Update of Friday newsletter
The latest Investor's Digest of Canada reprinted an article from this newsletter about a Canadian bank. Given that they get all the analysis Canadian brokerages produce, and many US newsletters like mine, I am very proud when they decide my write-up is the one to use. Paid subscribers will be told more below.
Since we stayed up late to watch the Scottish poll results come in I was somewhat groggy this morning and omitted the note above in my pre-subscriber blog. So here it is along with a note for paid subscribers below:
Scotland The Canny
Scotland turned out to be canny and not so brave. The same can be said for Alibaba, which came out at the top of its estimated range, but not a penny higher and promptly rose ~40% on its 1st day in public trading.
Another American Petroleum Institute record for US petroleum exports was shattered in August, which bodes ill for Scottish and Russian hopes to push up prices for European supplies. US exports at 4 mn barrels/day were up 7.5% from August 2013.
Another problem in the oil patch arose. To meet tougher US regulations for Keystone XL—if it is ever given a green light by the US Dept of State—costs will go up 85% to $10 bn, according to TransCanada Corp., its builder. XL seeks approvals needed to build the pipeline to take Athabasca oilsands crude via Nebraska to link up with the US Gulf Coast.
Waiting for Scotland; Waiting for Alibaba
Waiting for Scotland and waiting for Alibaba is something like waiting for Godot.
Today the new-look companies list in The Financial Times promised articles about “Fannie” and “Freddie”, presumably Fannie Mae and Freddie Mac. They were not visible on the page they were supposed to be on. Moreover, an article on Oi, a Brazilian company I am interested in was not at the page the index said to go to (and in fact not in the companies back section of the pink paper at all.)
And surely I am not the only reader who finds the 2-point type in the stock market pages hard to read?
After its bonds were re-rated to junk your editor finally sold a USA stock she has owned for years because one of her college friends had been on its board, Alcoa, AA.
How comforting it is to find that Israeli scientists have confirmed something I have long suspected: that artificial sweeteners (above all in soft drinks) come at a price. They change the balance of bugs in your gut and may wind up raising the level of your blood sugar. We wrote yesterday about a stock which may help the world's only country which has attempted a Mayor Bloomberg-style attack on big soda sales, Mexico. More for paid subscribers on this and other matters follows with news from Switzerland, Denmark, The Netherlands, Spain, Brazil, China, India, Ireland, Israel, and Jordan. Today's theme is internationalization.
Another New Stock Pick
The enemy of my enemy is my friend. The US is now aligned with Iran in fighting ISIS in Iraq and aligned with Bashar al-Assad in fighting ISIS in Syria.
The US is now aligned with Cuba in sending medical personnel to help end the spread of Ebola virus in West Africa.
Working together with these bad guys on current crises will impact our foreign policy shibboleths.
Former Chief Economist John Llewllyn (of the Organisation for Economic Cooperation and Development, OECD) comments on what's different now than during his tenure. He currently runs London-based Llewellyn-Consultancy.com. John writes about the error of relying on German-style supply-side reform to reflate Euroland economies:
For the extended period leading up to the crisis, Germanic policy, with its emphasis on the supply side, its scepticism about fine-tuning, and its inherent aversion to deficits and inflation, served the German economy and others which trod a similar path, relatively well, most of the time.
There are occasions, perhaps once every fifty or so years when, rather than dealing with relatively modest perturbations, policy has to grapple with something more serious: a major, confidence-sapping, debt-augmenting, demand-destructive shock. Under these circumstances, a more radical response is required than mid-noughties conventional wisdom. And in that special circumstance the Germanic policymaking doctrine can be found seriously wanting, if not counterproductive.
This, in our judgement, looks increasingly as if it is becoming the situation in Europe. Six years on
from the initial crisis, the Continent is suffering from a chronic deficiency of aggregate demand. That is not to say that the supply side does not matter. Nor is it to deny that supply-side reform is important – essential even – if the recovery, when it finally arrives, is to prove durable. It is simply to say that, right now, Europe’s over-riding problem lies on the demand side.
The level of real GDP, particularly around the periphery, remains below its previous cyclical peak and far removed from its pre-crisis trend. Germany aside, labour markets and other measures of macro resource utilisation are acutely depressed. Current account surpluses in the stronger and more fiscally conservative European economies are at historically high levels when expressed as a proportion of national output. Inflation is well below target, and in some cases is negative. Inflation expectations are gravitating downwards. Interest rates are historically low.
Over the period 2011-13 [almost] all countries tightened fiscal policy, and those around the euro area periphery by very large amounts.
Monetary policy responses were mixed. While the US, the UK, and Japan continued with variations on the theme of quantitative easing, the ECB [European Central Bank], true to the Germanic policymaking tradition, was determined to remove the patient from intensive care and return to normality to move policy rates away from the zero-bound, and begin to rein in its balance sheet.
This proved premature, [in] peripheral euro area[s]. Rather than progressively returning monetary policy to neutrality, the ECB ha[d] to do an about-turn and ease further, belatedly taking official rates down to their irreducible minimum and seeking to re-inflate its balance sheet.
On the basis of OECD calculations, the current and announced policies of the majority of countries are for continued fiscal restraint. IMF calculations, by contrast, portray the majority of fiscal stances as nearly neutral. Crucially, however, neither institution evaluates current and announced
fiscal policy for 2014 and 2015 as in any measure expansionary.
The rhetoric from Germany is that continuation of the present fiscal policy is the only option.
This is a wrong prescription. It stems from a policy recipe that applies most of the time, particularly to economies small enough to export their way out of aggregate demand deficiency by capturing some of the domestic demand of others. But it will not work to increase aggregate domestic demand in a region as large as the euro area. It is extraordinarily difficult for an economy to deflate its way out of a debt problem, [or] export its way out of an aggregate demand problem. A policy prescription of seeking to reduce deficits through tight fiscal policy when an economy is in recession generally makes the existing problem worse.
More seriously, it is indicative of a failure to grasp the severity and potential implications of the current situation. It is the voice of those who, despite the last six years, see Europe’s current problem as still predominantly on the supply side.
[Here is how John thinks the circle can be squared:]
Assembling a conventional fiscal expansion, [via] tax cuts and expenditure increases, would be difficult. It would take time to agree even the principle. The policy would have to be differentiated across countries: hard to devise, even harder to coordinate. Such packages usually end up doing too little too late.
The challenge will be for policymakers to coalesce around a necessarily German-sponsored package that supports aggregate demand while meeting objections to classic Keynesian deficit finance. Politically, the package [would have to be presented as increasing] productive potential longer term.
It would be ideal if it could also meet other broader and over-riding policy objectives too and can be sold, as in the past (the 1980s), as a supply-side policy to help small firms.
Our best guess – only a guess – is that it could take the form of a pan-European infrastructure investment Special Purpose Vehicle, perhaps under the auspices of the European Investment Bank, and financed at least in part by the ECB (albeit with indemnification against losses by member state governments). It could be oriented principally towards the geo-political goal of reducing Europe’s dependence on energy imported from Russia, now uppermost in the minds of many European leaders, not least Mrs Merkel.
More for paid subscribers today from Britain, Denmark, Singapore, Portugal, Israel, China, and points in between plus another new stock pick.
Forty Thieves, Gold, and a Stock Buy
The Chinese are creating a link between Shanghai and Hong Kong stock exchanges but Alibaba would not list in Hong Kong because it was not willing to accept HK corporate governance rules and a requirement that there be a single stock class. Some Chinese friends of Jack Ma are definitely among those who benefit from the special class deals he was protecting. So, according to today's Wall Street Journal, are some “quiet winners” who subscribed convertible preferred shares in a private placement two years ago.
Despite what Bloomberg is writing from China, it is not Chinese exchange controls and use of special rules for qualified investors that is the cause for the impossibility for its customers to buy BABA. Hong Kong will only list a single-share single-vote class of shares. The New York Stock Exchange allows different classes of shares, allowing stock to be issued without diluting insider control of a company.
It is because of the Hong Kong rule on shares classes that the Chinese public cannot buy Alibaba, because the rules meant it had to be listed elsewhere. The reasons is that the company founders, starting with the charismatic Jack Ma, who took over Alipay without compensating Alibaba and who earlier gave special deals to bigshots in China and on Wall Street had to deny IPO buyers control of the BABA stock. Alibaba is to be listed on Thursday without the buyers getting pro-rated voting rights comparable to what is being kept by the founders and their 40 friends. Or 40 Thieves.
This matters, according to Mohamed El-Arian, former chief of equities at Pimco, also writing in today's Bloomberg:
“At a possible $22 bn to $24 bn, it could well be the largest IPO in history. So it really matters how investors fund their purchase of Alibaba shares.
“The broader market would be least affected if the incremental funds came from a healthy and sustainable increase in borrowing, associated with a greater willingness (and ability) on the part of investors to assume risk. The deployment of idle cash would also have minimal effect on the rest of the market. Although both will occur to some extent, they are unlikely to be the main drivers.
“This leaves plenty of potential for downward market pressure as investors sell existing holdings in order to make room for their Alibaba purchases. Given that most investors don’t know as yet how many shares they will receive, most of the selling wouldn't materialize until quite far into the IPO process. “The combined effect could be quite significant.”
Adrian Ash, head of research at our advertiser www.bullionvault.com writes from London about one of the assets likely to be sold off to buy into Alibaba:
"Last week was a bad week for gold prices, but a good week for gold buyers. Down 2.7% against the Dollar, gold's worst drop since May saw BullionVault users continue to add metal to their holdings as a group. Silver also got bought on its drop.
"Bargain-hunters might get a better chance this week too, according to Wall Street and City analysts. You [can] expect more violent swings, we think, whether or not gold gets back to 2013's low of $1180 per ounce.
"[Today] the world's most important central bank, the US Federal Reserve, will announce its next policy statement. The financial world will be watching for one word: "considerable". That's the length of time the Fed has promised to keep interest rates unchanged ever since its QE [quantitative easing] money-printing scheme reached its peak in late 2012.
"Now several big-name economists think that, with QE set to end this month or next with the final 'tapering', that word will go as well.
"Does it matter? Back in 2003, then-Fed chairman Alan Greenspan used the words 'considerable time' when promising to keep rates at 1% after the DotCom stockmarket crash. One Fed research paper said it clearly pushed down longer-term interest rates on 10-year US Treasury bonds. That let the government borrow more cheaply and reflated asset prices, most notably US housing, with a flood of cheap money.
"Here in 2014, dropping the word 'considerable' from Wednesday's statement would be dramatic at least for economists and the trigger-happy financial markets. And especially with the Dollar's No.1 competitor as world currency, the Euro, facing a new QE-style deluge of its own when the European Central Bank starts running its printing press on Thursday this week.
"But another key word this week however is 'No'. Or maybe 'Yes' from voters in Scotland's independence referendum on Thursday. The big risk here is to Sterling. Knocked lower by surveys pointing to a dead-heat, it could rally very fast, knocking gold prices for UK investors much lower,if Scotland in fact votes to stay in the Union.
"But if Scotland splits? As we told The Sunday Times, BullionVault has seen Scotland-based users (as a proportion of all active clients on the Order Board) swell by over 40% so far this month compared to the previous 2014 average.
"A little insurance looks wise. Because while the UK authorities are only now preparing for a "Yes" vote, their likely response to capital flight from Scotland is obvious. Owning physical gold or silver in a secure, foreign vault, ready for instant sale if you need the cash, would at least keep some wealth far away from [possible] 'emergency' controls on domestic [British] bank accounts.
[While] price-risk is plainly an issue with gold right now, there are other reasons to buy physical bullion and own it, outright, in a safe place beyond your own borders."
More for paid subscribers follows from London, The Netherlands, Ire-, Switzer-, and Fin-land, Brazil, Bermuda, Canada, Mexico, Portugal, and China. Plus a new stock pick from our returned prodigal, Amb. Harry Geisel, MBA.
My Pink Paper
The made-over Financial Times came today with a self-congratulatory special supplement about its charms. As a reader of the FT since the 1960s, when it was edited by Sir Gordon Newton, I found the new layout fine, but I miss “Lex”, the gossip column. I searched all over the paper and could not find it.
There used to be two gossip columns, the other called “Men and Matters.” Neither was particularly authoritative and anyone who invested based on these columns deserved all the losses of money which ensured. But it was fun to get a writer's opinion on businesses, stocks, or events. Now they seem both to have bitten the dust to make room for more photos, maps, and graphics, and wider headlines.
Today there was still Lucy Kellaway, who writes about the linguistic and logical failings of self-congratulatory businesses (but of course not her employer.) But she was writing about the perils of forecasting 50 years into the future, and it was a serious article. Give me back my breakfast dose of British understatement and humor.
On a day when Bill Ackman announced that his Pershing Square fund will issue stock for the very first time to raise $2 bn with shares listed at $25/each, I would have appreciated Lex's comment, since Mr.
Ackman's retail-priced shares will trade... in Amsterdam, not Nieuw Amsterdam!
With two Mme. Presidents turning up for a South ABC program about Pres. Jacob Zuma's wife—and Mme Z 3 and Mme Z 4 practically coming to blows on camera--surely we need Lex today!
*Fund news first. The Thai Fund is now over 27% owned by the London closed-end fund (investment trust) investing in closed-end funds, City of London. TTF is down because of political uncertainty in Bangkok as yellow- and red-shirts battle for power while the aging monarch is in ill-health. The amount rose from less than 7% a month ago. The fund of funds run by Barry Olliff is a major holder of US closed-end funds invested in emerging markets. We remain in TTF but sold half earlier this year because of political uncertainty, despite Paul Renaud, our Bangkok-based source, being disgusted with my failure to stay the course.
*Mexico has removed 4-yr-old restrictions on businesses using US$s and the greenback can now be used to price international sales, and deposited freely in Mexican bank accounts reports Eduardo Garcia in www.sentidocomun.co.mx with which we trade blogs. In my opinion, this relic of exchange controls being ended will boost the visibility and global strength of Mexican companies and our Mexico Equity and Income Fund, MXE although the immediate impact will be on companies selling retail goods and service for cash rather than credit cards on both sides of the border. The regulations allow businesses to avoid expensive exchange rate fees which often leads them to holding on to the dollars themselves.
The resulting inflow of currency into Mexico should make the Mexican peso exchange rate stronger and less volatile, while also boosting Mexican tax receipts, as more money comes into the official system. (Special controls make sure that cash deposits doesn't come from criminals laundering money. Small businesses have to know their customers, have been operating for at least 3 years, and may only deposit $14,000/mo. )
As we reported last week, in Mexico American Express is now jointly issuing Mexican bank cards, hitherto the domain of Visa and Mastercard. The new cash rules further open the border across the Rio Grande.
*Our Mexican REIT, Fibra Uno, which already reports its purchases in dollars, can now follow through in explaining the rentals it is buying. FBASF.
This ends my second offer for pre-subscribers for a blog about funds, aimed at newer and poorer investors than the full blog and prices at $49 per year. I would like some of what Germans call "feedback." Only one response so far from a person getting our macro-oriented blog. This is how you can use the information without having to buy individual shares. More for paid subscribers follows from other corners of the world: China, Russia, Brazil, Britain, Israel, Canada, Finland, The Netherlands, and Spain.
Performance Tables Posted
I have just posted our performance tables after returning from my volunteer work. You can view whatever you are qualified to see at www.global-investing.com
Everyone can view the closed positions table but only paid subscribers get our current positions and my opinions on them.
My notes from pre-subscribers continue to pile in. Thanks to everyone giving me their views. Here is one pre-subscriber's reasoning and my response:
“Having cash in these markets seems crazy. I also strongly wonder about the wisdom of investing in a country where the ruling class seems to hate business and not understand who pays the bills. Further, it shocks and scares me that they seem willing to just fine the banks huge amounts almost just to prove they can do it. The banks were forced to make loans in neighborhoods they knew were not profitable. “They then figured out a way to move the "risk" which led to the meltdown. That is simplistic, but I also believe it is basically true.”
While I admit the US is not the worst offender I am not advising purchase in the US stock and bond markets. My writing is exclusively about non-US stocks. The US ruling class doesn't hate business; it is split right down the middle which makes it incapable of doing much at all. And I think we need serious moves on tax reform, healthcare and education upgrades, and infrastructure spending rather than a leviathan looking like laocoon and incapable of doing anything.
If your principles lead you to say out of the market you are missing some real easy gains. Our 1-yr returns according to Mark Hulbert (despite the high dollar hurting our positions) was 18.8%, my best year ever according to this Dow Jones newsletter rater. You can do even better in US shares which are being boosted by the Fed and are in dollars.
Why say no to profits because you think Obama is insufficiently pro-profits? Are you insufficiently pro-profits?
A more important suggestion came from another pre-subscriber. SG suggests that I offer a weekly summary of news on the part of our portfolios more interesting to her because she wants diversification and not too much work as she is 77: the closed-end and exchange-traded funds only. We cover such funds for investment outside the USA, and also hedge currency risks with ETFs. Moreover we mostly own gold via funds, another hedge.
A sample of the weekly is below.
She didn't suggest a price point but it could be as low as $49 per year. Is anyone else interested in this?
Today's blog is late because my newspapers didn't get delivered. But we bought them at the newstand. We have a note about the Holy Ghost at The Mouth of Hell, a stock downrating, and news from China, Israel, Mongolia, Canada, Britain, and fund updates.
*Poland resumed delivering natural gas to Ukraine today despite a cut in normal delivery levels from Gazprom all week. PGNiG, the local state-owned gas company, was able to cover the shortfall by importing gas from Germany and Czech Republic for trans-shipment to Ukraine. Kiev now has to import its gas from other sources as Russia has blocked its direct supplies when Ukraine could not pay quadruplied gas prices imposed after the fall of the pro-Russian Yevtushenko govt. Poland ships 4 mn cu meters of gas to Ukraine and is a stalwart supporter of Ukrainian independence. Russia in the past has blocked Polish supplies over political disputes.
We have a horse in this race, MSCI Polish Investable Index Fund, an ETF, traded as EPOL.
*Newsletter watcher Mark Hulbert writes in firstname.lastname@example.org today that what investors really want to buy is an ETF that invests in “boring” “yawnfest” shares, which are the least volitile. The boring ETF returned nearly 20% from 1990 to 2013 while the most volitile shares returned only 10%.
While focused on US shares, he actually wrote about two low-volatility shares in our portfolio based on his own measure of volitility: recent dd Novartis (NVS) which is Swiss; and Canadian BCE Inc (BCE) a telco. You can buy them (plus a lot of bog-standard US stocks) via iShares MSCI USA Minimum Volatility Index Fund (USMV) and the Power Shares S&P Low Volatility Portfolio (SPLV). While Mark doesn't say which fund holds shares we also recommend, I expect it is the latter. He also called Toronto Dominion Bank which we don't own a good low-volatility play. To be listed the share had to be low volatility according to his screening and be recommended by at least one newsletter which has beatn the stock market over the last 15 years. I think I made the latter cut. Mark edits Hulbert's Financial Digest which tracks newsletter performance.
*One way to cover risk in your portfolio is through an ETF, Proshares Ultra VIX Short-term Futures
or UXVY which aims to double the return of the S&P daily volatility index using 1-mo forward futures. They work better in short bursts but I just keep them around as a form of portfolio insurance I don't have to watch.
*Mongolian Growth Fund reported on its July results which saw rental income rise 22% over July 2013 levels in Mongolian Togrog. Billed revenue rose 1.6% to TGG222.7 mn. This data is for properties held 12 months or longer only. The occupancy rate last July was 94.7% for properties which include retail and office sites. MNGGF also reported that Mongolian GDP rose 5.3% in H1 in real terms (I am not sure if this was during H1 or annualized, but it's pretty impressive either way, but from a low base.)
It is seeking access to world markets via a piepline for natural gas from Russia and Russian Development Bank funding for thermal power plants at US$74 mn. Other neighbor China is offering $162 mn in development loands to Mongolia and giving it access to 8 Chinese seaports. Both Vladimir Putin and Xi Jinping visited Mongolia in recent weeks.
Mongolia copper exports hit $1.2 bn in the year to end August, vs a mere $470.4 mn in 2013 (either in the 7 months or for the full year.)
*Aberdeen Global Income Fund will pay a 7 cent dividend at the end of Sept. flat with earlier. It is made up 74% of investment income and 26% of untaxable return of capital. FCO now reports this at mid-month rather than right before the payment is made, under new Aberdeen rules but the levels have been the same all year. At the end of the year there may be an adjustment in the breakdown with the issue of 1099 forms.
*Aberdeen Asia Pacific Income fund will pay us a flat 3.5 cent dividend at month end, made up 62% of investment income and 38% of return of capital. FAX payout breakdown is also flat but it also may be adjusted in the IRS forms.
*Cecilia Gondar who recently retired from Thomas Herzfeld's Miami closed-end fund brokerage and fund management firm to move to Virginia, has been named a director by the board of Herzfeld Caribbean Basin Fund (CUBA). She counts as an interested person under SEC rules.
*A writer on www.seekingalpha.com named Jack Foley of Madrid said to buy Power Shares US$ Index Bullish shares, UUP, because he thinks his neighbors in Spain and other Europeans will be buying dolalr assets. His entry point will be a lot higher than the $21.08 we paid.
*Later today we should hear from closed-end EatonVance Tax Managed Global Dividend Equity Income Fund on the makeup of its monthly distributions. In contrast to earlier, last month EXG reported its entire dividend was from investment income (dividends and realized capital gains.) It yields 9.5%.
Special Table Posting
For technical reasons, a busted trade, I had to revise my stock and bond portfolio today, and I took the occasion to update on trades done this week as well. I also revised the public closed positions table.
View the ones you are allowed to see at www.global-investing.com
Neither I nor the webmaster can access your personal account data on our site. If you forgot your password there is a clickthru you can use to reset it which goes to your e-mailbox.
I am working on a marketing campaign with a copywriter and have just managed to figure out no fewer than ten reasons to buy global investing stock picks despite geopolitical risks and the high dollar and Wall St. It will be sent out free to people on lists we'll rent but not to existing recalcitrant pre-subscribers unless they ask for it. We also plan social media campaigns. That doesn't mean I intend to tweet or twitter or link in or facebook or post nude pix on Apple.
There will not be another update Sunday as I'm doing some volunteer work at my former high school and cannot do both. Read more »