Cigarettes are banned everywhere nowadays, which is a blessing for non-smokers. However, it can get a bit irritating for smokers not to be allowed to smoke indoors in the US and most of Europe- but can it get to the extent of making people quit?

Q1 earning show an increase in bottom line growth for the biggest tobacco companies, for instance, Philip Morris International Inc- the world’s biggest tobacco companies by revenues- posted a 13% increase in profits and Reynolds bottom line excluding one-time earnings rose by 5%. Does that mean that profits were not hit by the increase in indoor smoking restrictions?

Looking closer at the earnings, most Tobacco companies have increased their retail prices by approximately 5%. Both Philip Morris and Reynolds increased the price of a pack by 8 cents across all their brands. Another example is Lorillard Inc, which increased its’ prices by 6 cents, which accounted for 85% of the company’s unit sales.

To answer the question above- smokers are cutting back on smoking as volumes on unit sales are decreasing. Philip Morris USA and Reynolds volumes slid by 6.4% and 5.2% respectively. Having said that, will Tobacco companies feel the pain or will the hike in prices net off the losses in volume?

Top executives of the tobacco firms are confident that they can successfully pass along price hikes to consumers as they have been doing so over a long period. Then again, what is the price ceiling that the consumer is willing to pay for a pack of cigarettes?  

Gold increased to a record high in its fourth day reaching USD 1,474.60 per once. This rally was mainly attributed to the renewed Euro zone fears and inflation, which was backed by the increase in corn and oil prices.

Adding on the above, the weakening of the dollar which decreased by 1% relative to the euro fueled the rally. Analysts are expecting further dollar declines as a result of the widening interest rate differentials after the ECB increases interest rates for the first time since 2008.

Gold also broke a very important technical resistance of USD1,466 an once on Thursday. If this rally continues this week, Gold will target USD1,500 an once.

Gold remained below its all time inflation adjusted highs, which is estimated to be at almost USD2,500 per once in the 1980’s post cold war tensions, oil shocks and hyperinflation.

The Saudi Tadawul index lost 19.6% in value in the two weeks following the unrest in Bahrain; however, it recovered all the losses which were helped also by the increase in oil prices. The index gained 24% from its lowest level on the end of February. The Tadawul is down 0.39% YTD.

Oil prices, which increased 17% since Feb 14^th at the time Bahrain saw some protests, positively affected the petrochemicals sector, increasing its value by 29%.

Below is a YTD chart of both the Tadawul and the petrochemical index; the petrochemical index crossed to the positive zone for the year. However, on a case to case basis not all petrochemical stocks are positive for the year thus this might potentially trigger a catch-up play.

2011 witnessed a huge wave of political turmoil in the MENA region, which has reflected on the performance of all the stock markets. Today we’re going to focus on the Saudi Tadawul stock market.  Tadawul has lost 11% since the tension first began in Tunisia- the beginning of the political unrest. The market has rebounded this week after shedding 20% in the two weeks following the mid-February riots in Bahrain.

On March 5^th , Al-Arabiya news reported that Mr. Ibrahim Al-Assaf, Saudi Finance Minister, said that prices in Tadawul are attractive and that the Saudi Public Pension Agency bought shares last week.

Saudi is embarking on solid reform steps with its $36 billion spending plan. The plan will be setting minimum wages for Saudi nationals, providing housing and benefits for the unemployed, and approving a legal framework to govern property ownership by GCC nationals.

Tadawul surged to a two week high as no signs of internal Saudi protests emerged and the government became an aggressive buyer in the stock market. Tadawul increased by 3.3%, reaching 5,950 yesterday.

Yesterday, after the end of the trading session, NIC issued a statement in Kuwait bourse stating that their commitment to sell 46% of Zain was over. The statement ended a USD12 billion deal talks which began in September when Etisalat first announced their interest in acquiring a stake in their Kuwaiti rival Zain. The deal has faced many difficulties, most importantly was the opposition of other key shareholders of the company and the difficulties they faced in trying to sell their stake in Zain Saudi.

What’s next?

When the deal was first announced on September 29^th Zain was trading at KD1.260, then it rallied after the announcement to KD1.360, up 8%. It also ended the year by increasing its’ market cap by 25% since the day prior to announcement.

Zain has fallen 15.8% YTD and broke both its’ 20 and 40 day moving averages; yesterday it broke its’ 200 day moving average.

The Chart above shows a rebasing price graph of both Zain and Etisalat since the announcement of the deal to date. Zain is currently trading at a EV/EBITDA multiple of 6.7x as opposed to its peers of 5x, a 34% premium to its’ peers. Also, it’s trading a P/E 15.4x, against an average of 8.4x- 83% premium. Some might say that this premium was justified as Zain was an acquisition target- but what about now will it fall to match its peers since there’s no acquisition? Using a 2011 EPS estimate of 83 fils and multiplying it with the current average multiple of 8.4x Zain should fall to 0.700.

According to a recent press release by Etisalat, the company reiterated its stand towards Zain acquisition and that it’s still interested in the Zain deal. Bin Ali added that pertinent and suitable information related to the due diligence have been collected and “Etisalat” is in the process to study and analyze the collected information. Consequently the results will be discussed with the sellers in a later stage, and the final results will be presented to Etisalat`s Board of Directors to make a decision in this regard.  Etisalat will inform its stakeholders with the progress of the Proposed Transaction in due course.

Although Bahrain is a small economy and does not produce much oil, it is lauded for its position as a regional banking and Islamic financial hub and its diversified economy. Given the recent events, a diversified economy isn’t enough anymore as people are shifting their talks from sovereign defaults to political instability. Recent political unrest that has been spreading around the region has reached Bahrain, adding more risk to the economy as the 5-year credit default swaps reached record levels of 304bps, up 64% YTD.

This has placed a burden on all GCC markets, as most markets fell sharply last week sending the S&P GCC Large Cap Index spiraling.

Things doesn’t seem to be improving this week; the Saudi Tadawul has lost 1.6% yesterday and as I’m writing this article the Kuwait SE is down 2.6%, Doha stock market is down 2.3%, and the Dubai (DFM) is down 2.1%.

According to Goldman Sachs Group, about 2.5% of the global oil production is transported through the Suez Canal.

The insurance against the Egyptian debt (CDS) rose by 39.9%.

Venture Alliance (www.3sva.com) is organizing their flagship training, the Investment Valuation Program (www.3sva.com/pdf/IVP.pdf). I took this program last year and found it to be exceptionally beneficial. I really recommend this program to everyone working in finance and banking. The instructor, Prof Shehzad Mian is a top class professor at Emory University and at Duke executive training. He made the topic very easy and interesting. More importantly, he was extremely helpful after training hours and was accommodating for my very long conversations and questions. I think you guys should not miss out on this one!

After the disruption in Tunisia, Cairo’s financial market felt a lot of the pain. The Egyptian stock market fell by almost 8% and the cost of insuring against the Egyptian debt has gone to an 18 months high. Also, the Egyptian pound fell to a seven year low against the US Dollar!

Are investors pricing in a political risk whereby Egypt has the same fate as Tunisia?

Major investment houses and international investors have been hot on Egypt for a while, mostly because of its demographics and accessibility. A study done by Barclays Capital estimates that foreign investors own 15% of stock market capitalization and 20% of the outstanding bonds, an amount equal to around USD25 billion. Although this indicates that Egypt’s market is attractive, it also creates a potential risk in that investors might take their money away, thus creating massive selling.

“If alarm bells start ringing in Egypt, there’s potential for quite a lot of money to come out.” said Oliver Bell, senior investment officer at Pictet which has gone underweight Egyptian stocks.

Elections are coming soon and Hosni Mobarak, president for the past 30 years, will probably run again. Also, Egypt is facing high food inflation and high youth unemployment. Adding on the already existing political unrest and the events that happened in Tunisia, this will surely trigger a political risk.

What do you guys think: Buying opportunity or a falling knife?

Gulf Bank has performed magnificently well in 2010, adding 97% to its share price. It has by far exceeded the returns of both the KSE Price index and the banking index. Moreover, it has outperformed all its peers.

Today, Al-Qabas daily newspaper listed some reasons that justify this rally:

1) Although the bank suffered from a massive erosion in book value, it maintained its market share within the banking arena in Kuwait and continued to compete with other banks.

2) Huge growth in the bank’s earnings as in Q1 it recorded a profit of KD 524 thousand, Q2 it recorded a profit of KD1.4 million, and in Q3 it announced a profit of 8.9 million.

3) The bank is tightly held by its insiders who hold 56.7% of the shares.

4) Shareholders who suffered from the bank’s losses and had to recapitalize the bank were buying to average-down their losses.

5) The presence of the KIA as a lead investor.

6) The change in strategy and management and the enforcement of corporate governance. In addition, the cleaning of the balance sheet helped restore investor confidence.

7) The old shareholders are confident in the bank and maintained their ownerships.

Looking at the basic relative valuation, one might assume that the stock might be overbought as it is now trading above peers, with the exception of Boubyan bank. Although they have just cleaned up their balance sheet, the Gulf bank might still be conservative and not reverse provisions in the next few quarters. Still, I do believe that the Gulf bank has hidden value.