Buying Bigger Companies

Tue, 2014/05/06 - 12:31pm | Your editor

Morgan Stanley today writes that Europe-targeted exchange traded funds are underweight large caps and overweight small and mid-cap companies. We are guilty of the same bias, mainly because I think we are more likely to hit a home run with a stock others are not piling into for analysis or investing.

But while StarMine data shows that Q1 results at small and microcap companies have missed estimates 56% of the time, large companies in Q1 were 52% likely to match or beat estimated earnings. They are better covered and they massage expectations better, to be sure, but they also gain because they have more financial clout than the little guys.

Overall, MS says, you should buy companies growing faster than the broad market while sporting a lower price-earnings ratio. An example would be BASF, which we sold because it lacks access to cheap gas for its petrochemical plants compared to US rivals. I am not sure I am convinced.

MS says that in the present low-inflation, low-growth economic environment, large caps should be gainers because they offer attractive yields. Moreover, they are sitting on cash piles they may put to work with acquisitions. That counts as a word from our sponsors, of course, since investment banks like MS make money by advising companies on mergers and acquisitions.

Still, I am taking a few steps to increase the size of our portfolio holding companies.

More for paid subscribers follows including a stock holding switch today, and news from Canada, Spain, Sweden, China, Colombia, Mexico, Brazil, Britain, and Ireland.

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The Internet of Things

Mon, 2014/05/05 - 12:04pm | Your editor


Forget the Cinco de Maio. You have to have your tequila with salt alone because the lime harvest has failed. And guacamole is way too expensive to gobble what with the avocado crop also down. Moreover today the Bolsa Mexicano de Valores is spoiling the fun by launching its derivatives market. Luckily it is also the May Bank Holiday in Britain, Israeli Memorial and Independence Day, and a holiday in Japan. So today's blog is blissfully short and we can all go out and enjoy the sunny day. Viva la primavera!

Today's lead article is about our investment in the Internet of Things. And in a day devoted to the investment prowess of Warren Buffett I write also about the cleverness of a non-Omaha-based investment guru, George Soros. I write (again) on the logic of investing in Eastern Europe despite the Ukraine crisis. We have news about Mexico, Israel (despite being officially on holiday), Finland, Canada, Australia, Argentina, Ethiopia China, Brazil, Singapore, and Omaha (Neb.)

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Tables Updated

Sun, 2014/05/04 - 11:45am | Your editor

The tables have just been updated. You can view the tables you are allowed to see on our website: three tables for paid subscribers, and closed-positions (to show what you are missing) for pre-subscribers. Spreadsheets are easier to view if you click the printer-friendly button even if you don't want to print the tables.

The Ukraine crisis seems to have affected emerging bond markets, which is weird. Ukraine is clearly a special case: a fragile recent country with a history of extreme corruption, disunity in religion and to some extent language, no elected government, and a geopolitically tempting target for both Russia and its western neighbors. It matters because of the gas pipelines which cross its borders to the west, its role as breadbasket, and its industrial link to operations across its border with Russia. But it is really sui generis. I cannot think of another country except Iran which has the same jumble of pressures on it. And of course nobody owns Iranian bonds because of sanctions.

There are real risks in emerging markets mostly from Chinese competition and special situations in various commodities Third World countries produce. Some raw materials are becoming scarce and others are becoming over-abundant. Fund managers are charged with handling these risks.

Our positions are mainly via close-end funds trading at a discount. It is always appealing to buy a yield instrument (like a bond fund) at a discount from net asset value which boosts the payout. We have no positions in the emerging market bond fund which has terrified the market: Templeton Emerging Income Fund, TEI. Its manager has doubled up on Ukrainian bonds, now close to a third of its assets, something I am pretty sure that Sir John Templeton would never have countenanced in his lifetime. Yet it is the only emerging markets debt fund trading at a premium to net asset value, at 2.6% according to Monday's Barron's (Friday close data.)

The premium is a mark not of retail investor inertia so much as speculation by institutional investors and mindless seekers of high yields, a feature of the current market in other sectors as well. If you own this puppy, TEI, (as we did in the past) send it home to its mother.

I have better speculations for those aiming to play the Russian-Ukraine battle spelled out for paid subscribers below.

The ruble is rubble. Russian energy stocks are in deep disarray, trading at 3x earnings or less in the case of OAO Gazprom. And everybody and his brother is nattering on about how "the time to buy is when there is blood on the streets."

That assumes however that Russian stock markets are normal. But a normal bourse and normal business cannot take place in a country whose economy is in the hands of siloviki (KGB affiliates): friends of Putin, and crooked oligarchs. Russia is not an improvement on the Ukraine mess, just a less vulnerable variety of failed reforms.

You cannot assume economic measures will be taken in the national interest and not in pursuit of a Greater Russian Empire and populism. Buying Russia across sectors posits that ripostes to outrageous Russian adventurism across its borders like seizure of Crimea will never result in a serious coordinated response from the West. Such a purchase depends on  there being a game with rules. But there isn't one. It also assumes that fed-up Russians will make their discontent over adventurism known. That is also uncertain.

My own fervent hope is that the solution will be neutrality for the rest of Ukraine, with no seizure of territory by its Big Brother neighbor. It would not join Nato (as neutral Finland hasn't done either). It can like Finland straddle the east and west. It might join the European Union but that might be provocative. That is however only a hope not based on the situation on the ground.

If The Independent article I quoted Friday is right, I am deluding myself. But here is what I want to own after warning labels have been posted:

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Putin Watching

Fri, 2014/05/02 - 12:15pm | Your editor

Alexander Yevgenievich Lebedev is a Russian oligarch living in London, an ex-officer of the KGB (between 1983 and 1992), and a newspaper and media mogul. His Russian newspaper, Moskovsky Korrespondent, was sanctioned and ultimately shut down after it reported that Vladimir Putin had a mistress. Now Lebedev has upped the ante.

The Independent, a London newspaper of which Lebedev is the leading shareholder, published a note about Russian ambitions beyond Yalta. Its Adam Withnall wrote this week in a front-page article:

"After annexing Crimea and with troops massed on the border of Ukraine, Vladimir Putin will not stop trying to expand Russia until he has 'conquered, Belarus, the Baltic states, and Finland', one of his closest former advisers has said.

According to Andrej Illarionov, [Putin's] chief economic adviser from 2000 to 2005, Mr Putin seeks to create 'historical justice' with a return to the days of the last Tsar, Nicholas II, and the Soviet Union under Stalin. Speaking to the Swedish newspaper Svenska Dagbladet, Mr Illarionov warned that Russia will argue that the granting of independence to Finland in 1917 was an act of 'treason against national interests'.

"'Putin’s view is that he protects what belongs to him and his predecessors,' Mr Illarionov said. 'Parts of Georgia, Ukraine, Belarus, the Baltic States and Finland are states where Putin claims to have ownership.'

"He added: 'The West’s leaders seem, from what they say, entirely to have forgotten that there are some leaders in the world who want to conquer other countries.' Mr Illarionov has helped draft a host of Russia’s economic policies in recent years, and served as Mr Putin’s personal representative at a number of G8 conferences. He is now a senior fellow at the Cato institute’s Center for Global Liberty and Prosperity in Washington.

"Finland is not a Nato member, meaning a Russian invasion would not be considered an attack against the alliance. [Finland] on was part of the Russian empire for 108 years as an autonomous Grand Duchy. Asked if Mr Putin posed an immediate threat to what is now a stalwart of the EU, Mr Illarionov said: 'It is not on Putin's agenda today or tomorrow.'

“'But if Putin is not stopped, the issue will be brought sooner or later. Putin has said several times that the Bolsheviks and Communists made big mistakes. He could well say that the Bolsheviks in 1917 committed treason against Russian national interests by granting Finland's independence.'”

"On the subject of what can be done to stop the progress of Russian expansion, Mr Illarionov said sanctions had helped rather than hindered Mr Putin because they 'confirm his view of the world' – and that of 'the Kremlin’s propaganda'."


This morning the Russian energy minister questioned Ukraine's ability to pay for Russian natural gas from OAO Gazprom, which is demanding payments up-front. Minister Alexander Novak said that dispute with Ukraine over gas prices (which Russia doubled April 1) poses a risk of supply disruption to Western European customers. The new Ukrainian price is $485.50 per 1000 cubic meters, raised from $268.50 earlier this year. Ukraine's Naftogaz has initiated arbitration proceedings against Gazprom for "abuse of its market position." Russian gas deliveries via Ukraine were cut off to Western Europe in 2006 and 2009 triggering price rises and shortages.


Leaving these comments on Russia to be pondered, we report on stocks and bonds from around the world on a day when many markets are half asleep on the day after the May 1 holiday. Much news about funds and a from companies which function over the holiday, from Spain, The Netherlands, Canada, Australia, Japan and Ireland.

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Today's Blog As Far As It Got

Thu, 2014/05/01 - 12:06pm | Your editor


I had lunch with fund managers from Loomis Sayles yesterday at the new NoMad hotel on Broadway in the old Toy District, now part of Silicon Alley. It was tremendously gloomy not only because of the downpour, but also because the hotel has ultra-low-lit sexy corridors like a coal mine. Finding the penthouse elevator button required a flashlight from one of my fellow reporter-attendees.

The information given was valuable. The food was excellent. They served wine with lunch, also a sign of sophistication not as disorienting as the dark. And I was given a vaseful of flowers to take home.

Some general ideas about global hot sectors and fixed income to share follows.

Jean Gilchrist CFA, the Canada-born pharma expert told the participants that a likely US tax reform hitting S based drug firms if Congress gets its act together can be anticipated as early as 2015. She said that is why there are so many complex deals by US drug firms to merge with UK or Irish firms in the industry to beat the tax hike now and to forestall takeovers of attractive targets by rival drugmakers.

Global fixed income leader David Rolley CFA was asked about emerging markets debt, part of his portfolio responsibility. He said there was no tolerance for "guff from the US" in emerging markets where family and state-sector shareholdings dominate the market. He also said that the secondary bond markets in these countries is at excess highs because there is "too much investment money and not enough information" on the emerging markets.

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More for paid subscribers about specific stocks mentioned by the Loomis team below along with quarterly reports which came out today, good and bad news from London, good news from Canada, Arab-Israeli gossip, and fund reports plus a new Euroland stock from a returned contributor (who re-retired.)

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The Clotheswasher Cometh

Thu, 2014/05/01 - 8:43am | Your editor

The 21st century white goods vendor has not yet discovered that women work outside their homes. I am stuck in the apartment waiting for the delivery of a new clotheswasher as the old one died after 22 years of valiant service. The delivery will be done by 11:15 am, they say, so the blog will be delayed. The usual pattern is that they don't come when they promise to.

Yesterday a freight train full of crude oil derailed and four tanker cars burst into flames in Lynchburg VA close to the center of the city. Hundreds of people had to be evacuated as flames and oil hit buildings and the James River. That's why we need the Keystone XL pipeline to link oilfields to the US Gulf Coast.

Today is May Day in most of the world and therefore markets are subdued as I wait for P.C. Richard to deliver and install my laundry equipment. But there is as always news from our companies including a major holding reporting on its Q1 results. As has been the pattern generally, results are good but not great.

More will follow later when I get to my office. Apologies for this delay. I asked them to come in the afternoon but who listens to me? i am only the customer.


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Bankster Heal Thyself

Wed, 2014/04/30 - 11:25am | Your editor

Bankster, heal thyself! Don't rob your owners because you have no idea what is going on off the over-paid executive's floor. 

The usefulness of bank regulations has been thrown into question by the latest blooper, a mere $4 bn of potential capital charges which was discovered 4 years after their creation by Bank of New York Merrill Lynch. This follows the invisible actions by "The London Whale" who ate the profits at JP Morgan Chase without anyone noticing, and the Mexican mismanagement Citibank is still working on to find out how much it lost south of the border. Then too, BNP Paribas is in deep do with NYC bank examiners for sending money out of the USA to embargoed outlaw countries like Sudan and Syria. Meanwhile UBS faces more investigations of its old bad habit of money laundering for US residents.

Here we go again with a "stress test" in the European Union and a batch of regulations here in the USA and new capital adequacy standards by the Bank for International Settlements. But in fact the largest banks are incapable of providing accurate information on what their staffers are up to and what their accounts contain. They are not only too big to fail. They are too big to know what they are doing.

More for paid subscribers follows with two quarterly reports and news from Israel, Britain, Brazil, Canada,Ireland, Sweden, and a few other places like Russia and Ukraine.


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The Best Made Plans of Mice and Men

Tue, 2014/04/29 - 1:35pm | Your editor

Robert Burns said: "The best made plans of mice and men gang oft agly". My office was put off-limits by a carbon monoxide leak from the garage below it on a day with much news to write about.

I am not as badly off as Microsoft is now that our Dept of Homeland Security has warned people not to use Internet Explorer because it is vulnerable to cyber crooks using fake websites. Nor am I as embarrassed as Bank of America-Merrill Lynch is after an accounting error overstated its tier I capital by $4bn so that it had to suspend its dividend and share-buyback.

More for paid subscribers follows with a gaggle of corporate results from Spain, Finland, and Canada, an explanation for an Italian and a Canadian stock sale, and news from Brazil, Portugal, Israel, Britain, Ireland, Singapore, So. Africa, and Mongolia.

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The Red Rooster

Mon, 2014/04/28 - 1:00pm | Your editor

The Euroland eleven who want to tax financial transactions are still grappling with definitions. While all of the European Union countries agree on taxing stock and bond sales they are in disarray over derivatives. GFMA SmartBrief reports that the leading proponent countries are split over the extent of the new tax, while striving to reach an accord before the European Parliament elections take place next month. Supporter countries include Germany. Italy, and France who want to woo voters with fierce "Tobin taxes" to be used to fund financial regulation and development. Other supporting countries are Spain, Belgium, Austria, Portugal, Greece, Estonia, Slovakia, and Slovenia. Now the Tobin tax group are fighting over whether or not to tax derivatives (like puts and calls on shares; credit default and interest rate swaps on bonds and credit instruments; currency futures; and other swaps and futures used to offset risk.)

The Parliament is a boring and toothless arm of the European Union and its politics are irrelevant. But getting in a good left-wing law may help the troubled governments and coalitions of the pro-Tobin tax countries.

This law matters because that the Euro 11 want to tax transactions worldwide, not just in the signatory EU countries. If the issuer, the intermediary, or the purchaser of the instrument being traded is located in the European Union--and that is a lot of countries-- then even US trading of the stock, bond, or (perhaps) the derivative, would in theory be taxed too.

Some EU are skeptical that the tax will raise any revenues at all. They think all trading will move out of the EU to foreign markets. Among the skeptics in the same single market are countries with active financial markets like Britain, Ireland, Sweden, Finland, Denmark, Norway, the Netherlands, and Luxembourg, along with Czech Republic, Poland, Cyprus, Malta, Rumania, Bulgaria, Latvia and Lithuania.

Non-EU countries like the US, Canada, Japan, Hong Kong, Singapore, and Switzerland stand to gain a lot of business if this silly rule gets passed. The late Nobel Laureate economist James Tobin, an American, proposed a tax on currency trading to limit exchange rate transactions in 1972. Perhaps a better name for what the EU countries are proposing now is a "Robin Hood tax", but the purpose now is to punish banks and brokerages, not to cut volatility.

More for paid subscribers follows from Britain, Hong Kong, Finland, Israel, Spain, Portugal, China, Brazil, Colombia, Singapore, Denmark, Belgium, Australia, and Canada. We have an average down and a whole and a part sale today.

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Tables Updated

Sun, 2014/04/27 - 11:12am | Your editor

The performance tables have been updated on our website. All visitors can view our closed positions table but only current subscribers can see the current stock, bond, and fund recommendations. To view the spreadsheets more easily, click on the "printer-friendly" button even if you do not want to print the tables.

More for paid subscribers follows.

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