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Vivian Lewis is editor and founder of Global-Investing.com, the daily blog newsletter for Americans and others seeking to internationalize their portfolios. She brings unique experience and competence to the business of picking foreign stocks.
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Waiting for Godot (and the Fed)
Today we are waiting for Godot or the Fed.
Michael Kurtz of Australia's Macquarie Research writes that Chinese demand for empty property units is “perversely rational”
* A Chinese Academy of Social Sciences study making the rounds lately has revived 'China bubble' fears by suggesting that a startling 64.5 mn urban housing units -- one for every four households -- is sitting empty, based on dormant electricity meter readings. Even if these numbers are accurate, fears of a property crash may be misplaced.
* The real risk to China's economy may not be a property price collapse, but the way in which the supply overhang inhibits economic restructuring. To understand why demand for even empty housing units is so resilient, one needs toconsider the poor savings alternatives available to Chinese households.
* Beijing raises funds from households largely via below-‘market' deposit interest rates in the state-owned banking system. The 12-month deposit rate is currently just 2.3%, meaningfully below CPI inflation about to pass through 3.0%, and not even in the same league with first-half nominal GDP growth of 16.7%. So bank savings is a losing proposition.
* This forces households to look outside the banks in search of better inflation-hedged investments. But with China's restricted capital account, savers are mostly confined to a domestic-only palette of alternatives, chiefly property. Local governments also have avoided levying value-based property ownership taxes, relying instead on revenue from land sales to developers -- so thus far the carrying cost of empty units is effectively zero.
…but overhang could inhibit financial & fiscal reform
* These distortions portend at least three difficult eventual reform passages for China's property market: 1) interest rate reform, which would increase returns to bank savings and reduce property's relative attractions; 2) capital account liberalization, which would broaden Chinese households' access to the world of cross-border investment alternatives; and 3) the introduction of value-based property ownership taxes (to reduce local governments' reliance on land-sale revenues), which would impose a carrying cost for empty housing for the first time.
* Tricky as these reforms may prove, each is central to the economic restructuring and efficiency improvement Beijing hopes to pull off in the next few years. So the true risk may be that by having allowed a potential property overhang to come into existence, Chinese policymakers paint themselves into a corner where essential reforms such as financial liberalization and fiscal restructuring seem too dicey to implement quickly. If so, China may be able to keep its firm property market, but at the cost of slower reform.
Michael's article appeared in the Wall Street Journal August 9. Reprinted with permission.
The ADR market is coming back with a vengeance. Here are some wonderful new shares you soon can buy at your friendly local brokerage:
NXP Semiconductors of the Netherlands, NXPI, underwriter Credit Suisse;
Ambow Educational Holdings Ltd of China, AMBO, JP Morgan;
MakeMyTrip Ltd., a travel agency, of Gurgaon, India, MMY, Morgan Stanley;
China Kanghui Hlgs of Chanzhou, maker of medical devices, KH, Morgan Stanley.
And the NYSE began trading Emerging Markets Local Debt Fund (Ticker: ELD). This wonder from Wisdom Tree enables you to buy local-currency-denominated paper (bonds, notes, or other debt) to benefit from the yield advantage for holding rupees or reais or rubles. Of course the yield is paid because of risk. You cannot currently own renminbi, however because of exchange controls, not that that they pay off well, also because of exchange controls, as per the article above. This is not a recommendation.
Writes Tom McClellan, our favorite chartist: “The bond traders who have been looking forward to a Fed announcement about upcoming purchases of additional bonds are going to be disappointed by Tuesday’s post-meeting announcement. The current bond price action seems to be pricing in perfection for both deflation and a Fed response to that deflation, setting the stage for a big tipover once reality comes home.” Tom writes the www.McClellanOscillator.com Today we are waiting for Godot or the Fed.
More for paid subscribers follows from Britain, where I am currently, Brazil, Canada, South Korea, India, Israel, Thailand, and Belgium.
Aligning Interests
Aligning the interests of executives of a company with those of shareholders is the motivation for the welter of forever-cheap share options, piled on overlapping benefits, flower and football allowances, indefensible private jets, stratospheric salaries, multi-generational pension programs, profit-sharing even if there are no profits, all goodies it is now fashionable to pay to top corporate brass. Boards shower senior executives with megabucks at the advice of headhunters and compensation consultants to keep them loyal. Since many board members are themselves top corporate executives they are keeping the payout high also for themselves.
But you cannot buy loyalty. Just in case you haven't noticed, these big bucks do not produce CEOs who are doing their best for the company. In fact, the focus on monetary perquisites attracts to businesses people whose motivations are mainly selfish greed. This has been displayed for the world to see in the most recent top level CEO blow-up, that of Mark Hurd from Hewlett-Packard. Mr. Hurd has departed, taking his options and pension overpayments with him with the agreement of the Board of Directors (why?)
This resignation was over a supposedly non-illicit relationship with an employee of a supplier to H-P. How can a CEO have any relationship with a supplier staffer, however talented and beautiful, without violating the terms of his office? The trysts Mr. Hurd had the ineffable chutzpah to fund out of his H-P expense account.
I do not expect companies to be run by Mother Teresa, out of saintliness and altruism. But exclusively playing the money card to lure in and keep the sinners seems wrong. You get a narrow crude person running your company with all that focus on loot.
Why not appeal to the executive's creativity, a chance to make a mark? Give him (or her) a crack at getting into the Harvard Business School casebooks for doing something well. Appeal to their ambitions to build a reputation. Give them a chance to make their mark. Let them build or repair a firm to become famous. Give them a challenge rather than a windfall.
In my opinion the disconnect between the top levels of the corporate sector and the interests of the very companies supposedly being served is encouraging and justifying state-sector meddling in business. In capitalist countries, there should be much more resistance to the overreaching arm of the government in running things. Statism feeds on the suspicion that the guys running the show are merely interested in lining their pockets.
And while I know I will get dumped on by my readers for saying this, taxing the benefits package at the statuatory rate would help right the balance too. Paying taxes does not necessarily make businessmen less good at their jobs. Today Bloomberg revealed that Sweden, the home of the highest-rate tax regime on earth just finished a quarter in which 80% of comapnies beat the analysts' consensus forecasts for their earnings. Clearly, the top Swedes are doing a good job running companies despite the fact that Stockholm is taking most of their salaries away to fund a panoply of welfare programs.
*More for paid subscribers from Israel, Britain, and Switzerland follows.
The Last Friday in August
This is the last Friday newsletter you will get in August. We may also cut out another day if there is nothing to say.
Yesterday here in London I lunched with a source on Greece who is about to hit the islands for a holiday to be followed by a meeting of the board of a company we recommend. He is surprisingly upbeat about the country's prospects. So too, he told me, are members of the Greek royal family, led by the deposed king, all of whom are buying properties in the country (except His Majesty's sister, Queen Sofia of Spain who already has lots of sunny vacation homes in Spain and is a current royal, not a pretender.)
The Greek royals are Saxe-Coburgs, related to Queen Victoria's consort, Prince Albert, and indeed to the present Queen's Elizabeth's husband, Prince Philip. Later we all went to the National Gallery exhibit about art fakes and learned that Prince Albert first invented the idea of using science to study how paintings were made over the centuries.
My host did not mention company news as we are in a quiet period.
Meanwhile I am not going to try to predict employment numbers, that about which all Wall Street is holding its breath.
More for paid subscribers follows about Greece, Belgium, Britain, Chile, Israel, Denmark, and Canada.
Bad News and Anchors
China's stress tests are proving more stressful than those in the USA or Europe. The Beijing version required that banks test for a 50-60% drop in real estate prices. This has spooked the share prices of China's banks and big property developers as well.
West China Securities analyst Wei Wei (too bad he does not talk Yiddish) told Bloomberg that this shows “that the government won't loosen its curbs on the property market.” Actually, it shows nothing of the sort. It may well be that Chinese authorities turn around and allow real estate investing to resume its growth. There are plenty of factors to support a switcheroo. First there is demand for decent housing. Then too local government authorities are encouraging new developments because they can get paid for the leasing of land for the new homes. And then too China does want to mop up some of that money flowing into its reserves domestically. The regime is not set on a crackdown against building, only against speculation by owners of multiple empty letting properties.
The news service also reported that Kireichow Maotai (a Chinese firewater maker) rose sharply in Shanghai trading today. No it was not the bankers and real estate agents seeking solace; it was because of strong earnings as China's consumers buy something they like to drink.
Meanwhile here in the East End of London, the pubs are falling like flies. At least three in a short distance from Mudchute Manor are now shut in seeking a new tenant or owner. The reasons: first the arrival of lots of Muslims in the area, who don't go to pubs. Then the smoking ban which drove clients away. And finally the downturn in the economy which meant it made sense to invite your friends to your house for a booze-up (and a smoke) rather than paying more to the inn-keeper.
Despite the claims of some rival newsletters, nobody can pick stocks which only go up and never go down. There is a trick we are aiming for, instead. To mostly pick stocks which do not go down. If we can find more shares rising than falling we will get ahead of the market.
More for paid subscribers follows from Israel, Switzerland, Britain, and South Africa.
Lies, Damned Lies, and Statistics
There are lies, damn lies, and statistics. Like about growth comparisons. Here is some upbeat news about Britain and downbeat news about the USA based partly on information from David Smith, the chief financial writer of Britain's Sunday Times (for which I worked 25 years ago).
Wrote Goldman Sachs: Britain “will grow faster than US, eurozone and Japan” after its Q2 growth of 1.1%. The USA grew a disappointing 2.4% in the same period.
My first reaction was “huh?” It turns out that measured in the same way as Britain’s data, USA growth was 0.6%, barely half Britain’s Q2 expansion of 1.1%. Read more »
China and Thailand (2nd try)
Have you eaten rice today? Or steak?
It's not just the Russian drought that is turning our eyes to agriculture. John Baron in The Investors Chronicle, a local stock market mag, writes:
The global population is set to increase from around 6.6 billion at present to 9 billion by 2050, and food demand will grow with it. But the relationship between population growth and increased food demand will not be linear. As living standards improve for hundreds of millions of people in the emerging economies, they are eating more protein. Meat is replacing vegetables. The massive shift we are presently seeing toward urbanisation, particularly in China, is also supporting this change in diet.
Michael Kurtz of Macquarie Securities writes with cautious optimism about China:
With July's start to a new investment quarter (and half), a bit of portfolio rotation into an under-performing market such as China H-shares was inevitable. Still, Beyond the Bund believes the H-share risk-return profile has undergone a substantial rethink over the past month, as shown by relative sector performance: July turned the second quarter's pattern on its head, with 2Q underperformers (mostly cyclicals) becoming the outperformers.
With Beijing's administrative property tightening apparently over, domestic liquidity conditions having improved, and renminbi flexibility offering some needed relief from trade frictions, we believe the balance of risks on HK-listed China equities has gone from negative back to symmetrical – leaving room for multiples to expand further from current still-discounted levels.Equity buy-back should continue…for now.
Elevated portfolio cash balances at a time of ultra-low returns to cash, plus the possibility of additional short covering by absolute-return managers, could drive another leg up for Hong Kong listed China stocks. A view to additional upside also jibes with the results of our latest quarterly China Macro Sentiment Survey, which revealed a shift in China investor appetite toward beaten-down cyclical names, the double-dipper next door.
At the fundamental level, a fairly conservative earnings consensus ahead of H-shares' just-begun 1H10 semi-annual results season could help sustain buying interest in the weeks ahead by leaving room for positive surprises. Market expectations are for “just” 16.8% YoY and 19.1% HoH earnings growth, respectively -- well below recent-years.
Meanwhile Thai stocks are in a formal bull market and are the biggest gainer in Asian major markets. The SET index is now up 20% from its level in May when our then contributor Paul Renaud and I told you to buy Thai. That is the definition of a bull market. Bangkok rose for 9 consecutive days and is now back to the level of May 23, 2008.
More for paid subscribers follows including a sexy update on our newest stock pick, the resolution of a confusion day trying to make out what happened to one of our British shares, news of sorts from Hong Kong and Holland, real news from Canada, and of course more gloating about Thailand.
China and Thailand
Have you eaten rice today? Or steak?
It's not just the Russian drought that is turning our eyes to agriculture. John Baron in The Investors Chronicle, a local stock market mag, writes:
The global population is set to increase from around 6.6 billion at present to 9 billion by 2050, and food demand will grow with it. But the relationship between population growth and increased food demand will not be linear. As living standards improve for hundreds of millions of people in the emerging economies, they are eating more protein. Meat is replacing vegetables. The massive shift we are presently seeing toward urbanisation, particularly in China, is also supporting this change in diet.
Michael Kurtz of Macquarie Securities writes with cautious optimism about China:
With July's start to a new investment quarter (and half), a bit of portfolio rotation into an under-performing market such as China H-shares was inevitable. Still, Beyond the Bund believes the H-share risk-return profile has undergone a substantial rethink over the past month, as shown by relative sector performance: July turned the second quarter's pattern on its head, with 2Q underperformers (mostly cyclicals) becoming the outperformers.
With Beijing's administrative property tightening apparently over, domestic liquidity conditions having improved, and renminbi flexibility offering some needed relief from trade frictions, we believe the balance of risks on HK-listed China equities has gone from negative back to symmetrical – leaving room for multiples to expand further from current still-discounted levels.Equity buy-back should continue…for now.
Elevated portfolio cash balances at a time of ultra-low returns to cash, plus the possibility of additional short covering by absolute-return managers, could drive another leg up for Hong Kong listed China stocks. A view to additional upside also jibes with the results of our latest quarterly China Macro Sentiment Survey, which revealed a shift in China investor appetite toward beaten-down cyclical names, the double-dipper next door.
At the fundamental level, a fairly conservative earnings consensus ahead of H-shares' just-begun 1H10 semi-annual results season could help sustain buying interest in the weeks ahead by leaving room for positive surprises. Market expectations are for “just” 16.8% YoY and 19.1% HoH earnings growth, respectively -- well below recent-years.
Meanwhile Thai stocks are in a formal bull market and are the biggest gainer in Asian major markets. The SET index is now up 20% from its level in May when our then contributor Paul Renaud and I told you to buy Thai. That is the definition of a bull market. Bangkok rose for 9 consecutive days and is now back to the level of May 23, 2008.
More for paid subscribers follows including a sexy update on our newest stock pick, the resolution of a confusion day trying to make out what happened to one of our British shares, news of sorts from Hong Kong and Holland, real news from Canada, and of course more gloating about Thailand.
Trading Alert
It has been a good day on Wall Street and this morning we bought another British smaller cap stocks. Moreover it is up marginally at the close. More for paid subscribers below.
London Perspective
It is one of the USA myths that the government's stimulus measures are discouraging private investment by households, corporations, and banks. Uncertainty, fear of anti-business rhetoric, concerns about tax increases, and alleged "crowding out" of private access to funding are blamed for the persistence of slow growth, business contraction, joblessness. Rather than crediting the Bush and Obama administration measures to feed money into the economy in the wake of the 2007-8 global collapse, Washington is blamed for the slow recovery.
So let us start with the best study of how deep economic crises are overcome, by Reinhardt and Rogoff, ironically called This Time Is Different. The economists studied every single financial crisis and recession for which there was data, going back up to two centuries. And it turns out that historically there is no quick recovery for sick economic systems. The mildest recessions take 17 months to reverse, but the bigger the drop the slower the restoration. To bring things back on track in terms of output and employment takes, on average over 5 years.
Another antidote to blaming the American government for slow recovery comes here in England where, as is by now clear, the coalition Tory-Liberal government is alrady pursuing tax increases, cuts in government spending, and financial rigor. So with the government's stimulus out of the way, there should be lots of animal spirits around, with capital spending financed by unhampered bank lending, right?
Wrong. Loans to small UK businesses (the key to hiring and growth) are sagging. They are now running £564 mn/mo, vs £663 mn a year ago, and £991 mn in the dark year of 2008. Total loans outstanding to small British businesses are £54.3 bn now which is less thatn small firms have on deposit with British banks, £56 bn. So our USA pattern is copied across the pond, and maybe it is not Washington's fault after all. A financial contraction stops investment and production. The role of the government, just maybe, is to reverse the contraction.
More for paid subscribers follows starting with a new recommendation from Martin Ferera. Read more »
Data and Dates
A few comments on the GNP numbers which spooked the market today. Q2 saw growth at only 2.4% (annualized) whereas the expectation was it would be 2.6%. The number in any case is off from the 3.7% growth rate of Q1. But a slowing growth rate does not rpt not amount to a double dip. A double dip requires that there be negative growth again, which doesn't seem likely, among other things because bellwether companies are reporting sales growth.
Another thing the gloomy reaction is ignoring is the fact that GNP numbers get revised continuously. The Dept. of Commerce now says the great contraction and the recovery both took place earlier than they had estimated before. And the recession was deeper than previously reported, with bigger drops in consumer spending and a worse housing slump, according to revised numbers.
The shrinkage in Q4 2007 to Q2 2009 now is pegged by the Commerce Dept. at 4.1% vs 3.7% earlier. The DoC's excuse for the number mixup is that turning points frequently produce revisions, and the ones it was dealing with this time round were not familiar. For what it's worth, until the next revision, H2 2009 growth was 3.3% under the latest calculation, vs 3.9% reported earlier. The pit of the slump was in Q4 2008 (post-Lehman Bros.) when the US economy shrank 6.8% and not merely 5.4% as reported earlier. Therefore the drop in Q1 2009 GNP was already up a bit sequentially, whereas the last time round the DoC said the start of 2009 was the bottom. as reported earlier.
Another thing. The last quarter to see the economy expanding was Q4 2007 and not Q2 2008. The latter period was still a part of the recession.
The market focuses on only one number at a time. So gloom at the opening ignored the University of Michigan consumer sentiment tally, which while down was ahead of the preliminary numbers. It also failed to spot the Institute for Supply Management-Chicago business activity data, which surprised on the upside. It is also neglected the drop in the number of unemployed to 457,000, off 11,000.
I would love to look at more economic data but Nancy Drew is off this weekend for over a month in Europe. During that time there may be only two or three blogs per week because the reporting season will have ended and the news have thinned.
August vacationing is an old French habit which I religiously adhere to. I will start off based in Mudchute Manor, our London pad, but later in the month Frida Ghitis will be backing me up as needed when I explore the upwaters of the Rio Duoro in northeast Portugal, staying in Pousadas, hotels built into old stately homes, castles, and convents, with unknown Internet connectivity.
In 1991, shortly after Global Investing began (as a twice monthly print newsletter) I was in southern Portugal's Algarve, when I saw on TV that Mikhail Gorbachev had been overthrown. I rushed to the town square to a pay phone to call my then partner and publisher, Bill Bonner of Agora Inc. in Baltimore MD with a new front page. There was no phone where we stayed. The internet had not been invented. I had a big pile of Portuguese escudos because the Euro had not been invented yet either.
Our model portfolios will not be updated during August although the web designer may be able to put up a stock ticker tracker on the site to help make up for this.
When in London, I will definitely look into the case against a swindler who sold the Ritz Hotel to visiting tourists claiming he had a mandate from the owning Barclay brothers who wanted to raise cash discretely. He gathered GBP 6 mn from this variation on selling the Brooklyn Bridge in my native city.
Would you like a free iPad™? This offer is real. In July and August Covestor are suspending the fees charged to new subscribers for their first 2 monthsr. Moreover, they are also offering an iPad™ for new subscribers to the Covestor stock investment platform with $30,000 or more in assets (terms and conditions apply).
Vivian runs a leveraged yield portfolio invested in foreign equities for Covestor, which your account can track. Or you can also put money in other Covestor models than hers. Vivian and other model managers get a royalty for accounts tracking their portfolios. Visit www.Covestor.com or telephone 1.866.825.3005, option 2. Vivian's portfolio is up 18.6% in the nine months since she started it.
Of course there is a negative. You must open an account with user-unfriendly InteractiveBrokers.com/ It's a hassle. After you fill out forms on-line, you are sent an activation code by e-mail which turns into a pumpkin in about 5 minutes.
Perth, Australia's MOKO.mobi Ltd launched an unusual sponsored OTC-traded ADR with Bank of NY-Mellon as depositary, traded as MOKOY. Most OTC ADRs are unsponsored. MOKO.mobi is a global platform for cellphone or PCs to chat, meet people, upload photos and video, share links, and sample and recommend music. MOKO.mobi is available on wireless carrier portals worldwide (like KPN) and may be offered by US carriers. You can download it at www.moko.mobi/ A friend is involved in the ADR offering, one reason you are reading this. The other is that sponsoring an ADR stops the depositary bank from slapping annual fees on shareholders. I hope MOKO.mobi starts a trend.
More for paid subscribers from Brazil, Portugal, Singapore, India, Australia, Canada, Mexico, and France. And lots of other places where we are in Exchange-Traded Funds.