Having trotted around the city collecting insights from the wise I will share them with my readers.
Last night Qaffafew, the quant club, was addressed by Chris McHeffey of Reality Shares for which he has developed a system for isolating dividend growth (initially on the S&P 500) using puts and calls on this very liquid part of the market.
Isolated dividend growth backtested to 1999 shows 150% growth, McHeffey explained. This compares to a 119% in dividends, and a 50% rise in the stock prices of the index. You probably will not have to construct this portfolio by yourself as there will be an ETF soon, I believe.
Here's how to isolate dividend growth. Buy a 1-year call on the S&P 500 and sell a 1-year put. Then sell a 3-yr call and buy a 3-yr put. So you are long the index over 1 year and short over 3. The position is market neutral and you will have to do similar 1-year operations going forward.
This is about a pure USA play so I am sharing it with the world, as McHeffey spoke without requiring me to keep his secret in a public forum (an Irish bar near Grand Central.)
*Insight number two comes from David Woo, the chief forex and rates strategist who spoke at the Bank of America-Merrill Lynch. Dr Woo spoke at the brokerage's mid-year press conference.
That insight is for paid subscribers only along with a company report and some hot news from Australia, Canada, The Netherlands, Portugal, Argentina, Brazil, China, Belgium, Ireland, Israel, and Ethiopia.
Risk, Activist France, and Wierd Ireland
You win some and you lose some. Its activist government seems to have won some measure of protection for research, production, and employment in France by taking a 20% stake alongside GE in Alsthom.
However all the pressure Paris could wield did not save BNP-Paribas for a record fine of ~$9-10 bn for its Swiss sub violating US sanctions against Iran, Sudan, and Cuba in 2007-9. The fine will wipe out BNP profits for 2014 and hurt 2015 as well. Moreover, under French law, the bank does not get to take foreign fines off the earnings on which it is taxed. Perhaps the French will change the tax law.
I must confess that I am uncertain about whether or not the market is toppy. I noted yesterday that some observers, notably Mark Hulbert, editor of Hulbert's Financial Digest, thinks that the spate of mergers and acquisitions is a signal of a stock market ahead of itself, based on what happened in 7 years ago. Of course the situation is different now, however, because everyone remembers the selloff, and so there is still plenty of uninvested money on the sidelines. Much of it belongs to the younger baby-boomer generation which so far has avoided stocks. Moreover, the argument for equities remains compelling in this extremely low interest-rate environment.
But then too the summer is upon us and it is very often a time of down markets. And there are baddies about: front-running high-speed traders, company insiders trading against the shareholders they are supposed to be working for, pump-and-dump scams, widely-disseminated misleading short-seller reports and equally cruddy “research” posted by pretend-neutral writers who have been paid to post.
So how do I play the market as we are about to go overseas for 6 weeks?
I took a coward's way out, buying UVXY at a ridiculously low price of $27.13. This is the Ultra VIX short-term futures ETF which seeks results double the daily performance of the “fear gauge”, the S&P VIX NAV.
Since this has nothing to do with global-investing (the S&P 500 shares are USA) I am sharing it with everyone.
Tomorrow's blog will be late because I am attending a mid-year conference with projections for the rest of the year presented by Bank of America-Merrill Lynch.
More for paid subscribers from Canada, South Africa, China, plus a political trifecta: Israel, India, and, mostly, Irelandl.
The Anvil Chorus
The private-side Chinese purchasing manager's index, run by HSBC, rose into growth for June, with a score of 50.8. Anything over 50 shows orders are rising. In May the level was 49.4. What this means for our portfolio is explained below.
The hammering outside my office where the scaffolding is being partly assembled reminds me of The Anvil Chorus. The perilous-looking tubular structure in the building courtyard was 1 to 2 stories below our apartment when I left for work. We really have to leave for Europe later this week. While this is partly a vacation it is also a respite from daytime racket and the need to close windows during the summer. The pound sterling is near a new 5-yr high in anticipation of my spending.
With no fewer than 3 of my stocks topping the weekly and month top gainers, all up 22%+, I am getting fearful of a market top. My big winners last week were Covidien (which still counts as I only sold half); Shire, which my son put into our corporate profit sharing account; and Williams Cos, a US stock. Mark Hulbert is making bearish forecasts based on the level of mergers and acquisitions, M&A, which affected all 3, with WMB the buyer and the other two the target. Mark writes Hulbert's Financial Digest, which tracks our performance and is published by marketwatch, a Dow-Jones website.
More for paid subscribers from Britain, South Africa and Korea, China, India, Fin-, Scot-, and Ire-land, Spain, Brazil, Mongolia. Australia and Canada including a big annual report and a stock sale.
Portfolio Tables Posted
The www.global-investing.com tables have been posted. Instead of Chinese food today we will be eating home-made pesto on pasta, mainly because my windowsill basil plant will soon be ready for burial. We leave next weekend for a 6 week European stay. The reason is that our building is hammering and removing ceramic tiles facing an eastern courtyard from 9 to 5 every day. This will hurt the poor basil on the windowsill but it will also hurt by quality of life.
Our original plan was to sign up for a Black Sea cruise and muck around eastern Europe and Turkey looking for sites and stocks. But then after the Russians nabbed Crimea, our planned destinations were put off-limits: Sebastopol, Yalta, Sochi, and then also Odessa. Now even the Romanian coast is flooded.
So we cancelled and could not find another easy escape hatch. So we are moving to London and taking breaks on the Portuguese Algarve coast and in Paris. This can turn up a few stock ideas discussed for paid subscribers below along with other matters of interest.
Paris is not only important for French stocks, but also for the largest holding in my US portfolio, General Electric.
The Shamrock Prize
Challenged by a reader to prove that Confucius would have opposed today's Chinese familial political corruption despite his stress on filial piety, I was not short of citations. Here is the best:
“Choose the right people. If you put honest men above the dishonest, the people will have confidence in the government. If you put the dishonest above the honest, you will lose their confidence.
“But first of all there must be no greed in you yourself. Then those under you will not steal.”
(Michael C. Tang, A Victor's Reflections: China's Timeless Wisdom for Leaders, Prentice Hall 1999.)
Today I am facing an embarasse de richesse in my corporation's outside-managed profit-sharing account. An American Depositary Receipt (ADR) it holds, which I refused to buy or write up, is now a 10-bagger. The stock is Shire plc, the Irish drug-maker notorious for flooding the world with a nostrum for attention-deficit-hyperactivity disorder, ADHD, handed out like popcorn to young minority-group boys who misbehave in school.
Today in UK trading SHP rose nearly 14% on news that it had rejected a £27.25 bn takeover bid from AbbVie, allegedly undervaluing SHP.
The outside manager of my company's profit-sharing account is FIC Capital Inc. I will introduce any reader who wants an outside wealth manager firm focused mainly on US shares to my son the CFA who is a fund manager and director at FIC.
More for paid subscribers from Britain, China, Holland, Israel, Ireland, Japan, Mexico and Portugal, including a new stock pick.
The emerging world is divergent, something which catch phrases like BRIC might hide.
*China suffers from the contradictions of Communism. Two Chinese anti-corruption activists were sentenced to 6 ½-yr jail terms yesterday because they took photographs of themselves holding banners urging government officials to disclose their wealth. A third activist was given a shorter sentence after a show trial over charges Amnesty International called “preposterous”. While the current Beijing regime is formally cracking down on ill-got wealth in the hands of relatives of top officials, any populist movement with the same goals counts as a threat to Pres. Xi Jinping whose own family members have vast wealth of occult origin. What would Karl Marx say? What would Confucius say? Neither would lock up the critics of corruption and backhanders;
*India's new premier, Narendra Modi, is a follower of Maggie Thatcher. He is proposing both closer ties with Russia and partial privatization of government controlled companies. He wants to cut the level of state ownership of companies to a maximum of 75% over the next 3 years. The can cut the New Delhi government deficit by $9 bn, money that is needed, while also reducing the interference in business by India's sprawling government bureaucracy. The sales will probably also boost the Bombay bourse which has already risen sharply after the election of a free-marketeer;
*Argentina is expected to hold its nose and negotiate with hold-outs against its refinancing of government debt and make partial payment to them of the $1.33 bn it owes under new US court rulings. According to Bloomberg, Cristina Fernandez's ratings are so low that the population no longer is following her left-wing lead against hedge-fund “vultures” and supports negotiations. Approaches have reportedly been made to Elliott, a US hedge fund owner of the original bonds which refused to restructure them in 2005 and 2010. The bonds defaulted in 2002 and were purchased at a pittance.
We got into the Argentina debt mess early. Back in 2003 I researched in Buenos Aires a yankee (US$) bond issued by two offshore subsidiaries of Telefonica de España (TEF) and determined without any doubt that the bond was guaranteed by Spain's TEF, regardless of what went on in the government bond sector under Cristina's late husband, Nestor Kirschner. So we piled in and made a packet and were bought out 18 months later. I guess we were vultures too.
This week JP Morgan is launching its new Diversified Return Global Equity ETF (exhange-traded fund, ticker: JPGE) which uses multi-factor analysis to select stocks in the FTSE index, mostly from developed countries. The factors include relative valuation, momentum, low volatility, and market cap size. The fund as launched holds 450 different stocks. It is offered as an alternative to ETF's based on market cap or yield. The fee is 0.38%. The managers will use indexes selectively. They are Beltran Lasta who covers global and Europe shares and James Cook, an emerging markets and Asia equity specialist.
While it is always great to run into a new way to slice the global investing cake, the use of multiple factor indexes is unlike to reflect the news (as reported above) because indexes are by definition backward looking. That is why no ETF will really beat the performance of selected stocks.
Peter Schiff claims his Euro Pacific Precious Metals arm offers the cheapest physical gold for US owners. That's false. Without delivery (for which Schiff charges $25), our physical gold advertiser BullionVault (advertising on our website, www.global-investing.com) beats Euro Pac prices (7.5% to 8.5% over spot) by charging a maximum of 0.50% on any trade. And our advertiser only charges 0.12% per year for storage. Gold is up about 2.5% after the Fed projections yesterday, heading for $1300/oz.
More news from Spain (neither about the World Cup nor the new king), Israel, Ireland, Cyprus, Canada, Britain, Portugal, and China, India, Russia, and Brazil (the BRICs). Plus (of course) Argentina.
Argentine Economy Minister Axel Kicillof said his government wants to swap new bonds governed by local law for restructured government bonds under US law. The development comes after the U.S. Supreme Court refused to hear Argentina's appeal challenging the claims of holdout hedge fund investors who had refused to participate in the restructuring rounds of 2005 and 2010. Lower US court rulings bar Argentina from making payments to investors who went along with the restructuring deal unless it pays holdout investors at the same time. (As reported by the Buenos Aires Herald via Bloomberg).
So investors who swapped their bonds under the restructuring must accept payment from Argentinian rather than foreign banks. The banks need to gather the dollars in which the bonds are denominated and then send the money to foreign holders, most in the US and Italy. Moreover, it will be hard to do this by payout date (June 30).
The jurisdiction switch is the only way Buenos Aires can begin talks with the hold-outs and avoid default. Under the US refinancing deals it promised those accepting longer-term lower-yield bonds that it would not make an offer to the holdouts until the end of this year. But not including them in a payout now under US court rulings will put Argentina into default.
While it is not a direct commentary on Argentina bond politics, a famous Argentine close to the Peronistas commented yesterday: “Inside every Christian is a Jew.” The same Argentine also called Holocaust denial “madness”.
The commentator was Pope Francis in an interview last Friday with La Vanguardia, a Spanish newspaper, as reported by Jewish Week.
From when I was growing up in NYC I remember the influx of intellectuals' and Jewish classmates from Argentina including Irene who was one of my best friends, and Alejandro who was (later) the gorgeous tennis player which got the Bronx Science girls in their short white skirts onto the clay.
More from Israel, the Netherlands, Canada, Singapore, Ireland, Britain, China, and Finland. Mostly about cheap stocks, cheap in price compared to assets that is.
Peronist Perils and Lots of Biotech
The timing could not be more sinister. Argentina has ruled that the neo-Nazi Partido Bandera Vecinal will be legally allowed to contest the next election. Bandera is headed by Alejandro Biondini, a man with a Hitler mustache who appears on facebook and youtube doing a Hitler salute.
Yesterday, the US Supreme Court ruled against an Argentine appeal against its having to service hold-out hedge funds. The hold-out funds, having bought heavily discounted defaulted Argentina 2033 bonds remaining on the market after its 2001 default, then refused to join the the debt restructuring in 2005 and 2010. About 90% of bondholders agreed to accept conversion of the defaulted bonds into new ones with longer maturity and lower interest rates. Today Pres. Cristina Fernandez said the hold-out hedgies are practicing “extortion”.
Under the refinancing terms, no negotiations can be held with the hold-outs until next year. Meanwhile, not paying them along with the refinancing creditors, as US courts have ordered, counts as default. So it has to pay both lots of bond-holders under international rules, which would cost about a half billion dollars. Moreover, intermediary banks handling international payments of interest risk being sued by the hold-out funds. The jurisdiction of the restructured bonds is New York law, which means our Supremes' ruling is final.
What makes the two bits of news scary is that the leading hold-out hedge funds are NMB Capital's Elliott Fund, run by Paul Elliott Singer, and Aurelius Capital, run by Mark Brodsky. Both Singer and Brodsky are Jewish, something Pres. Fernandez did not need to mention.
You cannot safely eliminate Jews from capital markets. Even 70 years after the Nazi defeat, German stock exchanges miss the country's Jewish investors who emigrated or were killed. German listed stocks are not owned by German investors either directly or through funds. The largest holders of German stocks are American investors, followed by investors from other EU countries. German shareholders are third on the list.
The Peronist Party which Cristina Fernandez heads has moved away from the flagrant anti-semitism of its founders, Juan and Evita Peron, during the Hitler years. But it can revert if it has an opponent from the far right to counter.
More for paid subscribers, not from Argentina where we have not invested for over a decade, but from Canada, Spain, The Netherlands, China, Ireland, Finland, Britain, and Belgium. Lots of biotech and pharma news and a new stock buy today.
Inversions: Irish, Swiss, and Adam Smith
Today, June 16, is Bloomsday, a better one for getting people to think seriously about Ireland than St. Patrick's. It is the day James Joyce's Wandering Jew, Leopold Bloom of Ulysses, spent mucking around Dublin before the famous dirty sex scene with Mollie.
Bloomsday was first celebrated in Dublin in about 1954 and then in London. On Bloomsday 1956, Ted Hughes and Sylvia Plath were married, not a good omen. In Geneva, to which Joyce fled after Trieste became unsafe, and where he died, the local Bloom's Tavern celebrated June 16 annually starting in the 1970s.
The tradition has now spread to East 58th Street not far from here. The celebration features a breakfast of kidneys, readings from Ulysses, Irish music, and drinking Guinness stout. There will also be shucked oysters despite there being no “R” in June.
We are thinking seriously about Ireland because its attractions as a corporate headquarters is becoming notorious. Today Medtronic, a US firm from Minneapolis announced that it would buy Covidien plc, its Irish-incorporated fellow maker of medical devices for a 30% premium over Friday's closing price. MDT will help pay this huge premium by “inversion”, using a foreign takeover to move to a lower-tax jurisdiction. Ireland has a 15% corporate tax rate while the US rate is 35%. The merger, according to Bangladesh-born MDT CEO Omar Ishrak, will be to allow MDT to cut costs, being nipped by hospital penny-pinching under Obama-care and new medical device taxes to fund it.
It will also give Medtronic access to its $14 bn offshore cash pile of profits kept overseas which would be taxed if it was repatriated to the USA.
Some pundits think corporate taxes should be abolished or not imposed when companies bring home the cash stash from overseas. This is not what Adam Smith wrote in The Wealth of Nations. Smith argued that governments charter companies in return for revenues and fees. Governments must control and and supervise their operations. Smith worried about the disconnect between shareholders and the company managers fearing managers would waste money. He wrote that if companies become too large, they would distort markets with monopolies or resource mis-allocation. To stop this, he wanted government regulation.
Smith thought taxes were used too often to protect the rich and subsidize monopolies, the basis for his anti-tax positions. Taxes and regulatory intervention can keep competition working against companies that grow too large.
Neue Zuericher Zeitung reporter Christiane Hanna Henkel wrote today (my translation) that these inversion deals may not survive for long, although I think she is deluding herself.
“Only last week the EU Commission said it was examining whether supposedly Irish subsidiaries of Apple are include 'prohibited state aid' [under article 85 of the founding Treaty of Rome]. And in the US corporations engaging in aggressive tax 'optimization' have come under attack. CEO Tim Cook was summoned before a Congressional Committee to explain the tax consequences of its Irish arm.
“If an agreement on tax reform is reached in the US Congress, the window for inversions could close. In late May a group of Democrat Senators proposed a bill which would impose a 2-year moratorium on inversions.”
Covidien and its spunoff Mallinkrodt (MNK, sold) which also parlayed its Irish site of incorporation into a deal, both relics of Tyco, grafted together by Dennis Kozlowski. Kozlowski's shower curtain and solid gold umbrella stand surely are what Adam Smith meant by “negligence and profusion”. The firm was divided into three. A successor, Swiss Tyco International, did an early inversion deal with Brink's Home Security which merged into its ADT division which NZZ's Ms. Henkel did not mention.
More for paid subscribers on Ireland, Canada, Israel, Britain, India, Pakistan, Singapore, and Japan.