A Hot and Disputed Canada Pick

Mon, 2011/03/07 - 5:55pm | Your editor


I got a medical appointment right before flying away to Ohio on family business so the Tuesday blog is being written late Monday. I am seeing a dermatologist about a sore on my nose, which will not affect my survival chances, I think. We have news from Canada, Britain, Israel, Ireland, Japan, and China today. Apologies to Italy, but there is no follow-up on what I wrote this morning except to note that the Libyans own a lot in Italy.


I should have foreseen the down market today. Richard Suttmeier of ValuEngine put a valuation warning out over the weekend calling all sectors of the US market overpriced. He is a great macro forecaster whom I got to know when we were both victims of the late and unlamented Rightside Advisors. Some of the fallout is discussed for paid subscribers below.


Gen. Joe Shaefer manages money at Stanford Wealth Managment LLC and writes Investor's Edge, a newsletter. He came up with "a rather compelling agglomeration of companies in the right industries and sectors" and adds that "if management is half as good as they seem, I think they'll steadily grow this into something of real value." Paid subscribers can read on about an incubator with perhaps the right stuff, written by Joe:

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Italian-Libyan IR

Mon, 2011/03/07 - 11:32am | Your editor


Today's blog is particularly long because there was none on Friday. And there will only be a short blog on Tuesday when I am traveling for family reasons. To spare my faithful readers too much eyeball fatigue I am starting off with an off-color note for paid subscribers only.

But before that I wanted to share an anecdote. A half dozen years ago when we had a stringer in Italy he arranged for me to be given lunch by the IR of Finmeccanica, the large Italian conglomerate in businesses like defense, aeronautics, and security. As the charms of the company were pitched at me I asked my host how he had learned English so well. “I studied at Jew York University”' he told me.

So of course we did not buy the shares. To an Italian, I do not look Jewish, just vaguely Mediterranean.

Finmeccanica now is in deep trouble. Not only does it sell much equipment to Libya across the Med, but the Qadaffi regime owns a chunk of its capital.

Now to work in Britain, Colombia, Israel, Australia, Brazil, Argentina, Ireland, France, Belgium, Souths Korea and Africa, China:

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Plagiarizing and Ranting Part II

Thu, 2011/03/03 - 12:38pm | Your editor

This morning's newsletter was foreshortened so I could attend a Capital Link conference about a new ETF to invest in global corporate bonds, from Powershares Capital Managment Invesco. The webinar was late, chaotic, and a piece of marketing, but I write it up for paid subscribers below, along with another bit of delayed news from Thursday. There will be no blog tomorrow as my office will be refurnished.

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Plagiarizing and Ranting

Thu, 2011/03/03 - 10:41am | Your editor


IndexUniverse reports on Feb. ETF fund flows:

$7.6 bn flowed into U.S. exchange-traded products, lifting assets 0.72% to a record $1.056 trillion.

Investors, spooked by the unrest sweeping through the Middle East and North Africa, dumped emerging markets holdings. The world's biggest developing markets fund, the Vanguard MSCI Emerging Markets ETF (NYSEArca: VWO), had outflows of $1.41 bn. The iShares MSCI Emerging Markets Index Fund lost even more, suffering outflows of almost $2.4 bn.


As a former PhD candidate who never wrote her thesis (my degree is an ABD: all but dissertation) I am troubled by the spate of doctorates tainted by plagiarism. First Theodore-Karl zu Guttenberg, the German Defense Minister, who holds a rather posh baronry and is moreover married to a Von Bismarck, felt he lacked enough handles and got a doctorate in his native Bavaria. Now it turns out he simply cut and pasted articles from scholarly publications... and newspapers to create his dissertation. (Of course serious German newspapers do read like theses.)

Then Seif al-Islam Qadaffi, son of the beleagured Colonel, was accused by the London School of Economics of cribbing his PhD thesis in economics. Seif also is a painter and architect, as well as the closest to Papa, and again it is unclear why he needed a PhD.

Another hot trend is anti-Semitic tirades by men under the influence of alcohol or drugs. It was started by Mel Gibson, the movie producer and star a couple of years ago. Now TV personality Charlie Sheen did an anti-Jewish rant fuelled by drugs or drink.

Then Julian Assange, Wiki-leaker, accused The Guardian, a British newspaper, of hatching a plot against him because the editor allegedly is Jewish. But in fact the edtior is not Jewish although he has a Jewish brother-in-law. Tony Blair has a Muslim sister-in-law. Does anyone listen to their in-laws?

And then the blond braided Christian Dior designer John Galliano had to resign for a pro-Hitler outburst in a bar in the Marais neighborhood of Paris, where the Bobos (bourgeois bohemians) of the rag trade are pushing out the few remaining Jews.

Brazil raised its discount rate to 12.75% to try to ease inflationary pressures today. It's not easy being a fast-growing BRIC country is a slow-growth world.

My report on the ADR Small Cap Edge is now available for sale on the website.

There will be no blog tomorrow as we are having new office furniture installed.

More for paid subscribers follows from Britain, Israel, Korea, Singapore, and Chile. I am off to listen to why we should be buying bonds so we are posting early.

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Denial on The Nile

Wed, 2011/03/02 - 12:07pm | Your editor



John Thomas, my pseudonymous former colleague on The Economist, AKA The Mad Hedge Fund Trader, is becoming a cheerleader for the proliferating of exchange traded funds. He writes:

The current near monopoly enjoyed by the top three ETF issuers, Black Rock, State Street, and Vanguard, control 83% of the market. At last count more than 1,100 ETF’s were capitalized at more than $1 trillion. The result has been grasping management fees, exorbitant expense ratios, and poor structural designs which create massive tracking error.

The good news is that new entrants are flooding into the ETF space, and the heightened competition will help curtail the worst of these abuses. This development will accelerate the demise of the bloated and arthritic mutual fund industry. Not only will management fees and expense ratios plunge, there will be a far broader range of offerings, as new funds are launched from a diverse range of institutions coming from differing areas of expertise. Failure to enter the newly lucrative ETF market by the remaining giants sitting on the sidelines means that their existing mutual fund businesses will be cannibalized.

Look no further than bond giant PIMCO, coming out with a plethora of fixed income related funds, Van Eck’s expanding list of ETF’s for commodities, and the even growing list of inverse and leveraged inverse ETF’s presented by ProShares.


“Not so fast, John.” Consider EGPT, the ETF investing in the stocks of Cairo and Alexandria, creating by the Van Eck group whose commodity expertise you cited. With the bourses of Egypt shut by the Tahrir Revolution (the reopening has been further delayed until Mar. 6), the ETF pricing is in limbo. With no market trading for all but a handful of Egyptian shares with Global Depositary Receipts (amounting to at most a quarter of Egyptian market capitalization mostly from the Oraascom group of  Naguib Sawiris), ETFs cannot track an Egyptian index. The prospectus-designated role for institutional investors, creating and destroying ETFs by trading the underlying shares, has been suspended. The reason: underlying Egyptian shares will have not traded for 24 days if the Markets only reopen next Sunday as scheduled. And Egyptians who own shares are demonstrating (they do that) to stop the opening because they fear a market drop.

So Van Eck Market Vectors Egypt Index is trading at a 10% premium over the net asset value and the fund could plunge when the Egyptian stock market finally reopens, accordign to Aaron Pressman of Reuters. Actually the EGPT ETF is being priced by the market as if it were a closed-end fund, since new shares cannot be created or destroyed. The only ETF shares trading are those from before the bourses of Egypt closed. They are being priced by supply and demand like a CEF.

Pressman only is guessing at the premium to the stale net asset value. When the market reopens NAV can fall further. Van Eck can cite force majeur but it hardly will enhance market confidence in the newbie ETF creators among investors.

Full disclosure: your editor owns shares of State Street.

More for paid subscribers follows from Brazil, China, Belgium, Thailand, Britain, South Africa, and a few other places.

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Tue, 2011/03/01 - 7:32pm | Your editor

Trading alerts are only sent to paid subscribers. Join them. Your heirs will love you more than the Libyans love Qaddafi. Read more »

Japan Myths and India Committees

Tue, 2011/03/01 - 12:04pm | Your editor

In the latest edition of The Atlantic, Eamonn Fingleton writes a quiz from Tokyo:


Let me try some questions that will probably prove perplexing. They concern the Japanese economy, that erstwhile juggernaut of world trade of the late 1980s, which, we are told, has been mired in stagnation ever since.

Question 1: Given that Japan's current account surplus (the widest and most meaningful measure of its trade) totaled $36 bn in 1990, what was it in 2010: (a) $18 bn; (b) $41 bn; or (c) $194 bn?

Question 2: How has the yen fared on balance against the dollar in the 20 years up to 2010: (a) fallen 11%; (b) risen 24%; (c)risen 65%?

The answer in each case is (c). Yes, all talk about "stagnation" and "malaise" to the contrary, Japan's surplus is up more than 5-fold since 1990. And, yes, far from falling against the dollar, the Japanese yen has actually boasted the strongest rise of any major currency in the last two decades.

How can such facts be reconciled with the "two lost decades" story? I don't think they can. There is clearly a contradiction here, and after studying the facts on the ground in Tokyo for decades I find it hard to avoid the conclusion that the story of Japan's stagnation is a media myth.

Certainly anyone who visits Japan is struck by the obvious affluence even among average citizens. The cars on the roads are generally much larger and better equipped than in the 1980s (indeed state of the art navigation devices are more or less standard on many models). Overseas vacation travel has more than doubled since the 1980s. The Japanese boast the world's most advanced cell phones, and the biggest and best high-definition television screens. Japan's already long life expectancy has increased by nearly two years. Its Internet connections are some of the world's fastest --ten times faster on average than American speeds.

True, not all of Japan's indicators are equally impressive. The Tokyo stock market has never recovered from its 1990s slump. Neither has the real estate market. (In the latter case, however, there is a silver
lining in a major boost to living standards, in that young home buyers now get far more space for their money. In any case the implosion since 1991 merely restored some sanity to valuations that had previously become -- temporarily -- outlandish).

On the negative side, there is the fact that Japan's economic growth rate, as least as calculated officially, has averaged little more than 1% a year in the last two decades. For those who propound the "stagnation" story, this is their strongest card. But it does not accord with the common observation -- undeniable to those who have known the country since the 1980s -- that the Japanese people have enjoyed one of the biggest improvements in living standards of any major First World nation in the interim.

If we believe the evidence of our eyes, we must look again at those economic growth figures. Preposterous though it may seem to an unacclimatized Western observer, it appears that Japanese officials have been deliberately understating the nation's growth. But why would they do such a thing? A clue lies in trade policy. The fact is that, constantly since the 1870s (with the exception of a brief interlude in the late 1930s and early 1940s), Japan's pre-eminent policy objective has been to keep ramping up exports. That policy came very close to derailment in the late 1980s as a groundswell of opposition built up in the West. By the early 1990s, however, the opposition had largely evaporated as news of the crash led Western policymakers to pity rather than fear the "humbled juggernaut." It is a short jump from this to the conclusion that Japanese officials have decided to put a negative spin on much of the economic news ever since.

From India, more from Mohamad Habib Khan on the big gap in the new New Delhi budget:

Divestiture is needed to make public sector undertakings more competitive, to reduce excess political influence on their operations, to generate funds for expansion, and to provide much needed cash to the government the economy. Privatizations in FY10 and FY11 produced over $ 10.11 bn for the government.

But there is another reason why divestments are needed. 2010 was the year of multiple corruption scandals in India: the Adarsh Housing Society, the 2G Telephone Spectrum auction, the IPL scam, the LIC Housing Finance scandal, the Citibank scam. Even the Commonwealth Games construction program was deeply tainted with corruption.

A country facing challenges like maintaining fiscal prudence and attaining targeted growth is being racked by corruption which cost India multiple billions of dollars, A figure of $38.67 bn was lost by the corrupt 2G telephone auction alone.

Now, in the 2011-2 budget the government announced an ambitious target: raising $20.87 bn from disinvestitures over the next 3 yrs starting strongly with $8.79 bn in the current 2011-12 FY, Follow-up Public Offers for Steel Authority of India Ltd and Oil & Natural Gas Co,, originally schedule for the prior FY, are now scheduled for FY 2011-12. IOC, Power Finance Corp., Hindustan Copper, and Rashtriya Ispat Nigam Ltd. are also scheduled for disinvestment. Soon.

While the new budget was expected to include stringent measures and firmly laid-out plan to contain large scale corruption as companies are privatized, Finance Minister of Finance Pranab Mukherjee merely announced the creation of a committee, a group of ministers, to consider measures for tackling the rot.


You can expect more Colombian ADRs on Wall Street as the country moves into privatization mode for banks and utilities. Banco Davivenda may be next in line.


More for paid subscribers follows from Britain, Colombia, Brazil, Israel, and of course Canada:

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Why We Have Taxes

Mon, 2011/02/28 - 12:26pm | Your editor



I know I am not going to make myself many friends with this thought, but I think it needs saying:

“Taxes are what we pay for civilized society.” The quotation is from Oliver Wendel Holmes jr in the Compañia General de Tabacos de Filipinas vs Collector of Internal Revenue, in 1927.

Of course we don't like paying taxes, but we want to defend our borders, protect ourselves from crime and fire, educate our children, and fulfil our social responsibility to the old, the poor, the halt, and the lame.

From India, Mohamad Habib Khan writes:


Amid high concern over India’s fiscal deficit, Pranab Mukherjee, Minister of Finance, released the budget for FY 2011-12 in Parliament. Economists, investors (including foreign ones), opposition parties, corporations, and other concerned parties fixed their eyes on increased spending on key sectors, subsidies, and social welfare program. High oil prices were expected to strain the fiscal situation.

However, Finance Minister announced a decline in fiscal deficit from 5.5% to 5.1% of GDP for the FY 2010-11. an significant drop from the 6.5% of GDP in FY 2009-10. For 2011-12, the fiscal deficit will be kept at 4.6% of GDP, an improvement from the target 4.8% presented in the last Budget.

The Government succeeeded in fiscal consolidation in 2010-11 thanks to higher non-tax revenue receipts from the 3G and Broadband Wireless Access auctions which were a key factor helping the Government perform ahead of target. These receipts of around INR500 bn were available for infrastructure and social sectors spending and to cover subsidies.

Faster adjustments will help the Government in unlocking more resource from the Government revenues in the future and use them for various developmental programs.

Colombia surprised the markets with a 0.25% jump in its discount rate at which the central bank lends overnight. The most recent Bloomberg survey showed 21 out of 23 economists predicting no rate rise. The new 3.25% rate was slapped on because of inflation fed by higher food prices, the result of a catastrophic flooding. Today Colombian peso bond prices fell which means the market, having predicted wrong, now excpects the tightening work in keeping inflation in check.

There will be no blog this coming Friday as my new office furniture is being built in. It is tax deductible from my company's profits and will also put a bunch of Greek-American carpenters and a Filipino-Italian-American designer to work.

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A Zombie Stock Pick

Fri, 2011/02/25 - 1:10pm | Your editor


Here is a note from Garrett:

I subscribe to Vivian's investment model via covestor.com and wanted to ask how her investment strategy addresses potential future market downswings. 

Many people are starting to cry "bubble" and crash by end of 2011. I know Vivian's strategies are primarily long based, so I wanted to understand how she addresses downswings in the market. Other managers may have shorting strategy flexibility or hedging plays. Considering the market never goes up forever, how does her strategy play in this volatile market with potential future downward trends?

Here is my reply which I am making public under SEC rules.

Firstly, I am far from convinced that the US market is in a bubble now. Wall Street price levels currently are sustained by very good earnings reports from major companies.

Secondly, we do not invest in the US market. We are invested outside the USA where in general the price/earnings ratios are lower. And the covestor.com account Garrett is asking about specifically aims at companies paying high dividends. If good metrics are the belt holding up our portfolio, then good dividends are the suspenders giving us another level of support.

Moreover in Europe and Japan, manufacturers and consumers are better able to cope with higher oil prices, thanks to different geography and their experience with high gasoline taxes.

And even in the USA the forecasts are that the impact of triple digit prices for a barrel of oil will be lower than in 2007.

Moreover, there are reports that Saudi Arabia can simply open its spigots to replace oil not being exported by Libya.

What we have seen so far in 2011 is a massive move away from non-U.S. Equities by American fund investors. In one week alone $3.32 bn has been redeemed according to mutual fund flow-tracker EPFR Global. The money has headed home to US mutual funds according to the Cambridge, MA based service. Low interest rates have also led people to tap their money market accounts for more placements in US shares.

This is in part a panic reaction to the upheavals in the Middle East and North Africa. We are invested in high-yield oil search and production stocks from outside the US in the covestor.com account.

To protect against the flows to the USA producing a stronger US$, which hurts non-dollar holdings, we recommend an exchange-traded fund benefitting from US dollar strength as part of our global investing portfolio. We also are heavily invested in Canada whose high-yield stocks are producing even higher yields for US-based investors as the loony rises with the price of oil and raw materials.

After the “flash crash” of last year, I do not recommend shorting or hedges which can be triggered by aberrant market downswings, with the same awful impact on your portfolio as was produced by so-called stop-losses.

For whatever it is worth, chartists are now saying that Wall Street is suffering from the downside exhaustion of its bears. This was shown by the recovery yesterday (Feb. 24) of the S&P 500 from a new low.

More for paid suscribers follows with good news from Switzerland, Brazil, and Germany, and other reports from Brazil, Britain, Vietnam, and Korea. And a new and astonishing stock pick from our man in Vancouver, Martin Ferera.

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Markets are from Mars

Thu, 2011/02/24 - 1:24pm | Your editor


Based on the close of trading on Feb. 22, the 10-yr-old global Dow Jones Islamic Market Titans 100 Index, DJIM, which measures the performance of 100 of the leading Shari’ah-compliant stocks globally, gained 1.40% month-to-dat. About $5 bn in investments tracks the index which covers companies meeting Islamic rules against charging interest, and against investing in producers of alcohol or pork products. While the Shar'ia index has done well lately, this month it failed to match the Dow Jones Global Titans 50 Index, tracing the 50 biggest companies worldwide, which posted a gain of 1.82% from Feb. 1-22. Gerard Al-Fil of Dow Jones commented:

 “It is no surprise that the DJIM covering Arab stock markets suffered the largest losses in February. Political crisis and civil unrest in Egypt, Jordan, Bahrain, Yemen, Morocco, escalating even to a civil war in Libya, weighed on markets. The turmoil led the DJIM Kuwait Index to drop 8.64%. The DJIM Gulf Co-operation Council Index finished down 5.03% and the DJ Dubai Financial Market Titans 10 Index lost 4.83%. These declines stand in stark contrast to the rise in energy prices, which usually lift Middle Eastern markets.

“Meanwhile, analysts and bankers debate whether current trading levels mean buying opportunities. “'Valuations at Gulf Arab markets are cheap, but international investors nowadays avoid the region,' says Gary Dugan, Chief Investment Officer & Acting General Manager, Private Banking, at Dubai-based Emirates NBD, the Middle East’s largest bank by assets. 'Based on this, we advise our clients to be cautious during the next three to five months.'” (Reprinted with permission.)


BBR, a NYC boutique fund manager, sent out this note: “TSE and LSE announce strategic agreement”. The explanation followed:

“Tehran Stock Exchange (TSE) and Lahore Stock Exchange (LSE) have signed a Memorandum of Understanding (MoU) to strengthen and widen mutual understanding and cooperation between them. The MoU especially aims at strengthen understanding and cooperation in the areas of technology, launching new products, reporting and information dissemination procedures, market making, exchange of information and/or experts, preparing environment for participating two markets brokers in each other markets.It also intends to spread awareness of the legal infrastructure available in both markets, as well as investment opportunities. TSE said the MoU will ensure a periodic exchange of information between TSE and LSE and encourage collaboration between brokers in both markets. The MoU will serve as a basis for performing mutual training courses for both exchanges' experts and other market participants.” This is what passes for a joke in the world of stock marketry.

Peru decided to cut back on the amount its pension plans can invest outside the country, to 30%. Earlier reforms had raised the level to 50% for AFP investment. If too much stock investment stays within Peru there is risk of a bubble given its narrow market.

Today's issue is late because your editor had to deal with phone calls from Andrew in Canada and Nishant in India, interrupting my writing. Andrew will be the new webmaster, which we all are looking forward to once Ron completes the handover, which he is now delaying to attend a conference.

More for paid subscribers from India, Singapore, Thailand, Peru, Canada, Switzerland, Israel, Brazil, Finland, and France follow. Please join our subscription rolls to benefit from the full panoply of our services, which include telling you which stocks to buy globally.

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