As I struggle with my own tax filing duties, I am comforted by news from Europe. My least favorite European tax threat continues to flounder as the Euroland Eleven scheme to impose a financial transaction fee on trading in stocks and derivatives with any link to the tax-imposing countries wherever the trade takes place. It would apply to companies incorporated in the group; and to buyers and sellers from those countries unless they are day-trading. The tax is 0.1% on equity trades and 0.01% on derivatives like options or futures linked to equities.
The Gang of Eleven has to figure out how to enforce the Tobin trading tax charge in third countries (like the US or Japan) and EU countries who are not part of the Eleven, like Britain, Luxembourg, Ireland, and The Netherlands, to cite only the major holdouts against the Tobin tax. Without enforcement, of course, a tax is merely a political ritual.
Note that France has already imposed a transaction tax applying to companies, buyers, and sellers from La République, which moreover is twice as high as the level proposed by the Euroland Eleven.
Since we haven't had a blog since Wednesday, this is a full issue so let's get going. There will be two sells today and another one with a matching buy tomorrow. For paid subscribers only of course.
April Fool's Day Tables Posted
We are not pinning a paper fish to our readers' backs without their knowledge and breaking into hysterical giggles as happens in France. But Happy April Fool's Day all the same. Your editor, back from grandmotherly holiday duties, like making Matzo Kloeschen (matzoballs my mother taught me how to make) has just posted the latest tables on the website, www.global-investing.com where readers can view the ones they are allowed to see.
Remember to use the printer-friendly button to view the spreadsheets.
I was influenced by Harvard Biz Skul thinking after my weekend and wanted to try to collect feedback from subscribers and pre-subscribers about a new product I am thinking of launching, a lighter variant of Global Investing for less committed seekers of global diversification and value. It will come out weekly, and include articles selected from the full version about the most liquid of our portfolio stocks, exchange-traded funds, and closed-end funds. That means we will only report on US listed companies, and no hot numbers you have to buy on foreign markets like Tokyo or Hong Kong or via pink-sheet American Depositary Receipts.
The idea is to lure you into the full version eventually but to supplement the macroeconomic material we distribute free for a price lower than the full subscription (which is, of course, a raging bargain compared to what other services charge.) It would appeal to investors with less money than the c$50,000 you would need to invest in global shares to cover our waterfront. It would also help teach you ways to get to the more accessible parts of the ADR market. I will not write about ETFs as proxies for stocks, because I think they do a poor job of matching stock performance, but there are some good ETF options for foreign exchange, for example, which are helpful ways to invest even with smaller sums.
The idea is also to find a way to get spouses (alas, usually wives), children, and grandchildren of the readership to develop their own ability to create and track a portfolio.
So here's the question for you all: how much would you be willing to pay for a weekly www.global-investing.com lite? The full version costs c$8 per week and I would prefer to launch a weekly mini-version rather than pushing up the price for the daily. I will tally the replies to see if it is worth the effort. You can opt to get both the full version and the summary, should this be appealing.
Banks and Capitalism
Analyzing banks is made maddeningly difficult by the fact that they do not operate as capitalist institutions, because they have too big a role in the modern world to be allowed to put their depositors or the overall economy at risk.
When the US created the FDIC in 1933, initially Pres. Franklin Roosevelt worried that the guaranty of depositors' money would create "moral hazard", an incentive for banks to neglect loan security because of the government's backing, in search of wild and reckless profits. That was doctrine when FDR studied EC 1 at Harvard in his youth. However there was no alternative to insuring deposits in the Depression if US banks were to again become active intermediaries between savers and those who needed to borrow.
This ambiguity in bank regulation continued since 1933 and explains much of the unhappiness around the world with banks as the slow recovery from the global financial crisis proceeds. You see it in Occupy Wall Street and The Tea Party in the USA.
It came to the fore, of course, over Cyprus banks sinking in the east but the same dual regulatory role also colors how banks are viewed everywhere else. Ultimately, the Cyprus solution involves taking (or taxing) deposits from some accounts to refinance the insolvent banks holding them, and then imposing a host of exchange control measures to stop money fleeing the wee island for other parts of Euroland.
Suddenly new risks have arisen not just for Russian oligarchs with accounts on Cyprus, but for anyone with money in a bank anywhere in the world. In case you didn't notice before, your deposits are not secure when a bank has capital shortfalls they can be seized to fill. Banks run on confidence, and drawing on the Cypriot analogy means many of them no longer look safer.
Moreover any banking center country, even in a currency union, can impose "temporary" exchange controls (like Cyprus did) or fix exchange rates (like Argentina or Venezuela did) and terrify customers even more.
Remember that most banks use leverage to make some return for their depositors (and some more return for their bondholders and executives.) They lend out more money than their depositors have deposited. So all banks are running a confidence racket and all are susceptible to a bank run unless there is insurance on deposits. When insurance is removed, as now in Euroland, you get bank runs. If people can pull out their bank savings to escape seizure of their assets, banks and even countries will not survive. Hence the Cyprus exchange controls.
The big illusion is assuming that Joe Saver, setting out to open a savings or a check account, is in a position to judge the solvency, security, or sanity of the nearby banking hall offering him its services. He is supposed to know if a bank is operating as a funnel of loans to insiders, unless the regulators can prevent this. It is similar to the fallacious assumption that we can have a "free market" covering obscure medical care and arcane insurance options. People simply do not know enough to decide these matters for themselves.
In support of security, bank customers implicitly let governments collect information (to stop money laundering, tax evasion, support of crime or terrorism) as well as self-dealing by bankers. Governments also can tax bank accounts. Customers agree to pay ever-spiralling fees for bank services to help the banks make money even if the interest-rate spread (like today) is narrow. In the USA thanks to 80 years of practice, the FDIC can refloat dud banks to keep them from crashing. Americans in theory can pull out all their money when a default risk appears, but newly insured European depositors, regulated by a multilateral multinational committee of novices do not have that option.
As for bank stocks, KPMG today reported that UK bank profits which seemed to be going up last year in fact were wiped out by exceptional items: repaying mortgage payment protection insurance sold fraudulently; regulatory fines for money laundering and violating Iran sanctions; accounting fiddles; Libor fixing lawsuits and charges; misrepresentations of CDO pools; repayments for interest rate swap mis-selling.
Classifying the charges as one-off and exceptional allowed the banks to keep manager bonuses high via accounting fudge. So they could report a 45% rise in 2012 "core profits". By writing down their balance-sheet liabilities (to reflect the lower value of their debt) they were able to conjure up profits from thin air.
More for paid subscribers follows from Cyprus, Portugal, Sweden, Canada, Ireland, The Netherlands, Slovenia, Luxembourg, Belgium, and Israel. Although my forecast that Luxembourg could become the next Cyprus was echoed by The Financial Times, the country in peril today appears to be Slovenia.
The Next Cyprus
Predicting where the next Euroland financial crisis will hit, my bet is on one of the original six founder countries where the banking sector is even more disproportionate huge as a percentage of gross domestic product than on any island or country where people eat garlic: Luxembourg.
The tiny mountain fastness full of deep gorges between Germany and Belgium has long been a hot-money haven with banks to big to fail. They replaced the steel industry as the basis for Luxembourg prosperity in the 1950s. Of course Luxembourg is at the center of Europe rather than at the periphery like Ireland, Iceland, Cyprus, Greece, Italy, Spain, and Portugal.
The 11 countries that thought they had sewn up a deal last month for the European Community to impose a financial transaction (or Tobin) tax on stock and option trading are now in disarray over how soon it can be crafted and what exceptions will be allowed. As originally planned, the tax would apply to any company incorporated in one of the 11 countries, even if the shares or options were traded in other countries as Depositary Receipts (like the USA, Britain, or Switzerland.) This extraterritorial impact would also apply if either the buyer or the seller of other stocks came from one of the eleven countries. Without the ban trading would move from the 11 to other venues.
Not too surprisingly, Luxembourg and The Netherlands, both heavy international trading centers, are not among 11. France, with its own existing Tobin tax (only twice as high) on companies incorporated there, is a strong supporter of a populist and punitive Tobin tax. The EU measure was backed by the European Parliament and the EU Commission. FTT money was to be used to rebuild public finances of EU member states and stabilize financial markets.
You want to closely watch clever Indians outsourcers. Ford Motor and its ad agency WPP of Britain are red-faced over caricarture ads produced for the Figo car in India, boasting about the size of its trunk. Posted on the web by WPP Indian sub employees, they show Italian Prime Minister Silvio Berlusconi tying up and gagging three young women and stuffing them into a Figo car trunk. It hardly helps that India is suffering from global concern about women being abused, raped, and killed in India.
Along with the rest of the world, India holidays this week as Wednesday is Holi when people bop each other with bags of dye or colored water not only in India, but also (Abhimanyu Sisodia tells us) in Germany. In a few parts of India women get to bop men with sticks. With Passover Seder being celebrated by so many Christians, here is another exotic feast, if you can worship Lord Krishna. I don't so there will be a newsletter on Weds. but none Thurs. or Fri.
More news for paid subscribers from our team in Sweden, India, Japan, Finland, Belgium, Canada, Britain, and other countries follows including a stock sale.
Today our subscribers are getting the usual tables I post on Sundays and more. Our paid contingent are also getting a full newsletter with results from one of my favorite recommendations, plus an update on one of our funds. This Sunday special delivery is because the next two weeks will see very few blogs. There will be none this Tuesday and the following Monday because of Passover and Easter Monday and none on Good Friday because markets are closed. And because I am travelling to gather with my family over Easter weekend, there will also be no blog on Holy Thursday. I am very ecumenical.
Today I sing:
I'm dreaming of a white Passover
Just like the ones I didn't know.
Where daffodils glisten
And children listen
To hear matzo balls in the snow.
It's also snowing in Brussels where the President of Cyprus and the head of the IMF are trying to prevent a banking meltdown today.
More news today from China, Israel, India, Canada, and Cyprus for paid subscribers.
Beer and BAM
The Globe and Mail (Toronto) yesterday finally picked up the Southern Investigative Reporting Foundation's sceptical report on Brookfield Asset Management. Written by veteran financial journalist Roddy Boyd, it led us to sell BAM Mar. 12. Except for Lululemon, quick transparency is not a Canadian virtue. The Globe internet posting wrote: "it is difficult to overstate the seriousness of Mr. Boyd's allegations" about "one of Canada's most revered corporations". Help at email@example.com
"Beer is proof that God loves us and wants us to be happy," wrote Ben Franklin. Actually it is not that simple. Beer is also a big business. In Mexico, two brewers dominate the industry, Modelo and a sub of Heinecken. Because they finance the design and installation of bars, cafes, restaurant, and clubs, in return for exclusivity for their brews, the duo keep craft beers, imports, and exotic brews from being sold in them. They offer many varieties and brands of beer, but they are all made by one of the pair. That is why the US and Mexico are so anxious about the anti-trust implications of Modelo falling under the control of Anheuser-Busch-Inbev as it expands in Mexico. While we don't own BUD, we are in a related company
In another fast growing market for beer, the majors are taking a different tack. In several African countries, including two where we are indirectly invested in the brew, pubs and bars get special deals on tax by making beer from local ingredients. Instead of imported malt, African starches like manioc, millet, corn, sorghum, or even banana juice are used, encouraged by lower taxes on the brew, for which both the beer-makers and farmers lobby. In Nigeria, it is actually illegal to brew beer with imported barley malt. Then, to cut costs further, the beer is not bottled, but served from aluminum casks and served in paper or plastic cartons. So men drink in bars and not at home where prices are higher, without food, and often drink too much when beer is cheaper than clean water.
More for paid subscribers on brews and news from Ireland, Mexico, Colombia, Spain, Canada, Brazil, Belgium, and another mess at JP Morgan follows.
Three ad hoc reporters who write for my newsletter cover China, all dual nationals. One forced me last summer to sell Suntech Power, STP, a maker of solar panels, whose Wuxi, China arm has just declared bankruptcy. STP was the first NYSE-listed Chinese solar cell maker, founded by a Sino-Australian physicist who seemed eminently qualified to run a solar-cell firm and pitch its charms to Chinese and Western investors. It was recommended by a different Chinese-American who wrote it up for us. We sold it and then bought it back.
But the other reporter warned that this and other US-listed provincial small caps from her homeland incorporated around the Caribbean could not be properly covered even by a Chinese-speaker. They all ran businesses which sound plausible. We sold the lot.
Some of the companies still function but almost all their stocks are cheaper now because of the Chinese slowdown. The surviving solar stocks, Chinese and other, are up on the Suntech news but the glut is general.
We rely on journalists from around the world to keep us out of trouble. They are paid for their articles and may not take fees from the companies they write about or "investor relations" firms promoting stocks.
HSBC today reported that the Chinese purchasing manager index was firmly upbeat for the 4 weeks to Mar. 15 at 51.7 vs a consensus forecast of 50.8. This is the private sector variant; there is also an official statistic for month end. Anything over 50% means factory output is growing (why more supplies and parts are being bought.) While we no longer own US-listed small caps, we are present in China via Hong Kong-listed Chinese H shares.
We write about macroeconomics, mostly in the free part of this newsletter. But our readers gain from the microeconomics we do, rerports on individual companies to invest in. Today's newsletter features a stock from Bermuda (not a Caribbean but an Atlantic island) which reported on 2012 results in detail, plus Canadian, Israeli, British, Australian, Finnish, Swedish, Indian, Brazilian, and South African and Korean companies. And we have bad news from Kenya. And a correction from Mexico.
The Kremlin and Cyprus
There are three contenders in the race to rescue Cyprus. The first is obvious, the sensible heads in the European Community and global financial bureaucracy who are not having to win over disgusted German voters in the short-term, like the European Central Bank and the IMF.
The second is the Greek Orthodox Church, offering to mortgage its considerable real estate holdings to finance the bankrupt banking sector. I am not sure how this would work, unless foreign banks granted the mortgage loans, as the Cypriot banks are bust. The most obvious foreign lenders to the church--from Greece--cannot lend now either. I cannot imagine Pope Francis getting the Vatican Bank into this rescue either.
There is a third possible savior, from another country: Russia. Gazprom, a state-owned pumper and piper of Siberian natural gas westward, has a house bank called Gazprombank, which, according to the New York Times Moscow correspondent, Andrew Kramer, is proposing to refinance Cypriot banks. As is by now well-known, Cyprus's banks are used by Russian companies as an entryway into the Eurozone, and the offshore island is also a haven for Russian "hot" money from tax evasion, the fruits of bribery or fraud by its officials, or mere escapism. Moody's reports that Russians have over $30 bn deposited at Cypriot banks. Hence Pres. Vladimir Putin vigorously opposed the attempt to tax deposits there as "unfair, unprofessional, and dangerous."
The picture is murky (this is the Kremlin!) While the Gazprom's officiel spokesman denied it was involved in a bailout for Cyprus, an unidentified company spokesman confirmed to Tass that its banking sub, Gazprombank, was in talks with the Cypriot government and had already delivered a proposal to the government in Nicosia. A lawyer involved in helping Russian companies invest in Cyprus also confirmed that a private bailout was under discussion. Gazprombank reportedy wants to buy the less endangered of the two big island banks, Cyprus Popular Bank. Why not both?
While the two Gazprom entities are separately managed, the payback from Gazprombank's Cyprus help will go to its parent, Mr. Kramer wrote. Gazprom is threatened by offshore gasfields discovered in the eastern Mediterranean off the coast of Israel and Cyprus. It has already made a move to buy into developing the Israeli fields, which the new government there will have to act upon (after Pres. Obama's visit.)
The Cyprus fields are rumored to be just as large, and can be linked to the Israeli ones to create a gas liquifaction facility to move the gas to markets in Western Europe, undercutting the current Gazprom supply dominance. Of course, the political pressure Gazprom periodically puts on transit countries like Ukraine and Poland tends to enhance the attraction of alternative sources of supply to European gas consumers. In return for refloating the Cypriot banks, Gazprom will demand a concession to explore and develop the Cypriot offshore fields, which will ensure that it will supply western European gas consumers for decades to come.
Angela Merkel took the Russian rescue proposal seriously. The German chancellor warned the Cypriot president in a telephone call not to consider Russky alternatives to the European bailout which the island's parliament voted down on Tuesday. A Cypriot delegation arrived today in Moscow for talks. The official subject is not Russians buying a Nicosia bank, but extending and adding to the Russian state loan to Cyprus of euros 2.5 bn extended in 2011.
Mr. Kramer notes that both the Russian gas company and its bank, while managed separately, are linked to "a tight coterie of businessmen with longstanding ties to Mr. Putin." The history is muddled by asset transfers but the result is that two top officials and shareholders of the Gazprombank are not only supporters of Mr. Putin, but his dacha neighbors in a St. Peterburg gated community.
The Gazprombank purchase of a Cypriot bank could be eased by a cut in Russian corporate taxes to help.
A Canadian reader asked me to forward to my gloomy expert of yestday, John Llewellyn, a question: should he sell all his stocks? There has been no reply yet from John who in his report did note that stocks rise if inflation picks up. Dividends, especially rising dividends, will also spare share-owners. But the main reason why John's negative outlook for the global economies is not necessarily a harbinger of stock market drops is that, historically, stocks go up even if, as today, the global economy is still subpar. By the way, John's outfit is www.llewellyn-consulting.com not consultancy as I wrote mistakenly yesterday. It is located at 1 St. Andrew's Hill, London EC4V 5BY, and you can phone to 44 207 213 0300.
More for paid subscribers from Asia, Australia, Mexico, South Africa, Canada, The Dutch Antilles, Ghana, Israel, Spain, Brazil, Colombia, Scotland, India, and frontier markets including Cyprus. Today's focus is international funds.
A Gloomy Expert
John Llewellyn, who heads London's LlewellynConsulting.com, writes about the reasons for gloom, arguing that the global medicine used to get economies out of crisis since 2008 is losing its effect. And he didn't even mention Cyprus!
The former deputy chief economist of the Organisation for Economic Cooperation and Development, whom I got to know when we lived in Paris, forecasts problems in a March letter because "belief in the efficacy of policy is dwindling" and "undue faith has been placed in monetary policy to stimulate growth following balance sheet recession".
He summarizes the warning signs in macro-economic trends for the OECD countries (the industrialized world):
"Household and financial institution balance sheets have improved, but public finances continue to deteriorate;
"Pulses of risk aversion in financial markets are likely to continue; and no one policy lever can boost 'animal spirits';
"Though monetary policymakers may push further, growth is unlikely to increase soon;
"With the outlook for domestic demand weak, countries are looking to exports;
"Talk of currency wars is now mainstream, but a weaker currency is just one way that monetary policy works;
"Eventual public debt reduction will probably entail a cocktail of measures [which] may include prolonged financial repression/debt monetisation; inflation; depreciation; perhaps more explicit default/restructuring of debt; and capital controls."
Equities will not be a hidey-hole, he argues, in part because the so-called BRIC countries (Brazil, Russia, Indian and China) no longer can de-couple from the OECD world. They too are having to deal with slow growth which puts BRIC corporate profits at risk. Moreover, in the major economies:
"Trade and currency disputes are increasing, and may become damaging to corporate profitability;
"Equity prices can rise with profits, even if purely inflationary. However, much supportive action on the policy front has already been anticipated;
"Moreover, profit margins seem unsustainably high and headline revenue growth could disappint to the extend that the generally weak growth outlook materialises."
Here are the things he says to watch for:
"Negative surprises for corporate profits;
"Worsening sovereign debt dynamics spilling over into other markets as confidence wanes; and
"Depreciations of Western currencies beyond the yen."
We are watching the markets closely, as paid subscribers can see in my newsletter for today. More from The Netherlands Antilles, Greece, Spain, Finland, Israel, Colombia, Scotland, and Canada.