Swans Neither Black nor White

Wed, 2015/05/27 - 1:35pm | Your editor

I bought SGBK for my IRA yesterday at $30.23/sh. Reader LM commented:
“Your Stonegate Bank obviously will be well positioned to offer real estate finance for those Florida Cubans who want to get in on the ground floor (literally) via their relatives.”


Russell Jones, an Australian economist at London's Llewellyn.consulting.com argues that we should go back to Swan Diagrams, invented by an Australian economist and central banker. Swans diagrams could replace or complement the investment-savings/liquidity preference-money supply targets favored by economists today. Jones writes:

“Debate over macroeconomic policy should not be confined to the actions of central banks. “Notwithstanding the increasing hegemony of inflation-targeting regimes over the past 30 years, stabilisation policy should aim beyond relative price stability.

“In an ideal world, the ultimate objective of policymakers should be to maintain an economy in broad balance, externally and internally.

“An ingenious depiction of the issues involved in concurrently achieving internal and external balance was pioneered in the 1950s by Australian Trevor Swan, in the ‘Swan diagram’. ‘Swan diagrams’ formed a core of the undergraduate economics syllabus in the 1960s-70s. They have since been supplanted by often more sophisticated, though less user-friendly, diagnostic tools.

“A Swan diagram enables [one] simultaneously to assess an economy’s progress towards both over-riding objectives of macro policy: achiev[ing] full employment and relative price stability (internal balance), and balance on the current account (external balance). [It is done] using two macroeconomic instruments: the real exchange rate, and manipula[ting] real domestic spending through monetary and fiscal action.

“Only by employing both instruments in appropriate direction and degree, can policymakers achieve both internal and external balance. Policymakers also have to grapple with uncertain leads and lags, unavoidable data shortcomings and revisions, and political practicalities [that] can dilute or distort policy.

“An economy actually achieving overall macroeconomic balance is very rare. Nevertheless, Swan analysis provides a useful approximation of the policy mix a country should adopt towards this end, while offering an early warning when economic strategy is veering dangerously off course.” (Reprinted with permission.)


More for paid subscribers follows from Finland, India, Britain, Mauritius, Belgium, Israel, Ireland, Spain, Canada, Papua New Guinea, and Congo Brazzaville including a quarterly report.

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Buying Cuba and The Lavender Hill Mob Revisited

Tue, 2015/05/26 - 1:45pm | Your editor

Here is how to buy Cuba today, while waiting for more options:

Stonegate Bank of Pompano Beach, FL, has agreed to provide banking services to the proto-Cuban embassy in Washington, the Cuban Interests Section, at the request of Foggy Bottom, the US Dept of State. SGBK will help the Cubans issue visas which Americans pay for with dollars.

Longer term I have another US stock pick idea not yet listed. So I bought SGBK.


Our lead story is from Adrian Ash, Head of Research, at BullionVault, our advertiser:

There's a hot new parlour game for bankers, bullion analysts, financial journalists, and internet bloggers. Guess just how big are China's gold reserves really?

The known data about China's demand and supply don't add up. The gap between China's supply and demand MUST be going to the central bank, right?

If true, it would clearly say China means less than nothing for world [gold] prices, now slipping again below $1200.

Still, this was the game played at Bloomberg's Precious Metals Forum [Friday] in London. Starting from the 2009 announcement of 1,054 [metric] tonnes, maybe Beijing now holds 3,000 tonnes, matching Germany's national hoard (the consensus estimate).

Or maybe Beijing now holds 5,000 tonnes, only just behind the US's 8,000. Or maybe, at the top end, fully 30,000 tonnes, a wild stab which, as with so much tomfoolery about gold, is now being passed back to the Western idiots who dreamt it up as a 'fact' being repeated inside China itself!

To support such guesswork and to support ideas like how China's politburo is planning a Chinese Gold Standard if the US-controlled IMF doesn't give the Yuan the respect it deserves at this October's half-decade review, analysts and journalists pick through everything that any minor policy wonk might say about gold.

Thankfully Bloomberg's seminar also brought useful analysis from useful analysts. Notably on China, ex-[Goldfield Mineral Services] chief Philip Klapwijk showed how 1,200 to 1,500 tonnes of gold are now in 'shadow banking', used as collateral for cheap loans.

Klapwijk confirmed how Chinese dealers are exporting gold bullion in defiance of the strict export ban by shipping it out as plain jewelery and 'crude' items to Hong Kong, where it gets re-melted and turned back into kilobars for the bullion market. So China's officially reported gold exports of 750 tonnes in 2014 certainly did include gold bullion outflows. Only, they didn't take the form of investment bars when they were shipped to confuse China's customs forms.

What did these gold bullion exports look like? My guess: little gold bricks commemorating the Great Wall of China. Because today's Chinese bullion smugglers are unlikely to choose the Eiffel Tour paperweights used by British dealers to get around the UK's export ban after the end of WWII.

[The] 1951 comedy, The Lavender Hill Mob, was close to the truth. Gold bullion will always find [an] out, as well as [an] in. The more the world's gold market changes, the more it repeats trading from 60 years ago.

China's export of 'crude' bullion items "fell off a cliff" in Q1 2015, said Klapwijk, [from] "clearly successful intervention" by the authorities with Beijing's broader anti-corruption drive, now sweeping Chinese business. The result is now "real pain in Shenzhen" for manufacturers casting bullion into crude items for export and re-melting.


Your editor once lived very near Lavender Hill in Battersea, London, and found Adrian's note irresistible. Bullionvault, which you can access from our website, offers a cheap and legal way to own physical gold, and is sponsored by, among others, The World Gold Council.


China over the holiday set out to cut duty on imports, and also moved to let Hong Kong shares be traded in Shanghai, reversing the link established last year so flows move both ways. China was removed from the list of countries manipulating their exchange rates by the IMF.

However, Loomis Sayles's sovereign analyst Joseph Taylor reports that the People's Bank of China reported lots of bad news in its Q1 monetary policy report, available only in Chinese. The PBC, the central bank, says “China has too much debt.

The government has relied too heavily on investment for growth.

Chinese credit expansion is no longer possible.

The economy is inevitably decelerating as a result.” (Loomis' translation.)

Today's pile of news from our 3-day weekend includes several results of China's regulatory changes and credit problems.


Mexico's current account deficit for Q1 was 9.2% lower than the level of Q1 2-13 at $9.446 bn vs $10.409 bn. This year's deficit is equal to 3.2% of GNP, vs 3.3% for last year's.


We also have annual reports, one very good, and news from Canada, Brazil, Israel, Britain, China, Costa Rica, Panama, Peru, Colombia, India, Mexico, Finland, Germany, and Cuba.

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Memorial Day Update

Mon, 2015/05/25 - 8:59am | Your editor

The latest figures on our performance have been posted on www.global-investing.com where you may view them. The spreadsheets have been corrected thanks to work by AW who volunteered to check acquisition prices and the impact of splits after I found that my broker had failed to account for a split in the costs shown on my account nearly a year after it had taken place.

Our performance was improved thereby, as everyone can see on the site, thanks to AW and not because of any tricks. Current subscribers may also see our advice today which includes two sell recommendations. To better view spreadsheets on a small screen, use the "printer friendly" button.

Memorial Day is as early as it can be this year. Now dapper men can switch from their borsalinos to boaters and ladies wear white shoes and handbags. Labor Day is Sept. 7 this year, as late as it can be. That means a long summer season. I only hope that it will not be as hot as last year was, the warmest year on record globally. Already people in India are dying from an abnormally high pre-monsoon heatwave.

More for paid subscribers follows: Read more »

A US Stock Pick

Fri, 2015/05/22 - 1:21pm | Your editor


“Honkers and Shankers” is the term the late playwright Wendy Wasserstein popularized for investment banking in The Sisters Rosenzweig 20 years ago. But these days, Honkers and Shankers are going bad.

When there are too many short-sellers competing for shares on plummeting individual shares, they can use exchange-traded funds whose portfolios include the collapsers.

This week, when former Hong Kong-high-flyer Hanergy Thin Films's CEO went missing, possibly with the company's cash, the share action shifted to green ETFs known to hold the stock. Among the losers was Guggenheim Solar (TAN) which lost 9% and Market Vectors Solar Energy, which lost 7% in the HTF selloff.

Both ETFs track a weighted index of solar shares. As the Hong Kong company bubbled up 600%, their holdings automatically rose in tandem. They were not weighted to Hanergy itself, just to solar stock market capitalization. When Hanergy collapsed because of possible fraud, the ETFs lost value.

There are ways ETFs can protect against such risks, but small ETFs are less likely to rebalance their portfolios frequently, as this incurs trading costs which hurt their performance. Another safeguard is ETFs which do not use capitalization to place their holdings. But using “smart beta” means the ETFs fail to track the index investors want to follow.


For readers wanting more information on alpha and beta, about which I wrote earlier this week, www,.Seeking Alpha.com posted a masterful analysis on its site today, by Chuck Carnivale, on misuse of beta focusing on big US stocks. Treating beta as a mark of risk in individual shares is a misuse of statistics. Beta goes up if a share goes up, hardly the risk most owners are worried about. The risk they worry about is losing their money or being unable to extricate themselves from a sinking stock.


Today we recommend a US share, unusual for us, and write about Britain, Kenya, Finland, South Africa, Portugal, Brazil, Japan, Hong Kong, Denmark, South Africa, Switzerland, Israel, and Myanmar. You get a long blog for the holiday weekend.

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A Long Letter

Thu, 2015/05/21 - 2:03pm | Your editor


Today a corrected error in our model portfolios, the failure of my broker to inform me of a Canadian stock split last June, has resulted in a sudden boost to the performance of our buy-and-hold stocks which now show aggregate triple-figure gains. It followed an earlier 2:1 split which I did input. But too many splits spoil the broth!


I promised to share some of the highlights of yesterday's European Investment Forum sponsored by STOXX.

Bart Van Ark, chief economist of the Conference Board (who also is a Professor of Economics at the Dutch University of Gronigen, characterized the decision to adopt a single currency as “hare-brained” without economic integration “which is not happening.” He added over Brexit and Grexit (the potential exit from the European Union of Britain and Greece)” “political challenges create a risk of policy accidents to the European experiment.” He counts demographics and an aging population as a major Euro zone risk because the working age population is falling in most of Europe. As a result, “investment alone cannot produce growth” and “can be wasted” without rising labor force participation and higher productivity.

However, he also commented that Europe can do better despite demographics compared to Japan, because woman are in the European work-force, and thanks to a larger and more diverse consumer base, and much bigger services sector.

Van Ark also stressed economic positives including range-based currency movements, stating that the euro's “exchange rate variability is greatest vs the dollar but not emerging markets currencies”, giving European exporters a huge edge in exports. He expects long-term steady slow growth in Europe from factors like greater integration of the 28 small economies; good infrastructure; spending on research and development to develop technology; and a strong manufacturing culture.


Another speaker, David B. Mazza, who handles SPDR funds for State Street Bank, remarked that currencies should be viewed “as a trade, not an investment”.

Kevin Kelly of Recon Capital Mgm. stressed that they exchange rate movements are far more important to bond investors than stock investors. “You are paid for the risks with currencies in equity markets, but not in bonds. Weaker currencies give a comparative advantage.” [More on forex risks for paid subscribers below.]


Mr Kelly also stressed that “you have to look at individual companies in a country”, not at the averages. European countries “have different economies and cultures.” “Italy has underperformed because its leading outputs are consumer discretionary impacted by the global economic crisis. Germany's chemical companies account for 30% of industrial output. Chemical companies gain from the low costs of energy” “but they incur a geopolitical risk” “England is focused on banking and commodities.” There is no single typical European country.

Terence Dugan, who heads institutional sales at ALPS Portfolio Solutions, a Denver quant fund manager, remarked that US investors need to “stop worrying about trading on the pinks”. “You have to buy foreign stocks over the counter.” Mr. Dugan also cited a Chinese slowdown as the “worst case scenario” for European stocks because of the impact on commodities and the resulting capital flows.


Mr Kelly also said the Paddy Power plc, an Irish bookie share we used to own “in a long term sustained recovery is one of the small cap names you want in your portfolio.” Right now with a capital increase I am glad we are out of PDYPY which is also hard to track and trade from the US. (Charles Schwab will not let its customers hold it in their accounts because it offers “contracts for difference which compete with stockbroking. I love Paddy for its cheeky ads and wild betting offers, most recently on the Irish vote on gay marriage. But its US ADR is barely tradable on the pink sheets.

The Senate passed the trade bill to allow the Administration to complete negotiations for the 12-nation Pacific trade bill in time for the recess.


Morningstar tells us “our stock picks have generated returns of 266.8%.” That is over 15 years by combining two portfolios equal weighted.


Now for a busy news day we will talk about our current portfolio for paid subscribers, with news from Colombia, Canada, Britain, Denmark, China, Israel, Finland, Brazil, Germany, and Hong Kong plus an annual report and some dividend cuts. It is a heavy news day because Monday is the UK Bank Holiday, Memorial Day here, and Shevuot (Pentecost) for Jews so many are starting their long weekend tomorrow. There is a special report on solar cells and another on banksters.

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A Quickie

Wed, 2015/05/20 - 1:58pm | Your editor

As I warned, I attended a STOXX forum on European ETFs today and therefore did not prepare a morning blog. This is a summary for only paid subscribers ofhot market-moving news. Tomorrow the blog will draw some conclusions from the forum. But there is a stock-particular note today as well.

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Piecemeal Coverage

Tue, 2015/05/19 - 1:28pm | Your editor

Your editor listened to Morningstar's presentation of its global prowess during its presentations to go on all week. Here are some goodies from Monday about how they can cover the whole world piecemeal with quantitative flimflam:

Its Jeremy Glaser explained how Morningstar can extend its analyst ratings to cover “more of the world.” “We do have these analyst ratings. We have analysts who are covering stocks in the United States and Europe and Asia. Our research team has created a quantitative method that extends those ratings and tries to extrapolate what they think our ratings would be for stocks that we don't cover, market that we don't have analysts for, or stocks that are just too small for us to have full analyst coverage on. And using that data, we're able to get a snapshot of what equity valuations look like across the world.” Read more »

Hockey Pucks, Finding Funds, and BnB

Mon, 2015/05/18 - 1:35pm | Your editor

Morningstar, which 20-odd years ago ended its useful coverage of individual foreign stocks from Japan, is now going global again, with a “travel kit for global investors”. Then your editor went to Chicago to plead with Morningstar to reconsider.

Now it has thought better of hiding behind our borders and is telling Americans their stick-to-home portfolios are 30% overloaded in US stocks compared to a market weighted world global stock index. It didn't quote me because nobody remembers what happened two decades ago, citing a paper by Vanguard fund managers.

While agreeing that some investor hesitation makes sense, like fear of higher costs, currency fluctuations, and corporate governance issues, Vanguard says “shutting out international markets means closing the door on a world of potential investment opportunities”. Now Morningstar, in videos for its International Investment Week until May 22, has decided to also push global investing.

By telling people about how they need to buy global funds, Morningstar claims that to go global you need to let them find you a good fund manager who will buy big name funds overseas. Vanguard will pick up a lot of the business thanks to low fees or fares.

“Take the bus, and leave the driving to us.” That is not our way. We pick stocks not fund managers.


The puck was hit to him, the crowd roared, and then was hit into the goal basket by Vladimir Vladimirovich Putin. Eight times, 8 goals by the Russian president. Putin, 62, was skating on Sochi ice May 16 leading an unofficial National Hockey League “all-star” team to an 18-6 victory. Putin only started playing ice hockey in public 6 months ago, and according to the adulation-laden Russian press he had never played until 2011 and is “a natural athlete”.

Your editor sought insight from Claude, 14, her eldest grandchild and an ice hockey ace himself. Claude said "it was probably rigged,because you cannot score eight goals in one game, especially if you have only been playing for a few months."

Claude has made "a hat trick" (3 goals in one game) a couple of times and knows whereof he speaks.

While that hockey show was intended to prove that Putin has no health problems, it also marks a new rise in the cult of personality around the Russian president. In Russia, adulation of a Kremlin leader is not a Kennedy-esque myth about Camelot being reborn; it simply recalls Stalin's claims to all power, strength, and intelligence during the Soviet dictatorship.

Russia's ice hockey team lost 1 to 6 to Canada Sunday in the world championship in Prague despite some major Maple Leaf players staying home to join in the real NHL playoffs. When the Prague band struck up “O Canada” the Russian team skated off the ice in a fit of nationalist zeal.

Putin-land also failed to win at Sochi's Winter Olympics, where Canada also took the gold. Russian sports fans may soon realize that Putin's hockey puck goals are a sham.

Would that they also examined the flimflam over Ukraine! Two Ukraine “separatist rebels” were captured there over the weekend and confessed that they were Russian nationals and members of the elite Special Forces.


Since early this year, 18,000 foreigners have used AirBnB and less well-known lodging services to book stays in private homes in Cuba. They pay in dollars worth 24 Cuban pesos in the shops. That means a very good profit for those housing the foreign tourists seeking cheaper accommodation than in the country's pricey and overbooked hotels.

Hosts spend part of those dollars to keep foreign tourists happy, buying fans and air-conditioners, beds and bedding, towels, soap, toilet paper, and toiletries. This leads to tensions with the majority of Cubans who do not have dollars and live in the peso economy because they lack a spare room or relatives in Los Estados Unidos. The same thing happened two decades ago when Cubans were allowed to open businesses offering home-cooked meals to tourists paying with dollars. The chefs bought the best foodstuffs available using 24-peso dollars, boosting prices for the locals.

Pres. Raoul Castro says he wants to unify Cuba's two currencies, dollars and pesos. The exchange rate is very unrealistic, set in the olden days when Cuba was subsidized by the former Soviet Union, and then kept up thanks to the late Hugo Chavez of Venezuela when oil prices were high. The 24:1 exchange rate is out of kilter with the real economy making it hard to end the partial dollarization, now 25 years old.


Our work was quoted last week by Dick Davis Digest, Investor's Digest (Canada), and Talk Markets. Readers Rajiv, Jean, Pablo, and Steven thanked me for explaining alpha and beta. More for paid subscribers follows from Belgium, Israel, Australia, Brazil, Cuba, Colombia, South Africa, Ethiopia, Britain, Singapore, China, and Myanmar. One company reported today.

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Portfolio Update and Patsies Pricing

Sun, 2015/05/17 - 11:25am | Your editor

It being Sunday, I have updated our model portfolio charts which can be seen at www.global-investing.com Use the printer friendly button to make the spreadsheets fit on your screen. Everyone may view the closed positions which show our performance in real money; only current subscribers may view our portfolios in real time.

I have added another innovation this week. Because of the appalling detail work I confront as I try to move my global-investing-oriented account from e-trade, which no longer will allow "Global Trading" starting in July, I have discovered serious price discrepancies in US "F" listed ADRs, with the exception of those from Canada.

So to correct the data and keep myself and my readers from being taken advantage of by market makers who do not work for multiple US brokerages, I have worked out the European prices for our positions in Austria, Denmark, Norway, and Britain in F pink sheet ADRs for stocks and funds we own.

I will do this for Asian listed ones next week. Do not use the Patsy Prices brokers post on Friday after the close. Read more »

Greek To Me?

Fri, 2015/05/15 - 1:28pm | Your editor


“It's all Greek to me”, commented subscriber PM about my note yesterday. So for those not familiar with current stock market jargon, here are some definitions of alpha and beta. Technically speaking, they are both ratios used as statistical measurements for calculating returns and risk against a benchmark. They are part of the Capital Asset Pricing Model, or CAPM, for which several economists have been given not-quite Nobel Prizes. (There is no Nobel Prize for economics but one was added and it pays in money and prestige as well as the older prizes.)

Both alpha and beta are meant to help investors determine the risk-versus-reward profile of an investment portfolio, usually used for mutual and exchange traded funds. But the Greek letters can also be used for individual stocks against a benchmark index.

Alpha is determined using a mathematical formula estimating the market return of the investment compared to that of the benchmark. Alpha is an investment's or fund's excess return found by comparing its risk-adjusted over- or under-performance against how its benchmark index did. Excess return of a fund or share relative to the index under the capital asset pricing model is its positive alpha or out-performance. If it failed to do as well as the index, it has negative alpha, and under-performed.

For both alpha and beta, the formula to work out the percentage is: Return = (EP +D - SP) /SP or in English, the total of End Price plus Distribution per share minus Start Price, all divided by Start Price. The duration, the period over which you work out alpha is up to you. But you need to use the same period for both your holding and the index you are comparing it to. You calculate the index return using the same formula.

Usually alpha is calculated annually against a well-known index like the S&P 500, MSCI, the FTSE, etc. One of the problems with this is volatility, defined to mean by movement of the values of funds holdings or that single stock in either direction vs its benchmark during shorter periods than the annual alpha tally simply because your holding is not tracking the index well. The idea is to separate volatility and fluctuations caused by not matching that benchmark from those producing performance. Without beta, alpha merely measures how well your fund or stock is tracking its benchmark index, not how much risk it is taking to try to beat it.

So meet beta, which compares a fund or stock's volatility, its moves up and down in trading, compared to the moves of that benchmark.

Beta uses the very same formula (this is not higher mathematics) but it works out the variation of return versus the benchmark over a much shorter time-frames, like a week, a month or a quarter. It is looking for lots of data on how much the return of your holding varied from the benchmark This is defined as volatility, which is then called risk. Volatility goes up if your holding frequently failed to closely match the benchmark in either direction, up or down.

A positive alpha of 1.0 means the fund or stock has outperformed its benchmark index by 1%. A negative alpha of 1.0 indicate an under-performance of 1%.

A beta of less than 1 means that the security is less volatile than the market. A beta greater than 1, it means its price is more volatile than the market. So for example, if the stock has a beta of 1.2, it is 20% more volatile. If it moves less than the market, with a beta of 0.8, it is less volatile. For all intents and purposes, volatility is treated as the equivalent of risk, which has to be deducted to work out performance or alpha.

Now a shocker: most funds have negative alpha, mainly because of management costs and as they try to create a proxy for the big indexes they track without buying every Little Dingbat Company in it.

That means if Little Dingbat suddenly soars, they missed it.

The best tracking funds like Vanguard come close to zero in alpha because they keep costs low and are big enough to buy even Little Dingbat. But buying Vanguard is very boring.

A fund manager wants to have high alpha and low beta. But increasingly, investors are aiming at low beta and low alpha, good tracking of whatever index is being used. They are sacrificing a chance for out-performance for lower volatility, AKA the ability to sleep well at night.

Our diversified portfolio is not aiming to beat any index, and certainly not the Russell 2000, the one it is compared to by Dow-Jones. We are willing to put up with higher volatility (beta) to achieve high returns in our growth and speculative portfolios. That means we have both high alpha and high beta. To offset that we need a couple of things: time and diversification.

You have to stay the course and not pull out your stakes just because, for example, a period of excessive dollar exchange rates is hurting all foreign securities (which produces high alpha and high beta in a www.global-investing.com portfolio.) So patience is required. Over 10 years we will do better than over 6 months.

The second thing you need is what my buddy Mayri calls Vivian's “taste for stamp collecting.” You cannot put all your money on the red square or on the number 14. You have to diversify. We are more likely to buy Little Dingbat Company than even Vanguard is. Our small subscriber base gives us a chance to build positions in small caps which big funds cannot do without turning the market against them.

In a period of high beta, like we have just gone through in 2014, do not cancel your sub. Do not decide to invest in a pure red-white-and-blue rah rah all-USA portfolio. The worm will turn.

One worm that is turning now is gold. If the rise in yellow metal prices continues, your editor will achieve a 10-bagger level of return on her first holdings of the Spider Gold ETF, GLD. Barbarous relic, my eye.

Barbarous gold-love is a problem in India. The World Gold Council reported yesterday that Q1 gold demand fell by by 1% year-over-year to 1,079.3 metric tonnes. However, demand in India’s consumer market rose 15% to 191.7 tonnes worth $7.55 mn before counting disuasive taxes and duty and the smuggler and jeweler markup. Indian demand for gold jewelry was the only riser in a major market n Q1, as even China slipped. India mines almost no gold domestically so all the demand led to imports.

The issue as Adrian Ash spells it out, is how to get Indians to let their jewelry help their country by depositing it for its bullion value. PM Narendra Modi is keen about such a program. The difficulty is providing some sort of return on yellow metal deposits, not customary in gold markets anywhere. India could also set a guaranteed level for valuing the gold in crores of rupees when it is deposited that would apply when it is withdrawn. (Adrian produces a daily gold note on behalf of our advertiser, Bullionvault, where I keep my legal physical gold hoard. Like the GLD ETF, it is also sponsored by the gold-mining industry.)

More for paid subscribers with news from Japan, Belgium, Australia, Hong Kong, Israel, Portugal, Britain, South Africa, Ireland, Mexico, The Philippines, and the US.

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