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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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Not On Auto-Pilot
Today's blog is late and I wanted to tell you why. I got three time-consuming communications in the mail yesterday. They mark the way machine systems do not work any longer. There is no automatic pilot.
First I got a bill for a flu shot I got Jan. 15, very late because the doctor group which treats me ran out of the stuff in 2009. So when they had new supplies I trotted along for my jab. I am over 65, and covered by Medicare. Older folks are supposed to get flu shots preventively. And inoculation serves a public good by cutting contagion risk.
Despite this, the bill was $65 for a minute's work by a nurse. This was paid for $38.91 by Mewdicare, with your editor supposed to pay $26.09 in addition.
Then I got a statement for May 15 to June 15 from my personal bank account, with HSBC. It showed that on June 7, a day when I was happily in NYC writing my blog, and one on which I made a cash withdrawal from my HSBC account in midtown Manhattan, I also withdrew $970.37 from a branch in Edgbase, Birmingham (England, I think.). This was not me. My ATM card remained in my wallet. I did not share my secret password with anyone.
It was a fraudulent withdrawal and shows that my account was compromised apparently along with those of others at my branch or perhaps more widely.
Then Albany weighed in with a “penalty” bill for failing to file withholding taxes for 2009 for my company which is incorporated in New York State. It is called Agorot Ltd. d/b/a Global Investing. As long-term readers know, after the bankruptcy of the former publisher, Rightside Advisors, I financed a restart-up in early 2009 out of my own pocket. I did not pay myself a salary, and I am the only full-time employee of the company. (I did pay freelancers and web experts, and stuff like rent, Internet, electricity, but no salary.)
Dealing with this stuff takes hours. Hence the letter is late today. Moreover, there will be no blog tomorrow as I am again attending an investor conference. I could hire a day laborer to fill in for me but I suspect nobody would do it for what I pay myself, which is bupkas, nada, nichevo, nichts, rien.
The Renminbi and a Single Best Stock Idea
From Macquarie Group's Michael Kurtz in Hong Kong the hot news about the Renminbi, which was first reported to the world late Friday night in a scoop from Reuters:
The People's Bank of China announced that it would “further reform the RMB exchange rate regime and enhance RMB exchange rate flexibility.” But it did not implement any stepwise revaluation or technical widening of the RMB's +/- 0.5% daily trading band against its reference basket of currencies, or offer guidance on the likely degree of appreciation.
The move – while small – [is] directionally positive for Chinese and regional equities, as it could 1) reduce trans-Pacific trade frictions; 2) usher [in] key structural reforms at the micro and macro levels; 3) enhance China's overseas purchasing power; 4) boost regional FX; and 5) give China additional policy flexibility to deal with any future inflation pickup.
As we noted in April "the static impact of such a move may be underwhelming”. Our economics team expects only a shallow 3.5% upward crawl to RMB6.6/US$ by end-2010, followed by a 4.8% gain in 2011 to end next year at RMB6.3/US$ – just slightly faster than current NDF market assumptions.
As we flagged [earlier] “the more substantial benefit for stocks arguably comes from the dramatic reduction of US-China trade protectionism risks that a RMB accommodation will enable.”
My own view is that the Chinese willingness to drop a fixed exchange rate (which had been in place since July 2008) is less important for the country than the spate of labor unrest, strikes, and company concessions now sweeping eastern Chinese factory floors. I asked Paul Renaud in Thailand to give us an update on how the Thai stock market will be affected by the Chinese gentle rise in currency and the less gentle rise of labor militancy. The latter trend will not be stoppable just because the Beijing govt calls itself communist. When workers at a plant have won higher wages or other concessions with a strike it inspires others down the road in Shenzhen or Guangzhou or Tianshin to copy this tactic. Other notes from Paul about specific Thai stocks and from me on how to play the RMB revaluation odss are published for paid subscribers below.
The latest ipo of a China share, Xinjiang Goldwind, was withdrawn in Hong Kong because of lack of interest. This can actually help Chinese stocks because the press of new issues holds back the price of existing shares. But in a rumor-driven immature market like China's predicting anything is high risk.
Another ipo is being planned by Santander, a Spanish bank, for its British bank holdings (starting with Abbey National.) It has already done the spinoff routine all over Latin America to raise cash for further expansion while maintaining control over the banks it has acquired. If I were sure the tactic works I would recommend STF common stock. But for now I don't.
News for paid subscribers from Switzerland, Israel, Britain, France, Finland, and Thailand follows. We start with a single best idea from Canada. And other articles about CEFs, closed-end funds.
CEFs as I keep telling people, are like picking money up off the street. The joke tells about two economists walking along and spotting a $1000 bill on the pavement. "There is no reason to bend down," the first economist says to the second. "If it was really there someone would have picked it up already." But in fact, boys and girls, markets are not efficient the way classical economics preaches.
The Euro's New Mojo
The euro is finding its mojo again. Estonia yesterday joined the common currency. In the days of Communism, the Baltic country was always closest to freedom and capitalism, mainly because its weird language is close to Finnish. Estonians watched Finnish TV to learn what was going on in the real world.
Also helping the euro was the successful auction of Spanish treasuries. More about Spain for paid subscribers only is to be found below.
Be careful of magic formula investing, like this example.
Formula Investing launched four new separately managed account strategies, of international companies for individual and institutional investors, based on Joel Greenblatt's fundamentally-based quantitative value methodology of selecting stocks. These supplement Formula Investing's existing retail and institutional domestic value strategies, which have already amassed over $100 mn since launch in 2009.
The new strategies consist of two international and two global approaches for individual investors and institutions. All use a newly created proprietary database of company financial data to rank and select stocks from 26 countries. Each of the four strategies includes stocks from Asia, Europe and the Americas, while the two global strategies also include US stocks.. "Ever since we started Formula Investing last year, our clients have asked us when we would apply the same disciplined, quantitative approach to international stocks,'' said K. Blake Darcy, CEO, Formula Investing. ''As a result of the painstaking creation of an international database of company financial information, we were finally able to apply our fundamentally-based quantitative methods to these four new strategies."
Formula Investing will purchase stocks for client portfolios directly. This enables portfolios to hold more than just ADRs, increasing the range of stocks purchased. Individual clients can invest in the international or global strategies starting at $250,000, while the institutional offering starts at $5 mn.
These new approaches demonstrate a commitment to providing a suite of investing styles that help individuals and institutions invest in a value strategy. The money management firm employs strategies developed by its co-founder, Joel Greenblatt, a money manager.
Formula Investing constructs client portfolios of value stocks with the objective of outperforming broad market indices long term. Stocks are chosen based on a combination of their relative cheapness and quality, as measured by earnings yield and return on capital. Formula Investing was co-founded by Greenblatt, [author of the] New York Times bestseller “The Little Book That Beats the Market”.
What would my Qwafafew buddies say?
Backtesting is an art not a science, because data is neither realistic nor current, Marcus Bogue, PhD warned. I quoted him yesterday on the risks of using Reuters or Compustat databases to backtest strategies like Mr. Greenblatt's. The risk is restatement--of income data, balance sheet data, and cash flow data. These are the metrics value investors count.
Bogue's research shows that historical data on more than 40% of all companies (European or American) turn out to have been inaccurate when reported, and have had to be restated in stock databases. Asian restatements (essentially from Japan and South Korea) are marginally lower but still significant.
In response to my question, he said that these are not trivial restatements. Auditors require a restatement only if the change is “material” which means we are not talking about single digit percentage changes. Bogue also says that stale data is as likely to understate performance as overstate it. And you cannot assume that a given time lag will let you capture all the corrections.
The larger cap indexes (like the S&P 500) are more error prone than databases covering all traded companies in a market. And the database errors accumulate and pile up and lead investors astray.
Restatements occur for lots of reasons: acquisitions and diverstitures, changes in accounting rules, and good old fraud (remember Enron?)
The further back you go the worse the data, explains Bogue. Historical database numbers are 50% likely to have been restated. And when you are checking against an index, another quant warns, be careful of dead companies. Databases from 50 years ago are full of companies which disappeared entirely, about 8500 of them. So the remianing covered companies benefit from survivor bias.
Sorry, but there is no magic formula after all.
As for exchange-traded fund magic, remember these instruments were only invented in the past decade so they provide no guidance to future prices.
All this chat about charts has triggered a recommendation for paid subscribers, who should have some slightly dented cash from our sale yesterday. And from another trade we recommend today.
Into Africa
Only paid subscribers will be able to understand my headline. They will also get a stuffed issue with lots of commentary and one sale. Yesterday there was no blog. I attended two conferences, one by Old Mutual on outlook for markets, and the other by the Qwafafew quantitative analyst drinking club about data mining.
At the first conference Jerome Heppelmann CFA, the star manager of the Old Mutual large cap core fund, warned of mounting French credit stress and predicted "a long and difficult summer". His concentrated portfolio is focused on large caps because of "visibility".
At the Quants' club, the word was GIGO, garbage in garbage out. Bad and often restated data produces misleading back-testing results according to Charter Oak Investment Systems' Marcus Bogue, PhD. But it also can pay off it you can figure out how to clean up the data to predict the future biases and behavior of major instiutional players, according to Dirk Resnick, who runs StarMine for Thomson Reuters. One fascinating insight he provided is that because of fund and index rebalancing rules, managers in subsequent quarters will sell their largest positions after they have risen (thanks to good performance). Resnick also works to identify valuation shorters of stocks doing this for fundamental reasons, to remove the impact of 130/30 long short hedge funds and that of arbitragers (for example over convertible bonds or stock.)
A new mid cap Brazil Exchange Traded Fund is coming. The Brazil Mid-Cap Exchange Traded Fund will start NYSE trading Tuesday. Global X Management Co. is the asset manager. The ETF will invest in Brazilian firms with $2 bn to $10 bn in market cap like Natura Cosmeticos SA, its biggest cosmetics maker, and Cyrela Brazil Realty, its largest homebuilder. Trading as BRAZ, it will track the Solactive Brazil Mid Cap Index. I haven't decided yet if it is a buy.
The “bubble” in China’s property market is going to burst very quickly, with prices likely to fall by 20% in the next 12 to 18 months, Sun Mingchun, a Hong Kong-based economist at Nomura told Bloomberg. China’s banking regulator warned of growing mortgage credit risks and warned of increasing non-performing loans.
Real estate spending rose 38% in the 2010 to end-May, according to the Chinese National Statistics Bureau. Prices jumped 12.4% in May alone. To try to cool things down China increased down payment requirements and mortgage interest, and restricted lending for buyers of second and more homes.
So here are the round-eye responses, also from Bloomberg.
The property boom in China isn’t a bubble because it’s supported by “solid” demand for residential housing, according to Stephen Roach, chairman of Morgan Stanley Asia. While portions of the real-estate market such as high-end apartments are overheating, demand for residential homes will remain robust as rural Chinese migrate to bigger cities, Roach said in a Hong Kong radio interview ith Tom Keene (Bloomberg). “Each year since 2000, between 15 and 20 million people migrate to Beijing, Shanghai, and second- and third-tier cities in mainland China. That’s two and a half New York Cities created annually,” Roach said. “This underpins a huge demand for residential property. This property has not overheated and the demand for this property is very, very solid.”
Another round-eye view:
Jeremy Grantham, chief strategist of Grantham Mayo Van Otterloo said China may manage to avoid a housing collapse like ours, according to what he told Chinese media yesterday. He described Beijing's approach to tacking rapidly rising real-estate prices as "experimental," crediting the Chinese government with being "adventurous in trying new things.” “They're really quite aware of potential dangers," he told China Daily as quoted by Bloomberg. China's situation is also less serious than the one seen before the U.S. housing crash, since fewer Chinese own luxury homes and most had to make larger down payments than their U.S. counterparts.
Meanwhile the highest priced real estate on earth, in Hong Kong's mid-peak Henderson Tower, is not selling and the top floor penthouse buyer has cancelled the purchase. What this means for our portfolio will be spelled out below for paid subscribers.
In lieu of Wednesday's newsletter
That Old Special Relationship
BP drilling engineer Brian Morel complained about cost-cutting shortcuts that put the operation of the in an e-mail on April 14. He said the errors created a potential “nightmare well” 6 days before an explosion destroyed the Deepwater Horizon offshore drilling rig, killing 11 crew, and creating an environmental disaster.. The e-mail and other documents were released by the U.S. House of Representatives Energy and Commerce Committee, which said the British oil giant took shortcuts and made mistakes in the Gulf of Mexico.
My article yesterday about the rift in the special relationship was about economic policy and football, but the only resonse I got was over BP, from DH, a reader in Spain, who is British. He wrote:
Thanks as always for what is a very entertaining letter. Some comments no the BP debacle:
President Obama -- thought to be strong on foreign policy -- is showing himself up as an amateur, with his cowardly 'blame the Brits' rhetoric. Nationalism in any country is never pretty, but when its fervour is directed at your long-time allies it's particularly distasteful. The Brits have gone to war with [sic] the Americans again and again; Britain and America are likewise two allies who have not endured massive rifts even when they have ideologically opposed governments in place. Why Obama would wish to endanger that long-standing relationship with his schoolboy politics beats most of the British.
It's still unclear whether this was BP's fault, or someone else's. There's been no conclusion of any investigation, and hence such vitriol is misdirected. British people feel compassionately for the Americans who are suffering this disaster. And we are sorry that it happened. Sometimes, that's the best you can say. If, as you suggest, the hypothetical American Petroleum spilled lots of oil on a British coastline, there probably would be a bit of backlash too. But one thing is for certain: the Americans would never ever allow one of their nation's largest companies to go under because Downing Street held them to ransom and refused to act in a civilized and fair manner.
I replied:
I think you are wrong. I do not consider myself an amateur in international relations. I do however think that Tony Hayward is an amateur. Every time he opened his mouth he put his foot into it.That is part of the basis for the Obama ire at BP. Morevoer the journalistic investigations by the Wall Street Journal (ok Murdoch is not merely a British press baron but also an Australian) and other official investigations show BP tried to save money by cutting corners on the well capping, causing the blowup.
We are not running a vendetta against Britain here. We are not tearing up our copies of Shakespeare and Dickens or ending our infatuation with Virginia Woolf. This is a perfectly civilized set of moves against a company which deserves it.
That British pension plans own so much BP is not going to save the company or its top brass and geologists from falling on their swords. Hayward first. Lord Browne being gay was much more careful when he opened his mouth. Of course he also lied which is why Hayward took over. But I think Browne would have handled it better.
As for British stalwart support of US war aims, what we learn it in the USA is that we went over and fought to get your country off the hook in World War I and then again in World War II. And now Benedict Arnold Britain is planning to pull out from Afghanistan where they failed miserably in the 19th century.
FYI our longest-term ally is France which fought on the US side in our Revolution against Britain. When the GI's landed in France in 1917 they said 'Lafayette, here we are.” They did not say 'George III, here we are.'
Obama is not holding BP up to ransom. He is requiring that BP defer its dividend if required to create an escrow account, as exists under the laws of both our countries, to cover the eventual costs of the US cleanup and the rest of the disastrous consequences of BP's missteps. If BP is proven innocent by investigations and court cases to come, the money will be returned to the company. This is sad for the pensioners who may not be around by then. but it is merely another argument for global investing. Diversifying helps.
Nobody said that British pensions should be invested only in countries with British as their first name, but even so there are plenty of other options.
To which DH replied:
Like most of my countrymen, I do revel in a good debate! I note your arguments, but however I slice this, I cannot bring myself to agree with you at all..
The attitude of President Obama (who, in his own words, is "looking for some ass to kick") has been anything but civilized. A civilized and genuine way of dealing with this means focusing on the problem before the culprit, the solution before the disaster. Obama has done nothing at all but join in the whining of the underclass, and it is deeply unbecoming.
Obama ought to have left Hillary Clinton to deal with any and all international aspects of this crisis, and focused his energy purely on the southern states which have been affected by the oil spill. Instead, we are presented with yet another (damaging) example of Obama micro-managing.
I do of course agree with you regarding America's traditionally special relationship with France.
Obama is holding BP to ransom, all for the sake of white southern votes (those he most needs right now). The man who claimed he didn't care about being an effective one-term President is now selling out yet another chunk of US goodwill to get his additional 4 years in office. Trouble is, he's chipping away at the strength of the country by doing so.
To which I replied:
Now you are simply criticizing the US politician to defend the UK company. It reminds me of Oscar Wilde's remark about foxhunting, the unspeakable pursuing the inedible. Politicians globally attack companies from their own country or other countries. There isn't anything uncivilized about kicking ass. It's how pols behave, especially when there is an oil leak into the Gulf of Mexico 4 miles down and only BP can possible figure out how to cap it. Hillary Clinton would not be able to help.
There will be no blog Wednesday because I am attending conferences all day. More for subscribers from Israel, Britain, Poland, and Thailand follows. Read more »
Kissinger's Victory
Here are some comments from across the Irish Sea about BP's woes, from Paddy Power, which collects bets made with Irish bookies:
Troubled oil giant BP have today been cut from 10-1 to 4-1 to file for bankruptcy before the end of the year according to leading bookmaker Paddy Power.The cost of the ongoing disaster in the Gulf of Mexico is growing daily and recent demands by the US government for BP to set aside billions to service potential claims could hasten its path towards potential bankruptcy.
Tony Hayward remains odds-on to step down as BP CEO before the end of the year but has eased slightly in the betting from 1-2 to 8-11 on the back of some large bets, including one of £10,000, favouring the Englishman to weather the storm.
Paddy Power are also quoting odds of 10-1 for Hayward to serve any jail time as a result of the oil spill.
Henry Kissinger won. Saturday was a great day for all first generation Americans (including me) whose daddies played and cheered for hands-free European football (soccer) rather than the USA version of the game. The US team at the World's Cup tied in its opening game against England. We play Slovenia next, on Friday.
Kissinger in the 1980s advocated that our country to prepare to compete in soccer, a game I suspect the Secretary of State had learned during his boyhood in Fuerth, Germany, as my father had learned it in Bad Hersfeld. Thanks to his sharp eyes and quick reaction, my father was a goalie, and more successful playing against the Greek team in Inwood than the poor English goalie who fumbled a let the USA score. (For some reason England, which is not a country, has a team along with Scotland and Wales; other teams represent countries.)
The soccer victory is another dreadful comeuppance for the Brits, along with the mess caused by former British Petroleum, now BP, in the Gulf of Mexico. The Mayor of London, Boris Johnson, deplores “anti-British rhetoric” by Americans over the oil disaster spewing out as much as 40,000 barrels per day onto our fragile coastline. If the ultra-jingo Brits were confronted by a similar horror perpetrated by an outfit called American Petroleum off their shores, I suspect the rhetoric would be much nastier.
There is however a serious mid-Atlantic split in our alignment with Britain over budget deficits. The new British Prime Minister, David Cameron (like Boris Johnson, a Conservative and Old Etonian) is calling for austerity and budget cuts to reduce the deficit. Meanwhile, US policy calls for delaying counter-cyclical budget balancing moves because the recovery is still fragile. This is not the right time to imperil economic growth by reducing deficit spending, our USA economists are saying (of course they are quoting a British theorist, John Maynard Keynes.)
But the White House-Treasury line is being opposed by our own native-grown Congressioanl Republican pre-Keynsians who want to cut spending and stimulus measures now. The new austerity advocates here are ignoring the fact that unemployment is still excessive. They are preaching here as in Britain in favor of a virtuous cycle, whereby cutting spending and taxes revives confidence. I have to confess that I do not see how this can happen.
Injecting money into the economy, cutting interest rates, buying government debt stopped the 2007-9 economic collapse from turning into a repeat of 1929. This was the policy not just of the Democrats, not just of Labour in Britain, but of both parties.
Tax-cutting has become a knee-jerk reaction to every problem in the eUS conomy for some. But in the present situation, cutting taxes also means cutting benefits for people and programs funded by Washington (even if administered by states). This salve-the-rich Old Etonian rhetoric ignores real suffering, real need, among some less privileged lower-class Americans who are not paying taxes because they are out of work.
The one thing we should not bring over from Britain is its devisive class divisions.
More for paid subscribers from Singapore, Britain, Brazil, Greece, Canada, Panama, Israel, China follows.
Reader comments and my replies
Subscriber SR wrote:
Am I wrong that sometime during the Clinton administration they decided that banks needed to lend to "people of color in the less desirable parts of the cities?"This then forced the banks to make loans which they knew could not be paid. They had to figure a way to make it safe for them, hence the packaging and sub-prime debacle.
That to me makes it a government created problem which financial people solved in the only way possible: they packaged it and sold it to suckers. Where would we be if the government had not mandated those loans to people who only deserved them because they were minorities?
I agree private enterprise is certainly capable of evil on their own. It is just that government does it worse and with less recourse.
I replied:
You are entitled to your opinion. But I disagree. Nobody forced the banks into this tactic. They did it because they thought it would pay.The US government subsidizes mortgages through the tax code. It created Fannie Mae and its rival Freddy Mac to encourage home ownership. Both of these goodies predate Bill Clinton's administration.
So did rules against "red-lining" which cuts lending to people of color in less desirable neighborhoods. All this has been part of US policy for ages, backed by both parties.
As FNMA was a big source of funding for the Democrats, the Republicans finally got it "so-called ha-ha" privatized.
How do you get from this to blaming the government for the practices by the banks over mortgage backed securities, a market they voluntarily entered in order to compete with FNMA? This seems to me to be a reversal of the reality.
Banks went in for NINJA lending because they figured they could always repossess the homes of people of color in lousy neighborhoods because real estate prices would rise forever.
They were wrong. so were the borrowers, those who lied and those who told the truth. So were those who sliced and diced the mortgages for the banks, So were those agencies which rated them AAA. So were those who bought the CDOs which were so safe and paid so well.
But why do you think the government is at fault except based on some prejudice? There is plenty of blame to go around and not hit poor Mr. Clinton, who has so many other things feel guilty about.
We have readers across the political spectrum. In contrast to SR, here is what reader SF wrote.
Bravissima for this email!
President Reagan promised fiscal responsibility. At the end of his terms there were a trillion dollars of new federal debt; far more millionaires and some billionaires created, thanks in part to lower income taxes; tens of thousands of good factory jobs exported, many with help from USAID funding; a bigger, not smaller federal government; EPA gutted; the costs of the deregulation-instigated savings and loan crisis; and federal deficits as far as the pre-Clinton era eye could see.
As for 'too big to fail', in the financial sector that really means: too big for us to afford.
Oliver Wendell Holmes said it right: taxes are the price of civilization.
My business does not gain from political controversy. I had two cancellations this week, one from a Californian named Mohammed over my alleged support of Israel, and another from a disgruntled standard American over politics.
While I know bashing unions and strikes has become something of a shibboleth among Americans, I'm reminded of the Polish Solidarity movement and Lech Walesa when I read about Chinese workers picketing and demanding a union. They work for Japanese and Taiwanese firms seeking cheap, abundant, and docile labor. What these foreign companies are getting is The Weavers:
Oh you can't scare me; I'm sticking to the union
I'm sticking to the union, till the day I die.
To keep in business, I will stop getting into US political debates until I cannot resist commenting again. More on British, Argentine, Spanish, Singaporean, Korean, Swiss, Brazilian, and South African shares, and a 'sans-commentaire” note regarding a controversy in France. To read on, subscribe. We offer a $25 day pass which will let you test our subscription service. Read more »