Red Rooster Falters

We’ve had (according to Barry Ritholz) what technicials call a death cross. This tech specialists think means more trouble. There was not much here or in Europe to justify the fall. Sure the bank reform bill is in trouble. And consumer confidence is lagging.

But China had the real bad news. Shanghai fell on revised numbers for GNP growth from the Conference Board . That body corrected a leading index of Chinese growth of 1.7% calculated in April right down to a mere 0.3% now.

But in fact the Chinese market had slumping before this. The bears then escaped all over Asia, and hurriedly released their fellows in Europe and later in the US, where there was nothing particularly awful happening.

But if the Red Rooster is not a strong enough locomotive to pull the world economy out of its malaise, we are in trouble. Instead of watching the stock market sink I attended an alternative energy conference.

A new fund that may be of interest came out from Bank of New York-Mellon’s Dreyfun Corp. whose chief economist I have been quoting lately. Dreyfus Global Real Return Fund will invest globally in pursuit of absolute return. It will be managed by Newton Capital Mgm Ltd, a London boutique which already manages similar multi-asset absolute return funds for non-US investors. Newton is known for its thematic investment approach seeking total return (both capital appreciation and income) using a multi-asset strategy to get real returns with less volatility. The aim is to work over a market cycle (typically 5 years.) It does not use benchmarks or indexes and the goal is to get returns that do not depend on the movement of markets (or beta.) . Jeams Harries is the primary portfolio manager at Newton.

Meanwhile investors in Invesco Powershares ETFs discovered today that its managers have shifted indexes for their funds which keep the same ticker symbols. You no longer own what you thought you bought with this ETF family.

A trio of global funds are affected. Power Shares Autonomic Growth (PTO) will track Ibbotson Alternative Completion IndexTM in place of a New Frontier index; PowerShares Autonomic Balanced Growth (PAO) will drop New Frontier for RiverFront Tactical Balanced Growth Portfolio, and PowerShares Growth and Income (PCA) will drop New Frontier for a different RiverFront Index. Also affected are two Power Shars US portfolios linked to Value Line Timeliness and Rotation which are being linked to Morningstar indexes instead.

The renewable conference lobbied for the US to extend or replace cleaner energy programs which were part of the stimulus bills. They are slated to sink into the sunset by the end of 2010 unless what one delegate called “the Pearl Harbor” impact of the BP Deepwater Horizon gets Washington to change tack.

The American Council On Renewable Energy and the US Partnership for Renewable Energy Finance worried about potential deceleration and loss of jobs as green for green runs out. To say nothing of money for their members. In a joint press conference they called for extension of 1603 Renewable Energy Treasury Grants (AKA Grants in Lieu of Investment Tax Credit) to run out at the end of this year at a time of continued financial crisis and capital scarcity. Conferees, many of them lawyers and financial pros, clamoured for the1603 cash grants program to be renewed and for other loan guarantees and manufacturing incentives. Continued uncertainty and disorder in the US tax equity and credit markets are constraining financing for solar, wind, and other renewables, they say.

If BP is the best argument for money, the worst was the presence of so many foreign investors coming to feed at the trough: engineers, banks, utes, manufcturers of solar and wind equipment, pernsion plans. Even a Spanish Caixa turned up, from Madrid, presumably not in distress and about to be merged into the super-Caixa.

Antonio Garcia Mendez, CFA, of Santander Investment Securities (a US firm), cited the zeal shown by Europe’s “government-intervened banks” for more environmental deals. I had assumed European renewables would find funding hard to get now but he claims “inactive banks are active again” in Europe, and that liquidity, down in 2009, is on the rise along with “a higher risk appetite.” Against that, he noted that despite a strong pipeline of deals, “there are regulatory uncertainties in Spain and Italy.” To say nothing of the US.

Another European, the British-educated German, Gisela Kroess (of UniCredit, an Italian bank) warned that European banks face higher funding costs because of what she called “the Greek crisis” and the resulting lower euro. She thinks the time has come for longer-tenure financing involving mixes of loans, grants and equity. She wants to see a standardized system of funding and protection (maybe called collaterized debt obligations?)

She noted that so far this year there have been 10 US deals with a total funding of $3.4 bn in the USA vs 20 deals with a total funding of only $4.3 bn last year. (Of course this may only be because the funding will soon run out.)

Your editor was interested in how other countries encourage renewables without direct grants. Canada and many Euro countries make local utilities contract long-term to buy green energy and fold it into electricity sold, at a fixed price higher than non-renewables get. Sometimes utes finance the green plant. According to Daniel Soper, CFO of Carbonfree Technology (of Toronto) such pass-through pricing has less impact for example on German retail electricity prices than the bill for upgrading transmission sytems. So it can slip into your electric bill without your noticing.

But he warned that a weak economy makes it harder to contract for passthrough rate payment for renewables because politicians fear supporting it. A tax is a tax when it is contracted for even if it later is hidden.

The industry is frustrated mainly by lack of volume. Canada for example produces zero mW of solar vs 400mW or so in the USA, said Soper. The price of clean rooms and solar panels and cells has fallen sharply as the silicon industry finally woke up to new opportunities from solar. But solar prices are still too high for unaided investment.

Another thought: Consumers could cut their household electricity use by 2-12% and save up to $35 bn over the next 20 years if U.S.utes use smart meters and a range of energy-use feedback tools to educate us to use less energy.This according the nonprofit American Council for an Energy-Efficient Economy .We need at-home or on-line displays to inform and motivate us to cut down on juice consumptiom. ACEEE likes enhanced billing daily or weekly feedback,on- or off-line. But these programs are rare with no US ute providing the full gamut. Most have barely learned about smart meters.

Matters of subsidy and taxation are complicated in the main thing to take away from the above. Simplistic rants against government programs or taxes make no sense. In a period of shrinking investment somebody has to take the initative and right now the designated driver is government.

Stay the course. This is buy time not sell time.

Red Rooster Falters…

We’ve had (according to Barry Ritholz) what technicials call a death cross. This tech specialists think means more trouble. There was not much here or in Europe to justify the fall. Sure the bank reform bill is in trouble. And consumer confidence is lagging.

But China had the real bad news. Shanghai fell on revised numbers for GNP growth from the Conference Board . That body corrected a leading index of Chinese growth of 1.7% calculated in April right down to a mere 0.3% now.

But in fact the Chinese market had slumping before this. The bears then escaped all over Asia, and hurriedly released their fellows in Europe and later in the US, where there was nothing particularly awful happening.

But if the Red Rooster is not a strong enough locomotive to pull the world economy out of its malaise, we are in trouble. Instead of watching the stock market sink I attended an alternative energy conference.

A new fund that may be of interest came out from Bank of New York-Mellon’s Dreyfun Corp. whose chief economist I have been quoting lately. Dreyfus Global Real Return Fund will invest globally in pursuit of absolute return. It will be managed by Newton Capital Mgm Ltd, a London boutique which already manages similar multi-asset absolute return funds for non-US investors. Newton is known for its thematic investment approach seeking total return (both capital appreciation and income) using a multi-asset strategy to get real returns with less volatility. The aim is to work over a market cycle (typically 5 years.) It does not use benchmarks or indexes and the goal is to get returns that do not depend on the movement of markets (or beta.) . Jeams Harries is the primary portfolio manager at Newton.

Meanwhile investors in Invesco Powershares ETFs discovered today that its managers have shifted indexes for their funds which keep the same ticker symbols. You no longer own what you thought you bought with this ETF family.

A trio of global funds are affected. Power Shares Autonomic Growth (PTO) will track Ibbotson Alternative Completion IndexTM in place of a New Frontier index; PowerShares Autonomic Balanced Growth (PAO) will drop New Frontier for RiverFront Tactical Balanced Growth Portfolio, and PowerShares Growth and Income (PCA) will drop New Frontier for a different RiverFront Index. Also affected are two Power Shars US portfolios linked to Value Line Timeliness and Rotation which are being linked to Morningstar indexes instead.

The renewable conference lobbied for the US to extend or replace cleaner energy programs which were part of the stimulus bills. They are slated to sink into the sunset by the end of 2010 unless what one delegate called “the Pearl Harbor” impact of the BP Deepwater Horizon gets Washington to change tack.

The American Council On Renewable Energy and the US Partnership for Renewable Energy Finance worried about potential deceleration and loss of jobs as green for green runs out. To say nothing of money for their members. In a joint press conference they called for extension of 1603 Renewable Energy Treasury Grants (AKA Grants in Lieu of Investment Tax Credit) to run out at the end of this year at a time of continued financial crisis and capital scarcity. Conferees, many of them lawyers and financial pros, clamoured for the1603 cash grants program to be renewed and for other loan guarantees and manufacturing incentives. Continued uncertainty and disorder in the US tax equity and credit markets are constraining financing for solar, wind, and other renewables, they say.

If BP is the best argument for money, the worst was the presence of so many foreign investors coming to feed at the trough: engineers, banks, utes, manufcturers of solar and wind equipment, pernsion plans. Even a Spanish Caixa turned up, from Madrid, presumably not in distress and about to be merged into the super-Caixa.

Antonio Garcia Mendez, CFA, of Santander Investment Securities (a US firm), cited the zeal shown by Europe’s “government-intervened banks” for more environmental deals. I had assumed European renewables would find funding hard to get now but he claims “inactive banks are active again” in Europe, and that liquidity, down in 2009, is on the rise along with “a higher risk appetite.” Against that, he noted that despite a strong pipeline of deals, “there are regulatory uncertainties in Spain and Italy.” To say nothing of the US.

Another European, the British-educated German, Gisela Kroess (of UniCredit, an Italian bank) warned that European banks face higher funding costs because of what she called “the Greek crisis” and the resulting lower euro. She thinks the time has come for longer-tenure financing involving mixes of loans, grants and equity. She wants to see a standardized system of funding and protection (maybe called collaterized debt obligations?)

She noted that so far this year there have been 10 US deals with a total funding of $3.4 bn in the USA vs 20 deals with a total funding of only $4.3 bn last year. (Of course this may only be because the funding will soon run out.)

Your editor was interested in how other countries encourage renewables without direct grants. Canada and many Euro countries make local utilities contract long-term to buy green energy and fold it into electricity sold, at a fixed price higher than non-renewables get. Sometimes utes finance the green plant. According to Daniel Soper, CFO of Carbonfree Technology (of Toronto) such pass-through pricing has less impact for example on German retail electricity prices than the bill for upgrading transmission sytems. So it can slip into your electric bill without your noticing.

But he warned that a weak economy makes it harder to contract for passthrough rate payment for renewables because politicians fear supporting it. A tax is a tax when it is contracted for even if it later is hidden.

The industry is frustrated mainly by lack of volume. Canada for example produces zero mW of solar vs 400mW or so in the USA, said Soper. The price of clean rooms and solar panels and cells has fallen sharply as the silicon industry finally woke up to new opportunities from solar. But solar prices are still too high for unaided investment.

Another thought: Consumers could cut their household electricity use by 2-12% and save up to $35 bn over the next 20 years if U.S.utes use smart meters and a range of energy-use feedback tools to educate us to use less energy.This according the nonprofit American Council for an Energy-Efficient Economy .We need at-home or on-line displays to inform and motivate us to cut down on juice consumptiom. ACEEE likes enhanced billing daily or weekly feedback,on- or off-line. But these programs are rare with no US ute providing the full gamut. Most have barely learned about smart meters.

Matters of subsidy and taxation are complicated in the main thing to take away from the above. Simplistic rants against government programs or taxes make no sense. In a period of shrinking investment somebody has to take the initative and right now the designated driver is government.

Stay the course. This is buy time not sell time.

News of our companies follows from Israel, Britain, Canada, Spain, Portugal, France, Belgium, and Brazil.

*About the only comfort yesterday was that Teva’s stock price rose.

*Barclays Capital’s flagship asset allocation Radar Fund has piled into equities on the back of a market correction, with its research team citing fear rather than fundamentals for the recent sell-off.

Radar, launched in 2009, is run by Barclays Capital’s 800-strong research team. Radar’s equity exposure has significantly increased in the last two months, rising from 39.2% at the end of April to 69.3% at the end of May.

As part of that decision, Barclays Capital research team has invested 28.3% of its equity weighting into the US, believing the fiscal problems in Europe will impact the US less than other parts of the world.

*The Lisbon government used its golden share to veto Telefonica’s 7.15 bn-euro ($8.72 bn) bid for Portugal Telecom stake in Brazil’s largest mobile-telco. The sweetened offer was only made after US markets closed on Tuesday, for the PT stake in their 50-50 jv Brasilcel, owner of 60% of Vivo Participacões had been accepted by 74 % of investors attending the shareholders’ meeting. Both Spain with its late offer and Portugal with its veto failed to give their rights to foreign shareholders who own more than half of PT, either through ADRs or London-listed shares.

Prime Minister Jose Socrates, called the Vivo stake “strategic” for Portugal and asked state-owned bank Caixa Geral de Depositos, owner of 7.3% of PT, to reject the bid. TEF boosted its bid for a second time Tuesday from the 6.5 bn euros offered June 1,. Its initial offer of 5.7 bn euros was unanimously rejected by PT’s board. Bloomberg said the last minute TEF enhanced bid valued Vivo at 11 times enterprise value to EBITDA (earnings before taxes, interest, depreciation and amortization), double the 5.72 average for the Brazilian telco industry overall.

We were not given a chance to vote on the most recent TEF offer although I did vote against the earlier one of 6.5 bn euros. I would suggest a US class action suit but considering what Invesco Powershares did I suspect we won’t have much of a case.

*Canada’s Advice Hotline named Cameco its “Stock of the Week” TSX-CCO (or CCJ for us) “is the world’s largest uranium supplier. It has high-grade mines in Saskatchewan and the U.S. Midwest. The company also processes uranium in Ontario. It supplies utilities globally, including Bruce Power in Ontario, of which it owns 31.6%. Lower expected earnings this year give the shares a fairly high price-to-earnings, or p/e, ratio. But p/e ratios are less meaningful for cyclical resource stocks. Also, concern about greenhouse gasses is likely to lead to increased demand for emission-free nuclear power and the uranium that the company supplies. Debt-free Cameco remains a buy for long-term gains and dividends that rise more often than not.

“In [Q1], Cameco earned an adjusted $111 mn, or 28 cents/sh,.up marginally from an adjusted $102 mn, or 27 cent. Costs fell more than revenue. Earnings per share rose less than overall earnings because the share count rose by more than 19.1 mn over the past year.

“In 2010, Cameco is expected to earn $1.16/sh, down from $1.49 last year. With the lower expected earnings, its price-to-earnings ratio is somewhat high at 22.1. In [Q1], revenue declined by 1.7%, to $485 million. The price of uranium slipped. And a higher loonie cuts the value of U.S. dollar sales. Cameco expects revenue to fall by 5-10% in 2010. While electricity output should rise a little, lower prices will more than offset higher volume. At the same time, all regular-operating costs (excluding one-time gains and losses) fell by 8.7%.

With costs falling more than revenue, Cameco’s earnings rose.

Cameco generated higher cash flow of $203.8 mn [in Q1 which].comfortably exceeded net capital spending of $87 mn and dividend payments of $23.6 mn.”

*Britain’s Futura Medical Group signed a deal with the consumer health unit of GlaxoSmithKline to develop a painkiller, TR 100 for which GSK will do clinical and regulatory development and pay milestones. GSK also was cited as being a leader in renal carcinoma treatment by a study. It is also taking the lead in cervical cancer inoculation in Uganda.

*Nomura Securities hinted it might revise its earnings estimates for Smiths Group upward after presentations by the tech firm. “We not only found the presentations very informative in terms of a clear business strategy but we also left with an impression that the business heads of both Interconnect and Medical were very comfortable with the growth and margin targets set by CEO Philip Bowman, in 2008,” said Nomura analyst Rahul Garg. He added”we believe that the risk to our FY11-13 estimates and consensus lies on the upside rather than on the downside.” Nomura currently rates SMGKF neutral is “positively biased towards the stock from a long-term investment perspective.”

*A report from Galagpagos to correct its shareholding breakdown shows that apart from investment groups and insiders, its shares are owned by drug firms, Crucell with 5.2%, JNJ with 4.7%, and GSK with 2.1%. GLPGY is Belgian.

*Stallergenes, the French maker of sublingual allergy desensitizing material, reported that its Actair anti-mite product in Chinese tests after a year’s use continued to protect usersd from an allergic reaction in the following year.

*Standpoint Research cut Saneamento Basico de Sao Paulo to neutral from buy. Sabesp or SBS.

*In the meltdown I bought more Bladex at 12.60 and more PT at 10. I put in limit orders at midday before heading to the Waldorf for the renewables conference. Probably too soon.

Meeting the Challenge

From Adam Carr of ICAP, the Australian brokerage, some views on where monetary policy is going:

“The Bank of International Settlements always seems to know what’s what. While the G20 meeting may have yielded a flimsy ‘do as you wish’, there was no confusion from the BIS. The Bank is worried about a new crisis developing, but the rhetoric is far from what we’ve become used to. In contrast, the BIS are more worried about heading to the exit too late, which as regular readers know, is my concern also.

“The BIS acknowledged the difficulty policy makers had, especially as the banking system was fragile in some cases. ‘But the longer that policy rates in the major advanced economies remain low, the larger will be the distortions they create, both domestically and internationally.’ The BIS argued that extremely low real rates altered investment decisions, postponed the recognition of losses, increased risk-taking in the search for yield and encouraged high levels of borrowing. There was also the problem that central bankers would underestimate inflation risks given the crisis may have lowered potential growth rates.

“The UK illustrates this view perfectly. Rates are historically low, the economy is recovering, the land registry is reporting house price growth of 8.2%y/y to May (consistent with other house price measures) and inflation is well above target. All the while the governor of the Bank of England insists there is no problem.”
The US is not in the same situation on inflation and house prices. Challenged by a reader on what I would want to see from the Obama Administration now I made a little list, which he called “Porkulus Spending”. TM thinsk any measures would increase the size and reach of governmetn and add new bureaucrats and new regulations which would hamper future economic growth.

This is a challenge, But the US is not in the same boat over inflation and housing prices as Britain. Challenged by a reader to tell what I want the Obama Administration to do, I created a list, which TM thinks is nothing but “porkulus spending. Any measures he fears will add to the size and reach of governments and add new bureaucracy and regulations that hamper future economic growth prospects. But I do not agree.

I think our country is in a crisis because of a lack of liquidity and a lack of what Lord Keynes called “animal spirits” leading to extremely risk-averse investment in no-yielt Treasury bills and keeping corporate cash undewr the mattress rather than investing it. Because there is no way for the consumer to take up the cudgels and invest in this climate, because of American household’s probems with underwater housing mortgages and unemployment, I want the government to act, preferably in ways that stimulate employment, and require the private sector to join in.

The cheap funds are there. I did not create the lack of animal spirits in the bond market or the unwillingness of corporate America to spend the money it has rather than hiding it under a mattress. household oversaving is the likeliest to stop when my proposals are in place but they will also encourage capex by gun-shy corporate America.

Just for the heck of it, here is my list which I think will put people to work and pay them.

We can borrow to invest in the future of America. for my 5 grandkids without burdening them with debt. Here’s how:

We extend unemployment insurance payouts so people can continue to eat while they look for work.We get businesses to come on board with training programs and internships or apprenticeships.

We figure out a way to refinance home loans. I am far too stupid to know how but I do not like families living on the street.

We improve education by cutting down the vacations and extending the school day. Teachers then can continue to get the high pay they collect regardless and produce something in return.

We don’t stop healthcare reform with the first incomplete round and try to avoid taxing elderly Medicare folks at the highest incremental tax rate in the USA.

We invest the borrowed money to replace bridges which are falling down and build toll roads. These will pay for themselves with tolls but meanwhile will put unemployed Las Vegas condo construction workers to work building them. WPA for today.

We beam everyone up to the internet. We reopen closed libraries and offer web access and e-books..I hear America learning.

We build a high-speed railway running from LA to San Francisco (and maybe further north to TM’s area). Another line down the Florida coast to Key West. Maybe even one from NYC to Boston or Washington DC or both. Again we charge fares to repay. And meanwhile people get jobs doing useful things for th country.

We restore breakfasts in school for hungry children so they can learn without their grumbling stomachs getting all their attention. Corporate America can help.

We resume bus service to take people from poor neighborhoods to their jobs, get kids to school without mama-chauffeurs, and get old codgers out of the house. The auto industry can build the buses.

We build nuclear power plants and wind and solar plants. Maybe even hydroelectric dams.

We finish the job in Afghanistan.

We finance the SEC and the new bank lending overseers properly.

We start out by doing a real investigation of the Flash Crash to figure out what happened, what the role of arbitrageurs and electronic was. (That’s the one for us.)

The government is no bigger today than under Ronald Reagan as a part of GNP. US debt is falling without any need for rigorous cutbacks in spending.

The goal is not to grow the government or its reach. the goal is to gorw the economy. Rright now relying on private spending is not working. the cost of borrowing money for even sound and stable companies is way too high. firms which have cash are not spending it out of funk and fear. We have to let the government act as the counter-cyclical force because there ain’t no other. It would be better if there was capex and a functioning bond market. There isn’t one. so I am crying uncle (or Uncle Sam) .

The cheap funds are there. I did not create the lack of animal spirits in the bond market or the unwillingness of corporate America to spend the money it has rather than hiding it under a mattress. household oversaving is the likeliest to stop when my proposals are in place but they will also encourage capex by gun-shy corporate America.

Meeting the Challenge

From Adam Carr of ICAP, the Australian brokerage, some views on where monetary policy is going:

“The Bank of International Settlements always seems to know what’s what. While the G20 meeting may have yielded a flimsy ‘do as you wish’, there was no confusion from the BIS. The Bank is worried about a new crisis developing, but the rhetoric is far from what we’ve become used to. In contrast, the BIS are more worried about heading to the exit too late, which as regular readers know, is my concern also.

“The BIS acknowledged the difficulty policy makers had, especially as the banking system was fragile in some cases. ‘But the longer that policy rates in the major advanced economies remain low, the larger will be the distortions they create, both domestically and internationally.’ The BIS argued that extremely low real rates altered investment decisions, postponed the recognition of losses, increased risk-taking in the search for yield and encouraged high levels of borrowing. There was also the problem that central bankers would underestimate inflation risks given the crisis may have lowered potential growth rates.

“The UK illustrates this view perfectly. Rates are historically low, the economy is recovering, the land registry is reporting house price growth of 8.2%y/y to May (consistent with other house price measures) and inflation is well above target. All the while the governor of the Bank of England insists there is no problem.”

The US is not in the same situation on inflation and house prices. Challenged by a reader on what I would want to see from the Obama Administration now I made a little list, which he called “Porkulus Spending”. TM thinsk any measures would increase the size and reach of governmetn and add new bureaucrats and new regulations which would hamper future economic growth.

This is a challenge, But the US is not in the same boat over inflation and housing prices as Britain. Challenged by a reader to tell what I want the Obama Administration to do, I created a list, which TM thinks is nothing but “porkulus spending. Any measures he fears will add to the size and reach of governments and add new bureaucracy and regulations that hamper future economic growth prospects. But I do not agree.

I think our country is in a crisis because of a lack of liquidity and a lack of what Lord Keynes called “animal spirits” leading to extremely risk-averse investment in no-yielt Treasury bills and keeping corporate cash undewr the mattress rather than investing it. Because there is no way for the consumer to take up the cudgels and invest in this climate, because of American household’s probems with underwater housing mortgages and unemployment, I want the government to act, preferably in ways that stimulate employment, and require the private sector to join in.

The cheap funds are there. I did not create the lack of animal spirits in the bond market or the unwillingness of corporate America to spend the money it has rather than hiding it under a mattress. household oversaving is the likeliest to stop when my proposals are in place but they will also encourage capex by gun-shy corporate America.

Just for the heck of it, here is my list which I think will put people to work and pay them.

We can borrow to invest in the future of America. for my 5 grandkids without burdening them with debt. Here’s how:

We extend unemployment insurance payouts so people can continue to eat while they look for work.We get businesses to come on board with training programs and internships or apprenticeships.

We figure out a way to refinance home loans. I am far too stupid to know how but I do not like families living on the street.

We improve education by cutting down the vacations and extending the school day. Teachers then can continue to get the high pay they collect regardless and produce something in return.

We don’t stop healthcare reform with the first incomplete round and try to avoid taxing elderly Medicare folks at the highest incremental tax rate in the USA.

We invest the borrowed money to replace bridges which are falling down and build toll roads. These will pay for themselves with tolls but meanwhile will put unemployed Las Vegas condo construction workers to work building them. WPA for today.

We beam everyone up to the internet. We reopen closed libraries and offer web access and e-books..I hear America learning.

We build a high-speed railway running from LA to San Francisco (and maybe further north to TM’s area). Another line down the Florida coast to Key West. Maybe even one from NYC to Boston or Washington DC or both. Again we charge fares to repay. And meanwhile people get jobs doing useful things for th country.

We restore breakfasts in school for hungry children so they can learn without their grumbling stomachs getting all their attention. Corporate America can help.

We resume bus service to take people from poor neighborhoods to their jobs, get kids to school without mama-chauffeurs, and get old codgers out of the house. The auto industry can build the buses.

We build nuclear power plants and wind and solar plants. Maybe even hydroelectric dams.

We finish the job in Afghanistan.

We finance the SEC and the new bank lending overseers properly.

We start out by doing a real investigation of the Flash Crash to figure out what happened, what the role of arbitrageurs and electronic was. (That’s the one for us.)

The government is no bigger today than under Ronald Reagan as a part of GNP. US debt is falling without any need for rigorous cutbacks in spending.

The goal is not to grow the government or its reach. the goal is to gorw the economy. Rright now relying on private spending is not working. the cost of borrowing money for even sound and stable companies is way too high. firms which have cash are not spending it out of funk and fear. We have to let the government act as the counter-cyclical force because there ain’t no other. It would be better if there was capex and a functioning bond market. There isn’t one. so I am crying uncle (or Uncle Sam) .

The cheap funds are there. I did not create the lack of animal spirits in the bond market or the unwillingness of corporate America to spend the money it has rather than hiding it under a mattress. household oversaving is the likeliest to stop when my proposals are in place but they will also encourage capex by gun-shy corporate America.

More for paid subscribers from India, Australia, Singapore, Britian, Israel, and Switzerland.

*State Bank of India changed how the country pegs loans with a new base rate benchmark. This will give more flexibility to banks which want to cut rates among them ICICI. This means IBN can lend more money to solvent clients.

*Keppel Group’s K-Green spinoff hit the market there at S$1.33/sh, writes Martin fErera. That works out to the equivlant of 23 Sing cents per KPELY share, and twice that for every ADR. We will obviously not get the K-Green stock which is not registered, but we should be getting some cash.

*Gold fund ASA proved again that mining shares are harder to get right than bullion. In its H1 to May 31, the fund lost 3.3% in NQV mainly because of realized investment losses of $41.1 thousand and unrealized losses of $36.7 mn, or $1.89/sh. NAV fell 3.3% in the half year but the share price fewll only 2.6% because of gold’s appeal.

*For the lithium and rare earths investment enthusiasts among yuu, think SoQuiMich and Intertek now also Intertek. IKTSF’s battery testing labs in Cortland (NY), Stockholm, Sweden, and Shanghai received Certification Body Testing Laboratory status for Category BATT, and standard IEC 62133 for Lithium Ion Battery Packs. As the industry transition from UL 1642 to IEC 62133 began this month, Intertek is positioned to serve the needs of lithium ion battery manufacturers who are bringing products to market globally. Over the next year all lithium batteries tested to Underwriters Lab 1642 will have to be retested to IEC 62133 and in a year only the latter lest will be accepted. In the US and China, IKTSF is the only lab so far qualified to do the tests which are then accepted worldwide.

*Teva sold its first to file FDA rights to Allergen to Perrigo which will market the drug OTC. And Bayer withdrew its patent infringement suit against TEVA over Giamvi, the contraceptive. Teva also won from approval of its generic of antidepressant Effexor (from Wyeth) and most importantly,it won US FDA ok to launch a generic of Astra-Zeneca’s breast cancer drug Arimidex, which as nearly $1 bn in annual US sales.

*The other shoe dropped when two new studies showed a higher risk of heart attack and cardiac problems with Avandia from GlaxoSmithKline than with alternative diabetes drugs. GSK will probably have more trouble with the Journal of the AMA study of Medicare patients’ expeirences with Avandia vs Actos (from Takeda of Japan. The other study from the Archives of Internal Medicine is a rehash of the statistically flawed Steven Nissen Cleveland Clinic meta-analysis. The next step is an FDA meeting on Avandia in two weeks. The drug has already been given new labelling and now will probably face new restrictions. However GSK is no longer dependent on this former blockbuster because the news is 3 years old.

*Final drug note. Novartis may give way to pressure from independent diirectors to boost terms to minority shareholds in Alcon according to today’s Finanacial Times, including ADR owners of ACL like us. A leading Swiss takeover lawyer said NVS under Swiss law could not legally buy out the minority shareholders once it had gained majority control. NVS agreed to a 2-stage takeover of ACL more than 2 years ago with Nestle climaxed in Jan with the decision to sell the final NVS tranche without paying minorities the same price.

*Intelligent Investor (Oz) wrote about QBE (QBEIF) which it now rates a Buy. “QBE Insurancechief Frank O’Halloran and a cadre of his top managers fronted investors to provide an update on the group’s progress since its March annual meeting. O’Halloran tweaked a few numbers here and there, ‘guiding’ investors to the bottom end of the company’s previously stated range for ‘insurance profit’ (a key measure in assessing an insurance company’s progress). But the overall range for insurance profit remained the same (16% to 18% of net earned premium income) and, to us, there was little cause for concern.”

The letter did warn about the risks of converting US$ income into the high-flying A$, a factor which does not apply to us.

Tip From the Bond Market

Today Bloomberg wrote:

“The percentage of corporate bonds considered in distress is at the highest in six months, a sign that debt investors expect the economy to slow and defaults to rise.

“The number of speculative-grade companies worldwide with yields at least 10 percentage points more than government bonds climbed to 399 this month, or 16.7% of the total, the highest share since Dec., according to Bank of America Merrill Lynch index data. The ratio compares with 9.2% on April 30, which was the lowest since Nov. 2007.”

This move into Treasuries and foreign equivalents marks market panic. The first thing it tells us is that the government should use the cheap funding it can get to relaunch the economy because the private sector is being ovrcharged for money. If lenders are frightened of inflation, they wouldn’t lend to Uncle any more than to Bank of America or Goldman Sachs, which have to pay a spread of 257-8 basis points over Treasury bonds for 2020 maturities.

The other lesson is for investors. After hesitation for fear of margin calls, I’m taking full advantage of the leverage provided by the Interactive Brokerage account to borrow at 1.28% for my portfolio of non-US corporate and convertible debt, and foreign real estate and emerging market debt, yielding around 8%. So with care, I’ve added to positions and now have 35% more invested than I started out with. I am being opportunistic using investment vehicles like funds, ETFs, and high yielding foreign common or preferred stocks. While I am still in a defensive mode, I think I am being less risk-averse as the bond market correction proceeds.

Since govt bond yields are so low, it is hard to argue that it is “crowding out” the private sector. What we are seeing is a collapse in confidence that corporations will continue to earn more money and repay their debts. These are Wall St.’s upscale finance finest. Morgan Stanley pays even more;2.96% extra, but only to 2015; JPMorgan-Chase pays only 1.51 over 2020 T-bonds. All bond data from today’s Barron’s.)

Moreover those corporations which do have cash to hand are hoarding it. The US Association for Financial Professionals did a survey in May which shows that corporate execurives plan to expand their cash holdigns over the next 6 months rather than spending it, according to today’s Financial Times.

Another anomoly is that foreign non-finance sector borrowers, with the exception of houndogs like BP, are not having to pay anywhere as much as the giant sucking squid, again according to Barron’s.

Borrow more to gain more yield.As determined by the Ottawa Summit, U.S. fiscal and monetary tightening will come, in 2013. That is something like St. Augustine writing in his Confesisons: “Make me chaste, O Lord, but not yet.”

The Fed has won world permission to keep rates down for the foreseeable future. That is what they want to do anyway, Ben Bernanke, NY Fed Pres. William Dudley, and maybe the future vice-chairman Janet Yellen, all of whom combine a Keynesian taste for countercyclical moves with a Friedmanite understanding of the errors of the 1930s. They will take their time tightening in a period of low growth and low inflation according to Richard Hoey, chief economist of BNY-Mellon and The Dreyfus Funds.

He argues that any long-term structural risks like a future fiscal train wreck will not hit until 2013. The cyclical conditions would have to be the exact opposite of those prevaliling today. You would need to see high and rising inflation, restrictive (rather than expansionary) official monetary policy, and Treasury auctions being crowded out by strong croporate credit demand. Such factors may arise in 2014-6 but they do not exist today.

If you insist on buying low yield Treasury bonds, buy ones which are inflation protected due in 5 years or more.

The “union” trend affecting Chinese east coast factories producing for export with disputes over higher wages and better working conditions reflects a labor shortage. The workers come from the inland provinces which are shorthanded, an unintended consequence of the one-child policy imposed on China three decades ago. While China is not supposed to run out of young workers for another decade according to the tables, in fact the shortage is already emboldening dorm-hoursed workers making parts for Japanese and Taiwanese global manufacturers. One solution is for Chinese plants to open inland nearer to the home villages of young people with less gumption and get-up-and-go, who are less likely to down tools and walk out. Another solution is to find an alternative to China.

It may be months before the impact on commodity prices of slowing Chinese exports hits. But since much of the raw materials China imports are re-exported in the form of semi-finished goods or parts, the higher labor costs renminbi will cut imports as well as exports. This will reduce the appeal of commodity companies and currencies. Adjustments will be made in the portfolios during the summer to get ready for risign Chinese prices.

We have the first of a two part series on a country likely to replace some of China’s production in today’s paid blog. We also will think about how the new China will import less from Japan.

My apologies for leaving out a decimal point in Friday’s blog note about the huge gold coin sale in Vienna. It was bought for the exact equivalent of its gold content, one third below the auctioneers’ estimates, not 30% below.

More for paid subscribers from Scotland, Spain, Portugal, South Korea, Canada, Israel and Thailand follows. Join them by signing up on our website to receive stock information as well as macroeconomic ideas.

*I have voted my proxies against Portugal Telecom accepting the bid from Telefonica de Espana for its half of the jv which controls the Brazilian cellphone giant, Vivo, which TEF wants to merge with its creaky Telesp landline business there. I voted against accepting the euros 6.5 bn offer. It seems that the 8% TEF sold last week may not have a voting right at all. Portuguese shareholders own 36% of PT and reprotedly are also voting não; the key vote is the 58% in PT owned by foreigners, mostly in ADR form, who TEF thinks will vote short-sightedly on its side.

Vincent Fernando CFA, writing in The Business Insider, talks about Spain which he thinks “will need to financie 21.7 bn euros in a single month”, July. Fernando quotes Goldman Sachs are believe Spain will fall short by euros 12.6 bn.

*Canada will supply uranium to China after Saskatchewan-based Cameco (CCJ) won two long-term agreements to supply Chinese nuclear reactors during the Summit.when Pres. Hu Jintao was in Ottawa. TD Newcrest kept Cameco on hold because of the lack of details on the deals.

*Posco was one of the best performing stocks in the last week, according to The Financial Times which collects this data. PKX has been investing in ore and coal around the world to ensure its supplies of both. This South Korean stock is also owned by Warren Buffett.

*Israel’s Mallanox today announced that its ConnectX(R)-2 InfinBand adapters and IS5000 InfiniBand switches demonstrated world-record MPI performance for node-to-node communications at 90 mn messages/second, three times better than others. MLNX is a connectivity play and has set a new benchmark for something.

*Research I am ashamed I did not do earlier shows that reader MG is absolutely right about the continues payment of dividends on some Royal Bank of Scotland preferred series, although I am still unsure of why this largesse occurs. Three series of U.S. RBS non-cumulative prefered shares, F, H. and L, all valued at $25 at the issue, and all now past their original redemption date (in 2004 to 2009) are paying dividends at 5.75 to 7.65%. Our Fs pay the highest figure. I am not sure if the payments result from different language in the prospectus from that of later series of preferred shares whose dividends were supsended in April, or from the fact that the 3 series are past their redemption date. I got confirmation of the payment terms from brokers E-trade who hold my shares dated May 21:. “The Directors have declared the specified dividends on the undernoted Series of non-cumulative dollar preference shares of US$0.01 each, all of which are represented by American Depositary Shares, for the three months to 30 June 2010. The dividends will be paid on 30 June 2010 at the undernoted rates to holders on the register at the close of business on 15 June 2010.” Given that RBS is a bit short of funds right now and cannot be expected to redeem these preferreds at $25 in the short term, it is a nifty way to get 10%/yr on your money.

*Paul Renaud of www.Thaistocks.com visited with Demco PCL and had a “tete a tete” meeting with two of the company’s principals. He writes:

At Demco HQ an hour from Bangkok, in the country at Pathumtani, I met with CFO K. Paitoon and the assistant Managing Director, K. Phongsak Siricupta. The current Managing Director, Pradej KIitthi-itsaranon and Mr. Phongsak are original founders of Demco.

I’ve published various article on Demco since Feb. 17 2007, when its stock price was 3.14 Baht. It has since paid good cash and some stock dividends, and besides issued 2 free warrants. Combined with these shareholder sweeteners, Demco has been a good total performer well beyond the MAI or SET index. I think this out-performance will continue into next year.

The number of shares outstanding has more than doubled to 435 mn. It will increase further up to 635 mn shares, over the next 18 months as Demco just announced 2 new free Warrants #3 and #4. (XW date is end-July). These should not not get converted until next year. Investors always worry about dilution as do I. But do not forget that more shares mean higher average daily trading volume and higher market capitalization, attracting institutions. Volume and liquidity can lead over time to higher price-earnings ratios.

We expect Demco to pay an interim dividend this year, despite gearing up for massive revenue, backlog, and earnings expansion into 2011 and beyond. Note: the dividend represents a miniscule 2% of earnings. This high-growth company offers expected higher dividend yields along with nearly no debt. Per share book value is 2.54, but this is not a meaningful figure for a professional service engineering firm, which should be valued like a company like Crane.

When I first recommended, it, Demco employed 375 workers and 70 engineers, the level for the next 2 years. Today it employs 420 workers and 110 engineers. More than 50% more engineers shows Demco’s confidence in its future business expansion. When I asked, the company’s principals smiled in agreement.

Last year was a transition despite the global economic downturn,. Demco has been gearing up for massive expansion later this year and next. The political uprising in May had virtually no impact, an added investor attraction.

Here are key points re-affirmed at my visit:

–The backlog remains at an impressive 6.5 bn Baht, an absolute record.

–The high-cost steel inventory drag on earnings last year has now been eliminated completely.

–There are 10 planned wind projects coming in the next 3 years, 3 of them fully approved., one at 60 mW, and two at 90 mW, at a combined worth of 3.5 bn Baht. The other half of the backlog comes from the core business, now 90% services, a higher margin business than product sales. The 240 mW projects are a “done deal”, only awaiting the exact electric “adder rate”. This the Thai government is likely to announce at a BTAC green energy exposition next weekend. (June 28). (Editor’s note: Paul wrote this last week.)

The expected adder is 3.5 Baht per electric unit, the premium which EGAT will pay for green energy from tax incentives for green projects. The wind energy industry here is now anxiously awaiting this adder rate announcement as without this, no project can calculate the investment rate of return (IRR).

A delay, always possible with Thai politics, could run to Oct. according to Demco. The appeal of wind projects is that they do not incur any material risk as Demco will command a pre-set 15% net profit margin. The average measured wind speed on site over 2 years was 5.5 meters/second, attractive enough for class 3 long-wind-blade technology from a Danish Siemens sub. The blades do not pose risks for birds as they turn slowly.

Demco could also build new steel towers required for 3 G phone technology as soon as this is announced by the foot-dragging government. The whole country is waiting. This 25% expected gross profit margin business will be handled by their factory at Lopburi. Demco believes it will get this contract but I have not included it in my projections. Remember Demco already built earlier DTAC phone metal structure towers.

The warrants #3 and #4 will mean no share dilution expected until 2011. They will finance a new Solar Farm on land near the Moon River, next to EGAT, in Udom Ratchatani Province. This is a 2.7- 3 bn Baht investment which Demco will own outright producing 30 mW. The payback period is 6-7 years with an expected annual cashflow of 450 mn Baht. Construction is expected to start in early 2012.

The Solar adder fee is higher than for wind at 6-7 Baht/mW. The “engineering is easy on this project” (according to Demco) and it should receive BOI privileges. The IRR is around 12-15%, assuming a daily average of 5 hours of sun. Silicon wafer, the raw material for solar panels, has dropped precipitously in price (down 80%) in the past 2-3 years making such projects attractive for sunny Thailand.

Demco sell this solar farm for an extraordinary profit down the road. It shows again how Demco is entering green energy. With its engineering expertise; it can become a key player and should in time command a premium valuation.

Much smaller is a Telephone of Thailand fiberoptic project estimated at 150 mn and a planned rice husk biomass energy project.

Demco is optimistic it can achieve 5 bn Baht in revenues this year, if the government announces the adder rate in time. Delay to October would push these revenues into next year.

Below is my earnings model based on my visit:

=3.5 bn for the first 3 wind projects this year, at 15% net profit margin, 525 mn Baht (This very low risk business only awaits this adder rate.

From the stated backlog,

=3.2 bn from core business 90% services, at a conservative 5.5% profit margin, 176 mn Baht.

Estimated net profit for Demco over the next 18 months is 701 mn Baht, assuming nothing goes wrong, not likely, or no new opportunities arise, likely.

It is difficult now to allocate for this calendar year or next. My estimate remains around 360-370 mn net profit this year and more next, very conservative assumptions. This is not a “one off” great year for Demco but marks sustainable growth in wind projects and a new Solar Farm planned.

With 435 mn shares outstanding, using my estimates this comes to 0.85 Baht.sh. At the current price of 4.88 you get a 2010 p/e of only 5.7.

Next year the shares outstanding will increase to a potentially maximum of 635 million, if all warrants are converted. With 400 mn net profit, 0.625 Baht/sh, the forward projected 2011 p/e is 7.8.

But the solar farm is expected to yield an additional 450 mn Baht starting in late 2012 and there are another 7 wind projects. If they sell out this solar farm say for a buyer wanting carbon credits, a huge one time windfall will come their way. Also, I think more green service projects should be coming Demco’s way well before then. And non-green ones like the new 3 G towers for example.

Last but not least Demco will probably pay an interim dividend this year, having reaffirmed its 40% payout ratio on net profit. So the dividend yield should be around 7% on current prices, but higher if your average price is less then 4.88 Bahts, very attractive for such a fast-growing, low-debt green- energy company. Demco in the past has been very generous with dividends paid to all shares, even if days after the first warrants were converted.

Since the number of shares outstanding will increase to 635 mn later next year feeding into more average daily trading volume and an eventual a higher market cap, Demco should also command a higher p/e multiple, not least for being in the green energy field.

If Demco ever is listed in the energy sector that alone will double the p/e ratio. It now trades in the millions of shares per day with some peak days much higher, at this link…

We remain Demco fans because while there are always risks, the execution of their business has been excellent. I view the stock a stro*ngbuy even after its 20% price rise since I pounded the table here in early Feb. We await the Baht amount of this adder for wind energy, after which it can rise sharply. Demco is on course to becoming a Thai pure green energy play with combined long expertise in transmission systems, underground cables and substations. Demco has the rare full permits to built 230,000 Volt lines and Thai electrification remains a growth business.

Paul Renaud www.thaistocks.com

(Note that only about 1/3 of the shares are free-floating now, with the rest closely held by Thai investors. You have to buy this MAI stock in Thailand using a specialized brokerage either in Thailand, or like HSBC Bank, Euro-Pacific Capital, or Zoom.com. VL)

Sincerely, Vivian Lewis Global Investing

Gold Auction Disappointment

The world’s largest gold coin sold for $4.02 mn in Vienna at the venerable Dorotheum auction house. This was significantly below the pre-sale estimate of $490 mn for the auto-wheel-sized Maple Leaf monster coin showing Queen Elizabeth II, worth C$1 mn (face value) minted in 2007 before the gold price rose, and bought by an Austrian financier who was jailed for fraud and embezzlement.

Chartist Richard Suttmeier writes in Valuengine on gold:

“The daily chart shows declining MOJO and Monday’s all time high of $1266.5 was a failed test of my monthly resistance at $1265.9. The 21-day and 50-day simple moving averages provide key supports at $1230.4 and $1202.9.”

Amidst all the news about the Supremes overruling the law which makes it a crime to fail to provide “honest services” in managing a company, another bit of jurisprudence may not be noticed. But it matters to us.

A boost for the American Depositary Receipts we write about came from a court ruling that foreigners who own locally traded shares cannot file class action suits in the USA against the company management. However, owners of ADRs, even if they are not US citizens, are allowed to initiate or join class actions. The case was about Vivendi Universal, a French conglomerate seriously mismanaged in 2000-2 by megalomanicac Jean-Marie Messier, moi-même, maître du monde, popularly called JM the 6th power. French shareholders, frustrated that France lacks class action suits, sought to sue Messier here. They were turned down.

So in future, foreigners will have an interest in using the ADR market even if the stock is from their own country.

Richard Hoey, Chief economist of Bank of New York Mellon told me after lunch at the bank Weds. that the British coalition’s tightening policy may be the result of politics. He cited both tradition disgust with state-cector spending, and the fact that the Conservative-Liberal coalition will have to face the electorate. So he figures the govt will ease up right before the vote, saying that the economy was recovering and Britain can afford to ease.

Mr. Hoey thinks the US will not be able to start tightening its own monetary and fiscal policy until next spring.

News from our companies follows from Greece, Scotland, England (they ahve separate soccer teams so they must be separate countries), Spain, South Korea, and Chile.

My reason for buying National Bank of Greece (NBG.pr.a but there are lots of brokerage variants) yesterday was that it issued euros 3 bn in covered bonds “to optimize the use of its balance sheet and develop contingent liquidity.” And also support its operations. The bonds run 5, 7, and 9 years and pay coupons over the euro central bank of 1.7%, 2%, and 2.3% respectively. The coverage is from euro and forex denonminated home mortgage loans. The bonds were not sold but issued to the European Central Bank for repo (repurchase) transactions.

In my opinion, this may mean NBG will not have to tap the eventual Greek TARP which is wending its way through Parliament. Or that its eventual recourse to this money an be delayed. The delay means that we will be getting our dividends on the dollar-denomined preferred shares.

Reader MG checked my numbers and reports that the current National Bank of Greece preferreds pay 16.3% in dividends, not 17.6%. I was in a hurry to do a webinar yesterday and made a typo.

The same reader reports that the Royal Bank of Scotland is still paying dividends on the F series of preferred shaes we own, at the rate of $0.478125 per quarter. Apparently the rospectus for some of the RBS preferreds (L, H, and F) requires that payment be made as long as the Scottish bank has profits, and this eludes the rule imposed by the European Union to protect competititors of the state-controlled British banks. I will try to find out more. Thanks to MG.

*Banco Santander and Citigroup agreed to a deal under which STD will buy a $3.2 bn of auto loans from Citi and service another portfolio worth $7.2 bn. Santander is paying 99% of the value of gross receivables in the portfolio. The deal will close in Q3. We do not own the common of this ambitious Spanish bank, but two classes of preferreds.

Martin Ferera writes:

*Morgan Stanley downgraded G4S today to underweight (not much of a reaction today in London though – with a down-day you’d expect G4S to drop a penny which is that has happened). (GFSZY was recommended by Martin.)

*With Keppel now ex-distribution on the new green energy demerged shares (18 June), we are actually ahead. The KPELY price has not fallen at all. While I’m unsure on the value of this demerged enetity, we find out next week. (KPELY is from Singapore.)

*Killick & Co., British brokers, wrote: “For investors looking to maintain retail exposure, we would recommend Tesco, which offers a 3.5% yield and has a growing international footprint and substantial level of property backing”. That’s TSCDY.

*GlaxoSmithKline was granted EU variation for its conditional marketing authorization for Tyverb against breast cancer in the European Union. The GSK drug may be used in a new therapeutic indication in combination with an aromatase inhibitor for treating post-menopausal women with hormone receptor-positive, HER2 (ErbB2) over-expressing metastatic breast cancer and for whom chemotherapy is currently not intended.

WellPoint, the largest U.S. managed-care concern, made it harder last year for its members to gain approval for use of the Boniva osteoporosis drug after internal research linked it to higher fracture rates, lower patient compliance and higher total costs of care than two rival drugs. Boniva is from GSK and Roche.

*Coca Cola Hellenic (CCH) will make a tender offer to acquire 10.9% minorities in its Serbian unit for euros 16.9 mn. The entity is Coca Cola Serbia AD. The Greek bottler is 23% owned by the U.S. Coca-Cola Co. (KO), and is its second largest bottler.

*Aberdeen Chile Fund will pay a 44 cent dividend July 22 to shareholders of record July 9. Beware. This may be a return of capital under the CH distribution rules. You may be getting back your own money and you will know it only when you get your tax forms.

*Posco will eventually own 45% of PT Krakatau Steel in Indonesia under details revealed by the govt there. The S. Korean steel company is in expansion mode.

Sincerely, Vivian Lewis Global Investing

No Free Lunch; No Free ETFs

There is no such thing as a free lunch. Or free trading in exchange-traded funds. Commission-free ETF trading, the hot new way to invest, is now offered by Schwab, Fidelity, and Vanguard which have lured in billions of dollars worth of business. Other brokers like E-trade, Scottrade and T-D Ameritrade may follow suit.

ETFs are supposed to highly liquid, and are allegedly the favorite investment vehicle of day traders and small players.

But in fact the trades are not free. The ETF management groups in fact pay for trading activity. That means, in fact, that others holding the ETF incur the costs of rapid trading of these funds. But there is more.

And rapid-fire trigger happy trading of ETFs without having to pay commissions hurts markets.

As is by now well known, in the May 6 “flash crash”, when the Dow Jones fell 100 points in a few minutes after 2:30 pm close to 10%, the world of ETFs was more seriously affected. Over 68% if the trades “busted” by Nasdaq involved ETFs, starting with the biggest ETF of all, SPDR S&P 500, SPY. The situation was similar on the NYSE where 64% of the busted trades involved ETFs or Exchangte-traded notes, their close relatives These are called “questionable” or “spurious” trades but they were perfectly ordinary at the time they were booked. The only way to decide which trades are busted is linked to the amount the price fell during the crash.

So the integrity of markets is also subject to question. There is more. Thomas Petterffy, the head of Interactive Brokers, which offers $1 commissions on all trades. has testified that ETFs were the cause of the May 6 crash, not just a symptom.

And, while I cannot prove it, I think that the extreme volatility we have seen in US markets in recent weeks is linked to shot-gun ETF trading, usually in the final hour of the market day. With ever more variations of ETFs like ETNs, which also were mispriced during the May crisis, and leveraged and inverse ETFs, the risks ae higher. So too with managed ETFs which are less transpartent. Ditto for small cap ETFs, or ones investing in the bond market. The rush to replicate all the variations which exist in the closed-end and open-end fund space increases the ETF risk to the integrity of markets. Brokers (like IB) allow you to use margin to trade options on ETFs and ETNs. So the risks are even greater which is why the FINRA has been implementing new rules on margin for ETFs.

But that is only a first step.

More news from our companies follows a first batch showing how hard it is to deal with global corporate news from funndy countries like Spain, Portugal, France, Brazil, and India, as well as news from Israel and Britain and South Korea.

Pre-subscribers may want to sign up the Webinar about Global Investing today at 2 p.m., at wealthinsideralliance.com

*Telefonica sold 8% of of its 10.2% stake in Portugal Telecom in a manoeuver felt to be intended to allow its stock to be voted in favor of the sale by PT of its stake in their jv in Brazil. This will enable TEF to buy out Vivo from PT for a high price, despite PT opposition. The shares were transferred to a long-term holder of TEF and a Swiss bank.

*Areva announced that its backlog was euros 43 bn and that its H1 revneues would be up 2% but that was the good news. It will have an operating loss because it has taken euros 400 mn $446 mn) in new provisions for cost overruns at the Oliokula plant it is building in Finland, and the nuclear project is still 30 months from completion, based on the latest estimate. Analyst at Jefferies recommend buying Areva investment certificates, ARVCF.

The new charge takes total cost overrun provisions to 2.7 bin euros for the 3G nuclear power plant which Areva priced in 2005 at 3 bn euros. It was supposed to be commissioned last year. Areva, a French state-controlled company, aims to raise about 3 bn euros by selling new shares under the French austerity program (which call raised the retirement age to 62 from 60 triggering today’s strike). But now Areva’s A credit rating may be cut by Standard & Poor’s.

*São Paulo State-based waterworks Companhia de Saneamento Basico do Estado de São Paulo signed a contract to provide service for São Paulo City and State for the next 30 years and be paid for this. The city accounts for 56% of revenues for SBS.

The new deal enhances the powers of the São Paulo State sanitation and energy regulator, ARSESP, to manage the city’s water and waste operations. SBS agreed to invest 13% of its gross revenues in the state, net of taxes and fees, which is already part of its investment plan. SBS will also recover 7.5% of muncipal fees based on its investment costs, calculated (at last) by a normal discounted cash-flow spreadsheet in return for providing water and cleanup. The stock rose shareply so they must have won a good deal. But frankly, it is confusing even in Portuguese.

*Bank of Rajasthan shareholders are seeking rapid approval from the CB, The Reseve Bank of India, for the takeover of bankrupt BoR by ICICI. The Rajasthan shareholders June 21 in Udaipur voted for the deal despite a local court’s attempt to cancel the vote because IBN is not Indian enough to salvage BoR. The Tajal family, which may have engaged in fraud in the BoR’s collapse, voted for which the RBI reps voted con.

Apparently Secy of State Clinton’sr team intervened in this issue at the Ottawa summit, showing how hard it is to move the Indian bureaucracy even in a banking crisis. IBN

*Incredimail (MAIL) amended its agreement with Google extending its current contract only to the end of this year. Thereafter MAIL can implement deals with other major search engines and diversify its user base. Small-cap specialists Sidoti & Co. rate MAIL a hold but the stock jumped on the news that it was liberating itself from GOOG. It is the only tech firm I know that pays a decent dividend.

*Happily Sidoti has a ‘buy’ on beaten down Click Software, CKSW, also an Israeli firm, tje developer of customer service staff scheduling and tracking software, a Frida Ghitis find. Frida is in Sri Lanka so I will meet with both companies at a Sidoti small cap conference here.

*GlaxoSmithKline (GSK) and Medivir (a Swedish firm once in the Global Investing Pro portfolio) signed an exclusive agreement to commercialise cold sore treatment, Xerclear(TM) (acyclovir and hydrocortisone) for over the counter sales in many markets but not the Americas, Israel, China, or South Korea.

GSK with British universities in Leeds and Durham aims to make faster-acting, safer medicines by print0ing the active pharmaceutical ingredients on a pill’s surface This will allow a pill to contain several active drugs. nd eventually allow a single tablet to contain several drugs.

GSK is also entering the US soft drink market with Lucozade, a British favorite, which it is licensing to bottlers here, presumably to go with our new taste for soccer.

Japanese jv BioWa, licensed GSK with its Potelligent screening technology which finds antibodies which kill more cells (cytotoxicity.)

*Teva and cancer therapeutics firm Mersana (of Cambridge, MA) initiated a Phase 1 clinical trial on the safety and pharmacokinetics of XMT-1107 in patients with refractory advanced solid tumors. XMT-1107 is a novel anti-angiogenic fumagillin analog employing Mersana’s Fleximer(R) platform, a conjugate of Fleximer and camptothecin. Mersana received an unspecified Teva milestone payment.

Société Générale today raised TEVA to buy. I bought more last week.

It does not show in the Model Portfolio because I want to show the price I paid 20 years ago to make my performance look beter.

*Also from Israel, Delek Group (DGRLY) is selling its stake in credit-card clearning firm Gama. It is an insurance comglomerate investing in offshore oil.

*American Eagle Outfitters of the USA is in talks with Israeli retailers because it wants a presence in the Jewish State. Among the possible counterparties are Elbit Imaging which turns out to own the local franchises for Mango and The Gap. EMITF was created by investing royalties from sale of its medical technology to GE.

*British equipment testing firm Intertek was boosted by the acquisition by French rival Bureau Veritas of commodities testing and inspection firm Inspectorate. IKTSF.

*Tesco rose because the VAT increase in the British budget was lower than expected, exempted food, and will not come into effect until 2011. TSCDY.

*More on the Goldman Sachs downgrade of BG Group. It’s based on the stock price runup (by those who have to own an energy co. with British as its first name) and fear of exploration delays: from the 6-mo US moratorium on deep drilling, which may or may not be restored after a judge outlawed it, Australia’s 40% resrouce tax, Brazil’s new, stricter deepwater regs, and Kazakhstan’s attempt to impose new taxes. BRGYY

*Posco is withdrawing from its planned coal deal in Ukraine. PKX is South Korean. Ukraine is a mess.

Sincerely, Vivian Lewis Global Investing

Global Investing Trade Alert – June 24th, 2010

Reuters says

“Greece is readying legislation to set up a 10 billion euro support mechanism for banks to turn to if their capital adequacy falls and they are unable to raise funds from markets to beef up their equity.

Rising bad loans, downgrades to sovereign debt holdings and a deepening recession are seen taking a toll on Greek bank earnings this year and authorities want to have a safety net ready to provide capital should there be significant erosion in banks’ equity.

The so-called Financial Stability Fund (FSF), part of the 110 billion euro emergency loan package debt-laden Greece secured from the IMF and its euro zone partners to avoid default, will be gradually funded with 10 billion euros.

Debate on the FSF began on Thursday with the parliament’s monetary affairs committee grilling the deputy finance minister on the fund’s structure. The government aims to have a draft bill by the end of June.

“The purpose is not to provide liquidity support,” Deputy Finance Minister Philippos Sachinidis told deputies. “The aim of this initiative is to deal with a collateral problem … the banking system is facing the backwash of the fiscal crisis.”

Greek banks have underperformed European peers since the start of the year, shedding 44 percent. The country’s debt crisis, which sparked contagion fears and roiled the euro, has hurt them through higher funding costs, a squeeze on margins and trading losses tied to government bond holdings. [ID:nLDE64Q1B3]

Banks will be required to turn to the fund if their capital adequacy ratios fall below minimum thresholds set by the central bank and they cannot raise funds in the private sector to boost their capital base.

Capital injections from FSF will take place via the purchase of preferred shares banks will issue. The idea is that a stronger equity will facilitate lenders to re-access capital markets and limit recourse to eurosystem facilities.

Banks will have up to five years to pay back the capital and buy back their preferred shares at the issue price. Beyond this time limit, they will face a penalty surcharge on the buyback.

The news has hit National Bank of Greece’s 9% preferred shares because investors recall that the EU kept Royal Bank of Scotland from paying preferred dividends for a year from April because of the risk of anticompetitive effects. But NBG may not have to tap the new fund before a few dividends have been paid, and even then the Brussels wheels roll slowly.

So we recommend buying NBG.P 9% for a 17.6% yield.

Sell Nat West preferred to make room. We have enough RBS paper. NW is an RBS sub. This is a bigger gamble but NBG may not even need the dough as it is earning lots of Turkish lire and Balkan money.

Another bit of news. I have been puzzling over why Tesco is up in the last two sessions in London. It turns out that the Brit supermarket has just won a 3% investment by Berkshire Hathaway. Warren Buffett is copying me. TSCDY.