official data of most of 2013- have bid up USA stocks, will ask themself is “How Come?

Our answert to this is “Time will Tell

Teva Pharmaceutical:
Based on TEVA’s fundamentals we have a BUY rating for the stock and own it personally and have it either directly or as a part of an ETF in several clients’ portfolios.

As can be seen from below chart, TEVA’s shares have appreciated with approx. 15 percent during the last 52 weeks.

Until Next Time,

Eric Panneflek

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