Political Risk in Canada
If the US Govt shuts down, the New York Times writes, the animals in the closed National Zoo in Washington will be fed. Food stamp cards will not go out, however. The big political risk today, again, is from Canada.
Spain's Banco Santander tested the Euro bond market today with a 2-yr floating issue partly underwritten by Barclays Bank along with STD itself. The underwriters propose that STD pay 145 basis points over Eurobor for their money, having squeezed the rate down from the initial offer of 150 bp (i.e. 1 1/2%). But STD has to respect the sovereign ceiling on Spain's borrowing rates.
With Portugal having paid 5.1%-5.9% for its 6 to 12 month money last week, and up to 9.19% for longer term, Spain is the next victim of the euro vigilants and is also having to pay triple digit basis points over eurobor.
While all Spanish banks and financial experts say the rate should be reduced to 80 or even 50 bp, including Alfredo Saenz of STD, whom we quoted for paid subscribers yesterday, the market is not obeying.
Of course if the European Central Bank raises rates prematurely, it will cut pressure on the Club Med countries and Ireland over rates but may delay their financial recovery.
Having said that, it is uncertain exactly what rate STD will have to pay. There are two different methodologies for calculating the London Interbank Offer Rate in Euros, what Eurobor is defined as. One is used in London by the British Bankers Assn, and was gamed by large banks according to recent accusations.
The other is used on the Continent. The BBA Eurobor tally throws out the highest and lowest rates being quoted by banks. The Continental version uses any and all quotes.
Moreover, neither British nor Euroland calculations in fact provide a rate for two years. They only offer rates for overnight to a full year. The range is 1.014% to 2.033%, with the longest duration having the most risk and therefore the highest yield.
Banco Santander, which is borrowing in the UK, will be paying 1.45% over 3 mo. Eurobor, or 2.719% assuming its bonds are placed at par. A bank is smart enough to figure out how much it is paying. But you would not want to be paying a mortgage based on Eurobor as many are doing these days.
Canada likes to surprise investors by tax and regulatory changes which sour their prospects. Today another Canadian surpise hit the markets as the government of Alberta proposed new environmental rules that would revoke all or part the oilsands leases it has already leased, in some cases putting active projects at risk.
The measures are intended to protect water, wildlife, and woods. But of course they do not protect private property. This caught the oil industry in Canada, the USA, and elsewhere off-guard.
Alberta wants to create a national park of 2 mn hectares covering about a fifth of the oilsands leased area.
One of the affected companies is in our portfolio but in fact every single oil company, Canadian or other, appears to be under threat of reversal of leases which the province is drafting and others around the globe will copy.
The list by Alberta shows tracts held by every oil major and lots of minors and Alberta's famous number companies: Home Check Inc.; Ronald Lyle Smith; Ronald James Stewart; Lester Bonnard Vanhill; 0859953 BC Ltd.; 547184 Alberta Ltd.877384 Alberta Ltd.; Athabasca Minerals Inc.; Fission Energy Corp.; Graymont Western Canada Inc.; Thomas Moricet; Alberta Oilsands Inc.; Antelope Land Services Ltd.; Athabasca Oil Sands Corp.; BP plc; Canadian Natural Resources Ltd.; Cenovus Energy Inc.; Chinook Energy Inc.; ConocoPhillips; Harvest Operations Corp.; Imperial Oil Resources Ltd.; Pan Pacific Oils Ltd.; Scott Land & Lease Ltd.; Southern Pacific Resource Corp.; Statoil Canada Ltd.; Stone Petroleums Ltd.; Sunshine Oilsands Ltd.; Bancroft Oil and Gas Ltd.; Cavalier Land Ltd.; Koch Exploration Canada G/P Ltd.; Perpetual Energy Operating Corp.; Ranger Land Services; Standard Land Co.; Devon Energy Corp.; Lende Investments Ltd.; MEG Energy Corp.; and Rocky Layman Energy Inc.
However jolly it is to see the Koch family oil firm in the list (they finance the US Tea Party), and to see the Canadians also dumping on BP, this is still a setback for North American energy independence.
More for paid subscribers from Canada, Spain, Britain, Singapore, Israel (big news), China (bad news), Switzerland (chagrin news), India, Mexico, and Argentina.
There was a steep rise in Portuguese interest rates which now at 9.91%, the highest since the country abandoned its escudo for the euro.
Poland raised its interest rates a second time this year in the battle against inflation, and they are now 4%.
Foreigners reacted to the Arab revolutions by pulling out of Israel shares in Feb. Nonresidents invested only NIS 3 mn in Tel Aviv Stock Exchange equities (which includes their ADRs) in Feb. vs 423 mn in Jan. Israeli shares quoted on foreign stock exchanges were sold to the tune of NIS 106 mn in Feb. and NIS 141 mn. in Jan.
Figures published today by the Bank of Israel also show that bond purchases on the TASE in Feb. were NIS 429 mn vs NIS 2.64 bn in Jan.
The wonderfully-named short seller Muddy Waters yesterday launched an attack on a stock we bought last week while bottom fishing, Duoyuan Global Water. It had fallen nearly 80% from its high. But the shorts were not done yet.
DGW appears not to have answered the telephone at its Chinese regional offices selling water treatment equipment. Muddy Waters produced a video posted on the web showing its daytime calls to a half-dozen offices going unanswered or producing a Chinese voice saying the number was out of service.
There are three possible interpretations of this phone test. Muddy Waters, who has hit out at other Chinese -listed companies with mixed success over the past couple of years, argues that DGW has overstated its sales because the offices do not function. I give this possibility a 20% ranking.
Muddy was using the Chinese version of the company's 2009 report to find the telephone numbers for the regional sales offices. But if they do not operate now may not necessarily mean the sales were false.
One reason is that for years there have been two or three Western water technology experts on the DGW board. These men would have visited the plant in China whenever they were there for board meetings, and not just have gone to the Beijing Opera or eaten vast banquets. They would have been able to check on the scale of machinery production. Given that their own board fees depended on them, they would have checked carefully.
Moreover China's water is second in disgustingness only to its air. There is serious demand for H2O cleanup machinery, and the central government is financing it for the regions and municipalities.
I think it extremely improbable that the offices were simply closed or moved during the intervening 15 months, which I give a 20% probability to. There is no innocent explanation. While water treatment equipment is a big-ticket item sold to local governments, the odds are against the whole offices moving elsewhere even if the sale has been completed.
I favor a third theory, called Trioyuan. It is that Duoyuan's Chinese CEO, Wenhua Guo, a man of somewhat dubious reputation anyway, set up a system for marking up DGW equipment with local partners that eliminated the need for sales offices. I can imagine CEO creating a company in Aui Wei China in partnership with Mayor Chan, Councillor Chin, Engineer Chao, Alderman Xu, Communist Party local boss Wong, Councillor Po, and a half dozen others with access to the city checkbook. They could act as intermediaries skimming off some of the profits from sales away from the ADR shareholders and into their own pockets.
The local entity would sell spare parts, training (Guo is a former high school physics teacher), design, tubes, wires, plugs, hoses, and all the things that installing a water treatment machine requires. There is of course money to be made with the Aui Wei partnership. But there really are water treatment machines being installed.
I give this Trioyuan theory a 60% chance of being correct. I think there really is a company with a product despite what the short-sellers are saying.
However, given the mess, and the resignation of the American CFO, Stephen C. Park, a CPA, who had been the public face of DGW after its sister company, also headed by Guo, Duoyuan Paper, ran into accounting issues, I am sorry I tipped DGW. Unlike DYP which was delisted by the NYSE yesterday, DGW sells not to private buyers but to local governments. There are controls even in corrupt China.
More for paid subscribers about China, Canada, Panama, Colombia, Britain, Australia, Norway, Israel, and Belgium from out team of reporters.
Demonstrations in New York and London
A NYC scene. I went to the century-old Katagiri Japanese supermarket near my home to buy fish, where it is fresher than in other stores. A bunch of teenagers dressed in black with T-shirts depicting skeletons were demonstrating outside against nuclear power.
This shocked me. The staff and customers of the store are mostly Japanese, many with families hurt by the earthquake, the tsunami, and the meltdown risk. They are the victims not the perpetrators.
In Q1's last week, $2.6 bn net flowed into emerging markets from mutual funds, according to EPFR, the Cambridge MA. Tracking service. This modestly reversed net outflows during the quarter which his $25.5 bn. What are the chances of a revival of the BRIC gold rush? Russia, an oil and gas exporter, picked up investments week by week. But China, Brazil, and India were hit by redemptions.
Abhimanyu Sisodia replies before a lovely digression from his London trip:
I can speak for India when I say that the image of the subcontinent has been tarnished severely of late.
Hours after my arrival on March 26, a clueless me walked from Notting Hill towards shopper-friendly Oxford St. I was surprised by loud electronic music accompanied by anti-government chants. Chasing the sound, I discovered a half million-strong youth protest march, the “March for the Alternative”, protesting government funding cuts imposed to cover billions paid to bail out UK banks.
Sentiment was very anti-capitalist. My favorite banner read: “The best way to rob a bank is to work for one.” The number of protestors may have been as high as a half million. This was the biggest trade union organized rally since World War II War by any estimates.
Newspapers were full of the demo at a time when shockingly-high banker payscales were disclosed. Anthony Hilton in the London Evening Standard (distributed free) wrote about how integrity will be the key advantage for London in its bid to maintain financial supremacy:
“The collapse of the banking system exploded the carefully cultivated myth of Anglo-Saxon superiority in matters financial. We see the results both in a new determination behind EU efforts to curb such excesses through regulation and in a new indifference in emerging countries who no longer feel they have much to learn from the West. Future success can no longer be taken for granted - it will have to be earned.
"Far from being outdated and irrelevant in a world of bulge-bracket banking, the positive reaffirmation of the old City values of trust and impartial advice are surely the best way to secure its prosperous future.”
This caught the eye of an emerging country resident (yours truly) in the West (London) to learn. I was deeply impressed by how the protestors in London remained peaceful for such a long time. I marched with them all the way until the end at Trafalgar Square, a solitary capitalist infiltrating the ranks, and couldn’t help but sympathize with their cause, until the anarchists arrived later, and the rioting started.
Had this been back home in India, the buses would have started burning a long time ago.
Unfortunately the protest doesn’t seem to have had much affect, as soon after the British government announced funding cuts amounting to close to GBP 100 mn, with more than 200 organisations in the arts losing 15% of their funding. At least I got a guided walking tour of London by following the march.
What Indian companies will lead the India growth story? A friend, a London School of Economics student, offered insight. What emerging markets have now is numbers, huge populations. As with the telecom revolution India is enjoying, mass marketing translates directly into growth. Companies that can tap the bottom of the pyramid go far, although investor sentiment also favors technology and resources. Working with the masses is what creates a Tata, a Reliance, a Bajaj Auto, or an Aditya Birla Group, given the recent coming-of-age seen among Indian consumers when disposable incomes rises across social classes.
A fitting tie-in was India winning the cricket world cup on Saturday for only the second time in history.
More musings by Abhimanyu on what ethics means for emerging market stock picking along with our usual stock picking advice from him and others from India, Brazil, Israel, Singapore, Britain, Switzerland, Spain, France, Canada and China follows. I think we got three of the BRICs into today's issue but of course we don't only cover them, nor in reply to a pre-subscriber's questions do we only cover speculations:
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His long-term associate Charlie Munger did the same thing to Warren Buffett as David Sokol, according to Sokol: buying into a stock before he pitched it to the head of Berkeshire Hathaway. The Munger front-run, if you can call it that, was over Chinese electric car start-up BYD (for Build Your Dream), which has proven a disastrous venture for BRK.
Old-time readers may recall that Fei Chen tried to get us to buy BYD after Buffett went in. Had we done so we would have made money short-term but lost more later. I looked into the company, a jacked up maker of cellular handsets with automotive ambitions mostly dreams. And I decided it was a non-starter.
From Mohammad Habib Khan in India:
Over the last two years (to Jan. 2011), India has doubled its telecom subscribers base, adding over 400 million customers. But low overall telecom teledensity in India offers mobile network operators (MNOs) significant potential growth.
While urban telecom markets are nearing saturation with a teledensity of 150.67, they offer significant upside potential though cross-selling of data and other value added services. So MNOs paid up to purchase 3G spectrum licenses during the auctions last May. During the auctions, seven private MNOs collectively spent INR 509.68bn for 66 licenses.
Meanwhile, there is hugen untapped potential in rural areas were teledensity was under a third.
Currently Indian MNOs face a decline in revenues and reduced tariffs from fierce competition. Competition increased after the controversial or corrupt 2008 auction of 2G spectrum, which led to the entry of new players. Additionally, the balance sheets of many private MNOs have been strained by buying spectrum and rolling out 3G services.
So they are raising money.
In Jan,, Reliance Communications, India’s second largest MNO by subscribers, raised $255mn through commercial loans to partly refinance its debt for acquiring 3G spectrum and equipment.
Yesterday Teleservices Ltd. announced that its 26% Japanese partner, NTT Docomo, will invest another INR 8bn ($179mn) by subscribing to a rights issue by TTSL. The funds will be used to expand Tata Docomo coverage and improve its 3G network quality.
Meawhile, Vodafone Essar, the third largest Indian MNO, a financially stable player, is working differently. Britain's Vodafone Group Plc agreed to purchase the Essar Group’s 33% stake in Vodafone Essar for $5bn by Nov., bringing VOD's direct equity stake to 75%. However, as India doesn’t allow foreign companies to own more than 74% stake in a local MNO, Vodafone will have to sell 1% to an Indian entity or consider an IPO. VOD acted despite a $2.5 bn tax battle with the Indian authorties.
While analysts opine that Vodafone overpaid, the Essar transaction will give it complete operational control ending the fractious relationship with Essar partners.
More from other writers including a stock switch follows for paid subscribers from Frida Ghitis along with news form Spain, Argentina, Colombia, Thailand, Norway, Britain, Australia, and a few other places.
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Yesterday thanks to being on its press list (despite having recently sold the shares), I was among the first to break the story of how the Swiss hearing aid company, Sonova A.G. fired its CEO and CFO over their delaying bad news on troubles with its new implantable hearing devices. This enabled them to sell their own shares.
I wrote up the Swiss scandal for paid subscribers. Now it is publc
The insider trading went on after problems were known to the execs, and only on March 15 did the rest of the world learn about them. We sold that day following the surprise press release forecasting problems, booking a gain of over 200% on SONVF.
Business leaders are often ethically challenged. It comes with the territory for entrepreneurial success. Today's newspapers are full of tales of how Bill Gates squeezed out his childhood friend and partner from Microsoft while Paul Allen was battling cancer, revealed in a new Allen book excerpted by the appropriately named Vanity Fair magazine.
Also today we learn that one of the presumptive heirs to Warren Buffett at Berkshire Hathaway engaged in front-running his employer by buying Lubrizoil before nudging the Oracle of Omaha to take the company over. Mr. David Sokol now has resigned.
When bad things happen at companies with good reputations, and indeed highly visible boss-level philantophy, it raises questions about the American tendency to put entrepreneurial leaders on a pedestal. Are they really suitable role models? Do they have street cred on Main Street as well as Wall St?
For whatever it is worth, Berkshire is now more likely to spring for Indian-born Ajit Jain to succeed Buffett, which Abhimanyu Sisodia, our India reporter, says has electrified Indians just as Berkshire is investing heavily in Indian insurance. Jain is a more refreshing role model for Indians than the Subcontinent-origen insiders around hedge-fund operator Raj Rajaratnam.
Other recent big stock sales were of major drug firms Glaxo Smith Kline and Astra Zeneca, both British, after our biotech guru PW warned that their dividends are under pressure. Now GSK has won a lawsuit against Abbott over a component of its HIV drug cocktail, and was awarded $3.4 mn in damages, rather less than the $571 mn it initially sought. This is ultimately irrelevent for a firm this big.
AZN meanwhile has settled a major tax dispute with the IRS for $1.1 bn giving it a half-billion bucks this quarter from de-provisioning, increasing its estimated EPS to $6.90-$7.20 from earlier earnings figures of $6.45-$6.75. As you can see the tax settlement will feed down to the bottom-line.
Both British drug makers are getting more loot for their coffers. But this is short-termism. If the drug majors' strategy is not producing a full pipeline of marketable drugs filling medical needs, their dividends are still at risk.
More for paid subscribers from China, Chile, Switersland, South Africa, Canada, Israel, Virginia, France,and Britain.
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How Japan Can Be Played
Neil Dutta of Merrill Lynch predicts that the hit from Japan to the US will be limited and temporary. And that it may have positive impact on US growth:
Even though Japan’s economy has been in a long period of malaise, it remains a global industrial powerhouse, representing roughly 10% of global GDP. The devastating March 11th earthquake has naturally raised concerns over disruptions to the global supply chain, affecting autos and technology in particular. So, it is important to put these anecdotes into context.
We argue that the hit to industrial production will be limited and temporary. The big cost is missing small components.
Natural disasters are a form of “supply shock” as they disrupt the productive potential of the economy. In this case, the main economic shock is not the direct loss of business, but spillover effects in terms of damage to the power and transportation industries in Japan and disruptions to the global supply chain.
Many auto and electronics firms rely on the affected region for parts.
The Wall Street Journal reported that a small electronic part, which measures airflow to car engines and made in the affected region, was dwindling in supply. The risk is that once the supply of a gadget is exhausted, total production grinds to halt. A manufacturer cannot send new cars to dealers without the engine thermostat installed, even if the rest of the car is perfect.
To distinguish between final goods and components coming out of Japan, how critical is the component to production and how critical is the final product? Disruption to final goods production benefits US
producers, if they make a close substitute. According to the Wall Street Journal, “Supplies of some fast-selling vehicles including the Prius, the Nissan Rogue and Subaru Forester already are beginning to dwindle.”
So, if you cannot get your Toyota Prius you might buy a Ford Focus. And, if a car cannot be built in Japan, production might shift to the US.
The US has high spare capacity. Most industries are operating well below their long-run capacity utilization rates, implying that the disruption to the global supply chain can be quickly corrected.
The longer Japanese firms are offline in the production of final goods, the more likely US factories will come on line.
How to play this is discussed for paid subscribers below. We also have a new stock pick. And our team of reporters provides news from Israel, Saudi Arabia, Switzerland, India, China, Austria, Colombia, Brazil, Singapore, South Korea, and Canada. We pay for their work and therefore only let those who pay us read it.