More from his summer round up from Jeremy Grantham of Grantham, Mayo, Otterloo, fund managers;

“High quality stocks were left very much behind in the great rally last year, the biggest and most speculative since 1932. More surprisingly, they have underperformed this year. But unlike small caps, they have been cheap for almost five years and, given the uncertainties around today, this is unusual. “There are surely additional reasons, other than the low rates, why the great companies have persistently sold at a discount. Why didn’t quality stocks at least become expensive, and risky stocks become cheap on a relative basis, when we were at the deepest point in the crisis? Most risky fixed income securities certainly became very cheap then. I understand the general direction of performance of quality stocks: down in 2005, 2006, and 2007, which were speculative years; up a lot in 2008, the year of anti-risk panic; and down in 2009 and 2010, which were also very speculative. But, I’m puzzled by the general value level around which they have been moving. It’s as if there is an extra and unusual force working against them. This type of mispricing always has a reason. I have no certain answer, but I’ll offer a couple of candidates.

“One is the population profi le: there are more new retirees per new worker than there used to be. Retirees are selling stocks to pay the bills and to buy more conservative fi xed income investments. And what stocks are they selling? By the time they retire, they probably own blue chips, having sold down most of their speculative stocks in the decade before. This is just a guess; I have no good data to prove it. But it does seem reasonable.

A second candidate, accompanied by stronger circumstantial evidence, is the 'Let’s all look like Yale' syndrome. In the last 10 years, institutions and even ultra-rich individuals have, in general, been increasing the share of their portfolios that is invested in private equity and hedge funds, commodities, and real estate. They have been increasing their share of foreign equities, including emerging markets and small caps. At the second derivative level, hedge funds may feel that they do not get paid to buy Coca-Cola, and private equity firms, particularly now, do not go after many of the great franchise companies. So what is being liquidated to buy all of this new stuff? Old-fashioned blue chip U.S. stocks and U.S. government bonds that used to completely dominate even sophisticated institutional accounts and now no longer do. In the case of U.S. bonds, we have the noble Chinese to step into the breach for a powerful reason: they have no alternative if they want to run trade surpluses. But blue chip stocks are on their own, without any natural offsetting buyers.”

 

Subscriber Gen. Joe Shaefer of Stanford Wealth Management emailed in reply to yesterday's issue:

“ Very clever, young lady! If your younger readers know what a bull in a China shop is, they'll get it and smile as I did.

“I too am a current bear in the China shop. There is much to marvel at there, but the air pollution, water pollution, lack of enough potable water (occasional floods notwithstanding), failure to regulate, failure to know if the distant reporting is accurate, climate of fear if plans are not met, increasing ethnic unrest, and a population that, like all before them, will increasingly expect real wages for real work, all conspire to create an economy that will grow, but in fits and starts. I say they're ready for a fit...”

Vivian the Panda replied: It's interesting that I have to quote s British fund manager about how China is a load of crockery. The Chinese stock market is already in a fit. There are a couple of reasons not to be a bear all the same:

1) the Clipper Ship memory (which neither of us are old enough to remember), the idea that sailing to China and trading there will make your fortune. That lures all the corporations in to manufacturing there until they discover as did GE's current CEO Jeff Imelt that all the Chinese want is to steal the technology.

2) The aspirin analogy. if you can sell one aspirin to every single Chinese you will make your fortune.

3) The fact that China owns all those T-bonds and are piling them up some more. We American analysts have to step carefully.

Another reason for China is suggested by The Mad Hedge Fund Trader, my former Economist colleague John Thomas, who started with a list of savings rates he stumbled upon in Google:

Australia – 2.5%; Japan – 2.8%; USA – 3.9%; Brazil – 6.8%; Britain – 7.0%; Germany – 11.7%; Ireland – 12.3%; Switzerland – 14.3%; Turkey – 19.5%; India – 34.7%; China – 38%.

John commented: “Don’t expect a runaway bull market anywhere savings rates are low and rising. What are savings rates telling us are the best countries in which to invest? China, India, and Turkey.”

If nothing else, Chinese and Indian savings rates boost my confidence in our real estate plays in both countries. Turkey, where we have invested in the past, we currently give a pass to. More for paid subscribers on the China/India property plays below.

The British govt Dept. of Transport announced £43 mn ($67 mn) in grants for low-carbon autos. You will get up to 25% of the value of the car back, to a limit of £5000. The measure will increase demand for Japanese electric engine cars, especially those form Nissan Motor Co., which will begin producing its all-electric Leaf vehicles in Sunderland at the start of 2013. Mitsubishi Motors and Toyota Motor Corp. may also benefit.

Electric-engine cars need a subsidy because they cost more than gasoline burners. Britain aims to cut the country's cargon emissions by a third by 2020.

Mr. Thomas also bought a Leaf:

“The electrician from Nissan showed up at my home today to ascertain if it can generate sufficient juice to recharge my new all electric Leaf, which will be delivered in Dec. The good news is that it does, but the town permits and the installation of a new 50 amp circuit breaker for the EVSE charging dock (see below) was going to run several hundred dollars, half of which is tax deductable. Since the charging dock will have a 25 foot cable with a SAE standard J1772 universal plug, it can be used to top up a Leaf, or any other electrical vehicle that comes down the pike. It is also over engineered to handle triple the Leaf’sload demand to accommodate future upgrades with heftier battery packs.

“It was quite entertaining chatting with the tech. Some of his customers were “extreme” environmental early adopters, with bidirectional 'time of use' electric meters that allow their solar panels and wind mills to make them net suppliers of power to the grid. My new PG&E smart meter actually scored poorly on its SAT test, as it was still awaiting some future upgrade to become fully functional. He then pinned a life sized poster of my new charging station to the wall in the appropriate location, presumably so we and our gardening tools can learn to live with it.

“As he left, he thanked me for taking the technology a long awaited leap forward. Wow! When was the last time someone thanked me for my business?”

More on what the Leaf means to our portfolio for paid subscribers below. Along with news from Brazil, Panama and Chile, Greece and Turkey, Canada, South Africa, Britain. And first a strong buy.

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There's a bear in the China shop. China is not the best emerging market to invest in, says Julian Thompson, Portfolio Manager, Threadneedle Emerging Markets Fund:

The sustainability of the investment cycle looks to be more favorable in parts of Latin America and EMEA (Europe, the Middle East, and Africa) than China. Much of China’s investment in recent years has been funded through local governments’ debt. If returns on this investment capital fall short of expectations, the debt-servicing ability of these governments may become problematic. This is a serious possibility, as we expect pace of China’s economic growth to slow in the near-term.

The Chinese economy has a long way to go before it meets the government’s goal of making domestic consumption a major component of its GDP. For this to be achieved, wages must continue to rise, which is likely to place upward pressure on inflation — and compel the government to constrain growth via monetary policy. Meanwhile, the financial sector in China requires capital in order to continue growing, unlike banking sectors in other countries — including banks in developed nations, which have largely recapitalized themselves in recent years. This, too, may hinder China’s economic expansion.

Threadneedle, est. 1994, has £60.5 bn under management, about $98 bn.

More for paid subscribers from Brazil, Portugal, Britain, Israel, Greece, Germany and Australia.

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As we forecast, Israel has raised interest rates again, by 1/4% as expected, with effect August. 1 to 1,75%.

At reader RE's request I will comment on the sharp decline in bank lending. He asks me to do another macroeconomic note despite my having told you I would stop, writing: “When banks are not lending they are not creating money.

“Lending, espcially to small business, is declining and has been for over 18 months. Pres. Obama has propsosed $30 bn in funds for small business but the loans are not actually getting made.

“A chart from the Bank of England [shows] that UK bank lending has really fallen off the chart. This is primarilly due to a freeze up of the securitization markets, but there is anlso more caution in senior bank managers due to the economy.

“Not the case in East Asia where all the economies are growing rapidly because their banks are still making new loans."

My reply: there are two “Keynesian” reasons for deficit spending. One is that tax receipts are cyclical so they go down when the economy is not growing. Government then fall into deficits.

The other is what Lord Keynes styled “excessive propensity to save” the problem RE wrote about above.

Anecdotally, I have heard from London business friends about the impossibility of getting loans for expansion investment. I agree that things look better in Asia, and even in Europe where the need for deficit spend in Germany, for example, is falling thanks to improved tax receipts.

I find it utterly hypocritical that Germany is alone among member nations in refusing to sign off on the new muddle of capital adequacy reforms proposed the Bank for International Settlements, the so-called Basle III, for fear that German banks would have to reduce lending in order to improve their capital ratios.

My economic studies were run by Keynesians (it's generational). Richard Nixon said “we are all Keynesians now.” Ronald Reagan ran budget deficits as did George W. Bush whose veep said “deficits don't matter.” I have been programmed to favor stimulus over premature deficit-slashing.

But while being a certified Republican, I am also a liberal one. So I believe in progressive taxation. That is why I was happy US unemployment benefits were renewed. And why I am willing to echo Warren Buffett calling for fewer tax cuts on people with means, so as to cut the deficit fairly.

The real debate today is whether the prospect of deficits ahead is itself deferring capital investment, hiring, and growth. When you get down to the wire, this is a myth unproven by any economic studies which fits interests of richer Americans.

Attention subscribers:

If you are not getting your full newsletter and are being denied access to our website, it may be because your subscription ran out and you were not sent a renewal notice. In theory two notices go out, a month and a week before the subscription runs out.

The software situation is a right holy mess, but we are working on a major redesign. However, I have no way to myself check on the renewal notices that are supposed to be generated by the program.

If you are not getting full access and the full daily blog with the stock advise, and you have been a paid subscriber in the past, it may be that you have to renew. To do so, please visit www.global-investing.com and log on using your email and password. If you do not know your password you can get sent a way to set it anew automatically on the site. Then you can log on to renew inside your personal account.

You also can renew in advance without this triggering a second subscription. The new sub only begins after the present one expires.

 Thank to reader JM for persisting in contacting me a half dozen times and convincing me that there is a renewal notice problem. More from the deserts of Chile, the purlieus of Monterrey, the harbor in Sydney, the heights of Jerusalem, the non-beach in Brasilia for paid subscribers follows. Today there is another sale. The fact that I am about to go to Europe for a month makes me anxious.

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Today I spotted many forecasts on the future price of gold, ranging widely. Recent gold bear Tom McClellan had the best note, warning that because of a full moon there may be a shift in the market direction, meaning a price rise. And I thought it was silver that alchemists linked to the full moon.

There is no shortage of other nonsense in the stock markets. Two of our stocks suffered big losses last week. Each was an exceptional performer in an industry where there were many problems and other stocks did not do as well. Each was dumped down hard by shareholders selling out. Their weak hands were based on non-mainstream interpretations of the news. The negative stories came via Twitters and Facebook and blogs. They were not from mainstream websites, newspapers, or experienced financial analysts covering the companies.
 

You could call it the Shirley Sherrod effect. Poorly informed journalists (and others) fed half-truths and snippets deforming reality will not always check things out. And investors will sell first and investigate later when the rumors build up.
 

A third stock I happen to own personally also fell, because the CEO announced that on turning 65, later this year, he will step down. What did the sellers expect him to do, start going to kindergarten? That stock is Sandisk which was an Israeli share when I bought it, M-Systems Flashdisk, but then became American. It has recovered from the scare over Eli Hariri's retirement.
 

Things for us all to learn from these episodic sell-offs. The most important is that stocks do not go straight up, however well-priced, however fast-growing. For the record, all three shares are global companies with an Israel identification. This is not a sign of some kind of concerted attack on Tel Aviv listed or related shares. It results more from poor investor relations decisions. The first crashed stock held its quarterly earnings webcast after hours in Silicon Valley rather than at home in Israel, so the usual suspects were not in the audience. The firm warned after gangbuster earnings growth that this growth rate cannot go on. Who thought it could? But the Israeli analysts were sound asleep at 3 p.m. Pacific Standard Time and could not shade the news.

The second Israeli stock in our portfolio suffered from a tenuous and ultimately unconvincing attempt to link an FDA approval to a rival firm for a generic it also applied to produce, not normally enough to crash the stock, to future generics of our shares' blockbuster product. But without much science to go on, the gossips turned this news into a herald of a new age of biosimilars which would affect this company's patents and sales. It's not that simple.

I think the selloffs in these stocks are something like the Flash Crash in May. We will see further testing of the lowball prices hit last week by these shares, before they resume their normal upward trajectory. So the best thing to do right now is watch and wait.

However tempting the Blue Chip Israeli shares may seem off 10% and 35% from their earlier price level, I would not be buying more as they are picked up from the ground today.

For paid subscribers, details and advice which follows from the news, and other reports from South Africa, Australia, Canada, Brazil, Switzerland, the Netherlands, and Britain.

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