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Tue, 2011/01/11 - 1:06pm | Your editor

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Poor Euro-Pacific Clients

Tue, 2011/01/11 - 12:59pm | Your editor

 

Interviewed today by The Globe and Mail, right-winger Peter Schiff revealed his ignorance while attempting to promote his new Canada fund. Here is part of the Q&A:

Q. You argue that Canada needs higher interest rates right now.
A. Canada’s interest rates are still much too low. But they [authorities] feel that they can’t raise them, because they don’t want to see their currency rise too rapidly against the dollar. That’s a  mistake. The longer they follow our lead, the more problems they’ll create for their own economy. We’re going to take a lot of countries down that have tethered their currency to the [U.S.] dollar.

Q. But we fear a stronger loonie will cripple our already weakened
manufacturers. Why is that not a legitimate concern?
A. Ultimately, they won’t get creamed, because if the Canadian dollar is strong, then that means capital costs for Canadian businesses will be lower. There will be confidence in the future purchasing power of the Canadian dollar. Higher interest rates will mean more Canadians are saving, which will bring down the cost of capital for businesses to invest in labour-saving devices to make them more competitive. Also,  when your currency goes up, the cost of raw materials goes down. In general, manufacturers are helped by a strong currency.
The policies that produce a strong currency are sound. The policies that produce a weak currency are bad. If you’re running up big deficits on social spending and cranking out money, that’s destroying your economy.

Q. How does this figure into your bond strategy?
A. As an investor, the most important thing is the strength of  the currency where my yields are coming from. We have Canadian bonds in my bond fund. If I’m a bond investor, it’s the only thing that matters really. I’m not worried about Canada defaulting. But I would be worried  about Canada inflating. When you’re a bond investor, you want purchasing power. I have to make sure the currency that I own [for clients] is going to deliver that purchasing power in the future. So the currency value is paramount.

Poor Peter Schiff. Poor Euro Pacific Capital clients. If Schiff invests in Canadian bonds on their behalf he does NOT want Canadian interest rates to rise because that means their bonds will lose value. When yields go up existing bonds fall.

And as for Canadian manufacturers meeting lower capital costs if interest rates rise, that reverses the way the world works. Higher interst rates may boost Canadian savings, but they will hurt investment and manufacturing because capital will cost more.

The Euro Pacific Capital CEO is in Toronto this week to publicize the launch of his first Canadian venture, Euro Pacific Canada, in which he holds 20%, and to expound on his investment philosophy, which is nonsensical. More for paid subscribers from Australian and Argentina, with a new stock pick, plus news from France, Israel, Sweden, Britain, Norway, South Korea, Belgium, Brazil, Chile, China, and Japan.
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The Price of Onions II

Mon, 2011/01/10 - 1:40pm | Your editor

 

Today we look at Asian markets. This morning local time the police used tear gas and water cannons to break up a violent protest near the Dakka Stock Exchange in Bangladesh. The rioters who vandalized cars and built barricades were protesting a 9.5% drop in the Dakka stock market index during the first hour of trading on Monday. This followed a 6.7% drop during Sunday's trading.

The Dakka bourse suspended activities until 11 a.m. Tuesday. In 2010 to early Dec., the Dakka index rose 80% luring more inexperienced investors in. Then the market dropped 27% in Dec, 2010.

Frontier emerging markets are fragile and subject to blowout selling. We reported on risks in Vietnam last week. But do no imagine that market darlings India and China are immune to risk, even if they are part of the heavily marketed BRIC trend. Both face a serious economic risk which puts their growth into question: food inflation.

In poor emerging countries, food accounts for a major portion of household spending. So higher food prices have serious political as well as economic consequences. Hence China imposed draconian price controls at the tail end of 2010 after Nov. saw a 5.1% increase in food prices. China also attacked speculators and hoarders, a code for shopkeepers. The expectation is that Dec. levels will drop to 4.3%. That shows price controls work short-term in a regulated economy. And if they did not work, you can count on China's local officials to massage the numbers.

Longer term, price controls fail. I think 4.3% is still pretty high inflation. And the macroeconomic context probably means there will be higher cost of living, despite the Beijing political will to stop it.

Chinese banks are able to tap the market for more money to lend out despite restrictions and reserve requirements. Both public and private banks have had no trouble borrowing, with loans being made by the state sector mastodons.

But that is not the real cause of inflation in China. It is the result of a post-Lehman increase in the Chinese money supply. M3 grew by over 50% in the two years until early 2010 when the Chinese closed the spigot. But the snake is still working through the pipe. More money chasing the same volume of goods results in inflation. We do not need to read Karl Marx to understand that.

China's inflation problem will be resolved by a slowdown in growth and/or a revaluation of its currency. Price controls don't work for long especially if statistics are massaged.

India is barely better off. The country is in its second recent scandal over the cost of onions. They are a symbol of food price inflation. India has near-Chinese growth levels and in some areas, like the Punjab, new prosperity is stimulating spendihg in rural areas, because of good crops and better prices for grain.

New Delhi will spent $1 trillion on new infrastructure over the next five years to provide for further growth, but spending will also trigger higher income and higher demand. India also is gaining from its demographic dividend, as more young people join the workforce and make money, something not happening in China.

But unimpeded growth by Indian industry is hampered by land use rights, a lack of trained manpower, and the infrastructure isolation of bits of the country physically (even if you can chat on your cellphone or make payments). Then too the country has serious corruption, and a caste system enforcing inequality and maldistribution of growth's benefits.

Corporate growth will be hampered by by tight liquidity because India doesn't have a state sector elite able to lend freely, as Chinese state insurance companies do. While deposits are growing about 15%/yr, credit is growing faster, by 23%, according to CLSA. So banks have to offer higher interest rates to depositors which cuts their profits and increases what they charge borrowers. Growth will be hurt by this.

Inflation figures are hard to parse nationally. Indian wholesale prices actually are said to be falling despite food inflation. Nov. inflation (the last available) on an annual basis decelerated to 7.5% from a cyclical peak of 11%, but also rose 7% compared to Nov. 2009, according to a note by the Royal Bank of Scotland. "In our view, this reflects a structural divergence between rapid income growth and stagnant agriculture productivity," the RBS argues. The Reserve Bank of India last month warned that upside risks of inflation are rising in India despite higher growth estimates.

Which brings up the matter of onions. Today 250 traders boycotted the onion market after police raided warehouses to stop onion hoarders.

Onion prices have soared in India despite government crackdowns. Vegetables accounted for 16% of the 18.32% food inflation rates in the week ended Dec. 25. Vegetables alone rose 16%. Onion prices rose 82% from Christmas 2009 to Xmas 2010. You can blame a poor harvest due to unseasonal rains or problems with getting veggies to market. But the onion bharti has become beyond the reach of most families.

The only good thing about the onion crisis is that Pakistan may import surplus onions to its neighbor, although the Karachi government may not agree.

Moreover, both India and China will suffer as importers from any price hike in oil. This will boost the cost of everything transported. Like onions.

Reader Dr. KM, a non-resident Indian subscriber who lives in Germany wrote:"Could you let me know if there is any fund or way that shorts the Sensex in India. I find the rise there incredible and overdone."

I replied:

You could use a fund which you sell short (ie you sell shares in the fund you do not own). yYu have to buy them back, hopefully for less than you were paid for the short sale. The risk is that if the price of the fund goes up you will have unlimited liability. You also have to pay any dividends by the fund during the period you short it.

There is no shorting India fund or ETF. The ETF advantage is that you can only lose the amount you invested in it, which limits the risk.

Given that you are in Germany, there may be rules against short selling which apply; I know they did a ban on short selling two years ago.

Fund managers are still marketing the BRIC concept which includes India which you are negative on.

Higher food prices which feed into inflation which will cause political uncertainty and hurt the very fast growth in both India and China. India is a focus for new long-only funds for those looking to diversify out of established western countries and the fund managers, I fear, are unlikely to offer you a simple way to short.

With "hot" market ideas the risk is that the market will remain irrational longer than you can remain solvent. so be careful.

 

More on this search and other news for paid subscribers from Scandinavia, Israel, South Korea, Britain, France, Brazil follows.

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Funds Flowing

Fri, 2011/01/07 - 1:50pm | Your editor

 

EPFR (of Cambrdige, MA), tracker of equity fund flows, writes a weekly letter which helps figure out which stock markets appeal to American investors. Here is a summary of their latest report: Global equity funds absorbed a net $9.2 bn in the first week of Jan., of which emerging market funds accounted for $3.3 bn, while bond funds attracted an 8-week high of $2.6 bn. US investors pulled $14.8 bn out of money market funds.

With one exception, the larger fund groups that set inflow records in 2010 started the year by taking in fresh money: the diversified global emerging markets, developed market equity funds, emerging markets and global bond funds, commodity and some other sector funds, including real estate, and Africa regional, Russia, Germany, Turkey and Frontier Markets Equity Funds. But only a few matched the weekly record averages they achieved during 2010. their record-setting year.

Higher commodity prices and fresh evidence that the US economic recovery has some traction helped EPFR emerging markets equity funds kick off the New Year with their best week, in flow terms, since mid-Nov. They accounted for over two thirds of all inflows in 2010, and took in half of the money committed during the fist week of 2011. Flows into Asia ex-Japan and Latin America equity funds hit 7- and 12-week highs, while emerging Middle East and Africa ones extended their current inflow streak to 17 straight weeks. Mexico equity funds, one of the few fund countries with record outflows in 2010, suffered further redemptions despite the better US news.

Flows into emerging markets were again driven by interest in the commodity-rich among the, with Russia posting inflows for the 16th time in the past 17 weeks and Africa region (at a 2-year high of $130 mn) for the 72nd time in the past 75 weeks. Latin America funds had their best week since Q3 as investors sought exposure to Brazilian commodities. The possibility that new Pres. Dilma Rousseff will tackle some long-running structural issues fed Brazil fund flows which hit a 13-week high. Investors remain cautious about the outlook for China, which remains a drag on flows into Asia. But Korea equity funds had their best week in 8 months despite tension with North Korea.

I learn from today's Financial Times that innovative dentistry and orthodontics are coming out of Brazil according to the number of articles and patents. This may help my granddaughter whose permanent front teeth came in crooked. And if you want a good cheap X-ray machine or surveillance camera, it may be the one Indians are engineering. And for a cheap MRI, buy in China. BRICs are no longer only about resources.

Our new Indian stringer, Nishant Mishra, is writing up a respectable ADR from his country. Latin America expert Frida Ghitis is researching a highly speculative Australian stock investing in Argentina resources. Stock tips are for paid subscribers only, as we have to pay the reporters.

More for paid subscribers from Israel, Britain, France, Sweden, Thailand, and Canada follows.

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TRADE ALERT

Thu, 2011/01/06 - 2:25pm | Your editor

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Patdown and Jet Lag

Thu, 2011/01/06 - 1:13pm | Your editor

 

Back in the saddle in New York, jet-lagged, cold, and still using the laptop because my desktop is out of commission. I slept badly, used to there being no noise from outside the Moroccoan riad or from the banks of the Thames. A Manhattan street produces racket.

I was subject to a full body search on embarking at Heathrow. My husband was furious but I took it in stride. I chose to interview the woman doing the pat-down of my private parts and learned that the search was not random; it was in response to the US Passport Office asking BA to check me out because I travel so much. I got a new passport in May last year and have been abroad three times since then. I do not think this is a matter of any concern to Uncle Sam but in this era of panic about terrorism, I put up with it. One would think our authorities would realize that someone who works as the editor of www.global-investing.com would travel a lot. And would concern itself with people who have less obvious reasons to head abroad.

 

More for paid subscribers about my experience at Heathrow and other news from Colombia, Canada, India, Britain, Korea, Israel, Greece, and Germany follows.

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Flyday

Wed, 2011/01/05 - 5:04am | Your editor

 

Today is my fly day so this blog will be kept short and sweet. All the readers who worry about printing up my words of wisdom without spending money on paper and cartridges will be relieved.

 

Two more Chinese companies are doing IPOs in the USA according to Hoover's:


Based in Fuzhou City, China

Primary Industry:

Specialty Contracting

2009 Sales:

$80.3 mil

2009 Employees:

167

Proposed Ticker: China Dredging Group Co., Ltd. (filed 30-Dec-10)

CLFF

Offering Amount:

$50.0 mil

Lead Underwriter:

Chardan Capital Markets, LLC, Inc.

China Sunflower Group Limited (filed 29-Dec-10)
Based in Wuwei City, China

Primary Industry:

Grains & Oilseeds Production

2009 Sales:

$16.8 mil

2009 Employees:

65

Proposed Ticker:

Undetermined

Offering Amount:

$20.0 mil

Lead Underwriter:

Rodman & Renshaw, LLC

 

At reader request, here is the latest Hulbert Financial Digest summary of Global Investing's performance; this dates from Dec. You can buy the full report from marketwatch.com

 

Performance Summary (annualized)

Raw returns

Newsletter

1-year

13.73%

3-years

1.96%

5-years

10.11%

10-years

11.67%

Risk adjusted returns

Newsletter

1-year

100.85%

3-years

124.06%

5-years

124.91%

10-years

121.49%

 


News from Israel, Canada, Spain, South Korea, and, a first, Bangladesh, follows for paid subscribers.

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Midwinter Nights Dream

Tue, 2011/01/04 - 7:21am | Your editor

 

In the dead of Winter as the days grew shorter and colder, our European ancestors lit great bonfires and oil lamps, exchanged gifts and toasts, and prayed to the gods that longer and warmer days would return. Nowadays we continue some pleasant mid-winter customs. We have stopped sacrificing our children as gifts to the gods to ensure the return of prosperity and good harvests. Instead we merely sacrifice our prosperity and good harvests with gifts to our children.

That is because we know our calenders better than the ancients did. We don't listen for the animals speaking on Dec. 24 or light a Yule log. Mistletoe is no longer magic. We don't go wassailing around our apple trees. We react to “Silent Night” with boredom rather than sentimentality. Most of us don't need a dose of modern Son et Lumière from the Trans-Siberian Orchestra or the Hallelujah Chorus. We don't even feel the need to defeat Father Winter by going swimming in the sea at the turn of the year. Or accompanying Auld Lang Syne with drinking to excess.

Still, we treat the new year as a time to bring out our druids and prophets. These (mostly) beardless priests and priestesses are expected to forecast, not just the return of the sun from its perigee, but also the events to come in the new calendar year. They are allowed to use tea-leaves, tarot, kaballah, past chart patterns from up to 500 years ago, all varieties of solitaire and suduko, Kondratieff, Keynes, Friedman, crystal balls, the solar and lunar eclipses, horoscopes, the interpretation of dreams, wish fulfillment (regarding whether or not there will be a double dip, in particular), and of course intuition. But the druids must predict something.

Since I am in London, I eagerly opened my daily pink-paper fix, as The Financial Times not been published Dec. 31 to Jan. 3, looking for guidance from gurus. And I found nothing. The FT charts reported the markets of last Thursday in Britain and the world. Because the staffers had all been off for ski or sun breaks until late Monday, there was no new data on foreign markets (like the USA or much of Western Europe, and all Asia) that had already had a session in 2011.

This hiatus led me to ponder the urgency of telling people what will come in 2011 just because a new year has begun. In fact, I have no idea what will happen in 2011. Markets and currencies will, as always, fluctuate. Political events will surprise, delight, and annoy us. There will be new things in fashion and the arts. Technology will advance, and more people will be assured of enough food, clothing, and shelter. But there will new evidence of the evil impulses of humanity, the unreliability of Mother Nature and the weather, and the indifference of the cosmos.

What I do know is that taking things as they come pays off for our readers. According to the accounts maintained by Interactive Brokers we managed a time-weighted 5.62% gain in the Covestor yield account in Dec. Our annual target was 5%.

Moreover, Mark Hulbert has published new figures about risk-weighted performance showing that our overall portfolio produced a triple-digit gain, 100.85%, in 2010. To be frank, I do not exactly know how the renowned newsletter watchdog generates these figures, but they sure look good. Hulbert's Financial Digest is part of Dow-Jones and you can buy the report from Mr. Murdoch's firm.

Here are my short-term prognostications. There will be sales in January, Valentines in February, winds in March, holidays in April, Mother's Day (USA) in May, school holidays beginning in June. More in six months.

One sign of things that are changing: today's report that Brazil's Petrobras is proposing to buy for $4.7 bn the stake Italy's ENI holds in Portugal's GALP oil co. This deal must have been run by Dilma Rousseff.

More for paid subscribers follows from Thailand, Sweden, Poland, Mexico, Israel, Ireland, India, Germany, France, Colombia, Chile, Britain, Belgium and a few other places.

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Titanic in Talinn

Mon, 2011/01/03 - 7:59am | Your editor

 

There are two 2011 bubbles I want to prick before you get caught up in them. They are Vietnam and rare earths.

Marxism and markets are hard to mix. While China offshores production to Vietnam, this has been a mixed blessing. Growth topped 7% a year until last year when it fell to 6.8%. But inflation is running much faster than growth. And about a third of the economy is in the hands of the state. Unlike China, despite its doi moi policy, Vietnam has not been able to liberalize production while keeping political control. There are a few really huge state-owned conglomerates which have dividersified throughtout the economy. The giant Vietnamese state-owned conglomerate, Vinashin, thanks to poor management and misuse of capital (sometimes for corruption) faces effective bankruptcy. Once a ship-building firm, the current Communist regime decided to turn the politically well-connected company into a growth engine. Fed by fast growth of profits in the 1990s, it invested in hotels, liquor, insurance, whatever. Other state companies, starting in electric generation or telephones or oil, have also invested widely in Vietnam.

The Vinashin group now has debts topping $4.4 bn, equivalent to 4.5% of the 2009 GNP of 'Nam. As it cannot pay the $60 mn it owes Credit Suisse, the Hanoi govt has intervened with a new interest-free loan to cover this payment plus salaries. This comes on top of an earlier $600 mn state loan made to Vinashin at zero interest in 2007. Private sector companies have to fight to access bank credit, which goes mostly to state enterprises. And when they get a loan they pay 18% interest. After the latest Vinashin bailout, Moody's and Standard & Poor's downrated Vietnam.

Now the government is facing attacks on its finances at the 11th Communist Party Congress in mid-Jan. While I do not think PM Nguyen Tan Dung will be spared, the relatively young (60) and charismatic leader may keep power by bringing on a more collective leadership. But things are fraught. Meanwhile pollution is killing the fisheries and tourism receipts are below targets.

 

As for rare earths, 17 strategic metals used in electronics, solar energy, refining, and military applications, whose export China is limiting, by cutting quotas 72% for 2011, there appears to be a solution even before the mines in the West can be reopened. The new mines will have to operate under newer and costlier anti-pollution rules, which will take three years or more. Meanwhile China controls about 95% of the market and prices are soaring. About a third of total world reserves of rare earths come from China. It will export only 14,446 metric tons in H1 this year, down 35% from 2010.

But high prices lead to a solution. A company in former East Germany, Loser Chemie, has developed a method of extracting from industrial waste the sought-after rare earths like lithium, molybdenum, gallium, indium, selenium, neodymium, and wolfram. This small firm, in Saxony, is headed by Wolfram Palitzsch, who holds a bunch of patents on the recycling process. I think his name led him into this field, since Wolfram is another name for tungsten, but it appears that he got his start extracting aluminum from Saxony's abundant industrial waste for a water treatment plant. From this he developed extracting rare earths. An example is europeium which Palitszsch figured out how to extract from used low-consumption light bulbs. Germany alone trashes 400 tonnes/yr of eruopeium.

The German govt is subsidizing Palitzsch's work in strategic metal recuperation to the tune of abut $120,000/yr. The company is private and I suspect it will soon be acquired, making the former Ossi very rich. Meanwhile, do not count on rare earths remaining that rare.

Currently only about 1% of industrial waste is processed to extract rare earths in Europe; I suspect US figures are similar. The growth will come in extracting the stuff from waste, not from mines.

 

In Talinn the billboards read, in English: “Estonia! Welcome to the Titanic”, and show Greece, Ireland, Portugal, and Spain as ships sinking into the sea. Yet Estonia did give up its kroon on Jan. 1 and joined the Euro bloc. Meanwhile Spain and Portugal may apply Feb. 4 for bailout funds from the euros 750 fund for the purpose. Or not.

 

Thanks to new reader T O'B who wrote concerned that we are settling for relatively low returns in our foreign bank preferred stocks. In fact this is not true. We own different numbered series of these issues. Right now they yield 6 to 8%. But by marking them after the numbered series with a percentage sign marking their suitablity for IRAs, 401K plans, Roth IRAs, and other tax-advantaged funds, it may appear that the percentage sign shows the yield. For years since I started keeping these tables, the yield is in the last column.
   I now have switched to using words rather than numbers to show the prefered series and encased the percentage sign in parentheses to show this is a symbol rather than what the yield actually is.

More for paid subscribers from a few markets open today: Israel, France, Portugal, Spain, Vietnam, South Korea, China, and Canada.

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Oops

Thu, 2010/12/30 - 1:23pm | Your editor

Laptop stupidity corrected below for paid subscribers. Happy New Year to all.

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