In Today's Newsletter

Today's Detailed Commentaries

Asia >> China: China continues to buy strategic assets - reading time 2 minutes

Eurozone: Updates from the Eurozone - reading time 3 minutes

North America >> United States: Manufacturing returning to U.S.? - reading time 2 minutes, thinking time longer

Today's Detailed Commentaries

Asia >> China: China continues to buy strategic assets
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As you no doubt know, yesterday China National Offshore Oil Corporation made a $15 billion, 61% premium to market, bid for Nexen Inc. Nexen's portfolio includes:

• conventional oil and gas assets in the North Sea, the Gulf of Mexico, and offshore West Africa;
  
• oil sands investments and assets in Alberta, Canada; and,
  
• less consequential assets in Columbia and Poland.

Aside from the obvious, my comments are:

• this is but one more example of China's interest and reach with respect to assets it perceives strategic to it in the long term;
  
• it is unlikely to be a transaction the Canadian government will interfere with;
  
• it reinforces questions related to the Keystone pipeline and its turndown by U.S. President Obama earlier this year;
  
• it ought to cause America and American politicians to 'sit up very straight and take notice of what is going on the western Canada resource landscape;
  
• it speaks directly to the financial markets pricing of assets China and others may find strategic - in spite of, or perhaps because of, the current difficult and uncertain economic times; and,
  
• a 61% 'premium to market' is 'large by convention', and causes one to wonder whether there were or are other potential bidders'

Topical References: CNOOC's Nexen bid an indication of how far goal posts have moved, from The Globe and Mail, Jeff Rubin, July 24, 2012 - reading time 3 minutes; and As China costs rise, technology lures factories home, from Reuters, Scott Malone and Ernest Scheyder, July 24, 2012 - reading time 3 minutes.

Eurozone: Updates from the Eurozone

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Things continue to unravel in the Eurozone. Here is a quick overview of some of the events that have taken place over the past few days (in order of importance as I see things):

• concerns are said to have increased that Spain itself (as contrasted with Spain's banks) may need a financial bailout. I simply don't see how or why this ought to raise concerns to new levels, as it seems patently obvious (and has for some months now) that Spain has deeply troubling economic issues that it needs to deal with either by itself or in combination with its Eurozone partners;
  
• Eurozone manufacturing services output shrank again in July, including in Germany and France, and the Eurozone Purchasing Managers' Index was unchanged when it was expected to rise;
  
• Moody's on Monday reduced its outlook on Germany, Luxembourg and the Netherlands to 'negative from stable', ostensibly because Moody's thinks those countries may have to increase financial support to Italy and Spain;
  
• the Greek Prime Minister has said Greece is now in a 'Great Depression'; and,
  
• there is a suggestion yesterday that ten Italian cities, each with more than 50,000 residents, are on 'the verge of financial collapse'.

Topical References:

Spain's recession deepens as bailout fears grow, from The Financial Post, from Reuters, Nigel Davies and Julien Toyer, July 23, 2012 - reading time 3 minutes.

Fall in eurozone PMI heralds return to recession, from The Telegraph, Rachel Cooper, July 24, 2012 - reading time 3 minutes.

Moody's cuts outlook on Germany, the Netherlands to negative, from The Financial Post, from Reuters, July 23, 2012 - reading time 2 minutes.

Greece PM says country now in a 'Great Depression', from The Financial Post, from Reuters, July 23, 2012 - reading time 2 minutes.

Ten Major Italian Cities On Verge of Financial Collapse, from Mish's Global Economic Trend Analysis, Michael Shedlock, July 23, 2012 - reading time 3 minutes.

North America >> United States: Manufacturing returning to U.S.?

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There are increasing reports of repatriation of manufacturing to the U.S. from China and other low cost producer nations where product transportation costs are high, and where in some cases for 'high end products' (some furniture products for example) quality is seen to be better for 'made in America' products. That said:

Be somewhat skeptical of media reports (verbal or written) that proclaim 'manufacturing returns to America' as if that return, now a few drops of rain dropping from overcast skies, is going to become a deluge any time soon.

The big deal at a high level is not 'manufacturing returning to America'. The big deal is 'manufacturing jobs returning to America' if America is going to have any chance of reverting to some semblance of its former 'economic powerhouse' self.

In a nutshell, I believe:

• some manufacturing indeed will come back to America. This largely will occur where the products produced are high end, comparatively expensive consumer products (for example, solid wood furniture made from North American hardwoods) and industrial and construction equipment products;
  
• manufacture of the products manufactured in America and other developed countries with high hourly labour rates will have less labour hour content than they previously had as a result of technology enhanced manufacturing;
  
• for the most part the products 'returned to the U.S. for manufacture' will be niche products that will be purchased by a small percentage of the U.S. population that can afford them, not mass produced products;
  
• products dependant on hand assembly will not be manufactured in the developed countries, unless:
  
  • future transportation costs become astronomic,
    
  • skilled and unskilled labour rates drop in the developed countries very significantly from current levels,
    
  • some combination of those two things takes place, or
    
  • there is a major military confrontation that changes all the economic rules overnight; and,
    
• absent those things described in the previous point, unemployment in the United States and other struggling developed economies is highly unlikely to be resolved by repatriation of manufacturing jobs. That leaves America and those other developed countries an undesirable place.

Everyone in American and all developed countries in economic difficulty want to believe things at some point will revert to 'the way things were'. The closest they likely are going to come to what in retrospect were the 'great times of the 1960's through 2007 is to listen to 'oldies but goodies' on their electronic devices.

Topical Reference: As China costs rise, technology lures factories home, from Reuters, Scott Malone and Ernest Scheyder, July 24, 2012 - reading time 3 minutes.

Snippets from Today's Commentaries

Snippet #1: It (the bid fro Nexen) reinforces questions related to the Keystone pipeline and its turndown by U.S. President Obama earlier this year.

Snippet #2: It (the bid fro Nexen) ought to cause America and American politicians to 'sit up very straight and take notice of what is going on the western Canada resource landscape.

Snippet #3: It (the bid fro Nexen speaks directly to the financial markets pricing of assets China and others may find strategic - in spite of, or perhaps because of, the current difficult and uncertain economic times.

Snippet #4: Concerns are said to have increased that Spain itself (as contrasted with Spain's banks) may need a financial bailout. I simply don't see how or why this ought to raise concerns to new levels, as it seems patently obvious (and has for some months now) that Spain has deeply troubling economic issues that it needs to deal with either by itself or in combination with its Eurozone partners.

Snippet #5: The big deal at a high level is not 'manufacturing returning to America'. The big deal is 'manufacturing jobs returning to America' if America is going to have any chance of reverting to some semblance of its former 'economic powerhouse' self.

Snippet #6: Some manufacturing indeed will come back to America. This largely will occur where the products produced are high end, comparatively expensive consumer products (for example, solid wood furniture made from North American hardwoods) and industrial and construction equipment products.

Snippet #7: Manufacture of the products manufactured in America and other developed countries with high hourly labour rates will have less labour hour content than they previously had as a result of technology enhanced manufacturing.

Newsletter Methodology & Objectives

We personally filter over 1,200 articles published in the previous 24 hours in mainstream media and on the Internet.

Ian R. Campbell, FCA, FCBV, is a recognized Canadian business valuation authority who shares his perspective about the economy, mining and the oil & gas industry on each trading day. Ian is also the founder of Stock Research Portal, which provides stock market data, analysis and research on over 1,600 Mining, Oil and Gas Companies listed on the Toronto and Venture Exchanges.