Our Hidden Tech Stocks
Here is how John Maynard Keynes explained why Max Planck became a physicist rather than an economist:
“Prof Planck, the famous originator of Quantum Theory, remarked to me that in early life he had thought of studying economics, but had found it too difficult. Planck could easily master the whole corpus of mathematical economics in a few days... But the amalgam of logic and intuition and the wide knowledge of facts, most... not precise... required for economic intepretation in its highest form, is, quite truly, overwhelming difficult for those whose gift mainly consists in the power to imagine and pursue to their furthest points the implications and prior conditions of comparatively simple facts which are known with a high degree of precision.”
(Quoted in John Lanchester, How to Speak Money, London, Faber & Faber, 2014, which I am reading.)
The world's first ever blockchain trade finance transaction took place yesterday. Barclays Bank's letter of credit documentation for a shipment from Ornua, an Irish dairy firm, to the Seychelles, using the UK bank's Accelerator Program, went through the new Wave platform while the payment used the existing interbank system, Swift, whose own documentation may not always be secure. Swift was used by miscreants to steal money from the Central Bank of Bangladesh earlier this year, transferring the money to cash accounts at Manila casinos. The new platform for handling documents separately is much safer.
Wave, which developed the distributed ledger technology to all parties using a blockchain, is an Israeli startup company.
More for paid subscribers today from Canada, Indonesia, Britain, Poland, Brazil, France,Germany, and the Channel Islands. There will be no blog tomorrow as I will be traveling—still without all our baggage. The combination of rules prohibiting you from having your toothpaste, camera, or cosmetics with you on a plane--and then not getting your cases--is horrible. If protestors can paddle across a canal to occupy the runway, as they did at London City Airport early Tuesday, so can terrorists.
*We tend to distrust the overbought US tech sector and look for niche stocks. One of ours is Tencent, TCEHY of Hong Kong, operator of a Chinese empire of internet and smartphone apps which is now the most valuable company in Asia—and also one of the world's top tech stocks. We got into it early because our reporter, Harry Geisel, found charm in its parent, Naspers, NPSNY, a OTC South African media company which owned 34% of TCTZF, the US OTC version of the Hong Kong stock rather than the more recent ADR. Since the HK$ moves with ours, they track.
I Borrow, You Pay
In these weird times, it really pays to borrow.Two Eurozone firms, Henkel and Sanofi, will charge those lending to them rather than paying interest. They both issued negative yield bonds for a value of euros 1.5 bn yesterday. The negative yield is not dramatic—0.05% per year in both cases—but it is also unprecedented. The German household goods firm's euros 500 mn bond runs for two years and the French drug-maker's euros 1 bn one for 3 ½ years. At maturity the lender turns in the bonds and get back less money than was lent in the first place.
These could only ever have been created for the sole purpose of being purchased by the European Central Bank under its extreme quantitative easing program. The purpose is stimulate the common currency economies and also increase inflation, although the ECB is not allowed to admit this.
Central banks often have a hard time finding bonds to buy in a period of deflation. The idea is that they will sop up bank liquidity forcing up interest rates. As rates rise, those holding cash are supposed to hurry to invest it before rates go up higher and higher. The investment supposedly boosts growth and inflation, and leads to new hiring and new building. Unfortunately, the program doesn't work as it is supposed to.
Hence the Bank of Japan is buying not bonds but exchange-traded funds linked to the Nikkei share index. This pushes up the stocks of large companies (and Japanese export stars) while hurting the shares of smaller and more domestic companies. The big companies in theory react to a higher stock price by becoming less risk-averse, and spending to expand their output. But monetary policy is not really the way to boost economies. Their perverse effects can undermine the original good intentions.
There are known ways to stimulate growth which are not being seriously attempted now, except to some extent by China and Britain: pump-priming. Monetary policy alone will not work.
What is needed is fiscal policy, much more political and difficult. It requires cuts in taxes and/or increases in state investment. This the European Union is barred from doing now because Germany will not allow it. It is also hard to vote for in the USA without the accord of both parties, and in most regions and certainly in Washington deficit spending is treated as heretical and dangerous.
The G20 talks featured an agreement to boost spending (with no specifics), citing fiscal and structural measures—as well as monetary tools--to bolster faltering world economies. They will also cooperate to ensure stable currencies. All the others will stop calling Pres. Obama a “son of a bitch” even if the US cannot in fact put the growth-boosting measures into place in the scale needed.
China to protect the regime has finally decided that it must provide social programs for its population to cover medical and hospital care, childcare and education, and pensions and support for old age. Some 70 years after the Communist took over, the Chinese Communists will add social and socialist programs to a program that until now has focused only on building roads and dams, railroads and airports, and tearing down picturesque homes to build tenements. The Communists will no longer leave it's peoples' real needs out of its economic planning system to focus merely on raising production and exports.
The only surviving major Communist country managing the renminbi (which translates into “the people's money”) until now has neglected what the country's working people, particularly internal migrants, desperately need: to live where the jobs are without neglecting the youngest and oldest family members, their children and their parents left behind in the backward countryside.
Britain faces a more subtle crisis but the new Prime Minister seems to be determined to spread the benefit of globalization and international trade to parts of the population and part of the country which were left behind over the past decades. These were the regions and groups which generated the protest vote during the June referendum forcing Britain to exit the European Community. At least it will not have to impose negative interest rates, a policy which the Bank of England, its central bank, has ruled out. But PM Theresa May wants to build infrastructure for the neglected north, introduce apprenticeship and training programs for those rendered jobless by imports or new technology, and end the former Tory program of lower-spending under austerity budgets for education and healthcare. The crisis in the National Health Service over weekend work which nearly led to a doctor's strike has focused minds in Whitehall on the risks which Ms May is fond of grammar schools (select high schools owned by the state) because she went to one. In the UK education and healthcare are both in the hands of the central government—since roughly the same as Mao Tse-Tung decided they were not important for modernizing China.
Interestingly enough, the May initiatives are resulting in analysts calling off the Brexit recession, despite near total uncertainty about what the terms Britain is seeking for its future relationship with the European Union—to say nothing about what it will eventually succeed in getting. In reaction to the May social policy switch, today the “Brecession” was called off by Crédit Suisse and Morgan Stanley. The Swiss bank not only raised its growth forecast for 2016 to 1.9%, a respectable showing in the current global economy. It also now predicts a positive rather than a negative growth rate for 2017, admitted at a mere 0.5%, but definitely on the plus side rather than the minus. MS also expects 1.9% growth this year and is even more upbeat on 2017, where it expects a 0.6% rise in the UK GNP. Since the UK's global situation is unpredictable, they are reacting to the new Tory social programs.
More today for paid subscribers from Britain, Mexico, Canada, France, Spain, Denmark, Israel, and China.
Guy's Stocks and My Stocks
Yesterday we landed in London (via Dublin) at the crack of dawn and found that our baggage had not arrived with us. We flew from Newark with Aer Lingus and then on to City Aiport with BA. Today the airport we used (nearest Mudchute Manor) has been silent all day because a bunch of British “Black Lives Matter” demonstrators managed to sail across the canal from Royal Albert Dock and plop themselves down on the runway. They have now been removed but the airport is playing catch-up with flights for the next 6 hours or longer so our baggage is still in limbo.
Despite this snafu we managed to make our way to the Caledonian Club near Hyde Park Corner for dinner with Guy Spier—and his parents whom we had not met before. To my husband's disappointment we were not served haggis and whisky.
I owe Guy an apology for criticizing him for failing to tell his stockholders about the lawsuit he led against the chapter 11 reorganization of Horsehead, a US zinc firm. Its bankruptcy looked like a setup to favor its execs (and not only bondholders) at the expense of shareholders like Aquamarine Fund, which Guy manages. His silence was required by the judge in the case. This was unclear from the Gretchen Morgenstern's New York Times article which revealed the saga. Guy hopes his crusade against the misuse of US bankruptcy rules may ultimately win him friends, respect, and a Warren Buffett-style reputation in the investment community.
“The ground is shifting under our feet as the economic cards are being reshuffled. This normally happens during war or revolution. But it is happening without them now. So the best thing we can do is be defensive,” he summarized. One result of the Horsehead horror is that Guy is also becoming a more activist investor “I am opening my eyes to activism if I can do it the right way.”
But more important than Guy's fund (in which my husband has invested) is Guy's current view of the market. His favorite stock appears to be Mohawk, the carpet and flooring firm. He says it is like Procter & Gamble or Unilever but easier to understand, and is a total “opposite to Internet darlings”.
Overall, Guy's fund is now 17% invested in US auto stocks; 15% in credit card networks; 14% in major center banks; 10% in consumer branded goods—and 41% in cash or small holdings which can be liquidated quickly. The details are only for my paid subscribers and his. But here is Guy's logic:
His reason for buying banks is that he anticipates the regulators have overdone their clean-up after the 2007-8 banking crisis. Now the new operators in finance tech are going to be running into government regulations. But big banks will get an easier time of it. The required capital-equity ratio of 12% is “simply too high just as 3% before the global financial crisis was too low”, he says. He also anticipates a lot of consolidation in banking. The US has 12,000 banks, far too many in Guy's opinion.
Guy also expects consolidation in credit card networks also undervalued by the market. He notes that American Express has bought one of the internet startup competitors and points out that the credit card majors have the infrastructure and regulator smarts to buy up the challengers. Today another deal brought together Mastercard and Paypal. As for cars, the market is totally focused on Elon Musk rather than the classic players, whose shares are cheap. And branded consumer durables are also under-valued by the market.
More—lots more—for paid subscribers follows covering two days from London where my focus is on defense stocks as well as defensive ones. And thanks to Guy I am keeping my eyes open for vintage old-economy players gaining an edge on market darlings Musk and the Internet plays, the focus of today's blog. After Labor Day, deal-making gets going. Read on.
Before I fly to Europe, I posted the tables at www.global-investing.com
Please visit the site to view the tables you are allowed to see: closed positions for all; and our current holdings and advice for paid subscribers.
There is some fun news over the long weekend for our readers about former holdings. First, after an activist victory--the first ever in Germany to which I am headed--a new board was put in place at Stada Artzneimittel. STDAF, the sold native German maker of generics, was a share we used to own, created and managed by the medical association. Unfortunately, its management was not really interested in profits so we exited.
A second news item says that Liberty Global Media, LBTYA and LBTYK, which we used to own too, is buying up soccer teams in Europe. This is a push into content by John Malone, the US cable king, who is trying to create a quadruple play in Europe combining cable, internet, telephone (fixed and mobile), with TV. Being a billionaire he is now launching into "content" despite the risks. Read more »
Volcker on the Bus
The coming Labor Day holiday is being heralded with disappointing US manufacturing job figures for August. New hires came in at 151,000, sharply below the consensus forecast of 180,000.
However, as Marc Chandler, the currency guru at Brown Brothers Harriman explained, if you add in the additional jobs created in July (as revised, up 20,000) the new jobs total is only 9000 short. Yet that is taken by Wall Street today as a “bad news-good news” event, with the assumption that the US Fed will delay a rate rise for fear of hurting growth.
My husband spotted Paul Volcker on the bus earlier this week. The current obsessive focus on the Fed recalls the days when we lived in Washington and markets watched the Fed for signals on what would happen next to interest rates and the economy. The dollar, now that interest rates are not about to be increased, has lost some of its movie star appeal against other currencies. So it is down. So too for now is Wall Street's taste for financial stocks. Banks suffer more from low rates than the real economy.
Yet the truth of the matter is that stuff happens—both good and bad—outside the remit of our masters of money. An example is yesterday's huge leap in the British purchasing managers index which boosted sterling. Despite the fact that the post-Brexit drop in cable was exactly why British exports rose and British imports fell, causing the demand for UK manufactured goods to rise so dramatically.
More for paid subscribers today from Brazil, Ireland, India, Israel (a trifecta!), France, Hong Kong, Finland, Australia, Argentina, Colombia, and Britain. There will be no blog Monday, Labor Day. We will be flying to London Sunday overnight to then go on to a second-generation high school reunion with a professor at late father's school about which I have already written. I am designated family rep as my eldest cousin (actually born in Germany) is unable to go to the 10th anniversary of the creation of the Mikwe Museum in Rotenburg an der Fulda. She was present at the creation.
The Cure for Falling Currency and Oil
Just in time for our trip via England to Germany on Sunday, the pound sterling is up. Cable hit $1.3267 before slipping to $1.3247. It is also up against the euro.
The recovery results from the latest manufacturing purchasing managers index which went from 48.3 in July to 53.3 in August. The monthly PMI rise was the largest in the 25 years for which data exist. There were two components for the jump in demand. The domestic market for consumer products soared because after the Brexit vote, imported goods cost more. Furthermore, British manufacturers got more orders from the US, Europe, Scandinavia, and the Middle East-Africa countries, because their prices were more competitive.
There is a problem in the data, however. First of all, with sterling some up today, the priced advantage is not as great as it was last month when the pound fell below $1.30. Moreover, prices are rising mainly because of the higher cost impact of sterling inputs Britain has to import. These reached new 5-yr highs. A key metric still to come is the services PMI to be published next week. But it looks like the corrective for low exchange rates is... low currency exchange rates.
Similarly, there is a conundrum in the energy sector after the Energy Info Administration reported a 1.2% rise in US oil demand in June, the 5th month in a row to see a rise over last year, with crude imports hitting 8.92 barrels/day. Rather astonishingly, the increase was to offset heavy exports of US shale exports needed to keep up refinery production on the US Gulf Coast and in California. The cure for low oil prices is low oil prices.
More on the boost in sterling and gasoline demand below for our subscribers. We report from India, Britain, Switzerland, Ireland, Canada, China, Denmark, and Finland.
Protests in India, the US, and Mexico
You don't want to read Sir V. S. Naipaul's first highly critical book about his travels in India, An Area of Darkness, which I re-read last night, right before you have to explain low growth and try luring in investors. Naipaul, a Trinidadian of Indian Brahmin background, was then a resident of Britain and had not yet won the Nobel Prize. He scathingly reported on the defects of his ancestral homeland: the paralyzing caste system, its failure to defend its borders, its inability to do anything about abysmal poverty or disgusting squalor, (about which he quotes Gandhi), and its secret hankering to go back to the British raj (rule.)
Today's data show India's economic growth, while still ahead of China's, has fallen to an annualized 7.1% in the June quarter, from 7.9% previously. The private sector has cut down on spending and only government is boosting growth. It is now unlikely that India will hit its target of 8% growth in the current fiscal year to March 31.
Separately, India also offers foreigners 10-year residency for themselves and their families if they create 40 jobs in the country or invest $1.5 mn in industry. However Chinese and Pakistanis are not eligible. Naipul, a Trinidadian, would be welcome. More on the troubles in his homeland from our Indian reporter and other news from Mexico, Canada, Chile, Brazil, Australia, Switzerland, and the USA. Two bonus stock ideas for paid subscribers are given below by our reporters. And a part sale as well, also for paid subscribers. Join them to make money.
Mounties and Foot Soldiers
So Hillary's side-kick Huma is ditching her spouse, ex-Rep. Anthony Weenee. And Kadashians are paid to promote products on their websites. I learn about both these news items from the front page of The New York Times which used to filter out news that was not fit to print.
On the other hand, a friend who covers Mexico for The NYT managed to snag two by-lined articles in on day so things are not wholly out of whack as only one was about Juan Gabriel, a pop singer who just died.
Our Japan writer found out why the alleged top 3 gainers added 888.3 to 795.3% last week according to investorsintelligence.com. All 3 had 10:1 reverse splits. Information for stock picking is useless if it is wrong and a technical analysis site should have spotted these huge and improbable numbers without Chris Loew having to figure out what was up.
We no longer have a stake in Myanmar, after I opted to sell a Singapore-based fund investing there, Yoma Strategic, YMAIF, after criticism of excess micromanagement by Aung San Suu Kyi in The Economist. She and I share a birthday and we knew her late British husband who lobbied at the UN for her release from house arrest by the SLORC. But like Karl Marx, I take The Economist very seriously.
Since our exit, the Bagan (or Pagan) Buddhist temple complex, a key tourism magnet, suffered a devastating earthquake. That's the bad news. The less bad news is that fabulous high grade tin mines in the Wa tribal territory of Myanmar up against the Chinese border may be brought on to global markets if Ms Suu Kyi manages to get the rebel tribals to make peace and let the tin from Man Maw head for global markets rather than being slipped across the border to China.
Another former Asian stock we exited, Xinyuan Real Estate, busily building houses in Brooklyn, Flushing and along the High Line these days, issued $300 mn of 3 yr bonds with a tempting 8.125% yield. My city is being overbuilt with high rise apartment buildings aimed at Chinese investors, just like medium-sized China cities. Thanks to the now-hot NYC market Xinyuan had good sales and earnings in Q2 and raised its guidance. How long will this go on?
Today we have four quarterly reports to deal with plus hot news elsewhere from Israel, and Canada, and then Australia. Plus news from Latin America.
Gold Gamble from Adrian; Guy and Warren
Long-term readershave met my occasional contact Guy Spier, who like my husband is an Oxford grad. Guy, based in Zurich, manages the Aquamarine Fund, a value investor. My husband invests in the US-taxable variant of Aquamarine, which also has an offshore version. Thanks to this link, I get to join Aquamarine presentation in New York and sometimes get investing ideas from Guy, like our Fiat play which I closed out early this year at a loss after it spun out Ferrari. Selling both enabled me to avoid complicated tax reporting required had I kept Fiat.
Guy is frequently in the news when he talks about the impact of a luncheon he bid for with Warren Buffett on his investing style. But now he is being featured in The New York Times over another matter, the Feb. bankruptcy of Horsehead Holding, a zinc and nickel producer from Pittsburgh. It was valued by auditors KPMG before its filing at $1.1 bn. Now its management is trying to settle for around $330 mn, a valuation writing off its Mooresboro (NC) project to zero. This estimate, by Lazard, would favor the firm's major creditors leaving equity owners like Aquamarine and other foreign funds with a huge loss. So Aquamarine, Hong Kong's Boswell Capital Mgm, whose fund owns 250,000 shares of Horsehead are suing in a Delaware federal court. Over a thousand US retail investors also own Horsehead shares.
And they are getting some traction.
In May, Judge Christopher Sontchi raised questions about the reduced valuation and allowed creation of an equity committee to take part in Horsehead's valuation. This is not provided for under US bankruptcy law, which favors creditors and management over shareholders. The committee then discovered that Horsehead turned down attractive offers for assets received before it filed under chapter 11 in Feb., which greatly exceeded the valuation now put on them. The motive for the lowball bankruptcy filing may have been to get management a percentage of Horsehead shares as an incentive and a possible future IPO of the restructured metals firm later.
Gretchen Morgenstern broke the story in Sunday's New York Times, and her article is a plea for changes in bankruptcy proceedings to protect shareholders as well as debtors and management by giving them a voice in the process.
My husband found the article a bit of a shock as Guy Spier had not told his shareholders about this potential drain on Aquamarine's performance before it appeared in the newspaper. Has Warren Buffett ever tangled with bankruptcy lawyers? Would he have told his shareholders?
Adrian Ash writes from www.Bullionvault.com today that “gold output from Australia, the world's No. 2 gold-mining nation, is hitting a 15-year high in the first half of 2016, defying analyst forecasts of a global slowdown.” He attributes the rise to “the surge in prices from last winter's half-decade lows. That came thanks to 2016 investment demand thanks to professional investors finally realizing” that interest rates will not rise to “any meaningful level.”
He then adds that data from the World Gold Council says that “global demand for gold set a new half-year record between January and June.” “Led by shareholders piling into exchange traded trust funds, investment demand beat even the first half of 2009 as prices jumped 25%, the fastest pace in more than 3 decades in US dollar terms.” Meanwhile consumer demand for gold jewellery, coins, and small bars bell, while mining stocks outperformed even after some of them were hit by profit-taking during the summer.”
Adrian, who runs the bullionvault.com website which advertises on our website, sponsored by the World Gold Council, thinks a chance to buy gold cheaply is coming on Friday. “A strong number will hit gold hard because traders will bet it means a strong chance of the Fed raising rates at its September meeting. A weak US jobs number, in contrast, could fire the autumn starting gun which sent precious metal prices higher in every year of the early 2000s' bull market.”
Meanwhile last week gold posted its biggest weekly decline in a month. And while British markets are closed for the August bank holiday (Adrian writes from London), the price of the yellow metals is rising elsewhere today.
More for paid subscribers from Japan, India, Israel, Mexico, Britain, Canada, The Netherlands, Switzerland, Germany, Brazil, and South Korea.
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