Bond Picking

Wed, 2015/08/19 - 2:56pm | Your editor

Kamakura Corp today launched a new fixed-income portfolio service for individual investors called The Corporate Bond Investor. This new service is an important step forward in Kamakura's efforts to bring bond market transparency and state of the art financial and risk analysis small retail investors as well as large ones. The new service will offer a ranking of the best value bond trades in the U.S. fixed-rate corporate bond market. It will be written Kamakura's founder and CEO Dr. Donald R. van Deventer, based on the firm's state-of the-art default probability projections and current traded bond prices reported by FINRA's TRACE system with at least $5 million in daily trading volume.

Fixed income investors have learned the hard way that relying on legacy ratings can be a money-losing investment strategy. As shown by Prof. Jens Hilscher, a Brandeis professor and senior research fellow at Kamakura and Prof. Mungo Wilson of Oxford University, modern statistical methods like those used for the new service are more accurate than legacy ratings. Corporate default probabilities, which are at the heart of The Corporate Bond Investor, are very important for another reason. Prof. Hilscher, writing with Prof. John Campbell of Harvard University and Dr. Jan Szilagyi of Fortress Investment Group, showed that high default risk common stocks underperform low default risk common stocks in the Journal of Finance in 2008 and in the Journal of Investment Management in 2011.


Since the market is looking at bonds again today after the Fed's Open Market Committee seems to have called for a delay on interest-rate hikes, the Kamakura venture is welcome.


Today China's stock-price-boost squad rushed to buy shares in Shanghai right before the close to stop another 5% drop in the index, and more shares being removed from trading for falling too far under its rules.

“What impact does this have on US markets?” was a question posed at the Qwaffafew quants meeting last night. The answer was very narrowly focused by the macro-strategist whose name I will suppress for his own protection: “China being in a bubble hardly matters to the US and is not a surprise,” he stated. “The US is not dependent on international trade. Exports generate only 10% of US gross national product. And China accounts for only 7% or so of total exports. That means it only affects less than 1% of US GNP.”

This poor man never considered the impact of Chinese trade on countries the US does more trading with. And he left out the input-output analysis which covers the way shocks transmit through the US economy.

Today's blog is even later than yesterday's because I set out to get my printer working and it took 3 hours on the phone to the Philippines. I cannot believe that it makes sense for HP to send an existing HP customer a replacement printer without specific instructions on how to remove the old software and install the new. But that is what was done.

The result was loss of Internet connectivity.

Off-shoring tech support is not only bad for US jobs; it also wastes customer time because the seller doesn't bother giving clear installation guidelines. My apologies to you all.

Of course if there would have been hot news I would have abandoned Carly Fiorina's old firm to cover it. And I admit I don't understand the HP slogan: “Good for your business, good for your tummy.”


More news today from Hong Kong, India, Canada, Israel, The Netherlands, Bermuda, and Austria.

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Tue, 2015/08/18 - 1:51pm | Your editor

After a distracting week of concern about the yuan exchange rate, China is back to worrying about the stock exchanges, with the Shanghai bourse down 6.2% today.

The collapse of the Shanghai and Shenzhen stock markets is a self-induced problem. First, the figures: they have doubled to their peak in the last year months, with average price/earnings ratios over 60 while Hong Kong's are just 13x. After falling over 30% in the last 2 ½ months they resumed their slide today. Crazy numbers don't help. When a market is priced over the top and stops levitating, prices can drop hard and fast. Stock prices go up if there are more buyers than sellers, and down if there are more sellers than buyers.

And in China there are now more sellers. The smart money—the accounts with more than 10 mn yuan (about $1.6 mn)--fell by more than a quarter in July. Meanwhile smaller and less experienced investors, convinced that the Beijing government intends to boost share prices, have moved in. In fact the government support mechanism, China Securities Finance, a half-billion-dollar provider of funds for margin trading, which rescued markets over the part couple of weeks, is deactivating operations. In normal capitalism, governments do not encourage markets to rise or lure in new investors. It is not up to the state to try to support markets at crazy levels. Yet China has gotten into the business of sucking suckers in, not just retail investors, but some of the 150,000 state-owned enterprises (SOEs), encouraged by the government to invest in stocks.

But the real suckers are small retail investors who account for 80% of the trading in China. That is 89 mn mom and pop investors. Many are prone to gambling which is a Chinese vice. As Britain's Spear's newsletter points out, “Chinese are gamblers by nature. Macau is much, much bigger than Las Vegas.” When the market was rising, a million new brokerage accounts were opened every week and many neophytes were encouraged borrow on margin by their brokers.

During the rise SOEs and their chiefs were ordered not to sell but to buy more stocks. New IPO flotations were stopped. Big shareholders were forbidden to sell stocks. Short-selling was banned. Now the Beijing government is running out of measures it can operate long-terms to sustain the stock markets. And uncertainty is on the rise along with trading suspensions and margin loan defaults.

I am unsure how much impact all this will have on the real economy. The SOEs by definition get more funding if they lose on their stock portfolios from state-owned banks. After all, this is a Communist system. Meanwhile small investors who gambled and lost are not exactly poster children for a government handout.

Your technically challenged editor confronted two problems today. First, having removed Windows 10 from her nearly new laptop because it would not allow her to access her brokerage account which depends on a program called Trader Work Station. Windows 10 doesn't allow Javapath to update for some mad reason, presumably in order to force the use of a Microsoft variant. As a result of removing Windows 10 my laptop would not start in Windows 8.1 which supposed to be reinstalled with the click of one button.

Then my new all-in-one printer arrived from HP and trying to set it up I ran into the dread error code: “OXCAEB9343”. It said to restart the new printer, which I did. Error code again. Third try ditto. And with the new printer came lots of instructions all aimed at illiterates with pretty pictures—but no way to contact HP.

I want to go back to the 20th century. Sorry the blog is late, but luckily it has little actionable news today, with items from Britain, India, Finland, Ireland, Canada, Israel, Hong Kong, China, Switzerland, and Germany.

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Slow Days Coming

Mon, 2015/08/17 - 11:35am | Your editor

The Empire State, former home of the rag trade, publishing, and freight business, is making less stuff than ever. The New York Fed reported today that the manufacturing index for NY State fell to minus 14.94 last month from plus 3.9 in July 2014. That is the lowest reading since the great contraction in 2009. The low level was confirmed by data on orders and shipping.

The main reason for the drop is changing business focus, but the dollar going up 20% in this export-oriented state did not help matters. New York is mainly becoming a shopping and services center for the global ultra-rich, who like to buy pricey real estate do use for their visits, second only to London.

Slow news days are coming. My paid readership has come out strongly in favor of our team taking longer to cover results, so as to be more informative. This will make it a bit easier in 2-3 months when the next round of quarterlies hit. But by then chances are the Thursday overload, because everyone is expected to leave early Friday to hit the beach, will have ended.

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Weekly Update

Sun, 2015/08/16 - 11:20am | Your editor

A disaster in our neighborhood, a gas leak at an adjacent building, has taken down the woks at our favorite Chinese eatery. Despite the reward I am not getting, I still updated the charts as I do Sundays visible on

Everyone can view our closed positions, which now have 3 new sells of closed-end funds posted. They sales reflect China risk and market exuberance over Cuban diplomatic relations. Only current paid subscribers get to see the present recommendations. Read more »

Learning from Tom Herzfeld

Fri, 2015/08/14 - 1:05pm | Your editor

I think I should start taking Friday off too, the way the market thinks analysts do; every week during the summer the pile-up of reports and news on Thursdays is overwhelming. I feel an obligation to give my readers the latest even if it requires that I farm out the stuff coming in to my writer-experts lest I go mad from overwork. This costs money.

So here is a query for paid subscribers only: how important is it to you to get same-day company results and commentary on them?


The negative impact of having the most accessible market in a region where there are few of them makes Mexico, Colombia, and South Africa vulnerable to currency and stock bears. It is pretty hard to short the manipulated currencies of Argentina or Venezuela, so the moves take place in Mexico City or Bogota. In Africa, for all intents and purposes, Jo'burg is the only real market.


Today Secy of State raises the flag at the US Embassy in Havana. We are out of Herzfeld Caribbean (ticker:CUBA) because its price went into excessive premium to its net-asset value, something I learned to watch from closed-end fund expert Tom Herzfeld, the fund's manager.


More for paid subscribers follows from Britain, Canada, Finland, France, Denmark, Brazil, Belgium,

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Yuan Reactions

Thu, 2015/08/13 - 1:39pm | Your editor

Adrian Ash, with customary caution, ups his outlook for the gold price later this year, after another day when China let its yuan fall by more than 1%. It was 1.11%. Optimists may think the declining yuan fall means it will stop at today's close of 6.401 to the US$. The deputy governor of the People's Bank of China stated that there is “no basis for persistent and substantial devaluation.” But I expect further erosion beyond the cumulative current drop of 4.6%.

Adrian notes that it was their punting on the stock market earlier this year that turned off the gold-buying spigot in China. Here is the forecast:

“China's surprise devaluation of the Yuan now means September's typical rise in the gold price may have begun early on the turmoil in currency and financial markets. For the record, D\dollar gold prices have ended September higher from August in 15 of last 20 years. Since 1968, gold has risen 5.1% between end-August and New Year on average. The other four-month periods of the year averaged 2.6%. Indian retailers prepare for Diwali and the wedding season, and then Christmas leads into the Chinese New Year. Weakness in 2015 might well skew the typical seasonal pattern, which isn't guaranteed anyway.
“But should you need a price floor between now and 2016, in the way Asian demand leapt on 2013's price drop, the World Gold Council's analysts are 'cautiously optimistic' for a stronger end to this year from Asia's big consumer.”

Adrian writes a daily blog for, our advertiser, which is sponsored by the WGC, a grouping of gold miners.

Another heavy Thursday with reports so enough chatter. We have news from Brazil, Panama, Hong Kong, Norway, Belgium, Finland, Israel, India, Germany and catch up with our funds. Moreover, there is a new recommended buy and two sells and as is now the trend on Thursdays, more results that I can shake a stick at.

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Redbacks and Greenbacks

Wed, 2015/08/12 - 12:44pm | Your editor

How much should your yuans cost you? There is no easy answer after the supposed “freely negotiated” Chinese currency fell another 1.4% today to 6.387 at the close which was higher than its earlier low of 6.451 per US$. The state sector banks initially bought dollars to push down the yuan or renminbi, AKA “the redback”. But at the end of the Shanghai day, they reversed into selling greenbacks and buying redbacks.

Knowledgeable forex traders said the state bank moves were done on behalf of the People's Bank of China, (PBoC) the central bank. Yesterday the CB said the 1.9% devaluation was a one-off, but today it did another 1.4% devaluation, if indirectly. This is how China is leaving it to the market to decide what the price of its currency and shares should be.

So the Chinese currency spot rate fell again and global markets were rattled again. Wall St. fell into the red (American style) for the year. In China, red is lucky and therefore is used to show gains while green shows losses.


Writing from Hong Kong for Nomura, Michael Kurtz is upbeat on Asia:

“As with Europe and Japan in the past 2-3 years, if a bit of currency depreciation helps vent China's deflationary pressures, then Tuesday's move and possible follow-on RMB trading declines in the days ahead could be net-positive for risk assets, especially in underperforming Asia ex-Jpana, by help reduce (if incrementally) the chance that the world's second-largest economy hits the skids to everyone's detriment.

“As for global impact, take comfort from that we are on familiar ground. The RMB depreciated by a larger -3.2% against the US$ [in] February-March last year without sending global markets off. Outcomes that did not follow that RMB depreciation include: gold prices did not slump—in fact gold rallied; Chinese oil imports did not roll over; US import prices did not collapse; US core CPI inflation did not drop; Fed expectations (2-yr Treasury yields) were not set back; and global equities did not stop outperforming bonds. We don't see reasons yet to expect radically more adverse outcomes this time unless the PboC's 'one-time correction' leads to something more desperate and reactive.”


Also generating Agita was news from Bild, a German tabloid daily, that the Berlin govt thinks the terms of the 3rd Greek bailout announced yesterday are insufficiently stringent.


More today for the paid subscribers among you starting with Canada, Britain, India, China, Finland, Israel, Denmark, Spain, and Australia.

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The Guns of August

Tue, 2015/08/11 - 12:08pm | Your editor

The guns of August are again firing at Washington, according to one of my contributors. China has surprised the world by devaluing the yuan or renminbi by 1.9%. Bloomberg says the slashed reference rate has dropped the most since 1994 today. It also argues that the Chinese currency had risen 14% over the past year when adjusted for inflation and trade levels. The move was aimed at helping Chinese overseas sales and homeland manufacturing, without dangerous increases in credit.

The devaluation immediately reversed the boomlet of yesterday in commodities, raw material stocks, commodity-producer and Asian currencies, and most US stocks. The exceptions are Google, US T-bills, and gold which rallied. Gold's rise has been going on backstage but now it is front and center, starting with a jump of 2.2% on the Shanghai gold contract on what Adrian Ash calls “the heaviest volumes we can find on Shanghai Gold Exchange records.”

Adrian adds: “China accounts for 17% of the goods imported to the US. Net-net, China accounts for 70% of America's total trade deficit in goods and services. The drop in the Yuan equals a 2% drop in the dollar cost of Chinese goods. Translated directly onto US inflation data, that risks an immediate drop of 0.3 percentage points.”

He notes that despite the official US Fed target of 2% inflation, the most recent rate has been nearer 0.1%. This leads Adrian, who publishes a daily comment for (advertiser on our website) to forecast that the Fed will delay its September rate hike because of the negative impact of the Chinese move on US growth and inflation.

“With the world's second largest economy devaluing its currency and pushing the US dollar higher again.” “Wherever Beijing was aiming, this re-opened front in the global currency wars fires a shell straight into Washington.”


Commented economist John Llewellyn:

“China so far has done only the less difficult part, growing strong exports to the huge rich Western market. Transitioning to domestic-demand-led growth is more challenging. Such growth requires, at a minimum, more mature institutions: a sophisticated financial sector; decentralized decision-making; and a political system capable of mediating between increasingly powerful interest groups. Financial stimulus along cannot achieve all that is required. To the extent that China's growth slows, so will much of the (closely-linked) rest of Asia. No other economy, save perhaps India, is large enough to base its growth on domestic demand.” He runs


News from Australia, India, Hong Kong, Britain, Canada, The Netherlands, Israel, and Argentina.

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Basic Material (GIrl) Day

Mon, 2015/08/10 - 12:44pm | Your editor

Gold and gasolene are not married to each other and they got unhooked today, with the yellow metal and mining shares in a newly buoyant mood.

China's outlook and Wall Street also are not wedded to each other but they overlap. China's economy continues to flounder with new July data points so negative that they are boosting local share prices. The situation is so bad that a forceful move to stimulate the economy by the country's masters is now felt to be at hand.

Chinese exports registered a drop of 8.30% annualized, worse than market expectations for a fall of 1.50%. In June exports rose 2.80%.

July's trade surplus fell to $43.03 bn from $46.54 bn in June. Analysts had expected the trade surplus to trow to $54.7 bn, so this was very off. Imports duly fell, down 8.1% vs 2014 July. In June imports fell 6.1% y/y.

Chinese inflation is still modest according to the numbers published, with the consumer price index up 1.6% annualized but higher than June's 1.4%. Producer prices were down 5.4% annualized. So Beijing can risk a bit of inflation, observers think. There is a fly in the ointment, however. While Chinese trade numbers can be verified somewhat by looking at other countries' numbers, the figures on CPI and PPI are locally generated and can be manipulated.

What this means for Chinese stock performance will probably not be cleared up Wednesday when Alibaba (BABA) reports on the quarter to end-June. BABA is busy trying to invade foreign internet operations after selling itself as a way to enter Chinese internet.

More for paid subscribers from Australia, Canada, Israel, Japan, India, Brazil, Finland, and Britain. Markets are booming for now.

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Portfolio update

Sun, 2015/08/09 - 12:44pm | Your editor


This week's model portfolios have been posted on

I wanted to comment on our performance year-to-date which was undermined by two distress sales last week, of Tata Motors from India and Abengoa of Spain. ABGB was tipped by our resident Latina, Frida Ghitis, as a dynamic “green” developer of energy and environmental projects worldwide. It created its own yield sub, NYSE-ABY, so as to enhance its ability to finance projects its was building around the world, including Latin America, the Middle East, and Spain. However, last weekend, the stock began taking on water as the firm had hinted after its Q2 report that it planned a capital increase initially pegged at 650 mn along with divestitures worth 500 mn.

Alas, when the bankers on Monday revealed just how hard up Abengoa was, the stock lost value hard. Management had initially sought to play down its capital shortfall in order to ease the pressure on its 50%+ controlling shareholder Inversion Corporativa SA and another Spanish group with a minority stake, Finapisa SA. While a lot of corporate governance paperwork is generated by the links between ABGB and its ABY sub, these Spanish private company entities are hidden from view but control the ABGB board and management.

Tata Motors like many venerable India industrial firms, via its unlisted A shares is a family-controlled entity belonging to the Parsi family of that name, who began their industrial career before Indian independence, but only moved into automotive in 1954 via a jv with Daimler-Benz. It listed on the NYSE in 2004 and 4 years later bought (from Ford Motors) Britain's Jaguar-Land Rover (which makes Daimler and Jag luxury cars). Late in 2012 the chairmanship was given to a British Parsi of Indian heritage, Cyrus Mistry. We bought not because of its posh vehicle arm, but because our man in India, Abhimanyu Sisodia, thought its low-prices Indian-made Nano car had a great future.

Under Mr Mistry, rather than pushing into Nana-making, TTM opted to create a China plant to build Jags and Rovers. However, the timing was off, as China is cracking down on the corruption and privilege needed to buy cars from JLR. China is also charging huge fees for auto licenseplates to prevent pollution and traffic jams. Instead of supporting its Indian ambitions, the overhang of unsold Jags in China is limiting them because prices are being discounted.

While Spain and India are very different places, the occult ownership structure lets corporate management perpetuate errors of judgment. In both countries, a tradition of state control over industry, from the days of Franco or Nehru, right and left,  gives politicians too much sway in business decisions, and not just in the two companies we have off-loaded in distress.


Of course we are ahead of the US indexes, but that's not saying much. To view the model portfolios you have access to, visit Only subscribers get to see the current recommendations (more below) but pre-subscribers can view our track record.


More for paid subscribers follows:

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