The Mission Report

The MissionIR Report - February 2011

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Eurozone Agrees to Future Bailout Fund

European finance ministers have decided to provide euro500 billion ($674 billion) for a new crisis fund that will come into force in 2013. The ministers "agreed on the provisional volume of euro500 billion , which will be revised every other year," said Jean Claude Juncker, the prime minister of Luxembourg who chairs the regular meetings of the 17 eurozone finance ministers.

Additional financing for the so-called European Stability Mechanism will come from the International Monetary Fund, which is already contributing one third of the region's existing euro750 billion crisis fund.

While Juncker did not say how much money will come from the IMF in the future, the European Union's Monetary Affairs Commissioner Olli Rehn said it was an "unwritten understanding" that the fund would provide 50 cents for every euro spent by the eurozone members.

The European Stability Mechanism will succeed the European Financial Stability Facility, the eurozone's euro440 billion contribution to the overall fund, in 2013.

While the decision on the new mechanism is a big step in showing that the currency union is prepared to stick by its weaker members, immediate investor concern centers on the eurozone's ability to deal with the existing crisis.

Ministers didn't reach a decision on boosting the size and powers of the exciting facility, which at the moment can only give about euro250 billion ($336 billion) in loans because of several capital buffers required to make the bonds it issues to raise money attractive to investors. Juncker said that the euro500 billion promised to the new mechanism will constitute its effective lending capacity and won't be diminished by capital buffers.

Monday's meeting came amid renewed jitters on European bond markets. The interest rates on Portuguese government bonds were near euro-era highs, heightening speculation that the country might soon have to follow Greece and Ireland in seeking international help to service its rising debts.

"The situation on sovereign debt markets remains disturbing," Juncker told reporters. That statement echoed earlier comments from Luxembourg's finance minister Luc Frieden, who said Portuguese yields have been rising "probably because we are too slow in taking the relevant decisions."

His German counterpart Wolfgang Schaeuble, however, cautioned against rushing into new measures. "At the moment financial markets are so stable that it is probably better if we don't disturb them with unnecessary discussions," Schaeuble said.

Eurozone officials have promised to present a "comprehensive response" to the debt crisis by the end of March.

Obama Sends Congress $3.73 Trillion Budget

President Barack Obama sent Congress a $3.73 trillion budget that holds out the prospect of eventually bringing deficits under control through spending cuts and tax increases. But the fiscal blueprint largely ignores his own deficit commission's view that the nation is imperiled unless huge entitlement programs like Social Security and Medicare are slashed.

Obama called his new budget one of "tough choices and sacrifices," but most of those cuts would be held off until after the next presidential election.

Overall, Obama proposed trimming the deficits by $1.1 trillion over a decade. The administration is projecting that the deficit will hit an all-time high of $1.65 trillion this year and then drop sharply to $1.1 trillion in 2012, with an expected improvement in the economy and as reductions in Social Security withholding and business taxes expire.

Obama's 2012 budget would actually add $8 billion to the projected deficit for that year because the bulk of the savings he would achieve through a freeze in many domestic programs would be devoted to increased spending in areas Obama considers priorities, such as education, clean energy and high-speed rail.

"We have more work to do to live up to our promise by repairing the damage this brutal recession has inflicted on our people," Obama said.

The president went to a middle school outside of Baltimore to highlight the education initiatives in his budget and told the crowd, "We can't sacrifice our future."

Republicans, who took control of the House in the November elections and picked up seats in the Senate in part because of voter anger over the soaring deficits, called Obama's efforts too timid. Lawmakers are set to begin debating on Tuesday $61 billion in cuts for the remaining seven months of fiscal 2011.

"Presidents are elected to lead and address big challenges," said Republican House Budget Committee Chairman Paul Ryan of Wisconsin. "The big challenge facing our economy today and our country tomorrow is the debt crisis. He's making it worse, not better."

Senate Republican Leader Mitch McConnell said the president's investment plans missed the simple point that "we don't have the money" to finance Obama's vision of "trains and windmills" in the future.

"After two years of failed stimulus programs and Democrats in Washington competing to outspend each other, we just can't afford to do all the things the administration wants," McConnell said.

Even some Democrats complained that Obama needed a more vigorous attack on future budget deficits.

"We need a much more robust package of deficit and debt reduction over the medium- and long-term. It is not enough to focus primarily on cutting the non-security discretionary part of the budget," said Senate Budget Committee Chairman Kent Conrad, D-N.D., who called for a budget presentation matching the ambition of Obama's deficit commission.

Jacob Lew, the president's budget director, told reporters that the president's budget was a "meaningful down payment" in attacking the deficits that would get the country's finances headed in the right direction.

The $14 trillion national debt -- the cumulative total of deficits -- would grow to $16.7 trillion by Sept. 30, 2012, Obama's budget projects. Much of that debt is owed to China.

Obama's deficit commission made a host of painful recommendations including raising the Social Security retirement age and curbing benefit increases, eliminating or sharply scaling back popular tax breaks, reforming a financially unsound Medicare program and almost doubling the federal tax on gasoline. Obama included none of these proposals in his new budget. The deficit panel called for savings by making these politically tough choices of $4 trillion over a decade, four-times the savings that Obama is projecting.

The Obama budget plan, which is certain to be changed by Congress, would spend $3.73 trillion in the 2012 budget year, which begins Oct. 1, a reduction of 2.4 percent from what Obama projects will be spent in the current budget year.

Of the $1.1 trillion in deficit savings that Obama is projecting over the next 10 years, two-thirds would come from spending cuts, including $400 billion in savings from a five-year freeze on domestic programs that account for one-tenth of the budget. The other one-third of deficit savings would come from tax increases such as limiting the tax deductions taken by high income taxpayers, a proposal that Obama put forward last year only to have it rejected by Congress. Obama also proposes raising taxes on energy companies.

The president's projected $1.65 trillion deficit for the current year would be the highest dollar amount ever, surpassing the $1.41 trillion deficit hit in 2009. It would also represent 10.8 percent of the total economy, the highest level since the deficit stood at 21.5 percent of gross domestic product in 1945, reflecting heavy borrowing to fight World War II.

The president's 2012 budget projects that the deficits will total $7.21 trillion over the next decade with the imbalances never falling below $607 billion. Even then that would exceed the deficit record before Obama took office of $458.6 billion in 2008, President George W. Bush's last year in office.

Administration officials project that the deficits will be trimmed to 3.2 percent of GDP by 2015 -- one-third of the projected 2011 imbalance and a level they said would not harm the economy.

However, to achieve the lower deficits required the administration to assume the costs of the wars in Iraq and Afghanistan would plummet to $50 billion annually after 2012. The budget also fails to pay for the cost of keeping Medicare payments for doctors from being cut after 2013. Obama's budget also makes assumptions about economic growth that are more optimistic that those offered by many private economists.

While cutting many programs, the new budget does propose spending increases in selected areas of education, biomedical research, energy efficiency, high-speed rail and other areas that Obama judged to be important to the country's future competitiveness in a global economy.

China Bets Big on Gas Technology

Chinese companies are paying a heavy price to participate in North America's natural-gas boom in a bet on gaining vital new technology and access to a bountiful new source of energy.

Technological advances have opened up massive new gas fields in North America, creating opportunity for Asia's energy-hungry countries. The technology taps gas trapped in rock, called shale gas. Energy consulting firm Wood Mackenzie Ltd. estimates that potential U.S. shale-gas resources total 650 trillion cubic feet. By comparison, proved U.S. gas reserves at the end of 2009 totaled 244.7 trillion cubic feet, according to the BP Statistical Review.

Asian companies are looking to tap these resources and know-how. Chinese companies have been the most aggressive to date, signing joint ventures in the U.S. and China as well as supply agreements. PetroChina Co. (NYSE: PTR) said last week it will pay US$5.4 billion for a stake in Calgary-based Encana Corp.'s shale and deep-well gas assets. This follows a shale-gas deal between China's Cnooc Ltd. (NYSE: CEO) and U.S.-based Chesapeake Energy (NYSE: CHK) Corp. in January. Bankers expect similar deals this year as China continues to seek energy security and reduce its dependence on dirtier coal.

Energy analysts say state-owned Chinese companies are paying a high premium. "The deal metrics look rich in Encana's favor," research analysts at Credit Suisse said.

PetroChina's deal equates to a long-term gas price at roughly a 20% premium to the current benchmark Henry Hub gas contract futures price, said Gordon Kwan, head of regional energy research at Mirae Asset Securities (HK) Ltd.

Bankers say the price may be worth it. The deals could potentially let the Chinese buyers learn new techniques to get at hard-to-reach shale gas by explosive or hydraulic force, known as fracking.

That could help China's economy meet more of its energy needs from supplies at home. China's Strategic Research Centre for Oil and Gas has set a target of locating one trillion cubic meters of recoverable shale gas reserves by 2020. Its biggest potential reserves are in the Ordos, Sichuan and Tarim basins.

But the deals also mark a bet by Chinese companies on how shale gas will affect world-wide energy markets. "Similar to the case for Cnooc in its recent acquisitions of Chesapeake assets, we believe PetroChina has a strategic interest in gaining experience in unconventional gas that it would apply toward resources in China," said UBS in a note.

To send gas overseas in lieu of pipelines, companies cool it into a liquid and ship liquefied natural gas, or LNG, via tanker. In preparation for the U.S. to become a major importer of foreign gas, many companies have invested billions of dollars in terminals that can take LNG and turn it back into a gas for commercial use.

Shale gas has changed the game. "The U.S. is gas self-sufficient for at least 40 years based on 2009 gas consumption data," said Peter O'Malley, head of resources and energy banking in the Asian-Pacific region at HSBC.

Now, many observers see a day when the U.S. could become a major gas exporter. Mr. O'Malley sees more deals made for LNG from the U.S. to Asia, the world's largest LNG market, where prices are higher. He believes U.S. exports could take the place of supplies expected from expensive and complicated projects in Australia.

One example involves Houston-based Cheniere Energy Partners LP, which won regulatory approval in September that put it a step closer to building the first LNG export facility in the continental U.S. Cheniere struck a deal in November with China's ENN Energy Trading Co. to export U.S. LNG to China beginning in 2015.

Apart from the ventures in the U.S. to learn new technology, China is also signing deals on its home turf to develop the shale gas. New York-based Hess Corp. signed agreements with China Petroleum & Chemical Corp. (NYSE: SNP) and China's Sinochem Group last month to help develop China's shale reserves. Hess has experience in developing the Bakken Shale in North Dakota that it can use in China.

With this significant technology transfer to China, bankers think gas production in China is getting closer. HSBC's Mr. O'Malley believes the Chinese are likely getting close to having enough shale-gas know-how to develop their own reserves. "The Chinese have the ability to ramp up production faster than most.… When the Chinese put that technology to use then gas prices are going lower," he said.

Birks & Mayors, Inc. (BMJ)

Birks & Mayors, Inc. reported that net sales during the fiscal 2011 holiday season increased by 8% to $75.5 million compared to net sales of $69.7 million during last year's holiday season. The $5.6 million increase in net sales was driven by an increase in comparable store sales, $1.9 million of higher sales related to translating the sales of the Company's Canadian operations into U.S. dollars and $1.1 million of sales from two new stores.

President and CEO Thomas A. Andruskevich said the company is pleased with the increase in sales in its Canadian market and is encouraged by the sales growth in the U.S. Over the next quarter, Birks & Mayors will continue to focus on increasing sales and gross profit while diligently controlling expenses and managing the level and productivity of its inventory and limit capital expenditures.

About Birks & Mayors, Inc. (BMJ)

Birks & Mayors, a leading operator of luxury jewelry stores in the United States and Canada, operates 33 stores under the Birks brand in most major metropolitan markets of Canada, 29 stores under the Mayors brand in Florida and Georgia, two retail locations in Calgary and Vancouver under the Brinkhaus brand, as well as three temporary retail locations in Florida and Tennessee under the Jan Bell brand.

Founded over a century ago, Birks is recognized as Canada's premier retailer, designer and manufacturer of fine jewelry, timepieces, sterling and plated silverware and gifts. The company's Mayors brand was founded in 1910 and has maintained the intimacy of a family-owned boutique while becoming notorious for its fine jewelry, timepieces, giftware and service.

Birks has collected the highest total of awards than any other Canadian jeweler over the last fifty years. Among them, Birks has earned 12 Diamonds Today Awards, the most prestigious jewelry-design award in Canada. Birks designers have also received 6 Diamonds-International awards, sponsored by De Beers, and the Academy award of jewelry design. Mayors designers have also received merited praise and recognition for exceptional creative designs.

China Electric Motor Inc. (CELM)

China Electric Motor Inc. announced that an indirect wholly owned subsidiary of the company entered into an Equity Transfer Contract with New-Metal (H.K.) Technology Limited. Under the terms of the agreement, the subsidiary will purchase 100% of the equity interests of Shenzhen Guofa Optoelectronics Co., Ltd., a wholly foreign owned enterprise incorporated in China, for an aggregate purchase price of RMB42.7 million.

Through this acquisition, CELM will gain new production lines and expertise focused on high-end DC micro motors used in products like digital cameras, cell phones, electronic door locks, and other similar products. Mr. Yue Wang, the Chief Executive Officer of China Electric, stated, "We expect Guofa to be accretive immediately upon the closing of this acquisition and we believe that we can maximize Guofa's sales and profit growth in the coming years through our working capital commitments."

About China Electric Motor Inc. (CELM)

China Electric Motor Inc. (CELM) is a China-based company that engages in the design, production, marketing and sale of micro motor products through its subsidiaries, Shenzhen YuePengCheng Motor Co., Ltd. and Ningbo Heng Bang Long Electrical Equipment Co., Ltd. The Company's products are incorporated into consumer electronics, automobiles, power tools, toys and household appliances.

Despite 48.90% year-over-year growth in revenues and continued profitability, CELM is trading at a P/E of 6.1 (the average for the industry is approximately 28) as of Friday's close. The company is also undervalued by P/S, PEG, Price/Book and Price/Cash Flow. Currently two analysts cover the stock, one with a "Strong Buy" rating and one with a "Buy" rating. The average of their price targets is $9.50.

As of last report, the company had a very strong balance sheet with $75.9 million in total assets and $9.5 million in total liabilities. The management team has also shown great strength in efficiency, returning 28.1% on equity, 24.1% on assets and 28.1% on capital.

In most recent news, the company announced that through an indirect wholly owned subsidiary it will acquire Shenzhen Guofa Optoelectronics Co., Ltd. Through this acquisition, CELM will gain new production lines and expertise focused on high-end DC micro motors as well as a blue chip customer base. The acquisition is expected to be accretive immediately upon the closing.

Cytokinetics Inc. (CYTK)

Cytokinetics, Inc. reported its fourth quarter and year end highlights as well as its 2010 financial results. Robert I. Blum, Cytokinetics' President and Chief Executive Officer, commented, "In 2010, Cytokinetics took significant steps forward in connection with a strategic commitment to advance our portfolio of muscle biology programs. In particular, we demonstrated evidence of potentially clinically relevant effects of CK-2017357 in patients suffering from ALS."

The company is enthusiastic about translating pharmacodynamic effects observed in patients with ALS and patients with heart failure into potentially meaningful clinical benefits as may be demonstrated with its first-in-class drug candidates. This year certainly looks promising for Cytokinetics as it pushes forward towards key milestones.

About Cytokinetics Inc. (CYTK)

Cytokinetics Inc. is a clinical-stage biopharmaceutical company focused on the discovery and development of novel small molecule therapeutics that modulate muscle function for the potential treatment of serious diseases and medical conditions. The company's lead drug candidate from its cardiac muscle contractility program, omecamtiv mecarbil (formerly CK-1827452), is in clinical development for the potential treatment of heart failure.

CK-2017357, a skeletal muscle activator, is being developed by Cytokinetics independently as a potential treatment for diseases and conditions associated with aging, muscle wasting or neuromuscular dysfunction. CK-2017357 is currently the subject of a Phase IIa clinical trials program and has been granted orphan-drug designation by the U.S. Food and Drug Administration for the potential treatment of amyotrophic lateral sclerosis.

Cytokinetics is also conducting non-clinical development of compounds that inhibit smooth muscle contractility and which may be useful as potential treatments for diseases and conditions associated with excessive smooth muscle contraction, such as systemic hypertension or bronchoconstriction. All of Cytokinetics' drug candidates and potential drug candidates have been discovered via the company's research activities and are directed towards the cytoskeleton.

As of last report, Cytokinetics had $77.9 million in total assets, with $17.5 million in cash and equivalents, and $7.4 million in total liabilities. Insiders hold 14.4% of the shares outstanding while institutions hold 54.20%. Five analysts currently offer coverage of the company with price targets ranging from $6.00 to $11.00. Currently trading around $1.90 a share, Cytokinetics has an approximate $121 million dollar market cap.


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