This Land Is Your Land
The Eurozone is suffering from restricted growth according to the European Commission which now forecasts that 2014 growth will be 0.8% overakk for the 18 countries in the currency bloc. This is well below the earlier forecast of 1.2% growth, which was already low.
Things will not improve much next year. The Commission now expects 1.1% growth in 2015, vs an earlier prediction of 1.7%. This means that unemployment will not fall because nobody will be hiring the jobless. It also means a very low inflation risk.
The worst performers among the big EU countries are France and Italy, being forced by Germany (acting through the EU) to cut their deficits. This means they must raise taxes or cut government spending which puts a brake on recovery.
There are a couple of lessons from the lowball forecasts. Firstly, European malaise is not total. There are outlier countries which do not use the euro and which may be able to pursue growth policies despite the anti-deficit line. So they are better places to invest in as their company profits will grow without being trapped by the common currency and the demands of budget-balancers.
The obvious examples are Britain, Sweden, and Switzerland. Norway would be another but for its dependence on oil exports which are going to be hurt in both volume and price by the lagging economies of its neighbors.
Another lesson is that picking good companies is more important in stock performance than currency or growth trends. Macro-economics uses too broad a brush for seeking growth stocks, which exist even in stagnant economies.
A final lesson is that this too shall pass. Given the role of Germany (and to a lesser extent other advocates of fiscal orthodoxy like Finland or Holland), their own economic woes will probably override their ideology. With the risk of recession even in Europe's largest economy now clear, I expect that German politicians, with Angela Merkel in the lead, will shift gears and decide to invest more than tax receipts produce, in green energy, in infrastructure and repairs on the Autobahn, in defence, in housing subsidies, in all-day schools, and unemployment benefits. These modern and traditional German ways to stimulate the economy will also eventually help its neighbors.
A factor that nobody likes to consider is how well Britain is doing with its go-it-alone stimulus and quantitative easing. So successful has the UK program been that it is now being billed for a special fund because its growth exceeded Brussels estimates, which is causing a political flap.
The UK has been demanding special exclusions from Brussels levies since Margaret Thatcher was Prime Minister, and David Cameron is following in her footsteps even though he does't carry a handbag.
With the flaky UK Independence Party threatening the Tories on the right, Cameron has to show toughness to European bureaucrats to keep power and to eventually win a referendum on British exit from the EU. Hence he is channelling Maggie Thatcher, also in calling for limits on the free movement of people within the EU, a violation of one of its founding principles. However, what with Muslim terrorists taking advantage of their rights under the Schengen accord to hop across borders to commit attrocities or to go off to fight with ISIS in the Middle East without hitting passport controls, some of the Cameron program may wind up being accepted by the EU as a whole before too long.
There is a special reason explained for paid subscribers below why I am singing “This Land is Your Land” as I toddle off to vote.
More for paid subscribers follows with results and news from Spain, The Netherlands, Canada, Singapore, Israel, Britain, Mexico, Australia, New Zealand, Korea, and Japan.
Mice, Men, Chickens
To quote Burns, “The best-made plans of mice and men gang oft agly”. He left out chickens.
Yesterday we had daylight savings time (invented by Ben Franklin) and the marathon (invented by the Ancient Greeks). Tomorrow we have the mid-term election invented by the Founding Fathers who thought more turnover to keep the House of Representatives close to the electorate.
The Greeks and Ben created useful traditions; the 2-year House term has failed to generate enough interest among voters to stop partisan excess. The 2-year term clearly has gang agly.
After Goldman Sachs caused a stir last week by telling everyone to short oil, we now have Citigroup saying to short gold. It has broken under its “support levels” is the argument used by macro strategist Jeremy Hale.
The gold price drop is more a temporary result of the stratospheric rise of the dollar against other currencies rather than a lack of appeal from the yellow metal. But as I warned last week, I have no idea when this will reverse. Gold stopped falling like a stone today, down only 0.1% so far after it broke through the key $1200/oz. How to play it is discussed for paid subscribers below.
Which brings me to today's blog which shows some potential Greco-Franklin successes and also some reversals. Chickens are coming home to roost and other chickens are running across the road. Our diverse portfolio offers a balance between hot and cold running chickens. More for you from Brazil, Colombia, Ireland, Finland, the Netherlands, China, Norway, Britain, Canada, Israel, Switzerland, and Britain.
Today is Marathon Sunday in NYC and I am about to go off to cheer the runners. We used to always go to a lovely Italian restaurant right where the runners exit the former Queensborough Bridge (now named after Mayor Koch.)) But the restaurant closed last month and we will have to find a new perch.
Today's tables are posted with a couple of trades for the paid subscribers. I am losing my patience with a Japanese Internet stock and tempted again by the yellow metal.
Remember that the easy way to view the tables is by hitting the "printer friendly" button to make spreadsheets move visible.
As I forecast, Japan is rushing to fill the quantitative easing gap and this has boosted equities and further depressed gold today. Your editor has bought back the common shares of Barrick Gold, ABX, but since I am not sure that my timing is right, I have not put this into the model portfolios but into my IRA. It was upgraded by analysts at Mackie from a "sell" rating to a "hold" rating.
While gold shares are idiosyncratic, their ultimate valuation depends on the yellow metal, and there are forces pulling its price both ways. The price in other currencies goes up when the US$ rises, which discourages buyers up to a point when it looks cheap to them. I cannot predict when this will occur in gold-loving places like India, China, and the Middle East. I am not sure how the Swiss will vote about backing their franc with bullion. So I will scale in.
As promised, here is some of what I learned about Israel indexes at my quantitative analyst session on Tuesday. It has been delayed because of the press of news. The club is called Qwaffafew.
Israel came into focus for analytical experts when it was moved from the emerging markets group to the main MSCI EAFE index which pushed down its market impact. Israel presents many problems for index creators, according to exchange-traded fund strategist Steven Schoenfeld from Blue Star Global Investors LLC, our speaker. His work on indexing Israel has resulted in a new ETF from market vectors, ISRA, using Blue Star's benchmark to manage over $50 mn to date.
The first major switch by Blue Star was to redefine Israeli so that companies listed only in the US or Britain and not on the Tel Aviv Stock Exchange (TASE) get counted. We owned the past one of these Israeli shares, Mellanox, listed only on Nasdaq. We own another couple today listed below for paid subscribers.
Including listings from the “galut” (exile) boosts the liquidity of the benchmark for those seeking to track Israeli stocks. Only about 20 of the shares on TASE are liquid enough for institutions to buy.
Moreover, the top Israeli stock, Teva Pharma, accounts for an average of 60% of TASE volume so it has to be subject to a haircut in any index. BlueStar sets the ceiling at 12.5%. The situation applies to other markets as well, notably the Nordic countries or Canada where a single stock like Nokia or Nortel
dominates the market.
Getting More Israelis
0It uses several criteria to add more Israeli companies to the index mix: where they are HQ'd; where they were founded; where they get at least 75% of their revenue or their operating expenses; where their management or R&D are run from. The index also includes foreign-listed controlled subsidiaries of Israeli companies. A company which is 70% exposed to the shekel counts as Israeli, like Perrigo. A firm where the majority of the board is made up of Israelis also gets counted. The result is that the weighting of Israel in the MSCI EAFE is doubled by the Blue Star exercise, from 0.19% of the non-US developed world stock index to 0.37%. There are more Israelis! Check Point Software becomes Israeli, as if anyone doubted. So does embattled Soda Stream.
Blue Star has a total of 114 companies that it counts to better reflect the Israeli stock market. Only abut 20 are in other indexes.
The recalculation also better reflects Israeli strengths in small caps and electronic, telecom, and biological technology, the very Israeli sectors investors want to get into via funds, private placements, endowments, and other indexed strategies. And if somebody wants to boycott Israeli companies (as opposed to multinationals which operate big time in the Jewish State, they can find a better list of divestiture targets, although Mr. Schoenfeld and your editor hope they don't.
Now all this might be of only minor interest, except that Israeli index conundrums also apply to other countries, starting with the Middle East region itself. Our Jordanian-incorporated Dubai- and London-listed Global Depositary Receipt (GDR) favorite would count as from Amman under Blue Star index rules. In fact many frontier markets have the same indexing problems as Israel does.
Many Russian stocks are not listed in Moscow, but trade as GDRs or ADRs in London or NY. They would reveal their Russian soul under Blue Star Rules. We recently sold Coca Cola Hellenic, a bottler, which delisted from the NYSE and only traded (rarely) in London.
Chinese firms trading as H shares in Hong Kong, pending the again-delayed link with Shanghai, would count as Chinese, along with other stocks listed only in Singapore or New York. The latter would include Alibaba, a recent Chinese newcomer. Or Baidu, listed in Singapore. While it is less pronounced there are similar cases in India.
Mr. Schoenfeld thinks Singapore is a “reverse Israel” because it is a favorite listing site for companies from around the Asia region with almost no operations there: by tradition from Malaysia, but also form Thailand, China, and Indonesia. They could be removed from the Straits Times index. In fact other havens have similar exotic listings, among them another one of our stocks, which started out being listed in Singapore but then moved to Luxembourg. Details on these stocks for paid subscribers below.
Have a creepy and scarey Hallowe'en. Results from Bermuda and Colombia today and news from many lands like Italy, Mexico, Spain, Portugal, Brazil, Luxembourg (all about one single company!) plus Ireland, Britain, Australia, Chile, Norway, Jordan, Dubai, Canada, Japan, Australia, Argentina, Luxembourg, Finland, Israel, Denmark, and Singapore.
No More QE?
Now that Chris Viehbacher, a German-Canadian national has been fired as CEO of Sanofi., maybe the French firm will opt to hire another foreigner. Among those available is South African-born Jeremy Levin, who was ousted as CEO of Teva in Israel exactly a year ago. Both were sacked for daring to suggest that some verkers might have to be let go as the drug firms restructure.
The Fed will end its quantitative easing purchases of govt debt as scheduled. This boosted the dollar against almost all freely tradable currencies, which in turn hurt gold which is priced in US$. And it may hurt US shares overall as it did to General Electric today. While the Fed isn't buying government debt, Britain (and soon the EU and Japan) are still in QE mode. And the Fed still holds $4 trillion from its QE purchases. If nothing else, however, the end of its buying spree in US T-bonds will defang some of the anti-Fed rhetoric from US hard money stalwarts.
Another issue of Investor's Digest of Canada (dated tomorrow) and another quotation from this non-Canadian non-broker about a Canadian company, this one in a key source of Maple Leaf identity. The ID article quoted me about a maker of ice hockey equipment (formerly Bauer). Thanks to grandchild Claude a hockey player, we cover hockey gear carefully. But I am very proud when I am the source quoted by this venerable Canadian stock market magazine.
Now that fraud has been added to the charges against executives at beaten down Tesco, I thank my lucky stars that unlike Warren Buffett I actually visited various London supermarkets. This led me to sell TSCDY which at last report Berkshire Hathaway still owned. I spotted that its US aims were too ambitious and that its UK competition was fierce because in my alternative life I am a Hausfrau. More neiges d'antan news below.
Thank you to all the readers who agreed with me that Doctors Without Borders medicos are heros rather than publicity seekers. You are a more internationally oriented group of readers than are served by www.stockgumshoe.com which published attacks on the charity.
More today from Brazil, Hong Kong, Israel, Denmark, Mexico, Canada, and South Africa.
The Cat's Come Back!
The cat's come back! He just couldn't stay away.
Italy today urged the European Union to resume efforts to set up a financial transaction tax to raise money. Italy currently holds the EU presidency and it is one of the 11 countries who agreed to create such a tax among themselves, even if other member countries stayed away. But the 11 cannot agree on derivative trading rules, so Rome asked that ambassadors to the Common Market get to work on hammering out a rule that will satisfy the eleven who want a “Tobin tax”. This was reported by both Bloomberg and Reuters this morning.
I just wanted to put in my oar in favor of Doctors Without Borders, which I have been donating to for over 40 years (after my first visit to West Africa, in fact.) Dr KSS, the self-promoting doctors who writes for www.stockgumshoe.com (which I subscribe too) today attacked the charity because he thinks Africa needs more running water and should not attract other doctors who are looking to become heroes. I think Dr KSS is a flake anyway because of his attack on the management of a biotech start-up he initially recommended on that site, which I bought and am sticking with. More on this below for paid subscribers.
Today's blog is delayed because your editor stayed up too late last night at the gastro-pub and overslept. Then I had to spend long hours covering too many results from out companies for a single morning.
I will write up my notes about Israeli indexation tomorrow. It is a worthy subject for our newsletter on American Depositary Receipts, with implications far beyond the minor market (by world standards) of Tel Aviv.
Over to earnings from Canada, Ireland, and Israel plus news from Sweden, Denmark, France, Australia, Germany, and Britain.
Riksbank and Abba
The Real Bottom Line
Sweden has reached the real bottom line today. Their central bank has cut interest rates it charges to banks to zero for 0.25%. The Riksbank today surprised markets by opting to hit the “zero bound” although it had been expected to delay this. No other central bank has pushed the cost of borrowing to zero in the quantitative easing period since the global financial crisis, but now others may follow.
Our Fed targets keeping interest rates at 0.0% to 0.25%; the Japanese CB rate is 0.10%. The Bank of England charges 0.5%. The European Central Bank cut its charges to 0.05% last month.
But the Riksbank rate is now fixed at 0.0%. Zero. Nada. Nichts. Nichevo. Rien.
Adrian Ash thinks this may lead to paying lenders to take Riksbank loans, the next step beyond zero interest rates. The Swedish crown fell sharply on the news, as could have been expected.
There are two real problems with the trend.
Firstly, however cheap money may become, if governments and homeowners and companies do not want to borrow because they do not want to risk investing in infrastructure, homes, or expansion, then cheap money will not create growth. In Sweden or in the European Union, in Britain or Israel.
Secondly, as with any excessive move in a single country, there is an element of “beggar-my-neighbor” in rate cuts. This can go badly wrong, and did so in the recovery from the Great Depression. I fear its return because of what Sweden is.
Sweden is a Scandinavian regional financial powerhouse. It is the home of major multinational corporations like Ericsson, Electrolux, Scania, Sandvik, SCA, Atlas Copco AseaAbb, SKF, Aga, Volvo, Hennes & Mauritz, and Alfa Laval. These firms make it a major exporter of cars, telecom equipment, chemicals, phrama, machinery and precision equipment, appliances, wood, and iron and steel. It also remains the banking and investment capital of the Nordic countries. And then there is ABBA!
If you did not read The Financial Times, the Wall Street Journal, or NZZ today, you might believe the European banking sector mostly passed the stress test over the weekend. Beware. Firstly, the ECB ran the results past national regulators (except in the case of Poland which simply was omitted entirely because of delays). That means German banks' solid reputation was boosted by deliberately un-updated inputs from the Bundesbank, which thereby downplayed Deutsche Bank's litigation risks.
Because European Union member countries have different and inconsistent accounting rules for handling bank tax loss carry-forwards and goodwill (both of which are hard to reconcile across borders), the ECB stress tests simply included them in itspublished tallies as part of bank capital. Under the Basel rules which will go into effect in 2017, these numbers will count, and many banks which passed the latest exercise would fail under a full audit.
Israel is expected to again cut interest rates as it last did in August. To help understand what that is all about I am attending a Qwafafew quantitative analysts' session tonight on how to index the Tel Aviv Stock Exchange. This at a Times Square gastro-pub. The lengths I will go to get information for you!
More for paid subscribers including a trade follows from Switerland, Spain, Britain, China, The Netherlands, India, France, Brazil, Singapore, and Portugal.
Last Sat., Oct 25, marked the New Year in the Islamic calendar, according to a Moroccan source. It should be marked by a Fatwa from religious leaders that the time has come for Muslims to stop killing innocent by-standers who happen to be in target range: British or Canadian soldiers at home, cops, tiny Jewish babies and Latin guest workers waiting for the tram.
I am not sure if the 10 commandments apply to Muslims although they do treat Moses as a prophet of Allah, so I suspect that they also consider murder a sin. But it would help if someone at Al Aksa or some top mosque were to spell it out.
Some years ago, during the global financial crisis, I put a sell on Australia New Zealand Bank mainly because I feared we could not cover it well from halfway round the world. I was premature. ANZ today suspended trading because it published part of its full year profit forecasts, also prematurely. It was due to reveal the numbers on Fri. by division and region to help analysts with their forecasts for FY 2014-5 which ends Mar. 31. Of course the ADR is trading despite the ban Down Under.
From nearer home, Maxcom Telecomunicaciones of Mexico is delisting its ADRs from the NYSE because of high costs and administrative burdens, while only few shares traded. Eduardo Garcia writes in www.sentidocomun.co.mx. Adios, MXT.
Today's blog focuses on Brazil, which faces difficult times under a re-elected Dilma Rousseff. Barron's today quotes Michael Shaoul (Marketfield Asset Management) as predicting that “Dilma re-elected wouldn't be the same person who destroyed the corporate sector through regulations in 2012. Her mandate has changed. We own a broad Brazilian ETF and individual shares and would buy more in a 'Dilma dump'” More news from Spain, Portugal, South Africa, Israel, Canada, Switzer-, Ire-, and Fin-land, Hong Kong, and Belgium
Today's news pileup has so far only produced the latest stress tests for European banks, from the CB, the European Central Bank.
The election results in Ukraine and Brazil are far from tallied up yet.
The ECB ordered at least one bank we used to be involved with to tell the CB how it intends to boost its capital. That is Italy's Credito Valtellinese, whose euro-denominated bonds we used to own, and which reached maturity. That bond was tipped by an Italian newsletter we used to trade ideas with, before we were warned off because it was run by stock- and bond-promoters. In fact among serious EU countries, Italy had the most banks which could not survive a serious economic downturn, a sign of regulatory weakness in Rome.
But the official stress tests aren't the whole story for assessing banking risks. Consider the suicide ratio.
Over the past week, three prominent banks have taken their own lives because of the stresses of their jobs. It may be that they were simply overworked. Or it may be that the bankers feared that they faced scandal and perhaps prison. The best known suicide employer bank is Deutsche Bank NY branch, where Cologero Gambino, a former SEC enforcement attorney, hanged himself. Mr Gambino, an American, is the second top lawyer at Deutsche to kill himself, after Briton William Bolksmit killed himself in London. Later a US Congressional committee revealed how the UK lawyer had helped Renaissance Technology, a fund, turn its short-term gains into long-term ones to evade taxes. I have no idea if Mr. Gambino was ensnared in the same scandal or a different scandal or none at all.
Franco-Israeli banker Thierry Leyne jumped off a posh high-rise apartment building in Tel Aviv. He was a fund manager, and famously offered a partnership role to the disgraced former IMF chief Dominique Strauss-Kahn after he was accused of rape by a NY hotel chambermaid. I have no idea if Mr Leyne was ensnared in a scandal or if he was just depressed.
The final suicide last week was by David Zier, an independent financial advisor in Potomac, MD,with Convergent Wealth Advisors. Mr Zier also ran a side fund for family and friends which was not a sub of CWA (a sub of City National, a Los Angeles bank.)
The family and friends fund did self-custody, so its positions were not certified by the custodians, and they may have been depleted.
More for paid subscribers follows:
Since 3 readers sent me the following note I guess I'd better react to it. Matt O'Brien wrote Weds in Follow@ObsoleteDogma about research by Emmanuel Saez of UC Berkeley and Gabriel Zucman of the London School of Economics:
“Once upon a time, the American economy worked for everybody, and even the middle class got richer. But this story has only been a fairy tale for almost 30 years now. The new, harsh reality is that the bottom 90% of households are poorer today than they were in 1987.
“This is actually a much more dramatic statement than it sounds. While the Federal Reserve has already told us that the median households is worth less now than it was in 1989 -- that's the household right in
the middle -- it turns out that everybody but the richest 10% of Americans are worst off. That includes the poor, the entire middle class, and even what we would consider much of the upper class.
“This troubling finding [is] based on data from Saez- Zucman's new paper on U.S. wealth inequality, based on tax data. Inflation-adjusted net worth from 1945 indexed to 100, [shows] that the bottom
90% actually did very well during the first decades of the postwar period -- adding more wealth, in percentage terms, than those at the top.
“But these days of shared prosperity have come to an end, gradually and then suddenly. It started in the 1980s when the top 1% awoke from their long postwar slumber, thanks to the combination of lower
taxes, financial deregulation, and new technology. It wasn't a total disaster for the bottom 90%. Even as most Americans saved much less, accumulating far less wealth, stock markets and housing prices
continued to rise. Until they didn't, coming crash down in 2007-2008.
“The problem was that middle class doesn't own that much in stocks, but went into debt to buy lots of housing. So the housing crash turned their biggest financial asset into an albatross, wiping out their
equity but not their debt. And the housing recovery hasn't done much to fix this, since it's struggled to move beyond the 'nascent' stage.
“Stocks, meanwhile, collapsed during the crisis, but came back soon after. The middle class, in other words, missed out on the big bull market in stocks, but not on the even bigger bear one in housing.
“That's why the recovery has restored so little of the wealth that the recession destroyed. The bottom 90% kept losing net worth the past few years, in large part due to rising student loan debt.
Lost 25 Years
“It's been a lost 25 years for the bottom 90%, but a lost 15 [years] for the next 9% too. Altogether, the bottom 99% are worth less today than they were in 1998.
“This isn't a story about the top 1% running away from everybody else. It's a story about the top 0.01% doing so. Since 1980, the top 0.01 percent's piece of the wealth pie has increased by 8.6 percentage points, while the next 0.09 percent's has done so by 5.4. The bottom 99%, meanwhile, have seen their wealth share fall an astonishing 18 percentage points.
“A bit of historical perspective: the top 1% now own over 41% of all the wealth in the country. That's the most since 1939, although still well below the all-time high of 51% in 1928.”
One reader says: “There's a lot wrong with our country when, not only are 90% worse off but also 48% of our entire national wealth is held by 1% of the population. We may even be in that 1% but this situation is not a good inheritance to leave to our children.”
He suggests a few measures:
“Start off by eliminating the capital gains tax break on 'carried interest.' The Romneys have no money at risk for their 20% cut of private equity fund profits.
“Both sides of the Hill have been bought by the billionaires. Obama proposed repeal in 2009 and got nowhere despite a Democrat majority in both Houses.
“Next put billionaires in jail when they violate the law, e.g. Steven A. Cohen of SAC.
“No I am not a lefty. I am totally middle of the road and fed up with our corrupt society.”
Your editor thinks we should vote 'nay' on some corporate proxies which provide excessive compensation for their brass. If the Swiss can stop golden handshakes and Alpine-size golden parachutes, surely we can too. Your editor is a certified liberal Republican of the Rockefeller persuasion, if poorer. But like my reader we made money with the 1% in recent years by being in the stock market, and because we both are old enough to already own mortage free homes.
Sunday is going to be a big news day. There will be results from elections in Ukraine and Brazil. And the European Central Bank will publish the results of the latest bank stress tests.
Some recent polls show Aécio Neves pulling ahead of Pres. Dilma Rousseff prior to a TV debate tonight. Others show Rousseff in the lead. Brazilian polling is primative and in the first round the tallies failed to show Neves's gains over Marina Silves.