Titanic in Talinn
There are two 2011 bubbles I want to prick before you get caught up in them. They are Vietnam and rare earths.
Marxism and markets are hard to mix. While China offshores production to Vietnam, this has been a mixed blessing. Growth topped 7% a year until last year when it fell to 6.8%. But inflation is running much faster than growth. And about a third of the economy is in the hands of the state. Unlike China, despite its doi moi policy, Vietnam has not been able to liberalize production while keeping political control. There are a few really huge state-owned conglomerates which have dividersified throughtout the economy. The giant Vietnamese state-owned conglomerate, Vinashin, thanks to poor management and misuse of capital (sometimes for corruption) faces effective bankruptcy. Once a ship-building firm, the current Communist regime decided to turn the politically well-connected company into a growth engine. Fed by fast growth of profits in the 1990s, it invested in hotels, liquor, insurance, whatever. Other state companies, starting in electric generation or telephones or oil, have also invested widely in Vietnam.
The Vinashin group now has debts topping $4.4 bn, equivalent to 4.5% of the 2009 GNP of ‘Nam. As it cannot pay the $60 mn it owes Credit Suisse, the Hanoi govt has intervened with a new interest-free loan to cover this payment plus salaries. This comes on top of an earlier $600 mn state loan made to Vinashin at zero interest in 2007. Private sector companies have to fight to access bank credit, which goes mostly to state enterprises. And when they get a loan they pay 18% interest. After the latest Vinashin bailout, Moody’s and Standard & Poor’s downrated Vietnam.
Now the government is facing attacks on its finances at the 11th Communist Party Congress in mid-Jan. While I do not think PM Nguyen Tan Dung will be spared, the relatively young (60) and charismatic leader may keep power by bringing on a more collective leadership. But things are fraught. Meanwhile pollution is killing the fisheries and tourism receipts are below targets.
As for rare earths, 17 strategic metals used in electronics, solar energy, refining, and military applications, whose export China is limiting, by cutting quotas 72% for 2011, there appears to be a solution even before the mines in the West can be reopened. The new mines will have to operate under newer and costlier anti-pollution rules, which will take three years or more. Meanwhile China controls about 95% of the market and prices are soaring. About a third of total world reserves of rare earths come from China. It will export only 14,446 metric tons in H1 this year, down 35% from 2010.
But high prices lead to a solution. A company in former East Germany, Loser Chemie, has developed a method of extracting from industrial waste the sought-after rare earths like lithium, molybdenum, gallium, indium, selenium, neodymium, and wolfram. This small firm, in Saxony, is headed by Wolfram Palitzsch, who holds a bunch of patents on the recycling process. I think his name led him into this field, since Wolfram is another name for tungsten, but it appears that he got his start extracting aluminum from Saxony’s abundant industrial waste for a water treatment plant. From this he developed extracting rare earths. An example is europeium which Palitszsch figured out how to extract from used low-consumption light bulbs. Germany alone trashes 400 tonnes/yr of eruopeium.
The German govt is subsidizing Palitzsch’s work in strategic metal recuperation to the tune of abut $120,000/yr. The company is private and I suspect it will soon be acquired, making the former Ossi very rich. Meanwhile, do not count on rare earths remaining that rare.
Currently only about 1% of industrial waste is processed to extract rare earths in Europe; I suspect US figures are similar. The growth will come in extracting the stuff from waste, not from mines.
In Talinn the billboards read, in English: “Estonia! Welcome to the Titanic”, and show Greece, Ireland, Portugal, and Spain as ships sinking into the sea. Yet Estonia did give up its kroon on Jan. 1 and joined the Euro bloc. Meanwhile Spain and Portugal may apply Feb. 4 for bailout funds from the euros 750 fund for the purpose. Or not.
Thanks to new reader T O’B who wrote concerned that we are settling for relatively low returns in our foreign bank preferred stocks. In fact this is not true. We own different numbered series of these issues. Right now they yield 6 to 8%. But by marking them after the numbered series with a percentage sign marking their suitablity for IRAs, 401K plans, Roth IRAs, and other tax-advantaged funds, it may appear that the percentage sign shows the yield. For years since I started keeping these tables, the yield is in the last column.
I now have switched to using words rather than numbers to show the prefered series and encased the percentage sign in parentheses to show this is a symbol rather than what the yield actually is.
More for paid subscribers from a few markets open today: Israel, France, Portugal, Spain, Vietnam, South Korea, China, and Canada.
*Saneamento Basico de São Paulo was rated buy 5 stars (tops) by Valuengine where Richard Sutttmeier now hangs up his hat. SBS.
*Posco was upgraded to buy by Zachs. PKX is suffering from political uncertainties in its native South Korea. The world’s No.3 steelmaker, said on today that it will develop resources in Africa, Siberia and polar regions. It expects its group-wide sales to reach 200 trillion won (US$177 bn) by 2020, its CEO, Chung Joon-yang, told employees in a New Year address. It earlier announced that it would take a minority stake in a Vietnamese steelmill.
*Xinjiang Real Estate rose Friday because Thomson rated it a buy. XIN rose 10%. I do not have that much impact.
*A sub of Transocean called its 1.625% Series A Convertible Senior Notes due 2037 for redemption on Jan. 31. The redemption price is equal to the principal amount of the note plus accrued and unpaid interest up to but excluding the redemption date. The Notes may be converted at any time before the close of business on Jan. 28, and convert into shares of RIG. This is hurting the share price as is the company’s vigorous opposition to yet another investigation of the Gulf oil disaster which RIG says is not legal.
*Two London Times columnists favor our stock picks among their top ten for 2011. Martin Waller writes:
“I like BG, the old exploration arm of British Gas, because of the prospects for its liquid natural gas developments in Queensland, where it is ahead of the competioon, and because I do not believe the market has yet factored in the resevers in has in the huge Santos Basin off Brazil.” BRGGY.
*Its David Budworth, looking for low p/e stocks, likes Tesco:
“Even if spending cuts and the VAT increase force UK shoppers to tighten their purse strings, Tesco investors should still come out smiling. The supermarket giant has expanded overseas and is growth its banking operations.” TSCDY’s p/e he says is 11.8 and its yield 3.2%.
*Israeli coalition politics may help Delek avoid retroactive taxes on its offshore find, notably Tamar field but possibly also Leviathon. Uzi Landau, the Israel Beiteinu party industry minister despises Yuval Steinmetz, the Likud finance minister who voted to leave Gaza,. The parliamentary committee to decide on taxing offshore oil has reps of both parties. Likud, which favors a deficit reduction by new taxes, has a majority, But the industry minister’s buddies can issue a minority dissent to exclude the Tamar reservoir, which would provide an opening for lawsuits to stop new taxes on resource finds. DGRLY is off sharply on the antics of the Sheshinski committee which may be less united than feared.
*French tax authorities over Christmas have come after top former brass of Wendel & Cie for “abus de droit”, for how they structured investments in complex paper companies to benefit from WNDLF’s expansion up to the krach in 2008. The execs were ousted by a Wendel family revolt following the messy takeover of Saint-Gobain. Among those in the eye of the taxman in France are former chairman Ernest-Antoine Seillière and former CEO Jean-Baptiste Lafonta. WNDLF is now under new management and there do not appear to have been any charges against the corporation itself.
*French regulators gave Veolia permission to merge its urban transport systems, mostly in the south of France, with those of the state-pension guarantor, la Caisse de dépôts et de consignations, and jointly invest 6.54 mn euros in new bus and tramlines. VE.
*BCE in Canada has taken over a proportionate 44.1% of the former investment trust Bell Aliant Regional Communications as of Jan. 1. The IT structure no longer pays for Canadian investors. I expect there were similar moves by Big Rock Breweries and Cineplex Galaxy but I did not get notifications. BCE, BRBMF, CPXGF.
*Cameco proposed an asset swap arrangement with its joint venture partner Uravan Minerals that will give Cameco 100% ownership of the Boomerang uranium project (Northwest Territories). In return for 49% of Boomerang, Uravan will receive CCJ’s 100% interest in various mineral deposits in Saskatchewan’s Athabasca basin under a non-binding letter of intent.
*PT now has taken 22% of the shares of Oi, the Brazilian cellphone firm. The deal was finalized furing the inaguration of Dilma Roussef.
*Banco Santander plans to issue covered bonds in the next two months, reopening a source of funds in Spain which has been closed for a year. STD issued two preferred ADR stocks in our model portfolio.
*The beleagured board of DWS declared a $1.6698/sh dividend payable Jan. 12 of this year, prior to the vote that same day on the merger of DRP DWS RREEF Global Real Estate closed end fund with its open-end stable-mate.
Then the fund manager failed to deduct the planned payout from the net asset value of the DRP fund and had to publish a corrected to its report on Dec. 30. The actual net asset value of our soon-to-disappear fund was $18.85 and not the $20.52 it originally reported. How embarrassing!
Note that in doing the correction, the fund mgrs. rounded up the dividend to $1.67/sh. If you wonder why they left off a mil on what they actually will pay us, it is to penalize those with less than a round lot of shares, including those who entrusted DWS to reinvest their dividends, leaving them with an odd-lot the fund managers will be able to keep.
So a dumb question: Why doesn’t the SEC do something about these fund managerial tricks at the expense of ththeir own shareholders? This makes more sense than stopping US shareholders from benefiting from issues of new preferred stocks by foreign companies with expensive and time-consuming registration requirements, most recently for AREVA. ARVCF.
*Challenged by a reader to find replacement ideas for DRP, which of course will drop from the portfolio when it becomes an open-end fund, I came up with a few ideas. Firstly, inspired by Tom Herzfeld, the closed-end fund guru, I am tipping IRL, the Ireland Fund. What with Paddy Power, CRH, Ryannair, and other lights unto the nations, Ireland has great potential despite its bankrupt banks and empty real estate developments. Presumably the IRL fund managers have had time to adjust their portfolios. I will not buy until I am back in the USA so you can all front-run me. It won’t matter much.
*Another idea: Morgan Stanley Frontier Emerging Markets Fund for the Indiana Jones investor. You will not figure out how to buy in Sri Lanka or Ouagadougou on your own. Leave it to MS. FFD just paid a dividend of 0.197 cents/sh and trades at $14.61 while its NAV is $15.81 (as of Friday). It aims to be 80% invested in vehicles from companies in frontier markets which are uncorrelated with the rest, and also uncorrelated to emerging markets. according to NYU economist Nouriel Roubini. I am particularly pleased that its 4th largest holding was East Africa Breweries, makers of Tusker Beer, a favorite in Kenya. I was unable to buy the stock when I was last in Nairobi. Its main holdings are in Kuwait and Russia, eastern Europe and Africa. This one trades erratically; use a limit order.
*Among our current holdings, Global Income Fund GIFD at a whopping discount (except on days when someone buys its shares in quantity) is a truly brilliant way to earn yields on money you don’t have to put up. It trades at a persistent if variable discount in the high teens to its NAV. You should use a limit order.
The Rain in Spain
I was wrong about the next euro crisis waiting for the New Year. It has begun with attention turning to Spain’s extensive need for public and private sector debt restructuring in 2011. Once the market has focused on a problem, it does not wait for the calendar, I guess. So now the rain is in Spain.
Michael Kurtz writes for Macquarie Securities from Hong Kong today:
Washington has lately shed some of its more anti-growth policy inclinations, fueling an upgrade this week to our full-year 2011 US GDP forecast (to 3.5% from 2.6% previously), with contributions from both business spending and private consumption. Our end-2011 forecast for 10-year US Treasury yields also rises – to 3.75%, from 3.0% previously – even as our expectation for stay-put Fed short-term policy rates through 2011 goes unchanged (implying a substantial Treasury curve steepening in the year ahead).
Asian investors needn’t view this as an imminent threat. Far from fearing a zero-sum abandonment of Emerging Market equities in favour of the US and other Developed Markets, we see continued global demand recovery – including in the US – as the best prospect for the entire equity asset class, including Asia. If there is an asset class that looks “zero-sum” vulnerable to these developments, Fixed Income fits the bill. Asian stocks typically rally with their US cousins, and Asia ex-Japan PERs [p/e ratios] more often than not are positively correlated with Treasury yields.
As the US data firms and US 2011 recovery prospects enjoy fuller support from both fiscal policy and monetary accommodation (on which the Fed this week remained pointedly steadfast), our conviction rises that Asia’s more US-focused, trade-intensive, and Electronics- and Capital Goods-intensive equity markets stand to benefit more.
This is already reflecting in consensus earnings data, where on a sector basis, we note the most robust 2011 EPS upgrades since November are occurring in externally-driven and business spending-driven sectors such as Semiconductors, Capital Goods, and Transport, while EPS estimates in domestic sectors such as Retail and F&B [food and beverage] languish or decline.
Survey-based consensus portfolio-positioning data suggest that long-only investors remain Underweight Korea and Taiwan by a combined total of 4.5 ppts [percentage points] relative to the Asia ex-Japan benchmark – vs. Overweights. Indeed, a change in investor buying interest already appears to be afoot: Foreign net-buying/selling data for the six Asia ex-Japan markets that publish data show substantial shifts in emphasis since November from India- and ASEAN-oriented buying toward Korea and Taiwan.
More from China, Israel, Britain, South Korea, Vietnam, Canada, and Belgium for paid subscribers follows. Our stock advice is not free; only our Big Picture macro material is complementary for those who have not paid.
*About the only good performer in these days of makret malaise (or is it hangovers from all the eggnog?)is our DB US Dollar Bull UUP.
*At last an explanation of the selloff in Le Gaga last week has come from Forbes: Here’s the gist.
“When Forbes China finalized its choices of China’s best venture capitalists last month, Neil Shen topped the list, which models itself on the “Midas List” published by U.S. Forbes. Yet as the latest edition of Forbes China was rolling off the press, an earthquake leveled the stock price of one of Shen’s initial successes this year: Online retailer Mecox Lane, 62% owned by Sequoia. After rising on its NYSE listing in Oct., Mecox stock plunged amid lawsuits that allege it misled investors about its prospects. Mecox says the suits are without merit. aftershocks from the controversy at Mecox hit the share price of other U.S.-listed, Sequoia-backed companies, notably GAGA.” Ah so.
*Click Software stock gained after it announced ClickMobile Professional, a major release for advanced workforce management and service optimization using smartphones and tablets. Based on HTML5, CMP operates on many mobile devices: from traditional mobile phones and laptops to iPhone, iPad, Android-based smartphones and tablets, and new Blackberry devices. This allows “hybrid” deployment of the web-based application now needing no download or installation. When there is no connectivity, technicians can use the CMP application offline. When connectivity is restored, all stored updata are exchanged between the mobile device and the server. ClickMobile products also integrate with device hardware, including GPS and phone. For dispatch and call centers, in tracking technicians and warehouses, CMP adds real-time visibility and flexibility to systems, a real breakthrough for CKSW.
*CNOOC announced a deepwater gas discovery on Block 64/11 offshore China after the Lingshui 22-1-1 exploration well drilled by its partner, BG Group at Qiongdongnam Basin in the South China Sea. BRGGY will now conduct further analysis of the well results to understand the hydrocarbon potential in the block. Commenting on the news, CEO Frank Chapman stated: “This is an encouraging result from our first well offshore China, where our licence area encompasses three Blocks spanning some 15 000 square kilometres adjacent to large and rapidly growing Chinese gas markets.”
*GlaxoSmithKline signalled that a lack of cheap takeover deals could result in a re-start of its multi-billion pound share-buyback program, according to The Daily Mail. CEO Andrew Witty admitted that the clamor was growing for Glaxo to begin buying its own stock on the market after seeing the price of potential targets rocket beyond GSK’s reach. Witty said: “The time when you start to see us move back towards share buyback, clearly that moment is inevitably coming forward.” Faced with a slew of drugs losing patent protection, Glaxo two years ago suspended its stock buy-backs to buy new lines.
*Posco cut the ribbon on a new $130 mn stainless steel rolling mill at Nhon Trach in Vietnam, to go operational in Feb. 2012. Another example of how to invest in ‘Nam, again unlikely to affect the share price of the direct investor company, PKX.
*Galapagos today announced that its year-old deal with Roche has produced royalties of € 3.5 mn following the addition of new drug discovery targets in fibrosis. GLPGY is Belgian.
*Sales price for Brookfield Real Estate Preferred M shares (yield portfolio) was C$20.74/sh. We paid C$17.55 a half year ago when Martin Ferera recommended the stock, so we have a nice 18.5% gain plus another 3% in interest, nipped by commissions for trading in Canada, however. (Martin lives in Canada.) Today I will buy his switch candidate, Brookfield Renewable Power Income Fund, BRPFF, which will be in the funds portfolio when I snap it up.
*Luckily our trading update delay to yesterday saved you all from overpaying for Compugen which duly fell back after its exuberant rise on Tuesday. CGEN is a small-cap with no earnings and with few followers apart from our Patti. So its volatility is excessive. I will sell my stake at $20 some day, I hope.
*Morgan Stanley upgraded G4S to equal-weight from underweight. GFSZY.
*MS produced an underweight for Intertek, however raising its target to £16.70 from £14.70. IKTSF.
*Morgan Stanley overweighted for AstraZeneca, raising the target to £38.50 from £36.90. AZN.
*The same broker came up with an equal-weight for Johnson Matthey, raising target to £19 from £16.20 JMPLY.
If you blink you find that the dollar has fallen. It did yesterday while I was travelling to and in London with plans to spend money in cheap sterling. The move was, probably, related to the Fed’s meeting to determine whether or not quantitative easing will continue despite the latest congressional compromise over further government deficits. The fear is that the Bernanke bond-buying and money creation will continue, given that housing and jobs remain deeply depressed in the USA.
While the Greenback fell against most currencies despite the higher yields on US Treasury bonds, sterling, which is what I am spending this week, followed the dollar down. Phew. But it turns out that British inflation at 3.3% will zap my ability to spend. The target missed was 2%.
The yen rose despite Japan announcing a QE2 all its own. The Australian dollar is at parity. Other commodity exporters are up too because of the Chinese decision not to raise interest rates short term.
The euro also rises. This Hemingwayesque outcome is subject to revision when it becomes clear that nobody in the EU has any idea of what will come next. This will be when the policy-makers return from their ski junkets or Caribbean holidays. Or when they have done buying cheap Florida apartments for their future vacations. Or whatever they are doing now.
Yuletide cheer is intended to make up for the freezing cold of Northern European Decembers. The Lewis perch by the River Thames is Absolutely Freezing despite 24 hours of full blast from the boiler at Mudchute Manor fighting against the icy blasts off the river and the howling winds from the garage under my feet. If I could type with woolly gloves on I would. The super says to hammer at the radiator, which sounds like exactly what my mother would have done when I was a kid growing up in New York City. I always assumed she was banking to make the super stoke up the boiler, but no, it removes air bubbles or dropped valves.
Meanwhile it is only the prospect of bibulous meals, mince pies, eggnog, greasy great puddings, and shopping that keeps me from hiding under the eiderdowns. This is the last full trading week of the year 2010 with maximum 3 ½-day trading on bourses next week and the week after. So I type on, thinking of the souks of Marrakesh for my Christmas and New Year.
It is even worse for Frida Ghitis, deputy editor, in Paris, suffering not just from the cold, but from the need to do her tourist stuff in high places like the Sacré Coeur and the Eiffel Tower and the roof of the Pompidou Center. Moreover, as a Latina, she is used to clement climes. She will be on call in Amsterdam while I bask in the sun. Until then, I skip tourism when it is this cold and just cultivate friends.
Which leads to a sad conclusion: I mourn the most brilliant internationalist of my generation of U.S.-born offspring of German-Jewish refugees, Richard Holbrooke, diplomat, journalist, head-knocker negotiator, mentor. Our paths first crossed when Dick was in purdah during the Nixon Administration, editing the then-fledgling Foreign Policy magazine, after dissenting over the Vietnam War. I was on Capitol Hill working for a liberal Republican dissident, Sen. Clifford P. Case. Back then there were liberal Republicans. Dick got back into the diplomatic dance dealing successfully with post-breakup Yugoslavia and the UN, and most recently bringing his considerable talents to trying to resolve the Pakistan-Afghan mess. He will be missed.
Today’s blog is (surprise, surprise) mainly about British companies, with the odd note from more exotic places which may be warmer like India, Israel, and South Africa, and one where it should be colder, Russia. I sure hope that Marrakesh will be cozy over Christmas and New Year’s when we go there for a deep investigation of the phosphate market. But with all this global warming who knows?
*Reckitt Benkiser got off a Christmas present to itself yesterday with the winning bid for Paras, an Indian maker of OTC ointments and personal care products. RBGPY is paying Rupees 32.6 bn,around $725 mn for 63% of the maker of Krack heel-care cream, Moov pain-relief pills, D’Cold, and a bunch of elixers, fungal creams, and goo producs. Sellers were Actis, a private capital group focused on emerging markets, Sequoia Capital, and private interests of founder of the firm, named Girish Patel. Another Patel, his brother, has set up a rival firm to Paras, which may harm the British group’s plans to grow its business. Reckitt is paying 31x EBITDA and 8x revenue for this acquisitions which scares me, and which requires that the target be grown fast to make it pay off, but the market loved the idea and its stock rose on the news.
*I sold my shares of Brookfield Asset Mgm. Preferred M in Toronto yesterday when the stock went ex-dividend but my brokerages is still snoozling and I do not have the proceeds. I hope you did too. We made well over 20% on this position to be replaced by a higher yielding US listed fund from the same group, linked to the Famille Bronfman. We need closed-end funds as two other Canadian funds are turning into straight companies by year-end because of tax law changes up north. And because DRP is being open-ended and we do not cover open-end funds.
*Channel Trend analysts say Click Software is in an upward trend and raised its rating to neutral from sell for the Israeli maker of scheduling systems for service companies like central heating repairmen and package delivery vans. CKSW should benefit from the season.
*Thanks to Patti, our biotech maven, more insights into Teva. Apparently its latest drug for Mulitple Sclerosis is not just a follow-on to Copaxone, but in fact breaks new ground in stopping the progress of the disease.
*She also comments on Glaxo’s Russian deal. JSC Binnopharm, the strategic partner GSK will work with, is a sub of Putin’s designated pharmaceutical “development pole”. Sistema, the parent, is supposed to create a biotech research triangle for Russia. Meanwhile Binno will modernize Russian immunization with GSK supplied bulk vaccine it will process, package, and distribute. In addition to classic jabs, GSK will provide human papilloma virus, rotavirus, and strep pneumonia immunization to the $55 mn sales firm in which it will have a share stake.
GSK also did a deal to license the parathyroid hormone developed by Unique Oral of Boonton (NJ). PTH will go into Phase II trials with a $4 mn upfront from GSKand up to $142 mn in licenses and milestones if it pans out.
Here in its native Britain, GSK is buying Maxinutrition to put under its tree, paying £162 mn plus debt for the maker of sports nutrition products. This means protein-enhanced products for body-builders and athletes.
*The mergers and acquisitions market is not confined to the drug business. Bombardier, the Canadian maker of (along with airplanes) railroad equipment, is taking a 25% share in a sub of the Russian railways, Elteza, a maker of signalling equipment for trains.
*Naspers, writes Bloomberg, is trying to replicate its success with Tencent, the China text messaging firm it bought into for $32 mn a decade ago, which is now worth $14 billion. Its Mail.ru is one idea. So too its its purchase of OLX, in Latin American Internet classified ads. And also its Mulitply Inc. SEAS venture. The real issue is whether the S. African media group didn’t just get lucky with its brilliant Chinese partner, or if it has the ability to generate new media on its own.
*The family of Bob Diamond, future CEO of Barclays, spent £1 mn buying its shares last week. I tend to discount insider sales because they may be because the exec needs money for Florida second homes, trips to Morocco, or school fees. But purchases by people who know where the bodies are hidden are highly significant indicators. BCS.
Air Raid Drills Under the Desk
Air raid drills are back. The last time the Koreas were shelling and bombing each others’ population, I was in elementary school in Manhattan and we “took cover” under our desks to shelter against nuclear fallout.
So this is a trip down memory lane for me. Yesterday we learned that Pyongyang is developing its ability to build a nuclear bomb. But instead of waiting for the weapon to go live, the masters of the north have started another hot war, marking the Fin de Regime.
The shooting war over the inhabited Yongpyeong Island in South Korea will not lead to another global conflict in the Hermit Kingdom. China will remove King Kim Song-Il rather than supporting the monarchy, as it did for his father. That’s my fearless forecast for today.
Michael Kurtz of Macquarie Securities (of Australia) writes: Asian investors could be forgiven for not exactly embracing risk Tuesday — with MSCI Asia-Pacific ex-Japan Index down 2.3% on the day — given such diverse and headline-grabbing eruptions as a new cross-border military provocation between the Koreas; an FBI raid on three US funds with assets under management of more than $7 bn (raising at least the possibility of their liquidation and/or stricter regulation of the US investment industry); and escalating drama over Ireland’s sovereign debt problem (and all this while the implications of a sterner Chinese anti-inflation posture continue to sink in).
Yet we suspect that much of the risk aversion working itself into Asian equity valuations over the last 24 hours will prove relatively short-lived, offering a tactical buying opportunity for the level-headed and opportunistic.
Thai GNP in Q3 rose by 6.7%, well off sequentially from the 9.2% growth rate chalked up the in the prior quarter. Thailand’s PTT Exploration & Production, a state-controlled entity hitherto in my sights because it runs a gas pipeline in Burma (another one), anncouned that for $2.28 bn it will take a 40% stake in the Alberta Canada oilsands project of Statoil, of Norway, Kai Kos Dehsek. Thais are being tied into the rest of the world. China is also increasingly integrated into the system. That is why I expect a deal to dump the Kims.
What this means for our portfolio below along with some other news of fertilizers, software, supermarkets, telcos, hearing aids, gold mines, and pharmaceuticals and biotech. Life and investing go on:
*Both Korea Fund and Posco Steel are buys at today’s panic prices, all about political risk which is always high in Korea. PKX has commission a new blast furnace producing 4 mn tonnes/yr, uppping its capacity by 50%. That will help industrialize the barren north when the two Koreas become one. Unlike the German unification saga, there is little to recuperate in the Communist part of Korea.
*A note from PW, our biotech maven follows. In the present market CGEN is a good buy too: The Compugen proteins subject of validation by Northwestern U are recombinant fusion proteins similar to Enbrel. Wyeth developed Enbrel, an injectable drug being used with and without methotrexate to treat rheumatoid arthritis (RA).
There are currently about 258 clinical trials involving Enbrel and 78 are seeking new volunteers. The diseases targeted by these trials range beyond RA to lupus, psoriasis, kawasaki disease, Alzheimers, five different cancers (including breast and prostate), and pneumonia. The identified pathway is the one which the Compugen model represents, indicated as activated in many of the above diseases and others. Disease progress can be affected by attacking the pathway, thereby preventing continued “growth” or reversing the course of the disease.
Identifying a way to target pathways with pre-clinical trial drugs (even pre-animal trials), is hugely important. Computer modeling is a powerful tool. Selecting pathways has tremendous implications in many disease processes we already know about. Where it will go from here is anyone’s guess. The number of trials identified with this Enbrel pathway alone is remarkable. The number of trials for arimidex are over 100, and similarly for rituxan. These are just a couple of drugs currently on the market identified with this pathway (protein fusion and monoclonal antibody drugs). Probably many others exist (some may not even be associated with this exact pathway as an understood mode of action).
CGEN has tremendous value, and I am confident that this mechanism will be desired for future research. Protein research and pathway activation for cell growth is the rage, producing cures and treatments for many diseases. While I am not positive it is Enbrel which they referenced, it is an RA drug, and a recombinant fusion protein, so it fits.
These pathways have healthcare implications beyond what many credit, For example, I learned that Enbrel users have a significantly lower incidence than similar populations for Alzheimers. This is why current clinical trials are starting AzD patients on Enbrel to see if it will prevent or arrest Alzheimers. The pathway identified as implicated is our old friend B7/CD28.
CD28 is the receptor site. When it is bound by an alternative protein or monoclonal antibody, the action of the cell changes or is interrupted, and the disease process is affected. You are blocking one link implicated in the disease.
Translating this to profit is what the market is waiting for. We don’t know who has approached CGEN for collaboration or what agreements have been proposed, but I expect some discussions must be going on. Each announcement like this one from CGEN is just a hint as to the possibilities. That the investment community doesn’t see a value in CGEN is not surprising. When you look at biotechs in general most do not rocket up until there is a product announcement, partnership, or buyout. Financial analysts are not scientists, and they don’t book gains from science they don’t understand.
*Dr Reddy is buying the oral penicillin plant of Britain’s GlaxoSmithKline in Bristol (TN, not Palin). Price was not disclosed. GSK will continue to produce the antibiotic outside the US protecting by non-compete clauses from genenrics maker RDY, of India.
*Sonova, the Swiss hearing aid firm, which expensively bought Advanced Bionics, maker of implanted aids a year ago, is now recalling Hi Resolution 90K impants which malfunctioned. Sonova is a Global Investing Pro pick.
*Israel Chemicals reported Q3 sales up 4% to $1.39 bn, mainly because of a recovery in fertilizer demand. Despite 11% higher operating income, also fed by new demand for bromine from the Dead Sea, its net fell marginally to $243 mn because of higher taxes. ISCHF. Meanwhile K&S of Germany bought a small Sakatchewan firm, Potash One, for C$434 mn, showing that the curse of BHP is not shared.
*Britain’s Investor’s Chronicle reported today that 2/3 of Tesco’s grocery shelves are now outside the UK, mostly in Asia. It plans to quadruple China sales from GBP 600 bn now over the next 5 years and also has important holdings is South Korea. That is a good reason to buy TSCDY if the share falls over the war threat.
*Bank of Nova Scotia, BNS, is buying the remaining 82% of Dundee Wealth it doesn’t already own for C$3.2 bn, amounting to C$21/sh with cash, shares, and prefered share options to lure different constitunencies. Being a bank, the complexities do not cost it much.
*Goldfields settled the strinke at Deep South Mine in South Africa. GFI.
*IAM Gold is doing exploratory drilling at a new find in Tanlouka, Burkiana Faso. IAG is Canadian.
*Vance Info Technology plans a 2.53 mn ADR secondary issue at $36.15/sh. VIT, a Chinese IT firm tipped by its ex-employee, Fei Chen, was rising to nosebleed levels and while we both sold half we still loved the stock. That price was set before Korea erupted and the Chinese firm may cut its price. IT was all too good to be true.
*BCE is said to be threatened by the terms of the next Canada auction of frequency spectrum, along with all the other incumbents.
Bears and Ben
The attack bears surrounding Ben Bernanke are not serious currency forecasters. They are a bunch of tea-party Fed-haters, Republicans hoping that gridlock will sustain the Great Contraction long enough to defeat Obama in 2012, Chinese trying to deflect criticism of their weak renminbi by yelling about US policy, and Germans trying to deflect criticism of their smug unhelpfulness to fellow-Europeans over the risks of the common currency.
However, since I went long the Greenback on Nov. 4, the dollar has risen, fed by continued euro bailouts and the Chinese need to tackle inflation. This has hurt the euro and commodity currencies like the C$ and the A$ and boosted the US$.
According to Bloomberg, “strategist forecasts for the dollar to weaken have all but ceased.” The service today says that its most recent survey of 38 analysts show they expect the dollar to strenghten to euros 1.36 by the next year, from 1.3673 now.
Bloomberg cited analysts with “a good record” at Wells Fargo as being more bullish on the US currency, expected it to be worth 1.38 euros by year end.
China is seriously worried about the price of food leading to social unrest. Beijing’s food focus led China Daily News to write today: “Road tolls for vehicles carrying fresh produce will be scrapped from December 1, and local authorities will have to ensure energy and transport prices for fertilizer producers are reduced.” CDN is the main state media mouthpiece. More for paid subscribers on how to play China veggies and dollar strength and news from Canada, Israel, Thailand, Germany, and Brazil follows:
*Our play on dollar recovery is Powershares DB US Dollar Index Trust Bull, UUP for short.
*Our China veggies stock Le Gaga will report its Q2 earnings at 8 am on Nov. 29. Your GAGA editor will cover it, gaga because of the time of day.
*Compugen of Israel studies proteins in the lab to find new interesting molecules for treating diseases. It recently licensed Prof. Stephen Miller of Northwestern U to extensively validate a drug find, CGEN 15001 against multiple sclerosis, one of nine new molecules in the B7/CD28 family which regulate the immune response found by CGEN scientists. Now the other 8 are also being turned over to him. They all involve inhibition of reactive T lympacytes.
This reflects CGEN’s new strategy of taking its finds closer to market before licensing them to drug majors. It is a high risk way to move from in silico drug discovery to get closer to the market.
*Fellow Israeli Kosher food distributor G. Willi International reported Q3 sales up 16% to NIS 79.7 mn ($21.7 mn). While not strictly comparable, WILC net profit came in at NIS 7.8 mn or $2.1mn, 15 cents/sh, up 7.4%. The non-comparability was because of an acqusition in 2009 Q3. Selling expenses nipped the profits too.
*Another Israeli, Elbit Imaging, will spin off its Elbit Medical in Tel Aviv via a shell company. That means US EMITF shareholders will probably not be allowed to participate because the new stock will not be registered with the SEC. (See below.)
*One of the first Israeli stocks I tipped was ECI Telecom which is now being shopped by its latest owner to Dmitri Medvedev, the Russian president. I hung up on ECIL ages ago.
*Another takeover bid will help our portfolio, according to Business Week. It reports that One Equity Partners LLC, a JP Morgan entity owning half the shares, is shopping Sued Chemie, our recently acquired German “green” chemicals producer, only a quarter of whose shares trade publicly. The purchase had to be made in Germany and as you can read below caused some subscribers to cancel. SUC.GY had euros 1.2 bn of sales. Early next year Morgan will decide between listing its stake or selling. If it sells, the buyer under German law must make an offer for the whole company, meaning us. SUC:Deutschland
*Brazil’s Cosan is buying Brazilian listed shares, not those of our offshore entity, listed as CZZ.
*Saneamento Basico de Sao Paulo will borrow Reais 600 mn ($350 mn or so) for 18 months on the local market.SBS
Lots of changes in our funds portfolio.
*Our Canadian switch is to take place Dec. 11 when BAM.M:CA Brookfield Asset Management preferred M stock goes ex-dividend. At Martin Ferera’s advice, we will then buy the higher-yielding Brookfield Infrastructure Fund, which will go into the funds portfolio, BRPFF. It has the advantage of being quoted in the USA as well as in Canada. Brookfield is the Bronfman family investment vehicle which they have graciously allowed the rest of the world to invest in alongside the Mishpochah. Family investors’ needs set investments in the US, Australia, Europe, China, plus Canada.
*I have more confidence in Canadian family-controlled companies than ones from further afield: the Bombardiers, the Morgans (of Third Canadian) and the increasingly respectable Bronfmans, even if they did get their start running liquor across the border during Prohibition. I also believe in Power Corp, PWCDF, another Canada family enterprise.
*Big Rock and Cineplex Galaxy are both converting from tax-exempt Investment Trusts into standard corporations by year end when the tax advantage ends. There will be new ticker symbols from the current BR_UN:CA and CGX_UN:CA.
*The dividend on MFD, Macquarie FirstTrust Global, has gone up by 50%. MFD had been reclassified as a World Equity Fund rather than an Income Fund in Barron’s. Unless they change it back.
*Deutsche-Bank-managed Dreman RREEF World Real Estate is merging. Our closed-end fund, DRP, will be merged into another Dreman open-end fund with a similar investment strategiy. That means it will be dropped from out portfolio as we do not cover open-end funds. This will happen in Q1 2011.
*Finally a piece of rotten news, S&T System Integration and Technology, the Austrian speculative IT company operating all over Eastern Europe, which was due to be re-financed by an Austrian group after reporting a money losing Q3, saw the refinancing cancelled. It is now in the process of restructuring. We are selling after a decade in the share, marginally ahead. The idea of outsourcing to Bulgaria enchanted me, perhaps excessively. It fell by half last week. Gevalt. Its ADR barely trades (STSQY) and I am selling in Vienna, SNT-World. Fidelity just sent me stale quotes and no news and on Sunday it stopped providing a quote. (On Friday it did still.) So much for a faithful broker….
*A dialogue with Paul Renaud of Phuket (Thailand) follows. His comments are bold/italics, and mine normal:
I do occasionally recommend direct purchases in foreign markets on the pages of Global Investing, and then I get criticized by the readership for making things complicated for them. Some people cancel their subscriptions because an occasional foreign-only idea cannot be bought easily. That happened last summer when I recommended Sued Chemie of Munich.
Understood. It’s like eating…you can go to McDonalds and eat in 10 minutes, or you can spend lots of time preparing a nutritious meal. The difference is in quality of food and your health! I understand the Amercians (generalizing) have little patience in such things.
My readers are not all as sophisticated or rich as the ones who subscribed to thaistocks.com, and many are only dipping their toes into international waters. My job is to encourage them, not scare them off.
True enough, capice.
Global-Investing.com currently recommends stocks trading only in major foreign markets, all much more accessible from the USA than Thailand. I do not think that is the result of US imperialism or taxation or regulation. And naturally that makes it easier for you to outperform in your niche. Bangkok is not as accessible as, say, Switzerland or Canada. That’s a fact.
But if you own foreign securities and bank accounts, you become a “Person of Interest”, and so profiled by the IRS. The effect is alike regardless where you invest outside the US! That is what I am talking about! Most US people don’t want that hassle, so opt out. As IE just did. (IE is a reader who subscribered to both of our publications. I have no idea if Paul is right about IRS targets, but I do get audited every year myself.)
If you are a US resident tax-payer you have a responsibility to report on your foreign capital gains and dividend income. That caused my problems with boom.com, and that is what IE was referring to in his note to you. It is easier if you go through a USA brokerage that works out your basis, capital gains, and dividends in US dollars.
Exactly, and the effect is that most Amercians stay home and use only US institutions! Hurray for them. That is the whole point Vivian, the laws discourage direct foreign ownership of shares, and so [are] imperialistic in effect. Not you, US laws!
Also you are wrong that foreign directly listed companies pay higher dividends than the corresponding ADRs. Shareholders are treated alike if we are talking about open foreign markets without exchange controls.
I was not talking about ADR’s, my dear. I was talking about US security laws, which allow for different classes of US listed shares. This is an abusive practice not allowed in Thailand! There have been many abuses in your land so its no longer the great standard.
As for the price of trading ADRs, it depends on the liquidity and the market. Obviously, the MAI shares (Thai secondary market) are more expensive to deal with from the USA than from Bangkok. Again, you should enjoy your ability to offer something most people cannot compete with. To blame the US because the MAI firms are too small to undertake the listing process seems to be putting things in the wrong order. It is interesting that Singaporean and Chinese smaller companies are tapping into the ADR market, and I expect that Thai firms will be coming too.
ADRs are very expensive to undertake. It’s a rich man’s club reserved for the biggest non-US companies, often overvalued. Hence, these often do not represent a good take on foreign markets. In Thailand well over 2/3 of our GDP is made up of smaller companies, the real Thailand, not ADR’s.
A regulatory problem arises when there are in-kind distributions not registered in the USA. Then the banks sell the rights and you may wind up behind the locals. I wrote ofter and early against the SEC barring rights distributions to Americans because they are not registered since I started Global Investing. I have fought hard against ADR fees imposed by the depositaries. The fact that I took a lead in these matters is known in this country, to the SEC, the IRS, the DTC, to my competitors in the newsletter business, to brokers, to my readers. Just as you criticized Swiss practices which harm shareholders, I have criticized those of the USA.
Good for you and your followers, because there are many abusive tactics….just another reason why one should try to own shares here directly, even if it means tabulating the capital gains. No big deal if you don’t trade all the time. Realize too,[US} buying and selling commissions are near 10 times as high than using a local broker. Surely this savings then pays for a bookkeeping fee at home.
Your editor retains her Thai stocks picked by Paul, at least for now. IE made about 20% net when he sold out. I would not because I used US brokers.
Irish Bankruptcy News
There are cautionary lessons to be drawn from the Irish crisis. The current optimism over the euro’s future is misplaced, since there has really been no resolution to the EU dilemma over deficits and surpluses within the common currency group.
Despite the Irish bankruptcy, it has good companies whose shareholders can make money. Like Ryanair whose CEO stated bluntly that his country is bankrupt. The contagion is spreading to good Irish companies and ones across the Irish Sea, in Britain, also under a shadow.
Low taxation is not the solution. Ireland, the former Celtic tiger, famously taxes corporations at 12.5%, one of the lowest levels in the world. It exempts creative folks (like newsletter writers operating in Eire) from personal taxes. It offers tax holidays and incentives to encourage businesses in favored sectors like drug research and computers.
To keep those cheap rates and holidays in place despite the government deficit (from the decision to bail out the Irish banks), Ireland last year cut services to its citizens: a 10% budget cut; reducing civil servant numbers and wage levels; a cutback on funding for eduction and teachers; limiting access to its state health-care system; firing nurses, social workers, and home help.
That was not enough. Low taxes cannot provide capital or make an economy grow, despite what the current crop of novice Tea Party economic pundits around Ms. Sarah Palin are saying.
Ireland had one of Europe’s most exuberant real estate markets for two decades. Banks lent with reckless abandon even though there was no FNMA or even a functional CDO market, two elements blamed for excessive lending in the US. Ireland over-lent without them. It did not need the US mechanisms which went wrong to lend stupidly. Its banks attracted “hot” money from venture capital and hedge funds for ever-more excessively generous property loans.
Sure there was corruption. Cheap loans attract politicians like honey to a bear. And the decision to bail out not only depositors at the Big Three Irish banks, but also bondholders, was tainted by the need to return favors.
But stupidity messed things up too. Anglo-Irish Bank was totally nationalized, and both Allied Irish Bank and Bank of Ireland (only 90% state-owned) are on life support from Dublin. The Irish coalition government faces running out of cash soon. Nobody has any idea how Ireland can continue to tap financial markets. That is the cause of the current crisis. Knowing a money crunch is coming next year, hedge funds and counterparites have pushed up the Irish cost of borrowing. It’s now 9%.
More stupidity. Now-nationalized Anglo owns a portfolio of defaulted property throughout Europe and America. Even in my city, a few blocks from the site of the Twin Towers of the World Trade Center, at 225 Rector Place, (just a bit further than the controversial mosque site). An auction of the condominium plus retailing building yesterday produced no bids. So Dublin continues to own the nearly-empty edifice. Condo owners moved out; the subsidized renters which got the project a tax break live on in ever-increasing squalor.
The developer, Yair Levy, (probably not a son of the Auld Sod), defaulted on his taxes and Anglo repossessed the building. Now The Irish Republic owns 225 Rector Place because it owns 100% of Anglo. And there are 36 children in Irish 1st grade classes because the teachers have been fired and you have to wait 10 months for a hernia operation.
Now Ireland awaits an EU-IMF refinancing package worth tens of billions of euros. QE2 will finance our share; but the Brits and Europeans will have to bleed to pay their part.
New from our companies in Ireland, Korea, China, Canada, Britain, and Brazil follows.
*It is hard to trade because of counterparty risk in Ireland, but Paddy Power is going from strength to strength. In a crisis it helps to take a flutter and it offers also a chance to do speculative spread-betting on financial instruments on the cheap. PDYPY>
*Martin Ferera writes about a yield stock switch to prepare to take when our current holding goes ex-dividend:
Recently the Brookfield series M preferred share ran up and now yield around 5.6% (going ex-dividend in early Dec.) Canadian corporations like Brookfield are exploiting the huge demand for yield and are tapping markets for cheap money. Two weeks ago Brookfield raised a further $250m preferred at 4.5% for the first 5 yrs, thereafter at Canada 5-yr bond rate plus 2.3%.
Whilst our M preferred series is still well below par ($25) and yielding significantly more than the most recent issues (5.6%), an opportune time is coming to switch into one of Brookfield’s key underlying assets, Brookfield Renewable Power Income Fund (BRC.UN in Canada, BRPFF in the US.) Switch after BAM goes ex-dividend Dec.
BRPFF currently yields 6.4% and unlike the M, its annual dividend has increased by 2.5%/yr since its inception a decade ago. The share price rose 15%/yr. BRPFF is 34% owned by Brookfield Asset Management, with the rest publicly-held. It owns 42 hydroelectric generating plants producing over 1600 mW capacity plus 190 mW installed wind power capacity in Ontario. Some 97% of generated power is hydro, with plants in British Columbia, Ontario, Quebec, and New England. All have long-term purchase agreements with an average duration of 13.4 years with an average price of $65/mW/h and built-in inflation adjustments. Ontario’s Electricity Board forecast average rates in that province of $48/mW/h for 2010.
The market value of BRPFF is almost $2.2bn, with investment grade (BBB) debt of $1.5bn. Last week BRPFF said it will add a new wind farm to its portfolio, the 166mW Comber Wind Project (with turbines from Siemens) for $567mn, , $300 mn financed by debt and the rest provided by Brookfield ,probably by issuing of new shares. Comber will commence operation late next year and has a 20 yr supply agreement with Ontario Power. BRPFF expects Comber to be financially accretive and will seek further acquisitions.
Last year the dividend payout ratio was 80% of distributable cash, although this has been over 100% in the two recent quarters owing to “hydrology problems” (drought) in Ontario and Quebec cutting hydro-generation An insurance payment of $10m is coming for this. Rservoirs are now being replenished. Ironically whilst climate change has helped promote the development of BRPFF, the weather has undermined its short-term performance. Ontario promotes an aggressive renewable energy policy, resulting in much higher electricity prices for consumers and a possible consumer backlash at the next provincial election. Nevertheless, the regulatory regime is stable, unlike California in 2000 when, following de-regulation, prices briefly reached $3000/mWh.
A double dip recession would also cut demand. After initially announcing that it would convert to a corporation, BRPFF management reversed its stance and now plans to continue in its current form at least for 2011.
CIBC estimates that in 2011 sales will be $452m and distributable cash (after maintenance capex etc.) about $210 mn or C$1.93/sh (after issue of additional shares for Comber Wind Farm). Given a current dividend of $1.30 per share, this would represent a payout ratio next year of around 67%. While BRPFF currently pays dividends monthly (ex.date 26 Nov) it will switch to quarterly next year.
CIBC says “BRPFF represents a relatively safe way to play the renewable energy sector. The strong dividend payout ratio offered downside protection throughout the market downturn in late 2008 and early 2009.” Sell Brookfield Preferred M and buy BRPFF.
I await word from Martin on when our existing share goes ex-div and when we are supposed to make the switch. He has done so already but I am greedy.
*Posco announed that it has develped a sodium sulphar rechargable battery with 3x the density of existing lithium ion electric storage batteries and also cheaper to make. PKX plans to capture some of the current $10 bn/yr energy storage battery market expected by 2020. The current market, mainly because of problems producing batteries, is only $450 mn/yr. The new battery will be launched on the market in 2015. This is a huge potential winner for the South Korean steelmaker, which has patented the device suitable for large scale storage, which will become a component of systems using wind, hydro, and solar to make electricity which is not always available when and where it is needed. PKX is a technology company.
*Intertek Group revenues were up 15% in Q3 and organic growth was 9.4% and, according to management, “market conditions strengthened across many parts of its business in 2H”. Guidance is for 2010 organic growth to be at the high end of mid-single digits growth. It expects the rate to continue into 2011 (ie 6.5%), although this looks low relative to its 9% performance May-Oct. IKTSF indicated that 2010 margins will be slightly below 2009, perhaps the reason for the fall in the share price today. But revenue and organic growth may lead to upgrades in coming days.
*Reader SR sent me a message about a Motley Fool article about nested corporations from China (without the article) writing: “They do NOT say categorically don’t buy, but they did issue a strong warning and mentioned GAGA in particular. They said “we very, very strongly believe in investing carefully. If you take nothing else away from this article, please keep this statement from recently IPOed vegetable producer Le Gaga (Nasdaq: GAGA) in mind.” The article, he said, then quoted from the prospectus for Le Gaga:
“Your ability to bring an action against us or against our directors and officers, or to enforce a judgment against us or them, will be limited because we are incorporated in the Cayman Islands, because we conduct substantially all of our operations in China and Hong Kong and because all of our directors and officers reside outside of the United States.”
SR added: “I have been leery of stocks in non-open countries because of things like this.” I replied:
The warning is lawyerly boilerplate. There is nothing particularly odd about the fact that GAGA is Cayman Islands incorporated. Many mid- and small-cap entrepreneurial Chinese companies find it impossible to deal with China’s bureaucrats to create companies. Among the firms we currently own or owned in the past with a Cayman registration are Suntech and Xinjiang. XIN started out as a Cayman company and then reincorporated in China. GAGA is a speculation as is XIN.
There have been some scandals recently about PRC shell companies (like Rino International, a flue gas, sludge, and water treatment firm whose trading has been suspended because of apparently fraudulent accounting) which won a Nasdaq listing by buying out a defunct corporation, as American Dairy did (we are out of that stock). GAGA was a direct listing and it had all the usual Wall Street biggies on board as underwriters and depositary. It is not using a shell. It was a new listing. Underwriters were BofA Merrill and UBS; co-book-runners were Piper Jaffrey and Oppenheimer; depositary was Citibank.These are good references.
A fact: US shareholder protection laws do not apply extraterritorially, and most ADRs have officers residing outside the USA. Our most horrible recent ADR disaster was with Alcon, a company with a majority of shareholders on Wall Street which was incorporated in…. Switzerland. Swiss are less protective of minority shareholders than the Caymans.
Not Just Because It's There
Yesterday I got a lot of attention, being quoted first on Seeking Alpha.com, which picked up my overall blog with the note by Dr. Max Golt on how currency trading is becoming more restricted, and my quoting Michael Kurtz on China inflation sectoral predictions. I was also interviewed on his hedgefund radio program by John Thomas, of themadhedgefundtrader.com
I was thinking a bit about the latter chat today. As old-time readers know, I share a birthday with a Burmese “twin” Aung San Suu Kyi AKA The Lady. She was released from house arrest over the weekend. The question is whether there is any way to invest in Myanmar to celebrate with The Lady. The answer is: no. The SLORC, or whatever the military junta call themselves now, do not allow businesses, except Army businesses (like timber cutting, rubies, and oil exploration) they run for their own corrupt profit.
Every market in the world is not necessarily worth investing in. Vietnam is another. About 18 years ago Mark Mobius of the Templeton Group launched a closed-end Vietnam Fund which I and my readers bought. But Mark, an old Asia hand (his first job after getting his PhD from MIT was selling Tiger Milk in northern Thailand) could not find ‘Nam companies to invest in. So fund holders were given their money back or a chance (which I took) to buy into the Templeton open-end Emerging Markets Fund without paying the 8.25% fee then charged.
Just because Mount Everest is there, you don’t have to climb it, unlike Sir Edmund Hillary. And just because a frontier economy is appearing on the radar screen, you don’t have to venture to invest in it.
Meanwhile perfectly respectable stocks from western countries deep in disaster, like Greece, Portugal, Ireland, and Japan are doing well for our subscribers. In serious economies with problems, often investment vehicles caverride the problems.
*In Portugual, we gain from the continued international expansion of Portugal Telephone PT, the telco, which is in the process of redeploying its cash into Brazilian cellphone operator Oi.
*In Greece we gain from the good performance of Coca Cola Hellenic,
CCH,which is Greek only in its site of incorporation, as it operates across great swarths of Europe, from Northern Ireland to the Caucasus, and in sound markets like northern Itlay and Switzerland, as well as the Greece the controlling family hark from. We also gain from the National Bank of Greece preferred shares I like, which are still paying a double digit return despite the share outperforming most of the yield portfolio.
*In Ireland our Paddy Power, operators of bookie and spread-betting shops, mainly in Britain, are doing just fine. Despite those heavy losses, a handful of Irish stocks have recovered to hit fresh highs, along with some others that strategists see as potential winners, among them PDYPY. Of course it’s business is not really Irish said Stephen Taylor, equity strategist at Dolmen Securities.
*Sharing glory with Chris Loew, momentum-players smarTrend identified an Uptrend for Makita (MKTAY) on Sept. 20, at $30.65. In 2 months, Makita returned 17.4%. In the past year, they write:” MKTAY traded between a low of $25.55 and a high of $39.65 and are now at $36, 41% above that low price. Makita is currently above its 50-day moving average of $32.73 and above its 200-day moving average of $31.06. “ This was a Chris-Vivian find.
*The metal du jour is not an easy call. Gold continues to puzzle hedge funds. George Soros, who called gold “the ultimate bubble” cut his holdings of Streettrackers Gold, GLD, by 1 mn shares. Eton Park topped Soros by cutting its holdigns by twice asd many shares. Meanwhile buyers included Chris Shemagy, Dan Loeb, and Highfield Capital. John Paulson, the man who broke the bank of mortgage securities (as Soros broke the Bank of England) kept his gold stakes constant. I am not able to sell a million shares so I am keeping my stake as it is. But this is no time to buy more GLD.
*With everyone bailing out of Chinese property it had to happen. Your editor’s stubborn liking for Xinjiang Real Estate today was shared by Thomson Gradient analysts who raised XIN to buy from hold.
*Nuclear worries can never be laid to rest, but the Greenwich University-led British campaign against Areva has crashed: The British Nuclear Regulator stated in a joint letter addressed to AREVA and
EDF that both companies have “addressed satisfactorily” its concerns regarding the EPR™ reactor’s digital Instrumentation and Control system. The letter was issued as part of the Generic Design Assessment. There no longer are any showstoppers for the reactor to successfully complete the asssessment process. Areva will cooperated with constructors and British safety authorities,by providing input, helping the Regulator complete a meaningful assessment of the EPR™ by the June 2011 target. The EPR™ reactor is the world’s most powerful reactor and meets the highest safety standards. It is currently being built in Finland, France and China and US certification is underway.
Yestgerday it was revealed that last month the CLP-Guangdong Nuclear Invesment Co nuclear plant in Daya Bay, China leaked but operations and public safety were not affected. The leak was rated level one, the lowest level on the International Atomic Energy Agency’s Nuclear and Radiological Event Scale. The facility has been operating since 1994 and uses older French technology to generate 10bn kWh/yr.
*Posco aims to sign a contract to build a 450,000 tonne Guangdong steel galvanization plant in China to match the one it already is building in India, same size, same purpose (auto bodies.) Govt permits are pending. It alrady makes stainless in China at the rate of 1 mn tonnes/yr and has a 230,000 tonne cold rolled steelproducts plant. (A tonne is a metric ton.) PKX is South Korean and has some of the best steel tech in the world. Besides us, Warren Buffett is a shareholder.
*Mellanox took aim in two directions today announcing a next-generation infiniband bandwith connection system for supercomputers and mega data-warehouses (at the top end of the market in capacity and price). But at the same time it also announced 8- and 10-point small connection switches for smaller applications. MLNX is Israeli.
*AstraZeneca, facing a 2011-4 decline in sales after losing patent protection on two blockbuster drugs, Nexium and Seroquel, has figured out how to raise cash for buying startup drugs. It will sell its Swedish non-core unit making denatal implants and medial devices, Astra Tech, for 3.4x sales. This is about $2 bn. JP Morgan is the advisor. It will also sell its US Aptium Oncology outpatient centers on the market, for anoterh half billion dollars. AstraZeneca needs to generate $4-6 bn in new products to meet its 5-yr sales target range of $28-34 bn. AZN>
*Sonova being Swiss does not do quarterlies, only semiannual. Its sales in HI (FY to Mar. 31) hit a new record of SwFr 832 mn boosted 17.2% in Swiss money and 8.2% in constant currencies from organic sales. Pretax profits jumped 5.3% to 204 mn francs and after tax income to 170.5 mn. The company makes hearing aids. Just under 12% of the sales growth came from acquisitions like Advanced Bionics (hearing implants) and InSound Medical. And 81% of sales came from products less than 2-years old. Last month SNVKF luanched a new innovative line using its “spice” platform. Sonova, a Global Investing Pro share traded only aborad expects organic growth to hit 8-10% for the rest of the year and to post a pre-tax margin of 26% or so. In H1 gross margins rose sequentially to 70.1% from 69.4%.
*Today is crunch day at the US FDA for GSK’s Benlysta against lupus. Its advisory panel was quite worried about side effects, and usually the main body follows the advisors.
*Eli Lilly got its patent on cancer treatment Alimta confirmed by a US Federal Court, , which will protect against generic competition from, among others, Teva, until mid-2016. TEVA also lost in another federal court case which upheld the U.S. patent for the blockbuster antipsychotic Abilify, made by Otsuka Pharma and Bristol-Myers Squibb until 2015.
Despite these setbacks in the courts, TEVA was reiterated at Buy by UBS and the target raised to $64.
*Hyflux of Singapore signed a contract to build a $100 mn water treatment plant in Libya. HYFXF.
*Also in Singapore, RIG is buying a new $195 mn high-tech jackup from PPL able to drill in 30,000 fet deep offshore sites. Transocean of Switzerland has to upgrade its rig fleet part of which is currently idel by adding more sophisticated deep-water products able to compete with Seadrill and Dryships.
*Exane BNP analysts rate Intertek as outperform with a GBP 26 target. The company today announced that it will be testing the safety of WindTamer Corp.’s 8 gigaton wind turbines which are novel and big and American. IKTSF.
*Our poshest stock, Wendel & Cie, also from the GlobalInvesting Pro stable, reported a 23% rise in Q3 sales to €1,463.3 mn. WNDLF says it is firing on all cyclinders. It sold its Stallergenes 46% stake generating a capital gain of €300 mn which shareholders in STLEF, including PP and me, will join in when the mop-up takes place. WNDLF made 35x its investment in STLEF; we didn’t do that well, but I am up 606% on what is now only trading as GENP:FR (not STLEF). WNDLF is using its payback after 17 years to cut debt.
*ICAP plc (IAPLY) announced expansion of base metals broking business by addition of a London Metal Exchange desk in Hong Kong, and the hire of former Citigroup trader Jason Dobson.
*JPMorgan raised G4S the security firm to attractive. GFSFY.
Dividend news: Aberdeen Pacific Income Fund continues to pay 3 ½ cents/month. FAX.
Stable-mate Aberdeen Global Income Fund pays 7 cents/mo. FCO. Both are relatively light on the emerging markets bond markets, which is reassuring.
I try to keep my stock picking ideas cool and objective. I generate stock picks, of course, but I prefer to keep myself out of the portfolio side of this newsletter. First, my readers want stock advice, not chatter about me, because the advice gives them a chance to make money. That is what they subscribe for.
Moreover, as journalism, global stocks are more interesting than I am.
Finally, while I founded Global Investing, I am today only part of it. My ideas are often triggered by readers or my reporting the team. Putting my name on articles I write seems like a mild form of narcissism. So when I have written something myself it is not signed in the copy posted or emailed, but only on the bottom of the newsletter along with the copyright protection.
Jason the marketing guy says we need to “put a face” on the company. I’m hard pressed to understand why anyone would want to see my face, or why showing it is good business, but never argue with marketing.
Anyway, I am relieved that we have our banner headline and my signature and the copyright notice back after a tech migration problem.
Which brings me to another vexed matter. Paid subscribers do not have any right to violate copyright by re-sending e-mailed issue to buddies or relatives. This is against the law. Paying a subscription fee gives a subscription to a single household, via a single e-mail address. (Sometimes we collect a second e-mail address for the same person because of delivery problems, but it goes to the same one person.)
When we discover that emailed issues are being illegally passed on, we require that subscriber to log on to our website, www.global-investing.com, to read the issues and the convenience of e-mails stops. Log-ons are tracked so we can be sure that the person has paid and logs on a reasonable number ot times.
There is nothing unfair about this. Ours is a business, whose purpose is to make money. The fact that we now distribute via the Internet does not change anything. When we run articles from a reporter in Japan, as we did yesterday, we pay him for them. There is no free lunch, no free yakitori, no free miso soup.
I let Chris Loew talk about growing up in the woods of the Pacific northwest before moving to Japan, because that is part of what he is paid to write about. And it makes Jason happy. The whole thing is copyrighted. It is ours. It is not distributable.
As I try to deal with the emotional havoc of restoring this business I am relieved that our subscriber numbers are going up steadily, and that I have been able to extract my capital invested in the restart and the Rightside bankruptcy three years ago.
And I am shattered that another letter I respect, www.Thaistocks.com, is being shuttered by its creator, Paul Renaud of Phuket who is fed up with the grubby business of soliciting subscriptions, and wants to become a money manager. I sympathize.
And when long time subscribers who have sent me thank you letters for my work turn out to be sharing subscriptions with grandpa or uncle in the Bahamas or Berkeley I am tempted to do a Paul Renaud myself.
I’ve known Virginie Maisonneuve who heads Global Equities at Schroder Investment Mgm North America for decades. So I am delighted that the French-born China-hand is now buying into X, listed in Toronto, only traded in Canada, a long-time GI pick. Her firm now belongs to Vanguard; when I first met her she worked for Wellington, also part of Vanguard.
Another stock she favors is Y which can be bought by copycat investors if I put it in a Covestor account. X trades only in Canada. The Covestor system only allows me to pick shares whose capitalization is over $50 mn and whose USA trading exceeds $10,000/day. A stock from the True North, Y does not trade that much in this country. I am considering creating a buy and hold Covestor portfolio but compliance issues discourage me.
In any event, there will be no blog Wednesday morning since I am meeting with the Covestor compliance lawyers.
What follows below is for paid subscribers only, and not their children living away from home, their second cousins, poker pals, grandparents, uncles and aunts, ex-wives, etc. We report from the oil patch, on financial service companies and banks, on tech, on environmental stocks, and of course on chemicals and drugs. With a big find!
*Virginie’s Toronto stock is Niko, NKO-Toronto, developing offshore oil and gas in Indian and Bangladeshi waters.
*The British stock is BG Group, BRGGY, a global gas developer.
*The report on the causes of the Gulf of Mexico blow-out helped spread and cut the blame which pushed up the stock of Transocean by 6% yesterday. RIG also gained from higher oil prices.
*The wellhead services firm Schlumberger Ltd. also gained, helped too by the fact that it is selling a distracting communications business, Global Connectivity Services, for $397.5 mn. SLB ahs to pay for acquiring Smith International.
*Whenever I get too depressed about alternative energy, as yesterday, I remember that besides the environmental impact of oil dependence, there is also the geo-political cost of supporting various icky regimes in the Middle East and Venezuela, and the ever-higher bill for extracting the stuff we love. Having said that, I have to admit that the numbers for solar, nuclear, wind, geothermal and wave power, and for autos running on mains electricity or ethylene show they are still not financially viable. They continue to depend on subsidies which are increasingly had to extract from beleaguered governments, particularly ours.
*Analysts, on average, expect Cosan to report earnings of $0.38 per share on sales of $2.6 bn tomorrow. For the full year, analysts expect EPS of $0.97 vs $0.24 on sales of $1.9 bn in 2009. In Q2 CZZ reported a loss of $0.04, missing consensus estimates of $0.17 in profits. CZZ makes ethylene in Brazil from sugar cane and waste and has an edge as subsidies were paid two decades ago.
*The nice thing about bank accounting is that it is so flexible. Britain’s Barclays Bank PLC today reported a drop in Q3 profit blamed on lower revenue and higher charges at its investment-banking arm, while telling markets it has enough capital. The bank didn’t rlease quarterly net profit figures but say it was down 76% at 327 mn pounds ($527 mn) after a £947 mn charge in its Barclays Capital investment-banking arm because of the changed value of its own debt. Excluding that charge and a smaller charge a year earlier, Barclays profit dropped 28% to £1.27 bn.
Banks take charges on their own debt when the market price of their bonds increases, making it theoretically more expensive to buy them back. The charges are used to offset paper gains on lower prices for their own debt taken at the height of the banking crisis.
In retail banking, BCS was hit by thinner net interest margins and a fall in fee and commission income, offset by lower impairment charges for bad loans. Some of those charges are discretionary too. Total group loan impairments fell to £1.22 bn vs £1.66 bn. In investment banking, before-tax profit excluding the own-debt charge fell 1.2% to £765 mn as lower revenue from fixed-income and equity trading was offset by a significantly smaller credit-market loss.
CEO John Varley reassured markets on capital levels, saying Barclays is “well equipped to deal with regulatory changes” as the new Basel III capital rules come into effect. BCS core Tier 1 ratio (a key measure of financial strength) remained at 10% at end-Sept., unchanged from end-June.
Barclays estimated that despite stricter Basel III requirements, its retained earnings over the next 3 years will push up the core tier I capital level to 11.5% by 2013 when they go into effect. The stock rose because these rotten-looking numbers beat forecasts and because they are clearly contrived to allow new CEO Bob Diamond to beat them next year.
Here is KBW’s first take on the report, by Mark Phin passed on by CA reader PH:
“UK Retail/BarCard are slightly stronger and WERB slightly weaker than our thoughts. Core capital was 10.0% (KBWe 10.0%).
“All told, there is nothing overly surprising within the 3Q10 numbers, and while BarCap income will need to come down for 4Q10 that should not be a massive surprise. Of itself, it won’t remove the return debate on the group, but it should add some support to a very cheap stock (0.8x NAV).
*Martin Ferera called home with this:
*G4S announced satisfactory Q3 results yesterday. Net organic revenues growth was 2.1%, with 0.4% in developed markets and 7% in new markets. Overall revenue grew 5.6% at constant exchange rates or 4.2% at actual. Acquisitions this year cost £42mn. Secure solutions (providing security) organic growth was 2.7%. Cash solutions (handling cash for banks and retailers) declined 0.5%, with strong growth in developing markets offsetting declines in developed. Overall margins remained unchanged. Cash flow remains strong with cash conversion of almost 85% of profit before interest, tax and amortisation (EBITDA, a measure of cash flow).. G4S is currently trading at a p/e of around 12.
The outlook is improving according to management and despite challenges in Europe, esp. points east, the UK and US markets have stabilized. New markets now account for a third of GFSFY profits.
Contract wins and losses news. The contract to protect the US embassy in Kabul ends this year and G4S had no interest in renewing it. GFSFY also failed to win renewal of the UK Border Agency contract (handling deportations). DEO Nick Buckles was at a loss to explain how the winning bid will make money. The UKBA contract had annual turnover of £45 m for a net profit of £5m. G4S will more than make up for this with other UK contract wins, now around 9% of turnover. G4S also won a 3-yr contract to provide security at Brussels airport.
Overall, these are very solid results and the stock is cheap ( and I look to buy more for myself if there is any further weakness).
*Goldman Sachs upped its ICAP target price to 590 UK pence from 500 to reflect a 20% increase in earnings forces since the Mar. low. “Our revised forecasts are mid-single digits above “ consensus. “We expect further revisions to consensus.” IAPLY.
*Patti W sent this news about Compugen discovering a possible peptide to deal with ideopathic pulmonary fibrosis, drawn from the Journal of Pharmacology, which she reads for fun. BUY CGEN:
Pulmonary fibrosis is a progressive and lethal lung disease characterized by accumulation of extracellular matrix and loss of pulmonary function. No cure exists, and current treatments often fail to slow its progression or relieve its symptoms. Relaxin was previously shown to induce a matrix degrading phenotype in human lung fibroblasts in vitro and to inhibit pulmonary fibrosis in vivo. A novel peptide which targets the relaxin RXFP1/LGR7 receptor was recently identified using our computational platform designed to predict novel G protein- coupled receptor peptide agonists. In this study, we examined the anti-fibrotic properties of this novel peptide, designated CGEN25009, in human cell based assays and in a murine model of bleomycin-induced pulmonary fibrosis.
Similarly to relaxin, CGEN25009 was found to have an inhibitory effect on TGF-β1-induced collagen deposition in human dermal fibroblasts, while enhancing MMP-2 expression. The peptide’s biological activity was also similar to relaxin in generating cellular stimulation of cAMP, cGMP and NO in the THP-1 human cell line. In vivo, 2-week administration of CGEN25009 in a preventive or therapeutic mode, i.e. concurrently with or 7 days after bleomycin treatment, respectively, caused a significant reduction of lung inflammation and injury, and ameliorated adverse airway remodeling and peri-bronchial fibrosis.
The results of this study indicate that CGEN25009 displays anti-fibrotic and anti-inflammatory properties and may offer a new therapeutic option for the treatment of pulmonary fibrosis.
Ideopathic pulmonary fibrosis affects about 128,000 Americans with about 48,000 new pateitns diagnosed each year. About 40,000 patients die each year, the same number as with breast cancer. OPF is one of about 200 disorders called interstituial lung disease, and the most common.
PF usually strikes between the ages of 50-70 and the disease rapidly progresses. The lungs become stiff, breathing becomes more difficult, oxygenation suffers, and gradually activity and life style suffer. The treatments now include steroids and there are tests with other agents, but no cures and no reversal only slowing of progression (mostly pretty ineffective) it often leads to an enlarged heart and eventual death. Whether there is a genetic predisposition, a viral infection, or some other factors – no one knows.
Pulmonary fibrosis can also have known causes- inflammation (causes vary but smoking is one), infection, high oxygen concentration therapy, smoke or chemical inhalation (NYC!) and can be a result of other diseases. Chronic obstructive pulmonary disease, a result of IPF, causes chronic hypoxemia (many of these people have clubbing of fingers, bluish lips) and other major health problem. Similarly some of the symptoms and treatments used for IPF patients are also used for cystics, severe asthmatics, and other airway and lung problems (mostly out of desperation)…
Also IPF patients can have other complications. So, a real treatment is a huge unmet need. Determining a replacement for relaxin (or a simpler form) would be a big deal.
Pulmonary fibrosis is an affliction of the aging population, smokers, people with heart disease, and coal miners, and a complication of other diseases including cystic fibrosis, certain types of severe pneumonia, and is a side affect of the use of high oxygen concentrations in managing critically ill patients – which include premature infants as well as a variety of surgical patients. It is huge and there is no known cure and very few treatments beyond patience for the more temporary forms.
But most PF is irreversible and life threatening because it inhibits lung function. I read the entire study and it is to me quite compelling in the effectiveness.
They sometimes do lung transplants, and the progression varies patient to patient, but to outcome is never good.
*Teva is buying for $163 mn 51% control of Mediwound, an Israeli listed startup in high-tech bandages. It had owned 12%. Seller is Clal Biotech, the Israeli conglomerate which will remain a minority sharheolder. Mediwound is buying another bandage firm, Polyheal, which has developed a bandage for pressure ulcers. Teva benefits from being Israeli in these matters.
*VALE appears to be getting set to spin off part of its Fertilizantes sub, which is now drawing analyst interest. Vale’s arch-foe BHP attempted to get into Potash of Saskatchewan, and found that Canada is not as open as rumoured.
*Thomson Financial’s Gradient analysts raised Mellanox to Buy.
*Thomas White cut Veolia to hold. VE