Trojan Horses of the 21st Century

Wed, 2012/10/10 - 12:32pm | Your editor

Electronic Trojan horses are the latest variant on old warrior tricks. The first Trojan horse was a gift by the Greek army to the defenders of Troy, rolled into the besieged city by Trojans unaware that inside were brave armed Greek warriors ready to open the gates.

Last year, the Iranian push to purify uranium to weapons-grade quality was revealed to have been derailed computer worm, Stuxnet, probably smuggled in via machinery for controlling power use. Now the USA and Canada expressed concerns about telecommunications equipment coming from two Chinese companies ultimately controlled by the People's Republic military being installed for high-security North American systems thus made vulnerable to Chinese hacking or interference.

Commerce between nations with political differences will never be neutral about security risks. More from China, Japan, Israel, Ireland, India, Canada, Brazil, South Korea, Singapore, Australia, and Alabama, including a new stock tip. Two of our stocks are working together and two other of our stocks are working against each other.

Read more »

Bank Reform

Tue, 2012/10/09 - 1:33pm | Your editor

The Euro-Zone aims to add a banking union, with common rules and supervision from the European Central Bank and Brussels bureaucrats, to the shaky currency union which already exists. The idea is to stop banks being penalized for being from the wrong country within the Euro block.

But the new rules on everything from separating commercial banking and riskier trading or investment banking to dealing with crises proposed by the Liikanen review are idiosyncratic and incompatible with what regulators are proposing in other developed country banking and more stringent than capital requirements imposed by the Bank for International Settlements, the central banks' central bank. The impact will be to hamper global banking.

The US as is our wont has adopted a complex rules- and law-based post-crisis system with the Dodd-Frank monstrosity. It tries to define different banking operations which may interact with each other, to prevent transactions which would put depositors' money at risk, and lead to a need for government bailout (again). Banks are supposed to write “living wills” for how they will handle systemic losses, but given how much regulatory involvement there will be, the odds are that a crashing bank will see the government galloping to the rescue.

The US has also set up consumer protection mechanisms which limit bank profitability over credit cards, a former big money-spinner. As for money market funds which compete with banks in taking short-term deposits, we are still trying to figure out a strategy.

Britain has created its own muddle, having effectively nationalized the worst off banks and building societies (mortgage banks), which cannot be sold with producing a loss for the government, and therefore not for sale. It wants to “ring fence” operations for consumers like taking deposits, running ATMs, and handling payments, for which banks will be required to maintain a significant level of capital to prevent bank runs. The British do not have an FDIC like the US does. So the Vickers Commission wanted above all to stop bank runs and protect individual clients of UK banks with adequate capital.

Having looked after retail clients, Britain then proceeded to create pressures and programs to boost bank lending to business, especially small business. This of course is a risky business too, and undermines the capital put into the business to protect the UK equivalent of John Q. Citizen, John Q. Subject.

The Finnish variant to proceed to banking union from currency union also proposes a “ring fence” around part of banks' business, but this time it is around the trading operations of banks, not their customer accounts business.

What good intentions have produced in the three major banking systems of the industrial world is a muddle. The costs of compliance for banks operating multinationally (and they do, they do) will be huge and cut down on the ability of banks to mobilize credit for getting us out of the current economic crisis by encouraging borrowing and investment.

Nobody likes the banksters who got the world into this mess, and who remain grossly overpaid, incredible arrogant, and unrepentant five years later. But hobbling their operations by a set of incompatible regs will extend the global financial crisis and could trigger a double dip.

More for paid subscribers follows from Britain, India, South Korea, Israel, Finland, Spain, Singapore, Japan, Canada, Myanmar, and Outer Mongolia. We cover the global waterfront!


Read more »

Tables Posted

Sun, 2012/10/07 - 2:29pm | Your editor

It was not much fun updating my tables today as much was erased from my hard drive by the whizzkids who repaired the fan and the hard-drive.  However, I think it is now mostly accurate and everyone gets to view the tables they are allowed to see at after signing in. For paid subscribers there is a notification from Chris Loew in Japan and a couple of buy ideas from your editor. Only paid subscribers get to see the current stock picks, because of course we want our customers to do their buying without interference from people who are not our customers.

Your editor was quoted about the risks of austerity and the fiscal cliff in

I was asked what I saw at the Bodleian exhibit at the Jewish Museum whose opening we attended. Among other wonders, writing by Maimonides, the 12th century Jewish philosopher-doctor, found in a Genizah (holy book trash area) at the Ibn Ezra Synagogue in Cairo in the 19th century. Maimonides thought faster than he could write and his text is full of marginalia and notes to himself in almost unreadable Hebrew cursive script.

Another wonder was an early Spanish Hebrew book from the mid 15th century, the Kennicott Bible (from La Coruna, named after the librarian who bought it in the 18th century). It is beautifully illustrated with capitals for the start of the different passages for Sabbath Torah readings, and has illuminations about Hebrew grammar and other matter that appealed to the illustrator (Joseph ibn Hayyim, who signed his work, as did the scribe, Moses ibn Zabara). They lived at the crossroad of Jewish, Moslem, and medieval popular art. The grammar treatise is probably important, but my favorite illumination shows an attack by the cat army against a mouse castle. Where it was between the rise of the Inquisition and when Benjamin Kennicott found it is a mystery.

And regarding the other question I was asked: it was an Oxford occasion, with plenty to drink rather than a Jewish one with plenty to eat.

Read more »

India Flash Crash

Fri, 2012/10/05 - 11:03am | Your editor

The majority of Indians do not have flushing toilets, an invention of the 19th century. But they are up to the minute in other technology.

The National Stock Exchange of India said 59 erroneous orders prompted a plunge in equities that briefly erased about $58 bn in value today, underscoring the growing global concern about the integrity and instability of stock markets. Trading in the Indian S&P CNX Nifty Fifity Index and some individual companies stopped at 9:49 a.m. in Mumbai for 15 minutes after the 50-stock gauge tumbled as much as 16%. The volume of stocks in the benchmark index raded today almost doubled from the 100-day average, according to data compiled by Bloomberg.

India now has a developed country flash crash history.

From New Delhi, our correspondent Abhimanyu Sisodia commented:

We can be thankful the error was human, or the future for Indian high frequency trading would be even bleaker. Algorythmic trading is used to execute basket trades like the one today but the mess apparently resulted not from such a trade but rather from human error. SEBI, our regulator is very opposed to allowing algo trading. In April it issued a statement about introducing stringent regulations to serve as "economic disincentives" for algo traders.

Because SEBI watches algo traders so closely the glitch probably  was human rather than technical. The National Stock Exchange (NSE) is already the tightest Indian exchange in terms of market compliance and listing requirements. So this glitch is unusual, and moreover the circuit-breaker supposed to halt trading kicked in only after a 900 point fall when it was supposed to kick in at 570.

This may be from an order backlog in the market rally after the government today issued welcome reforms (allowing foreign direct investment in insurance, retailing, and pension management). There may have been lots of trades waiting in the shadows. Emkay Brokerage was the one caught but given the liquidity of Indian markets it would not have been the only culprit. The NSE systems are also probably at fault.

Dealers will not lose any money because of the glitch. The real loss as with all these episodes in in investor confidence. As the markets were expected to rally on the back of reforms, and foreign inflows get back on track, this could not have happened at a worse time.

Gun-shy foreign investors have been scared off by the politicos and their new trust is fragile. Also, the delays show that sophisticated trade-halts cammot stop increasingly sophisticated market scammers and posters of fraudulent price offers.

The good side is that the whole world needs innovation in monitoring systems and this may well come from India given our proficiency in technology.


More from Belgium, Ireland, Brazil, and Switzerland today. There will be no blog Monday because of Columbus Day.

Read more »

Frontier Markets

Thu, 2012/10/04 - 12:29pm | Your editor


Yet another share-pricing disaster hit the newly-trading stock of Kraft Foods Group on Nasdaq yesterday, part of a spinoff for its global business, also listed on Q, Mondelez. Alas, it was the good old Kraft that saw erratic price action, not the ridiculously named new global side of the business. Kraft Food went up nearly 29% in the first minute of trading. The exchange thinks there were “erroneous transactions” which will be busted.

The conclusion I draw is that computerized high speed trading has become so robotic that errors accumulate. Humans are too slow to spot electronic systems that have run amok.


Michael Kurtz writes from Nomura in Hong Kong about "frontier markets". We recently had to drop our Morgan Stanley Frontier Markets fund from our portfolio because it converted from a closed-end fund to an open-ended one, and we do not cover that part of the market. Nomura selected 11 frontier markets or countries in political-economic transformation, based on its analysts') subjective judgment. These it thinks are of interest to retail equity investors. The countries are Bangladesh, Croatia, Cuba, Egypt, Kazakhstan, Mongolia, Myanmar, North Korea, Peru, Russia, Sri Lanka, and Vietnam.

Russia, as "a fully fledged emerging market stands somewhat separate qualitatively, but displays a number of features common to the others – such as its dependency on resource extraction, authoritarian politics and increasing grass-roots pressure for deep political-economic transformative impact likely to follow from its August accession to the WTO". Here are some further extracts:

"Not all frontier opportunities are created equal. Even within our fairly arbitrarily chosen group of 12 including Russia, at least three distinct groups can be identified – based on the broad macro driver of the opportunity (in some cases there is overlap):

“1) Resource extraction-dependent economies. These would appear to be the most questionable frontier thematic from a medium-term investment horizon, given the substantial increase in new commodity supply globally over the past 18 months and Chinese attempts to shift its composition of growth away from investment-driven demand and toward (less resource-intense) consumption. More visible evidence of Chinese fiscal stimulus’ effect in the next couple months, plus further reversal of ‘safe haven’ US strength, could drive further near-term rally in hard commodities. These effects could particularly benefit Peru, Mongolia, Kazakhstan, and Russia. For longer-term investment, a key issue in these markets is the degree to which local political and financial systems successfully intermediate and channel mineral wealth into broader economic prosperity (or fail to).

“2) Structural rebalancing beneficiaries,... economies best positioned by way of their level of development (low per-capita incomes) and factor endowments (primarily abundant labor) to benefit from China’s ongoing shift up the value-added curve and its deliberate abandonment of lower-value-added labor-intensive manufacturing activity. This shift is opening substantial new development potential for Bangladesh, Sri Lanka, and Vietnam (as well as potentially Myanmar and hypothetically even North Korea).

“Separately, Croatia stands as a structural beneficiary – driven more by the country’s scheduled accession to the EU in July 2013... These ‘structural beneficiaries’ offer the most attractive Frontier thematic from the standpoint of bankable longer-term investable opportunity.

“3) Reform & opening cases. The final group that we explore comprises individual cases in which political regime change or major rebooting of fundamental economic policies open potential substantial new development opportunities and/or substantial reductions in risk premia. These include Myanmar and North Korea (again), as well as Egypt and Cuba.

“...we consider a few basic cross-comparisons to help relate these diverse opportunities in the context of common metrics: Public governance progress. Looking at marginal two-year change in both the World Bank ‘Corruption Score’ and ‘Political Stability Score’, we see that arguably the most comprehensive recent improvement in broad public governance is being logged by the likes of Peru, “Mongolia, Croatia, and Sri Lanka.”

Russia today signed up with Euroclear which will provide post-trade services to the OFZ government and municipal bond markets, but not yet settlement.

We ran for our paid subscribers ideas for investing in Mongolia and Myanmar although we did not add them to the model portfolio as they are high-risk. Your editor and many readers continue to own the former Morgan Stanley Frontier Fund, formerly FFD, because you want to have a specialist managing your risks. MSCI uses an index of frontier markets which helps allocate money not just in house but also at Normura.


My new account with exotic shares in it at my bank, HSBC, may not work after all as I was told that marketmakers Pershing (owned by Mellon-Bank of NY) would charge $70 per item for transferring in to my account foreign securities including ones with American Depositary Receipts. The bank is negotiating to see if the bite can be reduced from the original estimate of thousands of dollars. Given that Mellon-BNY are the monster creators of ADRs it is astonishing that will charge for owning them through a sub.

My stalwart monster desktop computer is at the Iranians' workshop and will be fixed up with a new regulator linking to the power supply. They advised against splashing out on a new computer which might not properly run Windows XP programs, thus frustrating my hope of stimulating the economy with a new antidepressant purchase.


More from Spain,Israel, Brazil, South Korea, Singapore, Sweden, Germany, and Thailand, Finland, and Ireland follows for our paid subscribers:

Read more »

Updated Hulbert Rating

Wed, 2012/10/03 - 11:31am | Your editor

Grupo Elektra, of Mexico City, is a furniture and appliance chain which also offers poor Mexicans banking services, including very expensive credit with which to furnish their homes and kitchens. It is 70% controlled by the family of Carlos Salinas Pliego, whose father founded the business. It is suing the Bolsa Mexicana de Valores because the stock exchange changeed how it weights companies on its benchmark index. Because so little shares can trade, the April changes mean index-trackers will soon be selling Elektra stock, on expiration of Elektra';s temporary restraining order preventing the new formula being applied. Mr Salinas Pliego says he is looking out for small investors in Elektra with his lawsuit. Salinas Pliego is planning to offer the same combo of stores and loans to US shoppers who cannot get bank credit.


From my note to HT:

When we sell half of a share it reduces our gain by 50% under Hulbert rules. That is why it is shown on the table, as otherwise the gains would be wrong. Again under Hulbert rules if I want to count the half we still own I have to write 'buy' in the advice column. These rules stop our double counting a gain in both the current and closed position tables. Moreover (less justifiably, I think) they exist because in the olden days brokers used 'hold' when they really meant 'sell.' I am rated by Hulbert so I have to do it his way.

Here are the latest performance figures for Global-Investing, from Hulbert's Financial Digest, a Dow-Jones publication:


Performance Summary (annualized)

Raw returns


Wilshire 5000













Sharpe Ratio


Wilshire 5000













* Performance divided by risk; a higher number is preferable


We suffer a risk penalty because of our global mandate; the Wilshire 5000 is made up of US stocks of varying sizes.

Several readers asked about the fire in my building. It was caused by an electric fault according to the owner of the apartment next to the ruined one. The flames raced through the walls engulfing the entire apartment in no time. The one-bedroom with drop-dead views of the East River had been renovated only about 6 weeks before but the neighbor had no idea if the electrics had been worked on.

The power outage caused my desktop computer to crash and even replacing the battery and cleaning the heat sink has not restored the fan function. This in turn causes the red screen of death. After this blog goes out, I will shlep the old computer to my Iranian techies and then buy a new one which they will move all my files to. It is time.


We will not be able to watch the latest Las Vegas event, the debate. We are going to an opening combining two of my favorite things: Judaica and Oxford University. The Oxford Judaica exhibit is opening at the Jewish Museum on 5th Avenue tonight. I am also interested in which side will win on the catering side: not enough to drink from the Jewish side or not enough to eat from the British. Perhaps a perfect balance will be struck.

More news from Britain, India, Canada, Finland, Israel, Norway, mostly from the oil patch:

Read more »

What Makes Romneys Tick?

Tue, 2012/10/02 - 12:13pm | Your editor

What makes Romneys tick?

I am deeply impressed by the innovativeness with which Bain Capital and its legal and accounting team managed to avoid paying hefty taxes on profits generated by their staffers and for their investors, revealed by today's New York Times. Mitt Romney did not set these things up in Luxembourg and Bermuda and the Cayman Islands, but he and his wife did benefit from them. Just as poorer Americans did not create veteran's benefits or free school lunches or uemployment benefits . But the 47% did benefit from them.

The eerie parallel between underpayment by the stinking rich and the deserving poor is striking. An obvious and simple conclusion is that taxes will have to be collected with rigor from both groups, and at a higher rate than Bush II set. If Mr. Romney's entrepreneurial zeal did not depend on his tax shelters, which he merely benefited from, that is another argument for higher taxes on those who create businesses and jobs. It also is an argument for a ceiling on shelters and also benefits, so every chips in.

Historians will confirm that during periods of seriously excessive taxation in the past, US businesses did not lose their creativity and animal spirits, and the economy grew. Surely Mitt Romney would not want to turn this argument on its head and say it was only because of the sweetheart tax shelters Bain created that he created companies and profits for the group. He did it because he is a bright and talented business creator.

To avoid having to wait for the Iranians who built my computer to return from a Jewish holiday which goes on today as well, I went to my friendly local Radio Shack to get a new battery for my hard drive. Big mistake. I am not sure what caused the fire in my building but it zapped through an entire apartment from a faulty electric wire, according to a neighbor whose husband is chairman of our coop board.

Now my Windows XP desktop computer has a new battery so it knows the right date and time. But it is afflicted with Red Screen of Doom at least until I can schlepp it to the Iranians' shop to get it fixed tomorrow when their time off ends.

Barclays today was downrated to sell from neutral by Credit Suisse. We told you first, selling the British bank over its role in fiddling Libor (London Interbank Offer Rate, a benchmark) and its US CEO's bumbled defense.


More for paid subscribers from Chile, Korea, India, Canada, Germany, Malaysia, Australia, Spain, Finland, Ireland, and Britain follows from our reporters and contributors:

Read more »

Sunday, Bloody Sunday

Sun, 2012/09/30 - 10:47am | Your editor

It is Sunday and I am suffering from a mess. We had a fire in our building on Friday night, and this resulted in water and electric messes in my office so that my deskto[ computer, used for preparing the tables, is out of commission with a battery fault. The computer guys don't work Sunday and being Iranian Jews will not work tomorrow either because it is Succoth, a holiday. Moreover attempts to access my account with my bank, to which I moved untrackable and untradable bonds and shares from my e-trade account have been blocked because of password confusion, at least partly my fault, which cannot be dealt with on a Sunday.

So no tables. Apologies. There is no back up for my doing this,.

News follows from Japan, Britain, Israel, and Canada for paid subscribers, as I will not be filing Monday.

Read more »

Is This Inflation?

Fri, 2012/09/28 - 12:47pm | Your editor


Thanks to all the readers who commented on my note yesterday about the futility of imposing austerity because of fear of inflation. Here is a comment and criticism from JS of AZ:

“Well-argued and crystal-clear, Vivian. Great job. I disagree about creeping inflation: education, health care, energy, and food are all well higher each year of the past decade -- call it a rolling sector by sector inflation...”  Is this inflation, I wonder?

I don't think there is any correlation between the rolling inflation JS cites and action by the Fed. While I love his big compliment I do not spot inflationary pressures in the current economy... yet. If as he says it has been going on for the past decade, it began in the wake of the bust well before any central bank quantitative easing measures had even been contemplated. I think the special case of inflation in public services like education and healthcare is coming to an end because of current disruptive structural changes in funding, competition, and operating models (like using computers to teach or maintain medical records.)

Energy is a special case because the price and availability of fuels doesn't respond to the cost of finance, except at the extremes (like with wind power or solar energy.) I write some more about this for paid subscribers below.

And food inflation exists but seems to come and go by sector just as JS imagines the whole system does. To quote Marie Antoinette, “if you can't buy bread buy brioche.”

Our former China real estate play, after buying a bunch of uncompleted homes in Las Vegas, now is buying a tract of land in Williamsburgh, Brooklyn, NY for over $54 mn. It will be sold to Chinese investors and presumably other hip people (everyone I know who lives in Williamsburgh who is not an ultra-Orthodox relative of mine is hip and trendy, even Marta's kid.)

Whatever this move by Xinjian Real Estate means, it is hardly supportive of Chinese small cap investing. XIN is controlled by its founder and a US property fund so it can do what they want because while HQ'd in Beijing, it is incorporated in the Virgin Islands.

More for paid subscribers from Colombia, Chile, So. Korea, Louisiana, Israel, The Netherlands, Mexico, Spain, India, Singapore, and China follows along with another sale:

Read more »

What Friedman and Keynes Agree About

Thu, 2012/09/27 - 12:47pm | Your editor

I admit to sympathy for all those Europeans demonstrating and rioting against the imposition of austere economics on their deficit-laden economies. I also worry about the American government prematurely adopting austerity measures to cut our deficit. Moreover, I favor central bank measures to “do what it takes” (to quote ECB head Mario Draghi) to create liquidity to save banks and governments from the tail end of the global financial crisis. We need Draghi et al mainly because fiscal policy (about taxing and spending) is too hard for the US, the Euro Zone, Japan, Britain, and China to manage for different political reasons in each country.

Without fiscal policy on taxes and spending, it is up to the Fed and its counterparts to help restore growth.

Severe deficit-cutting at this stage of the economic cycle would not prevent inflation down the road (to which the CBs are kicking the can.) But it could hamper the recovery by triggering another round of deflation and and negative growth levels. There is an element of beggar-my-neighbor in all the central banks acting in unison. But it is also their realization that squeezes on liquidity extended the world's woes during the Great Depression, a judgment shared not only by followers of John Maynard Keynes, but also by Chicago School economists who venerate Milton Friedman.

It was Friedman who argued that fiscal policy is useless. And also that the Depression was a normal financial shock which became more severe and longer because of the contraction of the money supply caused by the misguided actions of the Federal Reserve Bank. “Instead of using its powers to offset the Depression”, he wrote, “it presided over a decline in the quantity of money by one-third from 192i to 1933.” He concluded: “far from the Depression being a failure of the free-enterprise system, it was a tragic failure of government.” (Friedman for ideologicaly reasons conflated the Fed with the government. But in today's world they are quite separate in the US, the EU, and Britain, if not in other countries.)

It was also thanks to Friedman as much as Keynes that we now know that central banks (or governments) do not control the money supply even if they can print money. Money supply includes bank deposits by people and companies in banks, subject to independent moves to contract the economy that central banks cannot control but can only offset. To reconstitute their reserves, banks stop lending, corporations stop investing, households stop spending. These all add to the deficit in the banking system (deposits at banks count as a deficit on the banks' corporate accounts while lending creates assets.) And hurt the economy.

Moreover, a wounded economy produces a natural government deficit, because the unemployed get benefits and pay lower taxes-- or none.

So the Fed and its fellows are trying to increase bank surpluses by creating (or printing) money. Until those deficits in the banking system are sopped up, money creating is not inflationary, one of the obvious lessons you can learn from current CB policy. I watch out for generalized inflation in my alternative role as housewife. It aint't there.

Longer-term, without a doubt, the excess both in money supply and in government deficits will have to be cut and aggressive monetary creation ended. But to paraphrase St. Augustine, we need to pray to be able to give up pump-priming just as he gave up sex; but not just yet.

Barclays and Goldman Sachs both today downrated to sell ICAP plc, IAPLY, sold. We told you first.


More for paid subscribers from Brazil, China, Canada, Britain, India, South Korea, Morocco, Israel, Finland, Spain, Mexico, and Singapore. We clear up some leftover sins to our reporters (which are not atoned for by Yom Kippur which only covers sins against God.) And we place a sell.

Read more »