Today was a special Sunday because it marked the first full day after Passover. At the Sabbath services this week-end we stopped praying for rain and started praying for dew, silly in the USA outside California, but reasonable in the land of Israel when the Sabbath prayers were written.
Because Passover is over, we are having pasta rather than Chinese food for lunch. Normal noodles are not allowed on the holiday, being leavened, and I miss them more than our weekly Chinese feast.
This morning, as is normal for Sunday, I updated our tables on www.global-investing.com/ The closed position table is visible to all. But only paid subscribers can see our current advice. To more easily view the spreadsheets, click on the "printer friendly" button above the tables.
An apology. As I misread my fly dates this week I said there would be no blog on the 16th. In fact we are flying overnight the 14th to London and so there will be no blog the 15th. We will be in Paris next weekend, and Vienna for a college reunion the following weekend, after which we will spend a couple of days in Bratislava, the capital of Slovakia, which is just down the road and easy to get to Vienna airport from. We have been several times to Prague, but never to Bratislava, formerly Pressburg. There will be no table updates until the first weekend I will be in NYC, May 10.
More for paid subscribers follows: Read more »
Cuba and Canada In Focus
Your editor again was quoted at length about her views of Canadian stocks Pure Technologies and Veresen in Canada's leading stock market magazine, Investor's Digest. It was voted the world's best investment advisory 5 times, which is gratifying to anyone quoted in it. My notes were bullish but included negatives. I am not a booster bull. Only paid subscribers to my newsletter of the Canadian version of Barron's can find out more.
The two stocks are not usually covered by analysts in Canada, to say nothing of the USA. They are mid-caps covered by a mere handful of stock analysts. Canadian share coverage is dominated by oil and gold mining industries, where neither operates. They are not contrarian plays on the future recovery of the oil price.
They are not likely to attract Canadians pension plan money because they are too small, so analysts advising these institutions are not studying them. They are not run by TV star fund managers or gold bugs. Read more »
JP Morgan Chase is using a new algorithmic software program which signals employees who might be “going rogue”. It collects data on whether or not they attend compliance classes or if they have a prior history of having violated trading rules. Then it predicts which bank employees might behave badly again.
A danger at huge banks comes because the top brass cannot check on what the rank and file are up to. Back in the old days bankers were supposed to know their customers, and of course it was inconceivable that they then didn't know their staff members. It is an argument for breaking up large global banks with insufficient personnel control.
The theme of today's newsletter is perverse incentives. Having this software is an example.
I made an error in my article two days ago about the Wisdom Tree one-stop exchange traded funds investing outside the US dollar using currency hedges. The yen-hedged fund investing in Japanese equities is a new one, Wisdom Tree Japan Hedged Dividend Growth Fund, ticker symbol JHDG. Its priority is yields, not capital gains.
More for paid subscribers follows from Britain, Israel, China, The Netherlands, Singapore, Hong Kong, India, Myanmar, Ireland, Canada, and Brazil.
Gold is not yet dross for the criminals among us.
Over the 4-day British Easter weekend, about 300 north London jewelry storage safes at Hatton Gardens Safe Deposit Ltd. were broken into and robbed. The theft was only discovered at 8 am yesterday when the diamond district returned to work. Because the thieves used the back door while the security guard only checked the front one, they escaped with huge piles of jewelry and precious metals.
A British cousin's daughter was briefly married and then divorced from Adam, a third generation Hatton Gardens silver vault dealer. While Adam was our relative we got a discount. He also took silverware to sell on consignment. It is a profitable business.
Meanwhile in Sinaloa (Mexico) armed robbers heisted 900 kilograms of gold concentrate worth $8.5 mn from the El Gallo refinery belonging to Canada's McEwan Mining Inc.
Now the robbers have to try to fence their loot and the victims to collect from their insurance companies. Many London consignment customers were not covered by the dealers' insurance. Mr. McEwan told the Toronto Globe & Mail that his insurance will not cover his firm's full loss.
Now that oil and gas companies have been revalued by the move by Shell on BG, perhaps gold and gold mines are next in line for a boost. We used to own BG and also another takeover target, TNT of Australia.
One reason for a gold rally came from bond shop Kamakura's analysts today. They predict that the 3-mo US T-bill rate will rise to an average of 2.67% in 10 years, from 0.02% now, based on risk neutral scenarios using historic data. The range is between 21.096% and minus 1.97%, so not a sure thing.
More importantly, the T-bill rate a year from now is likely to be 0.579%, just over the forward rate now of 0.577%.
We are now exchanging newsletters with Investors Intelligence (which also goes by the name Stockcube plc or Chartcraft), a venerable west London-based chartist shop est. 1947.
More news today including an annual report from Canada, India, Brazil, China, Japan, Israel, Ireland, Panama, Brazil, Australia, South Africa, Jersey, the Cayman Islands, and Britain. I saw a robin red breast on my way home from the supermarket yesterday so I think spring has sprung. But half my friends and family have sinus trouble and bronchitis so the sequels of winter continue to harm us.
Plain or Fancy Currency Hedging?
Currency hedging is controversial when you invest outside the USA or another home country with a strong currency. Whatever the problems for US investors in Japan or Euroland, emerging Asia or Latin America, they are even worse for Swiss or Israeli ones.
Our tactic has been to cover risks with hedge funds positions matching our greatest exposure outside the USA, to Japan and Canada. We also own a double-weighted exchange-traded fund aiming to offset the impact of foreign exchange on the rising dollar. Lately, perhaps in error, I cut two of these hedges to take profits. But they are still very much our strategy.
These days many Americans are taking a one-step approach to insuring a decent return when investing abroad in foreign currencies while US dollars are going up. The one-step approach is very popular.
A mere 4 exchange traded funds offering built-in currency hedging from Wisdom Tree and MSCI have taken in over $20 bn in assets so far in 2015 according to Barron's, more than doubling in size YTD. About half the inflow went into Wisdom Tree Europe Hedged Equity Fund, HEDJ, over $10 bn.
That counts as a crowded trade. Yet Joe Shaefer's Stanford Wealth Management yesterday told clients that he was expanding its European exposure, which I applaud. But surprisingly he then announced he was putting the money into currency-hedged HEDJ for Euroland and DXJ for Japan. Joe argues:
“As US rates rise and Europe and Japan encounter long-overdue pain to get back from the brink (Europe cradle-to-grave insurance; Japan demographic decline and poor corporate governance), global investment will flow to where it is treated best. That will the the USA with higher interest rates. The dollar will remain strong and need to be hedged in order to profit from resurgent European and Japanese corporate profits.”
My recommendations are the reverse. I do not like equity funds with a currency hedge. Joe and I have a bet on this dispute not involving jet fighters, despite his being a retired Air Force General. By September we'll see who is ahead.
In fact there are good reasons for avoiding the Wisdom Tree hedge funds in particular. They are challenging the Standard & Poor's indexes which last year saw all their Euroland and Japanese gains wiped out by the ever-stronger US dollar. The first problem is that Wisdom Tree investors are fighting the last war.
But they are in fact incurring other risks as well.
Stephen Foley writes up the details in today's Financial Times on how Wisdom Tree is hedging. Foley says that HEDJ (the Wisdom Tree Europe ETF Joe bought) has a very concentrated exposure to a small group of multinational corporations. This amounts to what Mr Foley calls "a double hedge." He notes that last week S&P Capital IQ issued a warning about the risks.
HEDJ is "grossly overweight" with half its investments in just 3 companies: L'Oréal, Unilever, and Anheuser Busch, all bestsellers to the USA, but on all of which S&P has a sell rating. (S&P is not disinterested. Index creators like S&P are paid fees by tracking ETFs, so this is a matter of loss of business and not just intellectual concern.)
Wisdom Tree is deliberately challenging S&P. It responds by warning that HEDJ success depends on getting hedge timing right, and may not do so successfully. (S&P would say that of course.) Mr Foley adds that "hedging is does not typically contribute to returns over the long run."
Wisdom Tree has concentrated its portfolio in consumer non-durables: beauty products, food, and beer. If the 3 huge companies do well it will boost the euro against the dollar, meaning the hedge will be useless or diminish performance.
Another risk is acquisitions. L'Oréal which Nestlé of Switzerland has been trying to buy control of during most of my lifetime is particularly vulnerable, but BUD (owned by a Brazilian outfit linked to Warren Buffett) is not far behind. Even Unilever is heavily owned by British investors in the former Lipton's. The pound sterling moves independently of the euro and may rise when the election panic is over.
Today's TNT takeover planned by Fed Ex, or the Lafarge takeover by Holcim, are examples of companies from the US and Switzerland, outside the eurozone, buying up Dutch and French euro companies while the going is good. So is Canada's exit from GM.
Wisdom Tree Euro ETF, HEDJ, is therefore vulnerable to becoming less Euro-linked if cheap capital draws in acquisitions. By the time Wisdom Tree managers react, the damage may have been done. The bigger the fund and the more concentrated, the harder it will be to reverse its hedges.
A final risk is that the trio of Wisdom Tree branches are all in consumer non-durables, which react to short term price moves by inconstant and fickle US shoppers. The moment the euro starts strengthening the seeming dollar-linked profits being booked by the Euroland parent companies on goods sold (but often made locally in the USA) will go wrong.
If currencies reverse from the huge Greenback run-up in 2014, investors can simply exit the hedged fund and go back to the S&P or MSCI index linked funds without currency overlays. Switching ETFs takes about a minute with an internet broker. I hope Joe will be quick to beat the mob to the exit.
The one certainty based on the history of currency movements is that they tend to revert to the mean... eventually. In the long run, as Foley points out, Euroland stocks are tempting, with their combined valuation of just 52% of the area's gross national product, compared to 138% in the USA, citing Guggenheim Securities data. To benefit from that will take years, and short-term currency hedging is likely to interfere with those potential profits.
More for paid subscribers follows, with hedging details, and on heavy industry, drugs, and software from companies in Spain, Canada, Israel, India, Ireland, Brazil, Australia, The Netherlands, and Mongolia.
Unusually, I updated our performance tables this afternoon rather than on the usual Sunday, because I was away celebrating Passover with my family and did not want to break away for work yesterday.
That introduced an error. I used the pre-opening prices of our listed stock based on the quotations in my personal account, influenced by markets that had been open on Friday, so the prices were not the ones shown in tables for the Wall Street close Thursday. Market-makers adjust prices after the close and before the opening to reflect foreign trading, particularly when there was a long weekend and important news from the Fed and the Dept of State.
As a result our closed-end funds table which came out on Thursday doesn't jibe with the prices shown for individual stocks. I think we can live with this disconnect for a week.
I also corrected a very serious typo in my blog written this morning. I wrote that the CEO of a stock in our portfolio would ring the "losing bell" at Nasdaq. I meant to write the "closing bell". Ooops. More for paid subscribers follows:
News from Balmy NYC and Around the World
After an Easter-Passover escape to the snow-laden Boston area where Crystal Lake is still under a layer of ice, and only turkeys are warm enough to begin nest-building, I'm back in balmy Manhattan, relatively speaking. But the warmth of family was far greater 4 hours north of here. There were 16 at the Seder at our son's house, with 4 cancels at the last minute because his MD sister-in-law was summoned to work over the weekend and her immediate family stayed home, although her mother and step-father were at the Seder.
This left the most important job of all, triggering the ceremony by asking the Four Questions, to my first-grader grandson ably assisted by his siblings and cousins. They set the volume high.
The big Good Friday news was US job creation levels coming in well below recent trends, and hints the Federal Reserve will delay raising interest rates beyond mid-year. Alert readers will recall that our neighbor, Geoffrey, who predicted both continued job level fears and delay, has proven right so far.
It also confirmed the comments of Dan Fuss of Loomis Sayles which I quoted Thursday (also keynoted by Randall Forsythe, a fellow-luncher in today's Barron's) that the Fed is responding to geopolitical pressures to delay a rate hike, a 4th unofficial mandate for our CB. Mr Fuss told his lunch guests last week that “a solid line runs from the US State Dept. to the Fed” to delay higher interest rates on behalf of emerging markets and southeast Asian countries. For some reason Mr. Forsythe thinks this line runs from the Boston Fed—it is way too far from Foggy Bottom.
The other big news is the hint of an outline of a deal on Iranian nuclear ambitions, on the esoteric side, so no comment. If anyone wants my opinion on Reading Nabakov in Teheran I will provide it.
More for paid subscribers follow from a busy weekend. Many European markets did not trade today, Easter Monday, but there is lots of news from The Netherlands, Germany, Israel, China, Japan, Switzerland, Ireland, Mexico, Jordan,
Another Fed View
Vice-Chairman Daniel Fuss CFA at Loomis Sayles held a press luncheon I attended with other hacks yesterday. LS has over $230 mn under management, $90 mn in US and foreign mutual funds, and the rest in institutional accounts for insurers and pension plans, endowments and managed money for fatcats. Dan Fuss is the oldest and wisest bond manager left. Moreover he is more fun to listen to than Ben Bernanke.
Fuss forecasts and commentary on Federal Reserve policy leaves others in the dust. These days, in addition to its official US central bank goals of keeping the banking system working, fighting inflation, and boosting growth and employment, in his view, has had another unofficial goal added to them: a geopolitical goal coordinated with Foggy Bottom, our State Department (just down the street from the Fed.) That goal is to provide dollar liquidity to the global system. But it is unofficial.
Mr Fuss warns that if we quote him on this he may not be invited to have lunch at the Fed for another 3 months, which apparently happened the last time he made this comment—dining at the Fed.
The goal that dares not speak its name is hidden with our central bank using the excuse that the labor market has not yet recovered. This gives the CB a legitimate excuse for delaying interest rate rises really for another goal: being a responsible manager of the world's currency needs. As long as our CB doesn't face higher inflation it can avoid again throwing East Asian and emerging markets under a bus by raising dollar interest rates.
For a fixed income investor like Mr. Fuss this requires some strategy adjustments. The old game of acquiring lots of US Treasury odd lots, consolidating them, and selling them for a gain is tougher because there are more buyers of mini-lots. Today investment advisors (“formerly known as brokers”) buy laddered bond holding for their clients. That has boosted the spread on US bond trading on a quarter to a half billion dollar bond trades (Loomis' levels) to as much as 7 basis points from normal levels of 1 or 2 bps.
The market is illiquid and Loomis has to buy bigger lots to avoid the pinch.
Another tactic being adopted may be of interest outside the world of investment management: buying more equities. This is Loomis Europe strategy underits leader and dealer in global fixed-income, David Rolley. He remarks that Europe is a technical market, which means “you cannot make any money buying” in it. He finds “pockets” where Loomis can invest, like Turkish bonds (because of political risk over the President trying to rein in the CB head.) But Europe “is not a value proposition.”
As a result, the Loomis bond portfolios are currently ~20% invested in equities. Unlike ETFs which are forced to buy bonds in the present climate, Loomis has the option of using yield proxies, like stocks.
So equities it is for global investing, and Loomis' global equity leader, Eileen Riley, selected three stocks for the lunch guests: one of the is a pick of ours too.
More for paid subscribers from Portugal, Brazil, China, Israel, Ireland, France, Switerland, Ukraine, Sweden, Denmark, South Africa, and Britain follows. There will be no blog tomorrow because it is unChristian to trade stocks on the day you remember your God being tortured to death. Have a Happy Easter or a Pious Passover or a nice long break from stock markets.
Swiss Insurance Wraps
Lugano-based BSI became the first 2nd tier Swiss bank to settle with the US Dept of Justice for fostering tax evasion by US citizens, paying over $211 mn in fines.
Now owned by Italy's Generali insurance company, the bank located near the Swiss-Italian border was particularly vulnerable to US sanctions. Its violations came after the Swiss banking majors had agreed to halt opening accounts for Americans after signing a "non prosecution agreement" on August 1, 2008.
Instead of ending its tax-avoidance business, BSI rushed fill the gap by luring in more US clients to open accounts at its branches in the tourist area around the bi-national lakes. That made it a particular target for regulators in Switzerland, as well as the US DoJ.
Moreover, because Generali now wants to complete its takeover by Brazil's BTG Pactual, it is in a rush to settle with US tax authorities.
The other smaller banks are now likely to pay their fines too. And any American who still has a Swiss bank account had better come clean.
There is a peculiarity about the BSI accounts worth mentioning because it used to be a loophole for Americans who wanted to have money in Switzerland without declaring it for taxes. Having an insurance company parent allowed BSI for a decades to open so-called "insurance wrapper accounts" which hid the identity of the depositor. Despite the account being in the name of Generali, the bank then helped Americans access their hidden money by issuing nominative debit cards to them.
The potential damage to the bank's reputation caused BTG to threaten to end the takeover unless BSI came clean.
As a result, the Lugano bank undertook a purge which went further than the ones at UBS and Credit Suisse: it actually fired high-ranked managers.
Back when Global Investing was a print newsletter we used to run ads for insurance wrapper accounts, then not subject to US sanctions or Swiss non-prosecution deals with the DoJ. Those wrapper accounts incurred very large fees and had very low minimum deposit amounts. The beneficiary of the accounts went to the advertiser.
So I dropped the ad program as it was not in my readers' interest to peddle mini-Swiss accounts aiming to appeal to the US masses who were offered a Swiss account they didn't need which was not likely to pay off for them. It worked for the Swiss insurance agent who became a millionaire race-horse owner, of all unSwiss things.
I am off to an investment luncheon so this blog is a quickie.
Sometime I get the impression that central bankers are just winging it as they try to keep the world economy growing as did not happen in the 1930s. Ex-Fed Chair Ben Bernanke wrote his first blog on the Brookings website today. Here is an edited extract:
“If you asked the person in the street, 'Why are interest rates so low?', he would answer that the Fed is keeping them low. That’s true only in a narrow sense. The Fed does, of course, set the benchmark nominal short-term interest rate. The Fed’s policies are the primary determinant of inflation and inflation expectations over the longer term, and inflation trends affect interest rates.