After The Portugal Bail-Out

Thu, 2011/01/13 - 1:08pm | Your editor


Your editor, who studied Portuguese, is happy to report that for one day at least, the euro crisis was defused by developments in Portugal. Yesterday euros 1.249 billion in Portuguese Treasury bonds (Obrigações do Tesouro) were issued below the key psychological interest rate of 7%. Whether this will end the European disarray over deficits from the PIIGS countries remains to be seen. But reports from around Europe argue that the situation is easing.

Portugal issued 10-yr notes at 6.716% yesterday vs the 6.806% it had to pay late last year, and the issue was 3.2 times over-subscribed. It also issued 4-yr notes at 4.041% vs 5.3% last year.


The buyers reportedly included Nordic banks and institutional investors and insurers as well as ones from the euro-area, Chinese wealth funds, and Japan, according to Agencia Financeira, a news wire. Eighty percent was taken by foreigners.

Britain's Investors Chronicle reported:


Pessimists contend that this merely postpones the day of reckoning, that Portugal will need a bail-out sooner or later and when it does, Spain will be the next target for the 'bond vigilantes'. But optimists point out that, for investors prepared to look beyond sovereign debt jitters, Europe offers world-class companies exposed to global growth and trading at cheap multiples.”

This morning, Portugal's ex-president Mario Soares, a Socialist, used a meeting at ENA, the French civil servant university, to question whether the OT sales had been sufficient to “save the euro.”. ENA, the Ecole Nationale d'Administration, is the center of the French establishment and Soares is an alumnus.


He disparaged the level of “vision of the future” of both Nicolas Sarkozy, the French President, and Angela Merkel, the German Chancellor, chastizing them for their “bad and slow reaction to the worst global crisis since 1929”. This Soares blamed (of course) on “savage capitalism out of a casino”. He also lashed out at Britain for “prefering an informal union like the European Free Trade Association” to full membership in the euro.


But he added that the EU is suffering from “inadequate institutional planning” and “confusing and overlapping organization.” So he is pointing out the need for new mechanisms within the euro group, not specified, but presuably to be developed at ENA. (My translation from the Portuguese.) For Soares, the instability of the common currency has not been ended. I tend to agree.


Today both South Korea and Thailand central banks raised interest rates by 0.25% to try to cool down their economies. I think Poland is next.

Citibank reported on some data on full year 2010 Depositary Receipts, in its 20th Annual DR report. It said trading volumes were up modestly by 4.8 bon shares in 2010 to 147.4 bn shares. Capital raisings increased 26% over 2009 to $20.6 bn mostly from BRIC countries. U.S. investment in non-US equities as of Q3 2010 was $4.1 trillion, up 3% from 2009.


Your editor, the Patsy at the Fidelity Investment poker table, is still trying to get back $1800 in charges imposed by the broker when it “corrected” the mispriced sale of her Stallergènes shares yesterday after my blog was published. The trade had been posted on Tuesday and I got them to realize there was a problem yesterday morning. I'll keep you posted but want to give Fido a chance to make things right.


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The Patsy Is Me

Wed, 2011/01/12 - 1:27pm | Your editor


They say when you're playing poker, “if you don't know who the Patsy is, the Patsy is you.” That happened to me yesterday. I wrote about the shenanigans of a boutique brokerage, Euro-Pacific Capital (Peter Schiff's firm) but never imagined that my account would be looted by so mainstream an outfit as Fidelity Investments, due to be renamed “Infidelity”.

Yesterday afternoon a reader who works with another boutique brokerage, Mikiel de Bary, wrote me in surprise that the price of a share we own, Stallergènes, a French maker of sublingual allergy desensitizing products, the subject of a eruos 59/sh takeover bid by a Swiss firm called Ares Life Sciences, had fallen by 25%. I had been persuaded by Fidelity's international department to sell my 1200 shares in STLEF rather than tendering, because there was no SEC prospectus, somewhat surprisingly given that Ares was making a cash offer. The senior international guy, Mr. Hermanson, said it would be illegal to tender from the USA. So I had put in an order to sell at euros 58.75 at his suggestion. All this was on one of those recorded lines. I was on the phone on Monday and Tuesday for nearly an hour on this matter, but the amount involved was significant even to me.

But what PP discovered on the internet was that an order for selling 1200 shares of STLEF had gone in for not 58.75 euros, but for US dollars 58.8411. My initial reaction was to tell PP it was a stale price. But then I checked my Fido account and discovered that my shares had been sold for $70,609.32 instead of $90,945, a rather large haircut. I called Fidelity. Put on hold. Music and blablabla. Called again later, with anger. Told the international desk was closed. Called again at 8 am today, told that there would have to be an investigation. Goody. Someone can listen to those tapes and tapes and tapes, mostly of Vivian on hold listening to muzack.

Meanwhile at least one reader in the Bahamas, JH, e-mailed me to say he had been able to tender his shares in France at euros 59. I await word for PP on her execution with de Bary. Both have Huguenot background and may be able to also tender in France rather than forcing PP to sell the shares.

No you cannot trust your brokers.

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Tue, 2011/01/11 - 2:20pm | Your editor

Here is a second trading alert for Tuesday, by your editor. These are only for paid subscribers, because they pay off. The Macro stuff is free because it does not make readers money. We rarely offer two ideas in one day, but precedents are made to be broken.

If you want to learn about our stock picks and not just about broker/fund manager silliness (as in today's blog) you have to sign up for the full monte, and pay for it.

There is no such thing as a free lunch, or a free blog.

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Trading Alert

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

Trading alerts only go to our paid subscribers. Join them. Your portfolio will benefit.

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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.


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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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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 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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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:


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


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:


Proposed Ticker:


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


Performance Summary (annualized)

Raw returns










Risk adjusted returns











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