Tables Posted (in London)
I have just updated our tables on the www.global-investing.com site from London where my resources are more limited than in NYC. Readers are welcome to visit the website to view the tables they are allowed to see. Anyone can see our closed positions but only current paid subscribers get to see our live portfolios, because that is what we are charging for. To view spreadsheets more easily on notebooks or smartphones, use the printer friendly key, even if you do not want to print.
Spiking the Punch Bowl and Volcker
The Fed spiked the punchbowl instead of removing it and Wall Street roared ahead. It did this by not specifying more clearly when interest rates will start to rise. instead of promising to keep rates at zero "for a considerable time", the US central bank said it "can be patient in beginning to normalize the stance of monetary policy."
It also ordered delayed imposition of the Volcker Rule which is intended to separate the insured role of banks as deposit-takers from the public with their often high-risk underwriting and hedging activities. The rule is named after Paul Volcker who wiped out US inflation with awful high interest rates during the 1970s before the New Deal separation of commecial banking and investment operations was undermined by free-market enthusiasts.
Defending the sales of Swatches and chocolates, the Swiss central bank imposed a 0.25% CHARGE on bank deposits.
Germany's BASF extracted itself from a complex deal with Gazprom whereby it was supposed to replace Wintershall in a new exploration program in Siberia. Even in Germany, Russia plays are being reexamined for fear of becoming a target as Putin wraps himself in the flag and accuses foreigners of bringing the country into what he insists is not a crisis. We sold BASFY not over this new development but simply because I worried that it could not get its petrochemical feedstock at competitive prices against US shale oil.
More for paid subscribers follows from Brazil, Mexico, Canada, Britain, Ireland, Finland, France, Denmark, Israel, Spain, Chile, Poland, Colombia, Portugal, Italy, and India. Oh, and Zambia.
Bad Message Day
Apologies. Between BT cutting our phone and Internet connectivity until Dec. 23 and an upgrade which has taken down the website we use, you may not get your Thursday issue by email. Please visit http://www.global-investing.com to view the newsletter. I am writing at the local pub which is fun but may keep things from reading as clearly as they should as I want to finish with only one bar order.
Some people who recently renewed under a special offer are having problems with their Internet delivery from even before my hop across the Atlantic. You should always try to clean your Internet cache when things like delivery go wrong. And then check your spam blocker. And only after that go and ask for help from your technically-challenged editor.
When they asked John Pierpont Morgan what the stock market would do, he replied: "It will fluctuate." That certainly was what happened to the S&P 500 yesterday when the market zig-zagged between gains and losses before closing out the day down sharply. This is an example of volatility but not actually what market investors mean by the word. For most investors, volatility only counts on the way down. Volatility is a proxy for declines. We recommend (but not in our model portfolio) that investors hedge against volatility using an exchange traded fund, UVXY, which can be sold (but not yet) when it looks like the market has hit a low. Then you buy stocks that are cheap with the proceeds. This fund invests so as to double the daily movement either way of the S&P 500.
ProShares Ultra VIX Short-Term Futures ETF seeks daily investment results, before fees and expenses, that correspond to 2x the daily performance of the S&P 500 VIX Short-Term Futures Index.
While there are reasons galore to despair over US political chasms, there is sometimes good news. The latest Johns Hopkins Newsletter pointed out that the US Supreme Court unanymously threw out the claims of Myriad Genetics to patents for human gene mutations which may be linked to cencers and other diseases.Myriad found the BRC1 and BRC2 genes whose mutations cause breast cancer passed down through the generations. Other claims involved adenomatous polyposis in which a patient's offspring are at a 50% risk of developing this condition. I explain why I get this newletter for paid subscribers below in a note about one of our shares.
The patent let Myriad charge as much as $4000 for testing for these genetic flaws.The Supremes voted 9 to 0 against Myriad. Justice Thomas said "a naturally occuring DNA segment is a product of nature and not patent-eligible merely because it has been isolated." It ended the monopoly Myriad claimed. The Supremes did allow human modifications of the genes to be patented but not non-human genes.
I was impressed by the genetic test of my readers, a retired professor. CP wrote that she proved to be among the top 5% bearers of Neanderthal genes among those tested. Her children however as less low-brow. Their father was not as closely related to cavemen as she and her sister. More for paid subscribers including two exclusive reports on drug companies available nowhere else from China, Finland, Ethiopia, Israel, Britain, Belgium, Germany, Europe,India, Switzerland, and Cuba.
El Buen Fin: CEFs
Our last El Buen Fin from New York is about closed-end funds (CEFs). I am writing it rather than listening in to the presentations on this very subject being offered this morning, mainly because we take a special view of CEFs. We only care about the ones invested outside the US.
Closed-end funds or investment trusts were invented in the 19th century in Britain and were launched in Canada well before they were a feature of US stock markets. During the run-up to the 1929 stock market crash, US funds which were tradable on the exchanges flourished. These were largely unregulated and often served as a way for brokers to get rid of shares they had not done well with.
The 1940 Act Tax Edge
Reform came under the New Deal. Under a law passed in 1940 in the USA, the American closed-end fund, a version of the UK-Canadian Its, were regulated. CEFs issued a fixed number of shares via an initial public offering, just like another listed company. They could increase their capital only by meeting conditions aimed at treating existing shareholders fairly.
But in return the 1940 Act gave CEFs some advantages. They are allowed to pay divedends without taxation at source. They are allowed to borrow money to increase their investments which can boost dividends or capital gains, while other investment vehicles may not do this.
The Discount Edge
Because the fund trade when markets are open, they can move to a discount or a premium to the net asset value of the stocks or bonds they hold. In practice, during most periods, CEFs trade at a discount. That means you can acquire $1 of assets for 85 or 90 cents.
You are not buying in order to see that discount disappear. It tends to persist. You are buying your dollar of net asset value (NAV) at a discount. But that dollar will get interest or dividends for the full face value of the holdings. It will earn capital gains on the dollar, not on your 85 cents.
While other market entities like exchange-traded funds have also become part of the investment picture, CEFs still offer real advantages. There is about $225 billion in traded CEFs on US markets today. You can also buy some pink-sheet listed foreign CEFs from Canada or Britain or The Netherlands, all of which have similar tax advantages to the US model. There are no restrictions on US buyers of foreign CEFs, unlike what happens with open-end mutual funds. Overall the CEFs US investors have access to is well over $300 mn, I estimate.
Other Advantages: Filene's Basement
The advantages of CEFs apply to foreign-managed ones as well as US. CEFs are managed investments aimed at achieving diversification and a certain strategy: yield, capital gains, or some combination of the two. They invest mostly in shares but also in bonds, and again may combine the two. For a global investment portfolio, they are a quick and simple way to build up your portfolio without spending a huge amount of money. There is only one brokerage commission charged for buying into as many as 40 or 50 different equities or bonds.
Another edge for CEFs is that they are often managed by the same groups as also have mutual funds. But CEFs tend to have lower entry costs than mutual funds, often managed by the same fund groups with the same strategy.
Moreover, CEFs from outside the USA tend to be at bigger discounts than ours, because markets are more sluggish. Canada typically offers bargains not seen since Filene's basement closed, for investment in stocks from Canada or even globally.
I am off to London for my end-of-year break, but will file from there, perhaps not Weds. To all my readers, Happy Chanukah, a feast celebrating freedom fighters against imperial Hellenic oppression and light in a period of darkness. It takes place on the 25th of the Babylonian-Jewish month of Tevet which may explain the date of Christmas.
More follows from Mongolia, Canada, The Netherlands, Panama, Australia, Ireland, Israel, India, Brazil, Spain, and Mexico.
El Buen Fin: Emerging Market
Today's El Buen Fin celebrates something close to the most important development of the last 35 years, often forgotten. Focus on what looked like the end of Communist domination of eastern Europe was a big deal, even if some of the celebration has turned sour as Vladimir Putin pushed Russia back into bits and pieces of the old empire.
But we tend to ignore the other major change, how much better the lives of people in poor countries has become. Incomes and food consumption have risen significantly, if from a low base. The numbers are, as always, less reliable than the facts on the ground.
An economist few people have ever heard of is Antoine Van Agtmael, a Belgian who was a top director of the World Bank capital markets dept. In 1981, during a visit to Thailand, a country he knew well, he talked about “emerging markets”, a term he had invented to replace the depressing old phrase, “Third World”.
Van Agtmael defined an emerging market as a growing economy where people earned less than $10,000/capita of income. But in addition to poverty, an emerging market had to offer some protection to business, like the rule of law, regulations, enforcement of contracts, and strong economic and political institutions. They were countries that deferred consumption in order to invest in their infrastructure: roads, schools, communication.
About 7 years ago, when the Western World faced a lousy economic outlook, the 16 leading emerging markets, collectively, became as important to the global economy as the USA, as Van Agtmael pointed out a Brazil conference. About 3.5 million new consumers had emerged in emerging markets.
In a year when emerging market shares have been a poor investment except for India, we should recall Van Agtmael's focus: not to merely make money, but to provide private capital to countries needing it.
Apart from inventing the term, thanks to his job at the World Bank and its private sector arm, the International Finance Corp., Van Agtmael pioneered its opening to Third World capitalists, first via the Bank's pension plan, later by encouraging closed-end funds and lenders to invest in emerging markets. He worked closely with the private sector but his concerns were getting these countries to “take-off.” He ended his career with another triumph, getting emerging markets companies listed on rich country stock markets.
After retiring from the Bank, Van Agtmael has been an advisor to investment banks as Chairman of Emerging Markets Management (of Washington DC). He avoided the lavish promotion of so-called BRICs (Brazil, Russia, India, and China) by Goldman Sachs because what these countries had in common was little except size. He wanted investors to also study smaller emerging markets. And what ultimately defined the BRICs was relatively low debt compared to... us.
The market remains in what Nick Raich (in www.earningsscout.com) calls “The Ebenezar Scrooge Pullback” which came in place of the Santa Clause Rally we expected.
More from Australia (not about ISIS), Israel, India, Ireland, Mexico, Mongolia, The Netherlands, and Japan, where the Abe govt handily won a snap election yesterday. Tomorrow's brief blog will be followed by my exit to London for a working holiday.
The Model Portfolios have been posted on the www.global-investing.com website. Everyone can view the closed positions but only paid subscribers may see our current holdings and recommendations. Spreadsheets are easier to view if you click the “printer-friendly” button even if you don't want to print.
More for paid subscribers follows:
El Buen Fin 7 y 8
Today we have two reports in our El Buen Fin Series, starting with my favorite yield play.
People seeking high yields should buy foreign bank preferred shares, issued at $25 per share, NYSE-traded, and relatively liquid, a special class of American depositary receipts.
You should buy despite or rather because of the black label warning. The label reads “nc” which doesn't stand for “non-callable.” It means that omitted dividends are not recuperable in subsequent year, and are “non-cumulative”. In fact, the cheapest foreign bank prefs today are ones issued by banks which had to omit dividends, as they are trading below that $25 issue price. So their yields are higher and the eventual yield to maturity, if the bank pays back the prefs, will also be higher. Those foreign banks which didn't interrupt their payouts usually trade above $25 today because of the still generous yield.
Being non-cumulative allows these preferred shares to count toward a bank's capitalization ratio, a key element in allowing it to do more deposit-taking and lending. The banks offer these preferreds which count toward their capital precisely because they can skip payments in a crisis.
The vehicle was invented by Barclays Bank more than 30 years ago, and quickly copied by other banks in the English-speaking world, and later internationally. The initial offering paid a whopping 11.6% because of a now-ended tax break to UK banks. Their IRS, the Inland Revenue Service, allowed BCS to add back the 15% British corporate tax it paid on the preferred dividend, which boosted the yield without costing the bank any money. The tax break was too good to last.
Now banks have had to invent all sorts of complex hybrids between equity and bonds to boost their capitalization ratio, mostly only for institutional players. The old preferreds however remain around. We recommend a whole host of these preferred ADRs yielding between 4.5% and nearly 7.5%.
During the peak of the global financial crisis, two British banks got into deep difficulty and essentially were bailed out by the government. Royal Bank of Scotland, a heavily indebted bank which had grown by buying highly priced foreign lenders, wound up nearly 82% nationalized by the last Labour government to keep it from collapse for lack of capital.
This caused the European Union to block RBS preferred dividend payments for some of the multiple series of dollar-denominated preferreds it had issued in its own name, and also for one of the banks it had acquired, National Westminister. Some prefs, including Nat West C and certain RBS series, were allowed to continue to pay dividends because of the legal terms of their prospectuses. Others were forced to halt payments for 2 years to prevent distortions in the European banking system because of state-subsidies.
RBS's bad name means that its prefs which never missed a payment still trade at a lower price than those of its wholly owned NatWest sub.
The EU action came under Articles 85 and 86 of the Treaty of Rome which set the European countries on a more capitalistic course. After the RBS dividend blockages, the mounting troubles of banks in the EU led its anti-trust regulators to abandon the penalties for state-controlled bank like RBS. But the damage had been done. RBS had failed to pay the preferred share dividends to the American owners for 2 years. The share price reflected that bad credit history.
We loaded up on the affected series, on the argument that the UK government, owner of the bank, was unlikely to really default. And moreover, before it could privatize RBS, as the coalition Tory-Liberal Democrat government very much wants to do, it would have to redeem the preferreds. But the coalition doesn't want to do so by pumping in more money than the Gordon Brown Labour govt had already given RBS. This impasse makes the highest yielding RBS prefs, the once which had missed payments, a real bargain.
We also own some other preferreds which have paid dividends without a break, from British and Spanish banks. Our diversification.
The advantage of this investment for yield seekers is that the preferreds trade at about $25 still, and a round lot will cost you a modest $2500 at your friendly local discount brokerage. (Be aware, however, that the spread on these ADRs is relatively high, and you need to compare different series to find the one with the best yield.) Our list includes non-RBS preferreds for diversification.
While bonds are the classic way to buy future yields, and while we do cover so-called Yankee bonds, issued in US$ by foreign companies, and also North American bonds, issued in US$s by Canadian companies, the minimum investment typically in 10 bonds, means a price tag around $10,000. Moreover, bonds are even more occultly priced than preferred shares as there are so many of them. And in the current low interest environment, our bonds pay a lower yield (because they have gone up in price since we bought them.)
Neither bonds nor preferred stocks increase their dividends, why you also need to own some high-yielding stocks which do.
Our second note is about objectivity. Your editor has been lambasted by critics on various nasty Internet sites because I am allegedly “too close” to the companies we write about. To the contrary. We keep in touch with recommended share management to judge whether or not to sell their stocks. But we are not in the “investment relations” business, and never will be. This is a scheme whereby a share is promoted in a free newsletter mailing or blast, to build up its subscriber base. The subject of the “issue” is a stock which via an IR company, paid for the promotional letter. We pay for our ads and do not get any money ever from IR firms many of which are engaged in “pump and dump” schemes to sell insider shares just as the readers of the free publication start to buy.
But do not imagine that this is the only distortion afflicted on innocent bystanders by advisors. A fund manager interviewed by a respectable newspaper or magazine will “talk his own book”. That means telling the world via the pressabout the appeal of stocks and bonds he already owns, sometimes in terrifying volumes. (One Templeton bond fund owns more than half the Ukrainian bonds ever issued.)
And as The Wall Street Journal reported on Dec. 12 (today) big banks produce “glowing” research reports on stocks to win mandates for underwriting a capital increase or initial public offering (IPO) of shares.
A total of over $43 mn in fines was paid by Citigroup, Goldman Sachs, Bain Capital, KKR, and six smaller securities firms, the WSJ reported, over the IPO of Toys 'R' Us to land the deal. Their analysts wrote favorabe sales pitches so their firm would get the share issue mandate. The fines wer eimposed by the Financial Industry Regulatory Authority. That is one stock. There have been many IPOs associated with similar misdeeds.
Thank you to one of our Danish subscribers, FH, for intervening with Denmark's Trustpilot which published anonymous attacks on our newsletter from people who never subscribed. (We know because the claim is that we do not give people their money back if they are dissatisfied with the newsletter. We do but have not had a request for repayment for over 4 years because subscribers think our service is worth the money.)
Trustpilot is a free-wheeling consumer protection portal aimed at defending clients cheated by on-line businesses. We don't cheat. But it is hard to deal with anonymous attacks on social media.
I am off to London for my year-end working vacation on Dec. 16, the first night of Chanukah. Thanks to a cut in airfares, I am flying biz class rather than sardine+ on BA, and going not to Heathrow but to London City Airport, a short distance from Mudchute Manor where we stay.
This will keep me from taking part in the webcast that morning by Herb Blank about using exchange-traded funds and unit investment trusts to efficiently own closed-end funds, which often trade inefficiently, meaning at discounts to the assets they own. It will be by Herb Blank, who chairs the QWAFAFEW quantitative analysts' club I belong to, one of the creators of exchange-traded funds when they were new and called “country baskets”.
Herb, who now heads business development at S-Network Global Indexes, will be joined by Closed-end Fund Advisors VP John Cole Scott (of Richmond VA who creates portfolios of closed-end funds and business development corps.) and Kevin Mahn, Prexy of Hennion & Walsh Asset Mgm (issuer of SmartTrust UITs.) I'll tune in to the rebroadcast from London but recommend that others sign in live.
More for paid subscribers from Britain, Canada, Colombia, Denmark, Belgium, Switzerland, Panama, India, and the USA.
The Sixth El Buen Fin
This is the season when traditionally newsletters make their forecasts for the coming year. As astute readers may have figured out for themselves, our recent commentary is actually a cop-out by your editor. Having dismally failed with her forecast of a Santa Claus stock rally, she is now too cowed to tell you where the winners and losers will be in 2015. Or indeed if there will be any winner at all.
So I am talking about the mechanics rather than whether interest rates or growth will rise here or in Europe. I cannot forecast the outcome of the current scandals in Mexico. I have no idea who will win the elections in Israel, Greece, Sweden, or Britain. No, I do not know what will happen to Russia or Ukraine or Venezuela because I can't predict where oil prices will be a year from now. What will growth in China come to in 2015?
So here is No. 6 in our El Buen Fin series:
It is always good to read a guide to the perplexed about buying foreign shares. In general, American Depositary Receipts or ADRs exist to make it easier for individual investors (not necessarily Americans) to buy foreign stocks. They are usually bought with a brokerage operating in dollars and you get a 1099, at least in theory. But in practice, taxation can nip your dividends.
At times, dividends paid on ADRs are withheld for foreign tax. In theory, the easy way to recoup the tax paid is by filing for a foreign tax credit in your US tax forms. You offsett the tax paid with other taxes you owe to Uncle Sam. It sounds complicated but usually is not too difficult. But not every CPA knows these rules, because most of them do not have clients going global like our readers.
Withholding Tax Recovery
So an area needing far more work by newsletters, the brokerage community, custodians and depositaries, fund managers, and accountants is withholding taxes. When you get a dividend from across the water (but not from or to Canada), withholding taxes may be deducted from the dividend. This means you should not hold foreign stocks for yield in a tax-advantaged account like an Individual Retirement Account or a similar vehicle. The withholding tax cannot be offset against other taxes which would be owing from a tax-sheltered account because there are no other taxes to pay.
In a regularly taxed brokerage account, the withholding tax you paid can be used to offset taxes you would otherwise owe on other dividends from domestic shares you received in the same tax year. But people are failing to claim this.
The Goal Group, a specialist in withholding tax reclamation, this autumn published an estimate that as much as $22.4 bn of investors' returns on cross-border holdings of stocks, bonds, and funds was “lost” last year because of unclaimed withholding tax refunds.
It also claimed that US taxpayers failed to reclaim $2.77 bn in withholding taxes paid. British taxpayers forfeited $1.15 bn in cross-border withholding taxes. Goal says that just under a quarter of all recoverable withholding tax goes unclaimed.
Apart from stupid accountants, other reasons why withholding may be unclaimed may be if an account holds shares on behalf of an insider or a tax-evader who doesn't want to file and call attention to himself.
I am not sure how Goal corrects its numbers, which come from overall tax deductions at source, for IRA and similar accounts. Tax recovery services like Goal are offering high-tech help in tax retrieval thanks to a full database of how foreign portfolio investment is taxed in different jurisdictions using different rules and different timing. More transparency is not only in the interest of investors; it also helps funds and custodians improve their results.
For www.global-investing.com readers, a simple piece of advice is key. Tell your CPA to offset taxes paid with US (or Canadian) taxes owed. Outside North America things are more tricky.
I want to share a bit of tax evasion I engaged in when I moved to France from New York City. I owned a bunch of triple-tax-free muni bonds which then were in bearer form. My smart corporate tax accountant in Paris almost immediately warned me that the US munis would be taxable in France which doesn't recognize US breaks for munis.
So I turned them over to my father, living in NYC. He clipped the tax-free coupons, deposited the money in his account, and sent me a check for the proceeds.
My own tax evasion was the result of penalties on international investing. There are plenty of them in place against US nationals living outside the country, because Uncle Sam taxes its citizens on their global income. Most other countries only tax their residents on their global income. A French film star like Gerard Depardieu living in Russia or a British soccer player living in the Bahamas can avoid taxes in France or Britain. An alleged American, like London Mayor Boris Johnson (born in the USA) is being pursued 40 years later for US taxes on the capital gains on a London house he sold.
Congratulations to Alan Smith who won the Lilith magazine auction of a year's subscription to our newsletter. It will be entered today. We do not advertise in Lilith despite my liking its articles. But we do plan to advertise in The Economist for which I wrote back in the 1960s rather than throwing money at websites like google.
More for paid subscribers follows from Spain, Israel, Singapore, Britain, Mexico, Cuba, Canada, Denmark, Ireland, and Australia. Plus a part stock sale.
Hedges for The Common Man
Today's Fifth El Buen Fin report is about hedges and redundancy in a global portfolio. We do not actually run a hedge fund, meaning a combination of buys and sells supposed to offset each other in any kind of market, so as to produce ineluctible gains. In fact most hedge funds fail to gain as promised. This year has been a disaster for owners, although thanks to their high fees and 15-20% share in any gains, not for managers.
Our hedges are for the Common Man.
Our hedges are against known risk from stocks whose gains and dividends are denominated in currencies other than the US dollar, the money 80% of my readers need to pay for their daily living expenses. (It is also a useful unit of account for the rest of the readers, half of whom are in Canada, and the rest scattered around the globe.) We use currency hedges to offset a soaring dollar in periods like 2014 which saw a strong Greenback.
We use three hedges, buying dollars against all currencies collectively; against the C$, because we are heavily invested in Canada, land of th e limping Loony; and against the yen, which has fallen sharply. We recently cut our yen short position via an exchange-traded fund by half, because our currency expert hought there might be a rise in the yen and that we should take profits which were near 100%. For the details, look at our closed positions table at www.global-investing.com
But we don't only hedge currencies. A classic offset to the risks of stocks and bonds is gold, a haven as much as a hedge. As a junior reporter on The Economist in France I wrote about a French priest who had lined the fireplace in his rectory with gold bars disguised as bricks. The ingots were coated with a layer of reddish cement.
Père J could not light a fire because the gold would have melted, but one day his housekeeper was so cold that she used the fireplace and the gold poured out.
Père J was a bit behind the times in holding and hiding his physical gold within easy reach, but in the 1960s, when France suffered high inflation and a falling franc, gold was strategic. Another French banker kept an ingot in his hallway, disguised as a pre-Colombian wall hanging, to be used in case he was taken hostage by leftists.
Now with inflation looking dead and kidnappers demanding more money than one mere ingot can provide, gold has been sold off widely. The yellow metal was painted not with red cement but with cobwebs, for being passé, Gold we were told is just another commodity, falling with oil and iron ore.
However, the yellow metal has a role as an alternative to sinking stocks for Chinese investors. It is a traditional if expensive way to bank at home for Indian savers. Both India and China are habitual gold buyers.
Now they have been joined by Russians whose currency is at heightened risk of losing value.
A third hedge I use personally is against volatility, which in fact means falling rather than rising prices. I use an exchange traded vehicle UVXY which goes up when US markets fall so I will have money handy to buy in such periods.
In Chinese, active stock trading is called “stir fry”, I learned from the Financial Times today. There is a lot of it going on.
More for paid subscribers including news of a hedge fund follows from Ireland, Colombia, Israel, Denmark, Hong Kong, Australia, Britain, Canada, Brazil, Mexico, Spain, and Portugal.