May 25 newsletter: Better Late Than Never
Better Late Than Never
While my old college let itself be gobbled up by Harvard, the former women's annex still managed to fill the news Friday after it awarded a Radcliffe medal to the chair of the Board of Governors of the Federal Reserve, Janet Yellen. She attended the women's annex of Brown, called Pembroke, as an undergraduate. Both annexesno longer exist.
Ms Yellen answered a pointed question from Harvard economics professor Gregory Mankiw by saying that “it's appropriate for the Fed to gradually and cautiously increase our overnight interest rate over time, and probably in the coming months such a move would be appropriate.” Among the reason she cited was that it would be another tool for the central bank to use in the even of “renewed recessionary risk.”
Ms Yellen also sounded negative about the use by the Japanese and European central banks of negative interest rates, and appeared to rule out the Fed using this tactic for fear of unnamed “repercussions.
Ms Yellen noted that inflation levels are lower than the Fed's target but also cited the high dollar (which reduces the cost of imports) and the lower oil price as distorting the data.
The market took her remarks as hinting at a further interest rate rise in June. By responding at all, Chair Yellen reinforced her move toward greater openness at the Fed. “The days of never explain, never excuse, are over.”
My own sense of history was boosted by the event. In my day, although Dean Cohen of the Radcliffe Institute apparently doesn't know this, women were discouraged from majoring in economics in the 1950s and early 1960s. Until 1963 there were no lady economics grads, but then Judy Mitchell (later Guéron) and another woman I did not know broke the ban.
Women were also not admitted to the Harvard Business School in that decade. Those wanting a business career were steered into a course in typing and shorthand that Radcliffe offered them to boost their résumés.
A major event in global investing has just occurred, the creation of a new euro-denominated multinational corporation called Coca Cola European Partners plc which had sales of euros 11 bn last year in Androrra, Belgium, mainland France, Germany, Britain, Luxembourg, Monaco, The Netherlands, Norway, Portugal, Spain, and Sweden. This produced cash flow of about euros 1.8 bn, making newly listed CCE on the NYSE a major consumer goods ADR. Note that our former Coca Cola Hellenic share, which delisted from the Big Board, remains out of the new entity, as its coke is sold in Austria, Switzerland, Italy, Greece, Eastern Europe, and the 'stans. It also trades in London but it is incorporated in Switzerland.
I am considering CCE as a way to play the recovery of consumer discretionary spending in Europe. But first let's wait till the dust settles.
More today from India, Israel, and Canada (important company reports) plus a rundown of news from the long weekend around the world including our first ever note about Kazakhstan, plus Australia, Britain, Brazil Colombia, Switzerland, Panama, South Africa, and China. . Our website is back and running normally but, alas, my computer's external back-up drive has gone agly. It never rains but it pours.
Tech Follies and China
However inconceivable it sounds, google's adsense placement service put up material for global advertisers like IBM, Citigroup, and Microsoft on a Jihadist website run by Indonesian suicide-bomber backer Muhammed Jibril Abdul Rahman, a listed and convicted Islamist terrorist. Subject to US, EU, and UN sanctions, Abdul Rahman was under a worldwide asset freeze, travel ban, and arms embargo, according to the Financial Times today. Read more »
Why Populism Is Rising
Disarray among the cognoscenti over where the oil price is heading took a leap today. Nigerian sabotage of pipelines and an optimistic outlook for demand by former oil bear Goldman Sachs boosted the shortage of oil and its price. Meanwhile Moody's downrated the debt ratings of Saudi Arabia, Bahrain, and Oman because of fear of lower oil receipts. However the trio of Gulf states remain investment grade.
Russell Jones writes for Llewellyn Consulting of London today about “fiscal follies”. “Inappropriate emphasis on tax hikes and cuts in public spending,” he says, have generated “austerity fatigue.” Based in IMF data, Jones argues that government revenues in the Group of 20 and Group of 7 leading economies have recovered to their pre-GEC level of nearly 36%. Meanwhile government spending is much higher than it was before the 2007 global economic crisis, at 39%. And in the euro area, the spending is way higher, at 48% over 2007 levels. The difference shows up in government debt which was 77% before the crisis,, and is likely to hit 114% of gross national product (GNP) this year. It is much higher in the leading 7 economies, at 120%, and an amazing 250% for Japan.
Mr Jones, an Australian economist, then quotes Franklin Roosevelt who said in a 1937 fireside (radio) chat: “Let us unanimously recognize that the federal debt can only be paid if the nation obtains a vastly increased citizen income.”
Jones aruges that “front-loading fiscal consolidation” before the recession is over delays the cut in debt to GNP levels. To really cut debt levels you need steady growth plus modest inflation, missing this time. As for much-vaunted structural reforms to boost growth are lacking. And infrastructure spending to meet pent-up demand, improve education, boost R&D, encourage foreign direct investment, foster labor market flexibility are all being held back. Meanwhile politicians are raising taxes and cutting investment leaving it to monetary policy to sustain growth. And monetary policy is failing to do this.
One result is what Jones calls “the recent upsurge in political populism and social unrest” which he says “is hardly surprising.” “It echoes previous periods of fiscal austerity such as the 1920s and 30s.”
(published by www.llewllyn-consulting.com of London, 44-020 7213 0300, headed by former OECD deputy chief economist John Llewellyn, reprinted with permission.)
Last week Donald Trump was right about currency trends as the US$ recovered from an oversold level against the Mexican peso, the Canadian loony, and other currencies in the trade-weighted index. Today it rose further against the Japanese yen and the Swissie franc. But these trends boost the US trade deficit and keep Wall Street from being great.
More for paid subscribers from Brazil, Colombia, Vietnam, Bangladesh, Britain, the Dutch Antilles, Israel, India, Switzerland, and northern Virginia.
World-wide Results Day
Today we have a surfeit of reporting companies again, so the free blog will be brief. Today the yen has finally done what it was programmed to do, decline because of negative interest rates. I also expect the US dollar to go up after the good retail sales numbers today, which can be interpreted to mean that the Fed will do another interest rate increase sooner rather than later.
Now for our companies, starting with a biggie, a Swiss financial firm, followed by a confusing Brazilian and a Danish firm requiring patience and trust; plus updates on other companies from around the globe.
As we move into an era of robo-managers running stock portfolios, reporting companies are using sneaky “creative” tactics to sow confusion among non-human stock pickers. Their main trick is adjusting what they report under GAAP, generally accepted accounting principles to boost earnings and sales, the key metrics analysts use to rank results.
One reason for doing this is to preserve bonus awards to CEOs and top managers, which depend on achieving results which can be fiddled upward with adjustments. The trend is particularly common in Britain and the US where it helped preserve the bonuses of CEOs at BP plc and LinkedIn despite rotten results in 2015. But Germany is also allowing top brass at firms like Volkwagen to adjust accounts to avoid the impact of the extreme reputational damage caused by its diesel-gate cheat emissions software.
The Financial Times today reports that auditors are fighting back against misleading non-GAAP reporting, spearheaded by an unlikely leader, Hans Hoogevorst, the chairman of the International Accounting Standards Board. The Bernie Sanders of the accounting profession told a conference of auditors in Maastricht (Holland) that non-GAAP earnings are “getting increasingly detached from reality.”
Non-GAAP is also becoming part of our daily fare, with about 90% of S&P 500 companies providing these metrics in their shareholder reports. Not surprisingly, 82% of the non-GAAP data improved earnings. Citigroup says that the average improvement was 30%. Most management remuneration is based on adjusted rather than regular GAAP results.
David Goldman, who writes as Spengler in Asia Times, has come out in favor of Donald Trump, not perhaps altogether surprising from a man who for years supported the Lyndon LaRouche movement, which was run from the building next door to mine by the 8-time US presidential candidate. Like Trump, LaRouche collected more small individual contributions than big donations, and mostly self-financed.
His platform included getting rid of a balanced US budget and a boost of protectionism. He wanted to freeze mortgage foreclosures. And he blames Britain for most of the problems of current capitalism and the rise of opioid addiction, castigating the British elite as “drug-pushers” from the Queen on down. LaRouche did not want to ban Muslims from flights to the USA but he did want to block Africans, whom he accused of being carriers of AIDS and argued that Global Warming was a hoax.
Every now and then a LaRouche table is set up near my entrance to the subway at the Lipstick building.
More for paid subscribers follows from Japan, India, Sweden, Canada, Britain, Brazil, Pakistan, and Finland.
Another drop in a former favorite followed its Q1 report today. You have to know when to hold them and when to fold them. Canadian Solar, CSIQ, maker of solar cells and arrays, posted the following:
Net revenue was $721.4 mn, compared to $1,120.3 mn in Q4 of 2015 (down nearly 36%) but beating Q1 guidance in the range of $645-695 mn. It was down 16.2% from prior year Q1.
Net revenue from the total solutions business as a percentage of total net revenue was 6.3%, compared to 30.7% in Q4 2015.
Gross margin was 15.6%, compared to 17.9% in the fourth quarter of 2015, and first quarter guidance in the range of 12-14%.
Net income attributable to Canadian Solar was $22.6 mn, or $0.39 per diluted share, compared to $62.3 mn, or $1.05 per diluted share, in the fourth quarter of 2015.
More business was booked in Asia and much less in North America this year. It beat its lowball guidance.
My boast Tuesday about Veresen doubling in price turns out to have been the result of a misreported price quote by TD Ameritrade, my current brokerage (until I have completed the ACAT out). TD, a Canadian-bank, deliberately under-performs across our northern border, perhaps from fear of regulatory concerns when it competes with Red-White-and-Blue USA brokerages. So its report that the US version of Toronto's VSN, FCGYF, had more than doubled yesterday, turns out to have been simply wrong. I noted that the same jump had not shown up in Canada trading which TDAmeritrade doesn't cover. But now it turns out that the market-maker number the brokerage quoted was simply wrong. The stock did fall briefly to under $5 (US) when the FERC slammed the brakes on VSN's plan to build an Oregon gas liquefaction plant linked to pipelines from fields in the US and Canada, but the big 100% rise yesterday was a reporting error by TDA,not by me. Had I tried to take profits I would have found out but I wanted to let this one ride.
This sad tale stands in contrast to another company reporting what looks like poor earnings in Q1, which has led me to designate it my favorite for growth investing now. I am still interested in alternative energy, as paid subscribers can read below, but I want to avoid stocks roiled by the ever-volatile price of gasoline which poisoned the air on Wall Street today.
More for paid subscribers on this share and others follows.
Our Veresen has risen to $14.83 (US), more than doubling on breaking news that the US Federal Energy Regulatory Commission has issued a so-called tolling order to the Canada firm over its request for a rehearing over the Jordan Cove project in Oregon.
A tolling order means that it has received a notification that VSN wants a new hearing over the FERC ruling against feeder pipelines and a 6mn metric tonnes/year gas liquefaction plant. It allows the FERC to take more than 30 days to change its earlier ban on the project as being unnecessary earlier this year. Since then, VSN has completed potential deals for half the annual the liquified gas output with 3 Japanese buyers, showing that the project is needed.
Our Canada-based reporter Martin Ferera tipped Veresen and we followed his lead. Now we have doubled our money. When the green light is given the stock will rise even higher than what a mere tolling order involves, in my view.
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