Trading alerts are only for our paid subscribers. We wrote today about changes we expect in global supply chains which are being adjusted after the Japanese disasters. Companies globally dependent on Japanese parts for making cars or consumer electronics equipment are running short. They will have to maintain warehouses and inventories.
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My note about American's falling behind in their belief in free markets published yesterday drew wide coverage, and was reprinted as far away as Panama. F. Barry Nelson, fund manager at Advent Capital here in NYC, made this comment:
It strikes me that enthusiasm for free markets is rising where formerly rigged/regulated markets are becoming freer and [going] lower in the US where formerly relatively free markets are possibly/probably becoming more regulated/rigged.
The whole trend toward just-in-time manufacturing and low inventories must come to an end. I suggest a stock for playing this today. The Japanese earthquake, tsunami, and resultant power shortages had global impact. Supply chains need to be slacker and contain more rings. Inventories need to be built up.
Demand for new consumer electronics devices cannot be met, however many potential customers there are, without bits from Japan. Auto assembly lines to shut down world-wide for lack of Japanese parts. Companies will have to diversify their sourcing, and carry redundant parts. Depending on Japanese fabs to make custom chips mean those using them in products have no products.
Emerging markets—and even the USA—are likely sites for backup plants.
Abhimanyu Sisodia writes from India:
When reports of a superbug called New Delhi Metallo Beta Lactamase-I (NDM-1) surfaced, I found the Indian response comical. Politicians and doctors alike rushed to condemn The Lancet, the British learned journal that had featured the nomenclature, as attempting to tarnish India’s image.
Considering that bugs tend to be named after the cities they were discovered in, the nomenclature was not unusual. There also exists a community acquired MRSA strain called the USA300, a multi-drug resistant strain of Strep pneumonia called Spain23F, and others. Typically, we’re concentrating on sweeping the problem under the carpet, instead of looking for a solution. Calling it Mars Virus 3000 instead of New Delhi M-1 isn’t going to alter the threat, and at very least it warrants investigation. Besides, considering that all our best doctors travel to the west and set up practices there, the threat of antibiotics overuse hasn’t been taken seriously enough here. But there is always a contrapunto.
An article that contains a report on the bug states, “Most of those infections were in people who had recently traveled to or had medical procedures in India, Pakistan or Bangladesh.” I like the need to mention “had medical procedures,” as if those procedures wouldn’t entail travel to India by definition. Recall that medical tourism in India is a high-growth industry rising 30%/yr. So language like that smells a lot like propaganda. McKinsey has forecasted medical tourism to generate $2.4 bn for the Indian economy between 2009 and 2012, and some over a million medical tourists are expected to come here for the unparalleled cost advantage. Heart valve replacement surgery, which costs up to $200,000 in the US, costs a mere $8000 here. The average medical tourist spends at least $7000, more than double what an ordinary tourist would spend.
Trade in deadly organisms is international. If the NDM-1 went to the world from New Delhi, the Swine Flu virus, all the rage a few months back, came from elsewhere. It was a Robin Hood virus in India as it only attacked the wealthy, having been carried back to India by tourists and Indians who visited developed countries. I’m a conspiracy theorist when it comes to these viruses that we keep hearing about.
Frida Ghitis writes about shareholder democracy:
A few days ago, we received good news from a Brazilian company we own, whose name is familiar to paid subscribers. It announced it would soon eliminate its dual-stock system to move its listing to the Novo Mercado segment of the Bovespa (Sao Paulo's exchange). To list there, companies have to treat all shareholders equally, granting full voting rights to all.
This move was a small step to improved corporate governance in Brazil.
Corporate insiders worldwide use two-tier stock structures to favor some shareholders at the expense of others. A company that might have started as a privately-owned business issues shares on the open market, but doesn’t allow the new shares' owners to vote on who sits on the board. So the earlier owners or insiders raise cash by selling shares, but dont't give up control. This allows a minority to exercise full control, manipulate the board, and make corporate decisions. They can deprive others, even the majority of shareholders who own the company from having a say.
It happened at Brazil's mining giant Vale this week. Its
CEO was booted out by Pres. Dilma Rousseff although the government directly owns only about 5% of shares. She wants Vale to invest its resources for the benefit of Brazil, which is not the same as the benefit of its owners. Rousseff was able to persuade the handful of voting-stock holders to back her. The new CEO knows he must please the governemtn to keep his job.
Brazil is not the only country with Class A and Class B shares. But a 2006 study in the Journal of Corporate Finance showed the scale of voting rights concentration: Fully 85% of listed companies had dual share classes. On average, voting shares represented just over 58% of total shares. And the single largest shareholder controlled over 72% of voting shares.
Two-tier ownership exists in much of the world. In the US, the New York Times is controlled by the Sulzberger family, owner of almost all the Class B stock. Only Class A stock is publicly traded. Class A holders now choose 5 directors and Class B select 10.
Aiming to raise cash but maintain control, Facebook in 2009 said it had “no plans to go public at this time,” but was converting all ownership shares into Class B shares, with 10 votes each.
In other developed economies, multiple share classes are found, sometimes with extremely complicated structures. In the Netherlands, for example, corporations issue certificates representing underlying stock holdings, financial instruments without voting rights. Discrimination against minority holders is common.
We had an irritating experience with a Swiss stock we once owned. Non-voting stocks are common in Italy, France and Germany, as well as in Asia. LG Group, South Korea’s second-largest conglomerate has non-voting shares accounting for 11% of the total outstanding.
In developed economies, non-voting or reduced-voting shareholders may be compensated with increased dividends. That’s the case with preferred shares, which traditionally bring no voting rights but carry much higher dividends.
In developing economies, particularly in Brazil, the system has brazenly disenfranchised non-controlling owners, allowing large shareholders to treat the companies as a private business.
Foreign investors have complained about Brazil, an emerging markets with high capitalization. The good news is that regulators and corporations are listening.
The Brazilian SEC has been made more powerful, and the Novo Mercado (New Market) will become a premium vehicle offering investors top-notch corporate governance. Novo-Mercado rules are stricter than Brazilian corporate law.
Besides issuing a single class, all-voting stock, listed companies must adhere to US Generally Accepted Accounting Principals or International Accounting Standards (GAAP or IAS). Minority investors (but not in preferred shares) must receive 100% of the price paid to controlling shareholders in a takeover agreement. Rules restrict voting on matters involving conflicts of interest, and require arbitration for disputes between a company and its shareholders. Separate rules protect holders of preferred shares.
Happy to see one of our favorite Brazilian companies decide to join the Novo Mercado, we hope to see more companies move toward more transparent and equitable corporate governance.
More from our reporting team from Britain, France, Thailand, Japan, India, Argentina, Canada, Australia, and Brazil. By the end of the week I am exhausted by all their efforts to keep us informed, with another batch of news for our paid subscribers following what we published for the world to see above.
The Decline of Capitalism in America
Capitalism is declining in America. American public support for the free market economy has dropped sharply in the past year, and is now lower than that in China, according to a GlobeScan poll released yesterday by the Program on International Policy Attitudes of the University of Maryland.
These findings, drawn from 12,884 interviews across 25 countries, show that there has been a sharp fall in the number of Americans who think that the free market economy is the best economic system for the future.
When GlobeScan began tracking views in 2002, 80% of Americans viewed the free market as the best economic system, making the US the country with the highest level of support for free markets among countries surveyed.
American enthusiasm for free markets started to decline in the following years but recovered slightly after the financial crisis in 2007-8.
Since 2009, Americans have stopped cheering for capitalism. Support fell 15 points in the last year. So now only 59% of Americans see free market capitalism as the best system.
GlobeScan Chairman Doug Miller commented: "America is the last place we would have expected to see such a sharp drop in trust in the free enterprise system. This is not good news."
The results mean that a number of the world's major emerging economies have matched or overtaken the USA in their enthusiasm for the free market. The Chinese and Brazilians, 67% of whom regard the free market system as the best on offer, are now more positive about capitalism than Americans, while enthusiasm in India now equals that in the USA, with 59% rating the free market as the best system for the future.
Among the 20 countries polled in 2009 and 2010, an average of 54% today rate the free market economy as the best economic system, unchanged from 2009.
Abhimanyu Sisodia writes from a country which is equally enthusiastic about capitalism to mine:
The 2011 edition of the Wealth Report, published by Knight Frank Rutley and Citi Private Bank, pegged Mumbai as a future hub based on a survey of 5,000 ultra-high- net-worth individuals (UHNW) around the world. While New York and London top the list, Mumbai increased its importance to UHNWs by 118%, the fastest rise among 20 world cities. Sao Paolo and Shanghai are also catching up. India has 47 dollar billionaires, as against 42 in the UK, 72 in China, and a massive 396 in the USA.
Wealth creation skills by non-resident Indians are also high, and 6 Indian-Americans featured in the Forbes Midas List, of venture capitalists who bucked the recession and actually "created wealth and fund the new ideas that keep the US economy vibrant." Noteworthy is Indian-born engineer Vinod Khosla, who raised $1.1 billion - the most raised by a venture firm in three years – at the peak of the recession in the summer of 2009. What makes him especially noteworthy is social entrepreneurship through funding SKS, a microfinance provider that went public last August.
Your editor has met Khosla who is an impressive man.
More for paid subscribers from Abhimanyu, Vivian, and Martin Ferara with our first report from Pakistan follows. We report on South Korea, Britain, France, Canada, and India today.
Hallowe'en in April
This is a public service announcement from Vivian Lewis, ed. of www.global-investing.com/ It's Hallowe'en in April, folks.
Last Sunday after reading about the security leak at Epsilon, I asked JPMorgan-Chase to send me all notifications by snail mail rather than e-mail. We had gotten authorize.net customer credit card reports from our corporate bank, plus our company's credit card bills, and monthly bank statements. On Tuesday I confirmed with my branch manager that we would get snail mail notifications without charge until the security gap was removed.
Today your editor received a notification by e-mail allegedly from Chase allegedly about about my company's deposit account. Global-Investing.com does not have a deposit account and Chase had been told twice to use the post to contact my firm. I sent the notice to firstname.lastname@example.org because I knew it was phishing. Read more »
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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