The Next Cyprus
Predicting where the next Euroland financial crisis will hit, my bet is on one of the original six founder countries where the banking sector is even more disproportionate huge as a percentage of gross domestic product than on any island or country where people eat garlic: Luxembourg.
The tiny mountain fastness full of deep gorges between Germany and Belgium has long been a hot-money haven with banks to big to fail. They replaced the steel industry as the basis for Luxembourg prosperity in the 1950s. Of course Luxembourg is at the center of Europe rather than at the periphery like Ireland, Iceland, Cyprus, Greece, Italy, Spain, and Portugal.
The 11 countries that thought they had sewn up a deal last month for the European Community to impose a financial transaction (or Tobin) tax on stock and option trading are now in disarray over how soon it can be crafted and what exceptions will be allowed. As originally planned, the tax would apply to any company incorporated in one of the 11 countries, even if the shares or options were traded in other countries as Depositary Receipts (like the USA, Britain, or Switzerland.) This extraterritorial impact would also apply if either the buyer or the seller of other stocks came from one of the eleven countries. Without the ban trading would move from the 11 to other venues.
Not too surprisingly, Luxembourg and The Netherlands, both heavy international trading centers, are not among 11. France, with its own existing Tobin tax (only twice as high) on companies incorporated there, is a strong supporter of a populist and punitive Tobin tax. The EU measure was backed by the European Parliament and the EU Commission. FTT money was to be used to rebuild public finances of EU member states and stabilize financial markets.
You want to closely watch clever Indians outsourcers. Ford Motor and its ad agency WPP of Britain are red-faced over caricarture ads produced for the Figo car in India, boasting about the size of its trunk. Posted on the web by WPP Indian sub employees, they show Italian Prime Minister Silvio Berlusconi tying up and gagging three young women and stuffing them into a Figo car trunk. It hardly helps that India is suffering from global concern about women being abused, raped, and killed in India.
Along with the rest of the world, India holidays this week as Wednesday is Holi when people bop each other with bags of dye or colored water not only in India, but also (Abhimanyu Sisodia tells us) in Germany. In a few parts of India women get to bop men with sticks. With Passover Seder being celebrated by so many Christians, here is another exotic feast, if you can worship Lord Krishna. I don't so there will be a newsletter on Weds. but none Thurs. or Fri.
More news for paid subscribers from our team in Sweden, India, Japan, Finland, Belgium, Canada, Britain, and other countries follows including a stock sale.
Today our subscribers are getting the usual tables I post on Sundays and more. Our paid contingent are also getting a full newsletter with results from one of my favorite recommendations, plus an update on one of our funds. This Sunday special delivery is because the next two weeks will see very few blogs. There will be none this Tuesday and the following Monday because of Passover and Easter Monday and none on Good Friday because markets are closed. And because I am travelling to gather with my family over Easter weekend, there will also be no blog on Holy Thursday. I am very ecumenical.
Today I sing:
I'm dreaming of a white Passover
Just like the ones I didn't know.
Where daffodils glisten
And children listen
To hear matzo balls in the snow.
It's also snowing in Brussels where the President of Cyprus and the head of the IMF are trying to prevent a banking meltdown today.
More news today from China, Israel, India, Canada, and Cyprus for paid subscribers.
Beer and BAM
The Globe and Mail (Toronto) yesterday finally picked up the Southern Investigative Reporting Foundation's sceptical report on Brookfield Asset Management. Written by veteran financial journalist Roddy Boyd, it led us to sell BAM Mar. 12. Except for Lululemon, quick transparency is not a Canadian virtue. The Globe internet posting wrote: "it is difficult to overstate the seriousness of Mr. Boyd's allegations" about "one of Canada's most revered corporations". Help at email@example.com
"Beer is proof that God loves us and wants us to be happy," wrote Ben Franklin. Actually it is not that simple. Beer is also a big business. In Mexico, two brewers dominate the industry, Modelo and a sub of Heinecken. Because they finance the design and installation of bars, cafes, restaurant, and clubs, in return for exclusivity for their brews, the duo keep craft beers, imports, and exotic brews from being sold in them. They offer many varieties and brands of beer, but they are all made by one of the pair. That is why the US and Mexico are so anxious about the anti-trust implications of Modelo falling under the control of Anheuser-Busch-Inbev as it expands in Mexico. While we don't own BUD, we are in a related company
In another fast growing market for beer, the majors are taking a different tack. In several African countries, including two where we are indirectly invested in the brew, pubs and bars get special deals on tax by making beer from local ingredients. Instead of imported malt, African starches like manioc, millet, corn, sorghum, or even banana juice are used, encouraged by lower taxes on the brew, for which both the beer-makers and farmers lobby. In Nigeria, it is actually illegal to brew beer with imported barley malt. Then, to cut costs further, the beer is not bottled, but served from aluminum casks and served in paper or plastic cartons. So men drink in bars and not at home where prices are higher, without food, and often drink too much when beer is cheaper than clean water.
More for paid subscribers on brews and news from Ireland, Mexico, Colombia, Spain, Canada, Brazil, Belgium, and another mess at JP Morgan follows.
Three ad hoc reporters who write for my newsletter cover China, all dual nationals. One forced me last summer to sell Suntech Power, STP, a maker of solar panels, whose Wuxi, China arm has just declared bankruptcy. STP was the first NYSE-listed Chinese solar cell maker, founded by a Sino-Australian physicist who seemed eminently qualified to run a solar-cell firm and pitch its charms to Chinese and Western investors. It was recommended by a different Chinese-American who wrote it up for us. We sold it and then bought it back.
But the other reporter warned that this and other US-listed provincial small caps from her homeland incorporated around the Caribbean could not be properly covered even by a Chinese-speaker. They all ran businesses which sound plausible. We sold the lot.
Some of the companies still function but almost all their stocks are cheaper now because of the Chinese slowdown. The surviving solar stocks, Chinese and other, are up on the Suntech news but the glut is general.
We rely on journalists from around the world to keep us out of trouble. They are paid for their articles and may not take fees from the companies they write about or "investor relations" firms promoting stocks.
HSBC today reported that the Chinese purchasing manager index was firmly upbeat for the 4 weeks to Mar. 15 at 51.7 vs a consensus forecast of 50.8. This is the private sector variant; there is also an official statistic for month end. Anything over 50% means factory output is growing (why more supplies and parts are being bought.) While we no longer own US-listed small caps, we are present in China via Hong Kong-listed Chinese H shares.
We write about macroeconomics, mostly in the free part of this newsletter. But our readers gain from the microeconomics we do, rerports on individual companies to invest in. Today's newsletter features a stock from Bermuda (not a Caribbean but an Atlantic island) which reported on 2012 results in detail, plus Canadian, Israeli, British, Australian, Finnish, Swedish, Indian, Brazilian, and South African and Korean companies. And we have bad news from Kenya. And a correction from Mexico.
The Kremlin and Cyprus
There are three contenders in the race to rescue Cyprus. The first is obvious, the sensible heads in the European Community and global financial bureaucracy who are not having to win over disgusted German voters in the short-term, like the European Central Bank and the IMF.
The second is the Greek Orthodox Church, offering to mortgage its considerable real estate holdings to finance the bankrupt banking sector. I am not sure how this would work, unless foreign banks granted the mortgage loans, as the Cypriot banks are bust. The most obvious foreign lenders to the church--from Greece--cannot lend now either. I cannot imagine Pope Francis getting the Vatican Bank into this rescue either.
There is a third possible savior, from another country: Russia. Gazprom, a state-owned pumper and piper of Siberian natural gas westward, has a house bank called Gazprombank, which, according to the New York Times Moscow correspondent, Andrew Kramer, is proposing to refinance Cypriot banks. As is by now well-known, Cyprus's banks are used by Russian companies as an entryway into the Eurozone, and the offshore island is also a haven for Russian "hot" money from tax evasion, the fruits of bribery or fraud by its officials, or mere escapism. Moody's reports that Russians have over $30 bn deposited at Cypriot banks. Hence Pres. Vladimir Putin vigorously opposed the attempt to tax deposits there as "unfair, unprofessional, and dangerous."
The picture is murky (this is the Kremlin!) While the Gazprom's officiel spokesman denied it was involved in a bailout for Cyprus, an unidentified company spokesman confirmed to Tass that its banking sub, Gazprombank, was in talks with the Cypriot government and had already delivered a proposal to the government in Nicosia. A lawyer involved in helping Russian companies invest in Cyprus also confirmed that a private bailout was under discussion. Gazprombank reportedy wants to buy the less endangered of the two big island banks, Cyprus Popular Bank. Why not both?
While the two Gazprom entities are separately managed, the payback from Gazprombank's Cyprus help will go to its parent, Mr. Kramer wrote. Gazprom is threatened by offshore gasfields discovered in the eastern Mediterranean off the coast of Israel and Cyprus. It has already made a move to buy into developing the Israeli fields, which the new government there will have to act upon (after Pres. Obama's visit.)
The Cyprus fields are rumored to be just as large, and can be linked to the Israeli ones to create a gas liquifaction facility to move the gas to markets in Western Europe, undercutting the current Gazprom supply dominance. Of course, the political pressure Gazprom periodically puts on transit countries like Ukraine and Poland tends to enhance the attraction of alternative sources of supply to European gas consumers. In return for refloating the Cypriot banks, Gazprom will demand a concession to explore and develop the Cypriot offshore fields, which will ensure that it will supply western European gas consumers for decades to come.
Angela Merkel took the Russian rescue proposal seriously. The German chancellor warned the Cypriot president in a telephone call not to consider Russky alternatives to the European bailout which the island's parliament voted down on Tuesday. A Cypriot delegation arrived today in Moscow for talks. The official subject is not Russians buying a Nicosia bank, but extending and adding to the Russian state loan to Cyprus of euros 2.5 bn extended in 2011.
Mr. Kramer notes that both the Russian gas company and its bank, while managed separately, are linked to "a tight coterie of businessmen with longstanding ties to Mr. Putin." The history is muddled by asset transfers but the result is that two top officials and shareholders of the Gazprombank are not only supporters of Mr. Putin, but his dacha neighbors in a St. Peterburg gated community.
The Gazprombank purchase of a Cypriot bank could be eased by a cut in Russian corporate taxes to help.
A Canadian reader asked me to forward to my gloomy expert of yestday, John Llewellyn, a question: should he sell all his stocks? There has been no reply yet from John who in his report did note that stocks rise if inflation picks up. Dividends, especially rising dividends, will also spare share-owners. But the main reason why John's negative outlook for the global economies is not necessarily a harbinger of stock market drops is that, historically, stocks go up even if, as today, the global economy is still subpar. By the way, John's outfit is www.llewellyn-consulting.com not consultancy as I wrote mistakenly yesterday. It is located at 1 St. Andrew's Hill, London EC4V 5BY, and you can phone to 44 207 213 0300.
More for paid subscribers from Asia, Australia, Mexico, South Africa, Canada, The Dutch Antilles, Ghana, Israel, Spain, Brazil, Colombia, Scotland, India, and frontier markets including Cyprus. Today's focus is international funds.
A Gloomy Expert
John Llewellyn, who heads London's LlewellynConsulting.com, writes about the reasons for gloom, arguing that the global medicine used to get economies out of crisis since 2008 is losing its effect. And he didn't even mention Cyprus!
The former deputy chief economist of the Organisation for Economic Cooperation and Development, whom I got to know when we lived in Paris, forecasts problems in a March letter because "belief in the efficacy of policy is dwindling" and "undue faith has been placed in monetary policy to stimulate growth following balance sheet recession".
He summarizes the warning signs in macro-economic trends for the OECD countries (the industrialized world):
"Household and financial institution balance sheets have improved, but public finances continue to deteriorate;
"Pulses of risk aversion in financial markets are likely to continue; and no one policy lever can boost 'animal spirits';
"Though monetary policymakers may push further, growth is unlikely to increase soon;
"With the outlook for domestic demand weak, countries are looking to exports;
"Talk of currency wars is now mainstream, but a weaker currency is just one way that monetary policy works;
"Eventual public debt reduction will probably entail a cocktail of measures [which] may include prolonged financial repression/debt monetisation; inflation; depreciation; perhaps more explicit default/restructuring of debt; and capital controls."
Equities will not be a hidey-hole, he argues, in part because the so-called BRIC countries (Brazil, Russia, Indian and China) no longer can de-couple from the OECD world. They too are having to deal with slow growth which puts BRIC corporate profits at risk. Moreover, in the major economies:
"Trade and currency disputes are increasing, and may become damaging to corporate profitability;
"Equity prices can rise with profits, even if purely inflationary. However, much supportive action on the policy front has already been anticipated;
"Moreover, profit margins seem unsustainably high and headline revenue growth could disappint to the extend that the generally weak growth outlook materialises."
Here are the things he says to watch for:
"Negative surprises for corporate profits;
"Worsening sovereign debt dynamics spilling over into other markets as confidence wanes; and
"Depreciations of Western currencies beyond the yen."
We are watching the markets closely, as paid subscribers can see in my newsletter for today. More from The Netherlands Antilles, Greece, Spain, Finland, Israel, Colombia, Scotland, and Canada.
Touchez Pas A Mon Grisbi
Don't touch my stash. Touchez pas à mon grisbi.
Cyprus is a tiny island in the eastern Mediterranean with two governments. Most of the island is ruled by a Greek coalition. Another chunk of the place is run by an internationally unrecognized Turkish one. My husband when he covered the UN frequently went to Cyprus and crossed the "red line" between the two mini-states. There UN troops were stationed to prevent them slaughtering each other. The southerly Greek side had the amenities of tourism and global banking while the Turkish side to its north was cheap. This is a country of a million or so people.
If every German and every Finn chipped in all of 2.51 euros, there would be enough money in the kitty avoid taxing smaller depositors at tiny Cyprus's shaky banks, Greek Cypriot account-holders with under euros 100,000 in their bank accounts. The supporters of fiscal discipline then could apply a 9.9% haircut on deposits over that sum, above all coming from haven-seeking Russian oligarchs and crooked bureaucrats. But that would not show sufficient rigor for the German and Finnish politicians. So even smaller depositors will be hit with a 6.7% haircut on the money in their bank accounts. The total amount raised will be under euros 6 bn but 4 bn will come from the richest depositors.
Unleashing a panic in troubled European economies that smallholders' insured bank deposits will be tapped to bail out troubled banks to send an austerity message to banks is even worse than the error our own bank regulators made when in 2008 they forced Lehman Brothers into bankruptcy.
Regulators should not seek "to prevent moral hazard" as it shocks bank customers and markets. You do not want to panic depositors in southern Europe to withdraw their savings of under euros 100,000 lest it be taken away. You also need to observe the admittedly informal EU deposit guarantee.
Bank runs are disruptive and however solvent a bank may be, it never has enough cash to deal with a bank run. There are so many more intelligent ways to deal with banking issues. One would be to welcome another loan to banks where his countrymen have accounts in Cyprus from Vladimir Putin. But if that is not acceptable, bank debt can be monetized or depreciated. Banks can even be forced into default or to restructure their debt. They can raise capital by selling stuff. Mais touchez pas à mon grisbi.
Along with the launch of the mini-GLD option on US markets today, the Cypriot horrors have led to a panic boost in gold prices, as well as a weaker euro. Even the slow-growth UK economy looked good today, and sterling is up, plus everyone's favorite bolthole currencies, our dollar and all other English-speaking dollars as well.
More from The Netherlands, Canada, Britain, Israel, Spain, Poland, Ireland, India, Japan, and Sweden today.
Performance Tables Posted
The snow finally stopped; the water flowed again; the Internet is healthy. So I posted my tables. Readers can view the ones they are allowed to see at www.global-investing.com
Spreadsheets are easier to view in "printer-friendly format" even if you are not going to print them.
A few editorial comments.
Firstly, I was reproached by a Canadian readers for selling Brookfield Asset Management over accounting hanky-panky reported on by Roddy Boyd of Southern Investigative Reporting Foundation and I also advised readers to contribute (as I did) at firstname.lastname@example.org where SIRF gets funded. This is not a short-selling outfit doing exposés. It is a site for seriously researched financial journalism, something we need in this age of internet instantaneousness.
Having been taken in by the BAM 2012 and Q4 quarterly report shenanigans, I did not want to wait until the chorus line at Toronto's Bay Street got around to looking into the matter, while threatened with the collapse of the Canadian financial sector, loss of access to BAM funds, and lawsuits if they agreed with Mr. Boyd's examination.
Nor was I going to wait until some flak in the BAM team under Bruce Flack prepared a riposte although surely there will be one. Nor am I intersted in one or another Canadian analyst producing a beamish interim outlook for BAM without mentioning the kerfuffle. I was particularly fed up with BAM and with myself because unlike our neo-Canadian reporter who fell for rainmaker Flack, I had run into these guys before.
I can remember Edper and Brascan which are now subsumed into Brookfield, where the rights of shareholders (even ones named Bronfman) were not paramount. As my late father used to say, "Canada is the easiest foreign market to lose your shirt in."
What about "buy and hold", another (US) reader asked? You never sell anything, like Warren Buffett never sells anything. You buy and hold forever. When the Oracle of Omaha buys into a company, the scale and publicity on Berkshire-Hathaway's stake gives Mr. B a role in management, be it over strategy or dividends or assure reporting honestly. In case you haven't noticed, our weight is considerably lighter than that of Mr. B. I can protest at the top of my little lungs and nobody at any company will do anything differently than before.
Hence we sell rather than protesting. With North Atlantic Drilling, also sold, I didn't even wait until John Fredrickson found the way to use his bag of tricks to cover losses in other parts of his empire by nabbing NATDF assets. Maybe he won't. But I am not waiting to find out.
There are more sales this week over underperformers. Under the new tax rules I need to offset gains more seriously with losses, and moreover, for a combination of tax avoidance and family commitments, I took very large gains in 2012 which I now need to pay (yech) income taxes on.
Visitors to the site can use the opportunity to buy "My Best Yield Stock Idea", a new report for $49 which can be bought by anyone, including pre-subscribers. Look under the Global Investing masthead for "Special Reports" and then scroll down to the last (i.e. most recent) one.
More for paid subscribers about another bit of managerial chutzpah, this time from everyone's favorite banker, Jamie Dimon of JP Morgan-Chase, captain of The London Whale, who now has to chissle his shareholders to make more money. Given that Jamie is of Greek heritage maybe I mean not chutzpah but hubris.
India Opening, China Closing
From today's Financial Times, how Chinese netizens greeted the staged election of the new president. An internet polling station was set up and c5000 Chinese voted on it before the Great Wall of China censorship closed down the site. The winner of the balloting was Ma Ying-jeou, the President of Taiwan. Runner-up was dissident artist Ai Weiwei, closely followed by the imprisoned Nobel Peace laureat Liu Xiaobo.
From India, Abhimanyu Sisodida writes: Read more »
Down Under Up
Today the appointment of the new Japanese central bank governor was voted by the lower house. Haruhiko Kuroda is an advocate of increased monetary stimulus to take Japan out of its decades-old funk and boost exports. The yen fell against most foreign currencies.
Meanwhile Australian employment figures hit a 13 year high, with a huge jump in full- and part-teime employment, of 17,800 and 53,700 new hires respectively. This means Canberra will not be engaging in interest rate cuts or quantitative easing soon. Unemployment is at a mere 5.4% in the Lucky Country and likelier to fall than to rise. The A$ soared on this news.
To quote the new pope, the conclave looked very far away but he is here. We are here too with a way to play the Oz rally. The Pacific Rim countries have interconnected economies, but some are more accessible than others. The whole group are barely represented in major bond indexes.
Local-currency bonds in Asia-Pacific emerging markets can be invested in but this is not a market for simpletons like us to play on our own.
My personal favorite tax-reform ideas now include ending the capital gains tax holiday for residents of Puerto Rico (as John Paulson apparently plans to move there) as well as and end to carried interest being under-taxed at hedge and private equity funds (like Mitt Romney's) and getting rid of the depletion allowance for oil wells.
The most important reform however is to simplify the tax code which is full of loopholes inserted for nefarious purposed by our Solons to raise money from fatcats.
My new report on My Best Yield Stock Idea is up on the wwww.global-investing.com website. Look under reports which appears right below the masthead. Because I am a 20th century lady, the report is the last in the series which ordered by date. It should, of course, be at the top. For $49 you get a quick way to safely boost your interest rate return. After you pay you can download the report. It will not be delivered by pony express; we dropped that. The Post Office today delivered its warning card to everyone in my building telling us to beware receiving notices that we had won a foreign lottery, and asking for a modest sum like $250 to handle transfer costs.
Today's newsletter is late because of plumbing repairs in the building which houses both my home and my office appear to have cut not only the water but also the Internet. This is usually a convenience but not when the water and the web are cut off.
More for paid subscribers from Australia, Israel, Colombia, Ireland, Canada, Spain, Mexico, South Korea, The Netherlands, Brazil, Argentina, Switzerland, and Greece.