Reader Tom McC objected to Frida Ghitis’s Jewish New Year article on Israel’s currency. He wrote: “High prices for ‘stuff’ is a sign of a low value for the currency. A highly valued currency would bring low prices for things.”

Frida claimed she just meant that her fistful of US dollars and credit cards was not going very far in the Holy Land. But I think both of them are missing the contradictory forces at work when the Israeli Central Bank decided to raise rates.

With the open global Israeli economy one of the few looking good these days, the CB has to keep buying dollars to prevent the shekel from appreciating. The higher shekel results from the CB’s earlier move pushing interest rates to fight inflation.

Israel needs to keep down the shekel to export and lure in tourists like Frida, because a lot of the economy depends on tourist and pilgrim receipts.

Moreover, Israel is a tiny country which imports everything from oil to palm oil to suntan oil. It is not the land of milk and honey any more. They still raise honey but import milk, along with tea and coffee to pour it into plus meat, leather, paper. All this stuff costs more when the shekel is kept down. Hence the rate increase perversely triggers more inflation because of the dollars coming in for yield.

Some of this comes from a speculative carry trade into shekels with borrowed money. You can borrow US$ at 0.25% for placement in Israel. The CB has to sterilize these inflows to stop the shekel appreciating.

The Bank of Israel is caught between two needs, to raise interest rates to keep inflation within the target range, and to stop speculators pushing up the shekel. Apparently another country in the same boat is Czech Republic, which I am planning to visit in Nov. I am going to Prague.

You can also run into the reverse contradiction in CB policy. Here is an article from Bloomberg today based on an interview with a South Africa monetary specialist:

“The rand may do the ‘bizarre’ and gain if South Africa unexpectedly reduces its benchmark interest rate tomorrow as lower borrowing costs boost the economy, according to Brait SA, the nation’s largest buyout company,.

“The rand may extend its 25% advance this year, climbing toward a fair value level of 7.16 per dollar should the central bank reduce its 7 percent main rate, said Colen Garrow, Brait’s Johannesburg-based economist. ‘It’s quite bizarre but the rand could actually strengthen if they cut rates,’ Garrow said in an interview. “’Investors are hungry for growth and a rate cut would hasten South Africa’s recovery from recession.’”

I am still trying to catch up for having taken the weekend off for the Jewish New Year. Several readers have gently inquired why we are being so Jewish this year. There are a couple of reasons.

Firstly, about a year after the world as we know it came to an end with the collapse of Lehman Brothers and the TARP, the Jewish New Year is as good a time to look for a new direction as any. Moreover, I did predict that the market would do well in Sept. which is a traditionally down month. I pooh-poohed advise to sell at Rosh Hashanah and buy on Yom Kippur weeks ago. So it seemed only right to follow up.

Another reason is that when I started Global Investing over 20 years ago, my then-partner, Bill Bonner of Agora Publishing, an Episcopalian, told me that of course he wanted me to cover Israeli stocks. He also urged me to tell my readers about my religious affiliation so that it could not be “revealed” to discredit my advise.

We currently recommend three Israeli stocks, large, medium, and miniscule. The Israeli economy is an out-performer but its companies are not a slam dunk given the currency and inflation risks. That is why you need not just our macro-economic service, which is free, but also our stock advise which you have to subscribe for.

Today’s blog is late because of the buildup of business over the holiday weekend and because I have a nasty cold. In the diaspora, where I live, you celebrate the Jewish New Year for two days because of (historic) uncertainty about exactly when the New Moon appeared over the Land of Israel. It is of a piece with the battles over the date of Easter; and different days for Ramadan which sometimes arise between Sunni and Shia Moslems.

In responses to a Canada reader, I looked into the origin of the name of Ramada Inns. It has nothing to do with Islam. In Arizona, where the first Inn was set up, a “ramada” is Spanish for a temporary shelter during the harvest. In Hebrew, a sukkah; in French an abri; in Aloxe-Corton (where I have helped harvest Corton Charlemagne) an isba.

*Our trio of Israeli stocks includes Eastern European real estate investor Elbit Imaging, the medium; and the miniscule, kosher food importer. G. Willi International, EMITF and WILC respectively. But I write most about Teva, a generics drug-maker, because it is the heavy weight in my portfolio and the one I was writing about when I partnered with Bill Bonner in 1989. (He sold my company his half after a year for the proverbial $1.)

*Santander will raise euros 5 bn or about $7.5 bn with the issue of 52 mn units combining common and preference shares in its Brazilian banking sub. The sale of 52 mn units to be priced at reais 22-25 (each combines 55 common shares and 50 preference shares of the Brazil sub), totalling 15% of the Spanish bank’s Brazilian bank sub, will value it at about Euros 30 bn. Since STD parent in Spain itself is valued at euros 89 bn, this is a major deal. Moreover, STD plans to also sell its Visanet stake in Brazil following a huge gain post-IPO for the credit card co. earlier this year, and its stake in the Serasa credit information service, for another reais 2.1 bn ($1.16 bn) in gains. While its Dutch and British partners stumbled into the joint takeover of ABN-Amro, STD has benefitted brilliantly by asset selection.

*Another bank worth noting is ICICI of India. The latest Thomson poll of analysts shows 11 rating IBN as strong buy; 5 as buy; 14 as neutral; 3 as underperform and one poor brave soul as sell.

*Another capital issue in Latin America is harder to call than STD’s. Cemex has to raise $1 bn in equity under its summer loan restructuring. It plans to issue 1.2 bn new shares. The market expects a discount, because two Mexican real estate companies are also tapping the market at the same time, which will not affect CX much. The real risk is that another cement-maker, Heidelberg, is also raising money with new shares. Each ADR equals 10 CX Mexican shares.

I think the discount will not be very high.

*Yet another rights issue is in even greater distress, that of Royal Bank of Scotland. We briefly owned its ADRs after the ABN takeover (we had been ABN shareholders) but I dumped them as RBS went into decline, although we do still have a heavy exposure to the bank’s high-yielding preference shares despite taking profits from having doubled up last week. RBS is reportedly talking to shareholders and others about raising money by issuing GBP 3.-5 bn in new stock. The problem is that investors, like me, were burned the last time they did a rights issue, in the summer of 2008, for GBP 12.3 bn for buying ABN. In the end, RBS lost GBP 24 bn on that ill-timed adventure, and the British government became its largest shareholder. Even if the rights are placed, the govt will remain in control of RBS. How clever of Barclays to have avoided the bailout by preventively raising capital last year and keeping Downing Street out of the bank.

*Teva will buy $3.5 mn of shares in Rexahn Pharma in the US to invest in penny-stock RNN’s small molecule nucleonid which may act against solid tumors (colon, lung, pancreas) as well as making future milestone payments. The preclinical drug, RP 3117, has anti-metabolite action. Teva also settled with Shire a suit over its plans to sell a copycat of Shire’s Carbatrol epilepsy drug.

*GSK (new name, same as its ticker symbol) in partnership with Valeant Pharma is completing US and EU applications for an adult epilepsy drug which acts as a neuronal potassium channel opener. GSK also is following up on its 4-yr-old joint marketing deal with Dr. Reddy (RDY, a family-controlled Indian drug firm) by buying a stake in RDY. No details yet.

*As anticipated, Consumers" Waterheater IT, the Canadian traded south of the border is CSUWF, halved its monthly dividend to C5.4 cents which still is an 11% yield. Initially the stock fell and rose again. Any weakness is a buy opportunity.

We’re still in London. Baa baa BA. Having been told our flight to JFK was on, but would leave 2 hours late and that we were expected to check in at the normal time, we schlepped ourselves to Hethrow only to told upon arriving at the BA terminal that our flight had been cancelled while we were en route to the airport via the Underground. BA failed to use our mobile number or email address to update us.

The departure hall was full of other people in the same boat many of whom had spent far more than we had getting there. There were about 80 BA staffers around to add to the chaos none of whom seemed to be trying to phone passengers. We got rebooked to a flight leaving April 26. About 4 hours later the British reopened their airspace and flying began again. But we had left the airport for Mudchute Manor, our London base.

Being in London helped me get more very important infomation about three yield stocks in the model portfolio, for paid subscribers only of course. And a general update on the outlook for a 4^th British share.

Being across the pond, maybe I was too European in my reaction to the SEC charging Goldman Sachs with civil fraud for misselling the Abacus mortgage-backed synthetic collateralized debt obligation. Wrote subscriber Dr. AA, ‘are you serious? A synthetic CDO is composed of credit default swaps on mortgage bonds. How can you purchase a credit default swap if there is nobody on the other side. This was a private placement with Goldman functioning as placement agent, not underwriter.’

Dr. AA added: ‘I personally read the Abacus flipbook and I have heard it would have been a violation of SEC rules .. had they identified counterparties of the CDS.’

It would not have violated SEC rules but it certainly would have violated standard customer privacy protection. I do not think the Goldman error was failing to identify John Paulson & Co, as the short seller of the CDOs but in failing to inform buyers going long that there was a short seller who had selected the tranches to include.

Further supporting my view is the fact that Goldman has stripped the trader at the center of the alleged fraud of his license to operate here in London. Mr. Fabrice (Fabulous Fab) Tourre has been de-registered with the UK Financial Services Authority but he has not been suspended and continues to be paid for the work he is now not allowed to do.

Here is the news about the British stocks, plus updates from Brazil, Panama, Israel, India, and Britain about other shares we cover.

*The three yield stocks are non-cumulative preferreds from Royal Bank of Scotland, the P (cusip 7800977623); the F (cusip 780097804) and the NatWest preferred C (cusip 638539882). All are NYSE listed, and all are subject to a buy-in by the Scottish bank as part of a $3.2 bn 13e-3 reversal offer filed with the SEC on April 6. The buy-ins are because RBS was essentially nationalized by the UK government after (among other things) its buying ABN-AmRo which was one of the victims of Goldman shenanigans and other mishaps). The European Union competition directorate, under the feisty Neelie Kroes, now retired, ruled that RBS was getting an unfair edge against rival banks thanks to being government backed, and that it would therefore have to stop paying dividends on these issues for two years after April 1.

The conditions for the buy-in include a resolution by the RBS sub responsible, which is likely to be automatic. Tenders must be put in by May 3 and are subject to prorata discounts if too much is offered. Here are the details from Jason Knauf, head of the IR department at RBS.

For the P of which there are 22 mn shares outstanding, RBS proposes to pay $14/sh plus accumualted dividends but no interest for the period since the last payment was made.

For the F of which there are 8 mn shares out, RBS proposes to pay $20/sh.

For the NatWest C (subject of an earlier takeover by RBS), it proposes to pay $21.25/sh for the 12 mn shares out.

The prices of the three issues essentially reflect the payout expected except for the NatWest, which you could arbitrage at present prices for a wee gain.

As I wrote earlier, readers who have a need for fixed income should tender their shares. If you want to speculate a bit, you can keep the shares without income for two years and then get the very hgih dividends when they resume in April 2012. Being non-cumulative, the dividends missed will not be paid then, nor will the modest garnish of the interest to this May 5^th when the buy-in is expected to be completed.

As noted earlier, the potential yield on these preferred shares is very high and it is an interesting speculation if you do not need the income for two years.

Here are the risks. First, if you hold these shares in a tax-sheltered account you would have to sell, probably at a nifty profit, before the dividends resume, because it is likely that the British advance corporate tax (which let RBS pay the dividends gross without British withholding deductions) may be eliminated. So you would not be able to get back British withholding tax. I have some of my most recent crisis-time RBS preferreds in my IRA. They will be transferred into the Ross if I ever get around to doing this and the price will reflect the current offer, not what I think they will be worth two years from now.

The biggest risk I can think of is that inflation in the US will be so high by April 2012 that interest at 6 to 8 percent will not be enough to satisfy you. The other big risk is that US taxes on dividends are raised in the interval to cut our deficit. These hybrid securities were created so their payout could be taxed as dividends not interest, but that too may be subject to change.

*With another rate hike in India, to 5.25% to fight inflation, banking shares are looking better. That is good for ICICI Bank, IBN, if not for India. The inflation results from inflows of foreign investment funds (like ADR buying) and a rotten monsoon pushing up food prices.

*The other hot subject is Tesco whose shares fell after its report yesterday. The adage in London as in NYC is ‘buy on rumor; sell on news.’ By today everyone from Goldman Sachs (the same) to a bunch of British brokerages were weighing in with ‘buys’ on TSCDY. Goldman has a £5.47 target for Tesco which closed yesterday at £4.31, a nice piece of change. Buys came from Shore Capital and Seymour Pierce. At the latter firm, Freddie George called Tesco ‘undervalued relative to its peers.’ Sam Hart at Charles Stanley called Tesco ‘best in sector’ while Nick Bubb at Arden Partners noted how ‘remarkably confident’ the CEO was.

Moreover today’s Financial Times reported that in 6 years, Tesco will sell more in China than in the UK. That and the Goldman for

ecast are important because most British analysts are comparing Tesco to British rivals, like Sainsbury and Wm Morrison, and including Asda, the local arm of WalMart which is in management and strategic disarray. Moreover the Tesco US loss on building its West Coast Fresh ‘n Easy chain is much higher than what I wrote yesterday, at £1.75 mn, far behind what CEO Sir Terry Leahy forecast last year. It was sweet that Leahy now warns WalMart against predicting market share (as he did in yesterday’s conference call); but he may come a cropper in the US market which has defeated other Euro-supermarket ambitions.

*Mellanox of Israel introduced a 2^nd generation adaptor with intelligent queuing, something Israelis do badly compared to Brits. The new Connect X2 for Dell Server Power Blade M is intended for cloud computers, computer clusters, and enterprise data centers. The new connector is cheap to run and cost less than earlier solutions. The MLNX stock is up sharply and it will issue its Q1 numbers after the market closes today. Your editor met the company at a Nasdaq Israeli conference.

*HSBC today says to overweight Inmarsat, IMASF. We already have.

*Glaxo has more mixed news. It won EU conditional approval for Ofatumumab, a Genmab (Danish) monoclonal antibody to treat refractory chronic lymphocytic leukemia. GSK sells it as Arzerra and will have to pay the Danes Dangeld to the tun of $12 mn for this milestone. However, its lupus drug developed with Human Genome Sciences did not reach statistical signifcance. This is too bad for lupus sufferers but GSK will be hurt less than its partner in belimumab development. And finally its Zofran nausea drug (for chemo and post-operative patients) will be facing generic competition from Lannet for the injected version and from Aurobindo of India for the oral one. The fact that drug pipelines need to be constantly replenished is why GSK has signed up partners in drug development around the globe. We know about the end of patent protection but the new drugs are a crap shoot.

*Banco Latino Americano de Comercio Exterior, the Panamanian multilateral trade finance bank (Bladex or BLX for ease of use) rerported Q1 net off 40% from Q1 09 to $10.1 mn or 28 cents/sh. The bank managed to blow the commercial profits it achieved, double last year’s level at $14.2 mn, with weakness in Treasury operations ($2.8 mn in hedging losses) and asset management ($1.4 mn in trading losses). There are too many cowboys at this over-capitalized bank and presumably they will be reined in. The bank, 62% of whose business is trade finance, expects to expand its loan book this year as commerce picks up. Its book value per share rose 1% sequentially and 13% year on year but it must focus on commercial lending and not on trading. In mitigation of my strictures, note that most respectable Latin American countries are seeking their currencies up against the Greenback, the currency of Panama and BLX, notably the Mexican and Chilean peso and the Brazilian real. So the hedgebook has to be part of business too.

     In 40 years it will be the turn of Afghanistan and Iraq to become hot investment destinations for Americans. And there will be a closed end fund investing in Venezuela. But now the push is to Vietnam. The French after Dienbienphu had absolutely no interest in getting back into the Saigon bourse. They confined their interest in ‘Nam to a consortium drilling for offshore oil into which Total invested.

     But G.I. Joe always likes to return to his messes with money with hopes to make out well despite the shambolic departure the last time roung.

     My reflections are stimulated by news that Van Eck on Friday launched a Vietnam Index Fund, an Exchange-Traded Market Vector Fund listed on the NYSE Arca and the Euronext. This is not the first Vietnam Fund attempt; Mark Mobius of Templeton Group tried to create a listed Vietnam Fund in the 1980s, but once the money was raised he could not find any public companies to invest in.

     In the interval Saigon has risen to the stratosphere as less-savvy investors than Mark bit up what little bits of private enterprise shares were available to buy. And then there was bust, with the international cowboys pulling home from the Ho Chi Minh trail with the global crisis.

     So this may be a good moment for another attempt to bring the helicopters back to the roof of the American Embassy. The Market Vector fund is rules-based, capitalization-weighted, and float-adjusted. That means that if there is a pile into ‘Nam shares again it will benefit as long as new money is coming in to the market. And crash if there is another rush for the doors.

     The fund trades as VNM and tracks an index created to manage the money. This index is 70% made up by capital of Vietnamese companies getting more than half their revenues from Vietnam, and now made whole by non-Vietnamese companies with a similar revenue source.

     In the start-up, 37% of the allocation is into finance; 19% in energy (maybe they bought into the local Total?); and 12% in materials. Nobody is mentioning profit and I won’t either. This is not a recommendation.

     In 40 years we will see an Afghan Fund and an ETF to invest in Iraq. And probably a North Korea and a Burma vehicle as well. And after Chavez’s death, a closed-end fund investing in Venezuela. I hope we can get Net Asset Value data on these vehicles, discussed below.

     Our new flat world has seen a British scandal blown back from the USA. Daniel Hannan, a Tory Member of Parliament from the Libertarian Right, was interviewed on US TV in the increasingly hysterical debate on the ethics of healthcare reform. The MP for southeast England then called Britain’s National Health Service “a 60-year-old mistake”. The NHS is supported by all British parties and Hannan’s remarks, and some others by blabbermouth colleagues against the crackdown on MP expense abuses, have hurt the opposition party and encouraged Labour. The US insurance industry attack on Obama health care plans is paying off for Gordon Brown.

     For the record, based on my family’s experience, the NHS has been seriously streamlined under the Labour government to remove waiting lists for non-emergency treatments. It does a good job with real diseases like breast cancer, heart disease, and accidents my relatives here have suffered. Under public and press pressure it has had to allow highly expensive last-ditch unproven Notre-Dame-pass treatments which even US private insurers do not pay for. Finally, despite rumors, the NHS has never practiced euthanasia on granny or pops. It is also vastly better than the American system at dealing with screening for diseases and preventive medicine for scourges such as glaucoma or diabetes or depression, mainly because there is no conflict about who will pay for tests and drugs and services as at home. British babies have a better chance of life than American ones and British grannies have a much longer life expectancy than Yankee ones even if most do not live as long as the Queen’s mom.

      South Africa cut its interest rates by a half a percentage to 7% and the impact was immediate–food price rises the country can ill afford and a weakening rand. It is caught between the devil of popular unrest at the sloooww improvement of living conditions and the high cost of living, and the need to stimulate its economy on the one hand, and dependence on foreign capital flows and imports on the other. The country’s public (and often ill-informed) political disputes over inflation targetting makes it harder to set policy at the Central Bank.

      Bad news for our data services. It has been impossible to get current net asset values for the closed-end funds we cover, and others, from the Closed-End Funds Association website, www.CEFA.com/ CEFA are still publishing material about closed-end funds and links to some but not all fund manager home pages, but not good data on the sector. We are using in our tables for paid subscribers the latest data available for the closed of Q2 at the Herzfeld Advisors website which we subscribe to. I hope that when I get back to the USA later this week that I will be able to get NAV updates in print from Barron’s which does not include this in its on-line edition. There are several reasons why this gap in information is irritating. One is that funds trade at discounts and premiums to their stock holdings reflected by NAV, which helps timing buys and sells. The second is that the irrational movements of these disparities has predictive qualities for stock markets as a whole. 

      You want irrational exuberance, look for closed-end fund premiums. You want gloom and doom, look for their excessive discounts.

      If anyone tells you that the price of shares reflects all known information, it helps to have information. The price of closed-end funds by my long experience does not reflect known information and I want to know more information, not to be denied it.   

      News for our paid subscribers about our stock, fund, and bond picks follows.

      *The first note is about a share whose performance we have long understated. The stock had a 2:1 split in May 2007 which I failed to show in my tables. Correcting the error a MD reader spotted has boosted our overall buy-and-hold performance. And as usual, I begin the week with news of analyst forecast changes for our shares.

      A Zimbabwe-born Canadian reader had earlier questioned my sticking with this stock.

     *The stock in question is Keppel Group of Singapore, KPELY.PK. The Thomson Reuters consensus forecast for KPELY for 2009 has been slashed 25% to 66 Singapore cents. It earned 69 cents last year. The PE ratio s under 12. We spotted an article by Vincent Wee of the Singapore Times comparing Keppel with SembMarine, its smaller and less blue-chip rival in building drilling rigs in Singapore. I like Keppel because it is a conglomerate with interests in water treatment and real estate; Semb is a one-track pony whose results depend on the animal spirits of the oil and gas industry. Mr. Wee writes: “the bulk of Keppel’s and obviously all of SembMarine’s profits still comes from the offshore and marine sectors and it must be here that investors must look for clues to future performance. In current orders, both are practically neck and neck.”

     However, new orders were particularly hard for KPELY to land in Q2, worth just $30 mn, but then last week it announced another $85 mn in bookings.

     Back to Mr. Wee: “Most notably, however, neither of them has secured a single rig newbuilding contract since the start of the year, although SembMarine does have the edge with two semi-submersible jobs that it is taking over from another builder. This contributed significantly to its new order tally.” I am not shifting my portfolio around over this kind of comparison.

     *GlaxoSmithKlinehas begun human testing of its A/H1N1 flu shot in healthy human volunteers in Germany and will have results next month. The swine flu jab will have side-effects as all flu shots do. There will later be tests in other areas in Europe and North America. While the pandemic is infecting few people, it is still much deadlier than seasonal flu in how many of those who catch it die. GSK trades at 12.4 times US estimates of its earnings this year; but at only 10 times British estimates. (It earns a lot in the US and they differ in their forecast for the dollar.)

     *More vaccine news. Crucell after a disappointing quarter managed to land $300 mn in new contracts for its lead product, Quinvaxam, a 5-in-1 vaccine for babies which is transportable at room temperature, and has been given a seal of approval by the World Health Organisation. The new order from an unnamed supranational organization brings the total volume of current orders for the jab to $800 mn. CRXL is a vaccine specialist using its own biotech platform to culture the vaccines.

     *Another drug note. The Bill and Melinda Gates Foundation, a charity set up by the Microsoft founder to develop programs to treat widespread diseases like AIDS and TB, has opted to drop its holdings in drug companies. Among the shares sold recently was an enormous block of TEVA.Q. This slashed the price of Teva, an Israeli generics firm the analysts adore, to a mere 12x next year’s EPS estimates according to the Thomson-Reuters consensus. If I did not have so much money invested in Teva already I would bhe tempted to buy more.

      *Obviously, Compugen (CGEN.Q) did not file a shelf registration for issuing more shares without a good reason and now we have it. The new consensus estimates for the Israeli biotech drug developer is that it will lose 15 cents/sh this year.

      *Crytologic landed Ladroke, Britain’s leading betting shop group, to which it sold three Internet gambling games via its Orbis Tech operation. CRYP.Q is now focused on Web gaming. CRYP is now expected by the analyst fraternity to earn 16 cents/sh this year (US) vs a loss of 58 cents/sh last year. Its 2010 PE ratio is 12.3.

      *Good old DryShips brings out the best in green-eye-shaded analysts. They expect DRYS.Q will lost 4 cents/sh this year in GAAP terms but, thanks to side deals and extraordinary gains they anticipate, they have raised their non-GAAP earnings estimates for the Greek-owned dry bulk carrier firm by 10% to 93 cents/sh. The PE for this year and next is about 7.

     *While I have a taste for water-treatment in China via KPELY we should remind you that the real winner is Saneamento Basico de São Paulo, a pure utility play in booming Brazil. It is expected to earn %5.72/sh this year putting its PE under 9.

     *Coca Cola Hellenic, the Greek bottler to the eastern European coke market, saw its consensus estimated earnings this year raised 9% because one bank covering it went wild. Now the theory is that CCH will earn $1.69 this year vs a mere 91 cents last year. With this estimated growth in earnings, in fact more likely to respond to serious cost cutting by CCH which we have been reporting, not too surprisingly, the CCH PE ratio is 36 according to the consensus.

      Notice: all the stocks mentioned above in bold type are owned by Vivian and by her readers who follow our Model Portfolio.

Pres. Jacob Zuma probably did not expect an uprising in his first hundred days of office.

The riots are mainly about delay in providing houses and services like water and electricity to the populace. But they are also a reaction to corruption and nepotism in assigning the new homes. In Port Elizabeth, where things so far are calm, we had pointed out to us township houses which were being rented out by ANC big shots to whom they had been assigned illicitly, because the owners already had bigger and better houses.

South Africa suffers from extreme income disparity, measured by the GINI coefficient, comparable to that in the U.S. But the difference is that the poor are vastly poorer. Statistics show that 30% of households live in shacks or informal structures. About 40% of households to not receive refuse removal services. Twenty percent of households lack links to water or electricity.

The resulting crime and ill-health further holds back the population. So riots ensue. They target stores which are looted, and visibly better-off people, like those of European heritage. And as a result, more South Africans leave for Europe, Canada, Australia, New Zealand, even Israel. We had lunch with a South African liberal judge and other relatives of my daughter-in-law, all people of my generation. None of their children or grandchildren were living in South Africa any longer.

Offsetting this white flight is upward mobility among the African population. Education is sought after, including private education for the children of the Afro-elite; a lot of business-related and accounting studies; and professional studies in law (always way to popular in Africa as in pre-War Germany), medicine and nursing, and languages. Local furniture suites always include a bookcase, which impressed me.

But the generation aged 35-50 lacks education and job skills, having been excluded during the apartheid years. These are the people who account for the 25% unemployment in South Africa, because they lack skills for modern jobs. They are the ones who see no future even with the new populist government in Pretoria.

Yesterday, I went to the Inns of Court right behind the old Fleet Street watering hole, El Vino’s, where generations of reporters had their lunchtimes of booze. They are all gone, either based in the nether reaches of Docklands or working from home offices or simply sacked. Fleet Street of old is now more.

I visited an interesting exhibit at the Temple Church virtually behind El Vino’s about lawyers under Nazism, murdered or exiled if they were Jewish or kept from practicing if they were otherwise in bad odor with the Fuehrer.

Law is much less portable than journalism or medicine if you want to be a free ranging globalist. In my parents’ generation of Jewish “Fluechtlinge” from Germany there were two members of the bar in their circle of friends, one who had become an accountant and another who settled for being a legal consultant. Doctors and even journalists could start all over again more easily because their studies (even if they had to be supplemented) were applicable in the U.S.A. Law was too different between countries.

Then I went shopping on Regent’s St. I bought a candelabrum for my new South African Kapala candles from Habitat, reduced from GBP 27 to 4, my kind of bargain; a dress from Gerry Weber, a store going out of business, less cheap; and a duvet cover from the family emporium, John Lewis on Oxford St., GBP 85 reduced to 20, also my kind of price.

British retailers are getting more sales, statistics show, probably because they are cutting prices. In June, retail sales rose a surprising 1.2%, quadruple what had been forecast, mainly because of clothing purchasing by the British female.

There was a rush into John Lewis because they have re-introduced extraordinarily hyped “slimming” Brazilian girdles, Scala Bio-Fir Cellulite Pants at GBP 25 and 30 which make your bum smaller while eliminating cellulite (a disease invented for advertising). These had been sold out but went back on sale today. You have to

wear the thing on your fanny for 30 days after which it will be slimmer and less dimpled (cellulite is dimpled skin.)

Naturally I lined up with the rest of the ladies to try on the magic knickers; there was a queue to use the lingerie fitting room and another at the cash registers. My husband hid patiently and discretely among the dresses reading London Lite, a free newspaper which wrote up the "Bridget Jones Fat-Busting Knickers" to help fan the flames. In a quiet British way, it was pant-a-monium. The medium (42-44, my size) was too long in the thigh for little me so I did not buy. I may be past the age when I am so vain as to wear constricting body armor for streamlining my shape.

I seem to have left South Africa just in time to avoid the riots which affected the Eastern Cape Garden Route towns we drove through, although we did not spend much time in the African township slums where the angry populace live. We could not avoid seeing the shanty towns from the roads, however. Other areas where there was violence are around Johannesburg, which we did not visit.

Pres. Jacob Zuma probably did not expect an uprising in his first hundred days of office.

The riots are mainly about delay in providing houses and services like water and electricity to the populace. But they are also a reaction to corruption and nepotism in assigning the new homes. In Port Elizabeth, where things so far are calm, we had pointed out to us township houses which were being rented out by ANC big shots to whom they had been assigned illicitly, because the owners already had bigger and better houses.

South Africa suffers from extreme income disparity, measured by the 40% GINI coefficient, comparable to that in the U.S. But the difference is that the poor are vastly poorer. Statistics show that 30% of households live in shacks or informal structures. About 40% of households to not receive refuse removal services. Twenty percent of households lack links to water or electricity.

The resulting crime and ill-health further holds back the population. So riots ensue. They target stores which are looted, and visibly better-off people, like those of European heritage. And as a result, more South Africans leave for Europe, Canada, Australia, New Zealand, even Israel. We had lunch with a South African liberal judge and other relatives of my daughter-in-law, all people of my generation. None of their children or grandchildren were living in South Africa any longer.

Offsetting this white flight is upward mobility among the African population. Education is sought after, including private education for the children of the Afro-elite; a lot of business-related and accounting studies; and professional studies in law (always way to popular in Africa as in pre-War Germany), medicine and nursing, and languages. Local furniture suites always include a bookcase, which impressed me.

But the generation aged 35-50 lacks education and job skills, having been excluded during the apartheid years. These are the people who account for the 25% unemployment in South Africa, because they lack skills for modern jobs. They are the ones who see no future even with the new populist government in Pretoria.

Notes for paid subscribers follow.

*We sold half our Vance Info Systems, NYSE-VIT, at $16 yesterday.

*In my rundown of hot stock picks from our contributors I failed to mention Makita, the Japanese hand tool makeer, which is up sharply this year, a pick of Chris Loew. MKRAY.Q

I also failed to mention Coca Cola Hellenic, a backdoor investment in Russia and the former Comecon countries, via Greece. CCH is up just under 50% year to date. CCH

*From analysts at KBW:

We revisit Spanish banks ahead of the 2Q09 results season, fine-tuning our forecasts to more closely mimic the economic cycle. In the 1990-94 crises, the peak in NPLs (non-performing loans) came three quarters after the bottom in GDP. Similarly, we now expect the peak in NPLs by 2Q10. This reduces the provisioning effort in 2009 for some of the banks, although we keep our estimates of 2010 credit losses broadly unchanged. On Santander, we upgrade our forecasts by 13% in 2009, and by 3% in 2010. [STD can] we believe offer above-average earnings power near term and over the cycle. We remain buyers of Santander. We remain underweight on the Spanish domestic banks.

NPL formation in 2Q to be broadly in line with 1Q. Spanish banks have seen a deceleration in net additions of NPLs in 1Q09 versus 4Q08, and we expect NPL formation in 2Q09 was broadly in line with 1Q. Lower interest rates are improving affordability for clients and proactive refinancing has had a positive impact on reported NPL ratios so far, but in our view the main drivers for asset quality erosion are unemployment for individuals and contraction in the economy for corporates – and both continue to deteriorate. We have factored into our forecasts a more stable trend in 2009, but keep our estimates for 2010 unchanged, where we now see the peak in asset quality deterioration.

*GlaxosmithKline according to The Financial Times‘ Brian Groom, “is sneezing all the way to the bank”. It reported net profit rose 11.6% in the June quarter to GBP 1.44 bn, below forecasts. Sales rose 15% in sterling to 6.75 bn but fell 2% in constant currencies. While the dollar was up, US sales were off 15% because people did not fill their prescriptions. EPs rose to 31 pence from 27.2.

The main GSK news was over swine flu. It plans to add anti-viral masks and diagnostic tests for the disease to its existing lines, an adjuvant-boosted vaccine development program which is expected to turn out 195 mn doses by early next year, and a general anti-viral nasal inhalent, Relenza, whose sales were 20 times last year’s Q2 at GBP 103 mn, expected to further triple by the end of this year. Relenza is licensed from Biota, an Australian drug developer we used to own, which got A$7.28 mn in royalties so far this year.

GSK announced that it will sell to the U.S. Government a quarter of a billion worth of adjuvants which make the flu shots go further, without the antigens themselves. Further deflecting criticism, GSK revealed that it had invested GBP 1.2 bn in pandemic flu R&D, and that it would donate 10% of Relenza doses and 50 mn flu jabs to poor countries.

Emerging markets are a main thrust of corporate strategy, sales there rose 14% year over year. Europe also did well, but neither could offset the recession-linked decline in the U.S.

CEO Andrew Witty predicted “significant orders for pandemic vaccines and significant volumes of Relenza” in H2.

*Kumba, the listed iron ore mining sub of Anglo American, today reported good results and plans to boost its iron output. This bodes will for Highveld Steel & Vanadium, our recent purchase. HSVLY.PK

*Bladex, Banco Latino-Americano, reported net profit year over year off 60% in H2 at $10.5 mn because of increases in loan reserves. These were not offset by cost controls or increased margin spreads in commercial lending. One bright note was treasury operations, where own trading produced a return from appreciating securities and an operating income of $4.4 mn. But investment for others slumped because of losses and withdrawls, although it remained profitable.

BLX, a multinational Panama-based bank reporting in dollars and U.S. GAAP, has $662 mn in tier one capital, equal to 21.1% of its loan book. It is now provisioning 3.5% of its commercial portfolio for loan losses, vs 1.9% a year ago.

CEO Jaime Rivera told the world that “general economic stress levels in most of Latin America seem to have peaked and might already be easing ins ome sectors of the market as a result of effective government support programs and return of investor confidence.” He added, “recovery will involve and expansion in the region’s trade flows which which Bladex is ideally positioned.”

*Boosted by the proceeds of its sale of Singapore Petroleum to the Chinese, Keppel Group reported net profits of S$739.5 mn in the June quarter ($514 mn US), or S$46.34/sh. A year earlier KPELY.PK only earned S$299.3 mn. This is a one off but the stock rose all the same.

*As hinted and forecast, Vale will spend euros 965 mn ($1.37 bn) to boost its share of Cia Siderurgia do Atlantico, CSA, to 26.9% from 10% buy buying shares from Thyssen-Krupp. This steel slab plant newar Rio do Janeiro is the first modern steel mill in Brazil, where steel mills were not built since about 1980, and it is due to open before this year ends. It will use iron ore exclusively from NYSE.VALE for slabs to be exported to non-Brazilian rolling mills.

    In college, before course and grade inflation became the norm, I took Ec 1 (not Ec 10) and studied from Paul Samuelson’s Economics text, still on my bookshelf today (in a newer edition.) It was first published in 1948 by McGraw-Hill and has been used by students worldwide ever since. Paul Samuelson, an emeritus MIT professor, has died at age 93.

    Abu Dhabi this morning decided to provide its fellow emirate with a $10 bn loan and the stock market fireworks have gone off.

    Less noticed is another piece of good news. Our neighbor to the south, Mexico, is in recovery. Over 106,000 new jobs were created in Nov.

     A Chanukkah note from Poland. Under the rabbinic rules for the Jewish holiday, you are supposed to light your candles where they can be seen by others to inform them of the miracle. This usually means in a window, but living on the 14^th floor as we do, it is a bit hard to do.

    Back when Solidarity was rallying Poles against the Jaruzelski regime, it was common for Walesa supporters to put their television sets up against the window with the screen facing the glass. This showed their neighbors that they were not watching the propaganda news.

    As the end of the year rolls around, there are some year-end reports to write for you and other publications. The first of them is now about to be posted, about China. It costs $44.95 and is available on the website for sale starting later today.

    The other reports will be about my favorite stocks for 2010. One of my top stocks is featured in the second item for subscribers below.

    *French presidents like grand projects, Grand Louvre, grand Bibliothèque. The current president will launch a Grand Loan raising euros 35 bn over ten years at 26 basis points over what Germany has to pay. This is not good but better than the bite for borrowers from other Mediterranean countries or Ireland. France is paying 3.75%.

    Among the beneficiaries, to the tune of an estimated euros 5 bn, will be Areva, the nuclear power company, which is getting more capital from the govt as well as from the tout-Français firms allowed to buy its distribution subsidiary. ARVCF is grumbling about having to accept lower payments to remain French than was offered by GE and Toshiba.

    *The stock I am keen on is GSK and I have already told you all about how new-broom CEO Andrew Witty has moved research from in-house. Buying into startup pharma and biological companies or their products avoids the costs and politics of trying to find the right areas for R&D within GSK years in advance of results.

    Witty has also moved to focus on growth areas of the world like South Africa, where GSK has taken control of Aspen, China where it has a jv, and now India, where there are rumors GSK is buying into Dr. Reddy NYSE.RDY. Emerging markets, unlike developed countries, are fast growth areas but there are problems

    One is that family-controlled drug-makers have excessive ideas of what their technology is worth. Another is that production of cheap drugs can slip into developed markets unless different formulations and packaging are adopted. GSK has created a whole line of cheap drugs and vaccines for emerging markets which have different packages, labels, dosage, and storage requirements than what goes to the West and Japan. Some of this makes sense, like not requiring as much refrigeration or creating multi-baby vaccination doses. But some of it is also to protect the brand.

    GSK is an “ethical” drug firm and is expected to lose out in the move to generics. But thanks to its full research pipeline, I think it will survive better than some rivals.

T    oday its Belgian biologics sub announced a £105 mn deal with Intercell of Austria to develop patches for vaccine delivery. This can be v. big.

    Its Tykerb (lapitinib) combined with Herptin (trastuzumab) in phase III tests produced a 14 month survival in women with Her-2-neu breast cancer. This is important as some of the traditional vicious chemo drugs are being phased out because of their damage to patients’ hearts.

    Its Bexxar drug against non-Hodgkins lymphoma is now doing well with newly diagnosed as well as more chronic patients. Survival means not only that patients are happy; but that the company selling them the drugs is.

    Analysts have raised their average estimates for GSK to 120.47 pence/sh this year vs actual earnings of 104.7 pence in 2008, according to Bloomberg.

    There are negatives. It was revealed that GSK has paid over $1 bn to settle lawsuits against its Paxil anti-depressant drug since 1993. It has been linked to suicide. This is what “ethical” apparently means.

    Friday GSK lost a ruling in a Phila. Court to keep the Avandia (diabetes) drug papers out of a court case. The definition of “privilege” will probably be tested in appeals courts.

    And Promacta has been withdrawn for treating purpura because of liver damage by GSK, despite its FDA approval.

    This drug business is not as clear-cut and simple as just making products and putting them on the shelf in the market. There are risks even if drugs are a supposed recession-proof non-discretionary growth sector.

    GSK is cheap and gives you a high yield; but is not going to become cheaper unless its management goes imperial again, as under Mr. Witty’s predecessors. Some of that old-time anti-shareholder bonus culture continues to haunt GSK. It is a fallen angel for that reason, and because of fears of U.S. medical insurance reform. Both I think are overstated.

    *Teva also had good news. The FDA removed some restrictions on patients taking its Agilect/Azilect Parkinson’s disease drug. These involve medications like cough syrup or foods rich in tyramine like soya, dried meats, and old cheese, wihich interfere with its MAO-B inhibitor function.

    *My other favorite stock for 2010 is BCE also with the qualities of a fallen angel (more so that GSK), and also giving you a high yield under new-broom management.

    Friday’s news is that Canada has reversed its rules barring a 4^th cell-phone network from the country, hurting existing telco operators like BCE. The newcomer is a sub of Egypt’s Orascom, but it will not be able to roll out its new system outside two areas in time for Xmas 2009. Longer-term, there will be price cutting. But remember, BCE has lots of other businesses. If the stock stays down, buy more.

    *Keppel was given a general boost as analysts decided that the Singapore offshore drilling-rig builder will benefit from the recover. The latest estimates from Bloomberg are for it to earn 73 Singapore cents vs and earlier estimate of 69 cents. KPELY.PK.

    *JP Morgan has raised its estimates for Diageo‘s price to £9.90 vs an earlier estimate of £9.33 but only rates DEO as a hold; it prefers Pernod-Ricard.

     Norway<’s central bank (CB) again raised rates to 1.75% but the assumption now is that another rate hike will not occur until March 2010. The main reason was concern over housing inflation producing a bubble.

     Meanwhile over in China, a central bank survey early in this quarter found that 67% of respondents who live in China think property has become too expensive. And 47% of them complain that consumer prices have become too high.

     Comments an observer with long-term investing experience there: “the guys that run the place are highly motivated that wealth trickle down to the 800 mn Chinese who do not live near the coast.”

     These ‘freshwater Chinese’ who own television sets can see how Chinese near the ocean live. They want the same but cannot afford it.

     Jim Chanos, of Kynikos Fund, the well-known contrarian, gave a CNBC interview in which he expressed doubt about Chinese growth and told the world he was shorting materials whose prices Chinese imports were supposed to boost.

     I am not joining Chanos. I think our observer is closer to the truth; the Beijing oligarchs want to keep Chinese happy and will continue to build and import.

     Another contrarian, Prof. Nouriel Roubini, has put out a tirade against belated gold purchases by central banks in China, Russia, and India.

     For the record, when the CBs last began buying in earnest 11 years ago, the price of the yellow metal started falling. The same thing happened in 1980 when gold had its prior peak.

     The difference this time is that there is a potential risk of inflation which makes gold attractive.

     China keeps coming up and readers are advised that our new China study is available for purchase at www.global-investing.com whether or not you have subscribed to the newsletter.

    A-rated equity investor Leigh Harrison has selected ten stocks which he believes will do particularly well next year. 

     While he warned he expects the UK economy to face a testing time in 2010, he expects markets – which have rallied by more than 50% from lows – to continue to trend upward over the next 12 months.

     Each has cash-generative qualities which he thinks will become more valuable this coming year.

     He also identified a number of stocks which have had a tough time in 2009, but which should enjoy a better 2010 after the businesses were overhauled.

     He notes that an extreme policy reaction has fuelled the recovery of some businesses – such as banks – this year, but with no such action expected in 2010, he said investors’ focus would shift elsewhere.

     Harrison, who runs the Threadneedle UK Equity Income Fund, said: ‘Cyclicals have done well, but there shouldn’t be any more stimulus next year.

     ‘So next year the real hard slog begins and the winners will change.’

Below are his top picks for 2010:

3i Group PLC (III)

BG Group PLC (BG.)

British American Tobacco PLC (BATS)

Capita Group (The) PLC (CPI)

Compass Group PLC (CPG)

GlaxoSmithKline PLC (GSK)

Imperial Tobacco Group PLC (IMT)

Smiths Group PLC (SMIN)

Standard Chartered PLC(STAN)

Tesco PLC (TSCO)3i Group PLC (III)

     To the best of my knowledge he is not a subscriber but three of his top ten are stocks we recommend too. Note that I do not recommend tobacco shares on ethical grounds. So that means three of his top 7 ideas are also mine.

     Here is what he told Nicholas Pater of Citywire, in an article passed on by Canadian reader MF:

Tesco

     The biggest retailer in the country has a steady proposition in the UK, although some analysts have turned more bearish recently after its dramatic price rise, arguing better value can be found among its peers.

     However Harrison is sticking with the stock, citing its strong franchise in growing markets and its international business, which achieved international growth of 12% in the most recent quarter.

BG Group

     Harrison favours BG Group because it too has a strong franchise in a growth market, namely its Liquefied Natural Gas (LNG) operation.

     Harrison said the LNG business should continue to grow, while the company also has exposure to the oil price via its Brazilian operations.

     Given Threadneedle’s bullish stance on the outlook for oil, this was another strong factor in the stock’s favour.

GlaxoSmithKline

     Like the Tobacco companies, pharmaceutical giant GlaxoSmithKline (GSK) has recovered from lows but has not benefitted from the rally in equities anywhere near as much as cyclical stocks.

     The main argument for holding GSK is the same as the tobacco firms, namely that it can generate very strong cash flows and pay dividends consistently.

     The main difference with GSK is that, according to Harrison, it is better value at current levels than BAT or Imperial.

     He said: ‘The tobacco firms are more expensive, so GSK offers a reasonable valuation and terrific cashflow.’

     *Teva was tipped as ‘best in class’ for generics in the coming year by Royal Bank of Canada’s drug analyst, Alan Green, who cited biogenetic opportunities for breakout growth. 

     *Galapagos won another euros 6.5 mn upfront from GSK for its drug discovery program on arthritis developing GST 622. GLPGF of Belgium may get up to euros 40 mn for this product from GSK.

     *GSK began attacking the arms of 2.8 mn little Afghan children who are being given its double polio jabs which have just been approved. The boPV vaccine fights both sorts of polio.

     *Our buddy Paul Renaud is not the only one keen on Thailand. Bank of Nova Scotia and HSBC are bidding for the 7^th largest Thai bank together using a BNS sub. We own BNS shares and HSBC bonds.

     *Deutsche Bank downrated Diageo to neutral from Buy. DEO is the British maker of demon drink.

     *Le Devoir, the Montreal paper, reported (without sources) that China is seeking to derail the Bombardier-Alstom bid for the city’s new Metro cars. It says Zhuzhou Electric Locomotive of Hunan has posted a lower bid to be considered by the city. However, this may just be tit for tat as BDRAF in Q3 won a landmark order for 80 Zefiro 380 railway trains from China’s Ministry of Railways.

This morning I put in two orders to repurchase Barclays preferred shares. I will not tell you which series, because you may get in the way of my lowball offers. But there are at least 4 variants. My reasons follow:

1)     Today’s Barron’s cites Barclays as “vulnerable to decline” because it cannot stabilize its balance sheet.” I happen to disagree, as does the bank’s own management. In a period of near-panic, I do not think CEO Varley would stick his neck out saying Barclays did better than expected, unless it had. We have seen what happens to British bank chieftains if they get it wrong;

2)     Barclays was downrated to AA3 from AA1 by a rating agency. This is still very high investment grade;

3)     Ireland, whose banks compete with British ones, is about to provide a refinancing operation for the surviving Irish bank majors, after takeover of Anglo-Irish. When you bail out one bank in a market with only a few players, you hurt the others. That has already happened in Britain too;

4)     This week’s promised U.S. bank bailout however structured will not include Barclays, just as its purchase of Lehman Brothers could not be accommodated. Barclays is not a U.S. bank and the regulatory process is very nationalistic. Everything put in place to help sick banks sickens their rivals who start out being healthy;

5)     My husband and son both think I should continue the day trading. And I defer to the men in my family, on condition they are older than 8.

*Over the weekend, British newspapers competed in producing high estimates of how many people would be laid off by GlaxoSmithKline. The highest number was 10,000, estimated by the Guardian. GSK has 120,000 employees.

     *Teva won U.S. FDA approval for marketing its oral generic of anti-psychotic drug Risperdal. The ethical version from Janssen sold $78 mn last year.

     *The Financial Times blog published scary material about DryShips which the company’s normally active investor relations contractor failed to send me. The proposed spinoff of the former OceanRig ASA oil drilling company to DRYS.Q shareholders is in difficulty. The parent DRYS may have to keep in house the debt of the offshore drilling unit, now called Primelead unless its banks allow an exception to the loan agreements. DRYS apparent is in breach of half the $3 bn of loans incurred for the takeover the Norwegian deep driller.

     As I said before, I don’t think its bankers really want to run DRYS or force it out of business, so they will try to be accommodating. But now we know why the spinoff, supposed to occur last year, has been delayed.

     Momentum-trackers of Zacks cut DRYS.Q to a 5, sell. It is down sharply today. Maybe I will buy more. In for a penny, in for a pound.

     *Wendy Koh of Citigroup reiterated her buy on Ascendas India Trust, A-ITrust, the Singapore REIT we recommend. She acted despite Citi downrating the parent Ascendas financial services group, whose troubles do not directly feed into the funds it manages. She noted Jan. 9 that Q3 results met expectations with revenues up 7% and higher rents and new openings raising net property 9% year over year. Helping too was a drop in the cost of electricity thanks to the lower oil price. Dividend per unit at S 2.02 cents was up 35% and met her forecast.

     ACNDF.PK occupancy rate on opened Indian commercial properties is 99%, actually up marginally from Q2. Renewed leases are running 86%. These are very healthy levels and indicate that India is not in the same kind of slump as other markets. Meanwhile a bunch of new sites are being developed in Chennai (formerly Madras) Phase III for 1.5 mn sq. ft.; Bangalore retail mall renewal of 500,000 sq. ft this year and next.

     She notes that the sponsors from the fund manager have greatly increased their own stake in Ascendas India, from 17^% to just under 25%. Cash she says at about S$ 35 mnaccounts for 10% of the current low Ascendas India price. Moreover, much of the currency risk is hedged.

     With all that, Ms. Koh reiterated her buy on ACNDF “as a defensive play in Indian property) which yields nearly 15%.

Dateline: Sailing down the Amazaon

The rush to get into safe assets has zapped gold and pushed up the dollar. These combined to push down our portfolio last week. I will not be updating the Model Portfolios because ship-to-shore Internet is painfully slow and costly. But I am pretty sure the animal spirits of investors will rise again if not in the remainder of 2009 (when Window Dressing dominates) then in 2010.

Let me share with you the remarks of David Kotov (of Cumberland Associates) in an interview with CNBC:

“Everybody points at Greece and looks at the Eurozone and says ‘look at the problems’. Greece and California have the same credit rating.

“Greece is 3% of the Eurozone GDP. California is 13% of U.S. GDP.

“So before we throw stones we need to look at both sides of the issue.”

The flight to safety has boosted the dollar from clearly oversold levels. But I do not think this will result in a longer-terms boost for the Greenback, any more than last year’s similar panic buying. The dollar will start to fall if it gets too strong again.

Currencies do not achieve equilibrium. They fluctuate in our floating rate world. That is one reason I do not bet on exchange rates except if I am certain that there will be a push in a certain direction.

For the dollar I see no immediate likelihood of a resumption of its depreciation, but longer term it will go down among other things because this is in the U.S. interest. Being abroad I do hope that the dollar will remain high until I stop spending reais (Brazil); and euros (French Guiana and St. Barts).

As I write this I am sailing about where the Rio Negro, a tributary, has flowed into the main Amazon River. I can see the meeting of waters of different colors from my posh stateroom. POSH goes back to the British who traveled to India: it originally stood for “port outbound; starboard home.” We are on the port side and sailing eastward. Life jacket drill was a breeze as your editor’s cabin has a virtual private staircase to the cabaret lounge where passengers assembled. We never got “past muster”, an term I use without thinking. Had we done so we would have been filing into lifeboats.

This is the second triumph of my trip. The first was finding my suitcase at Miami Airport after it had gone off in a separate direction from its owner on the American Airlines leg from New York. The cruise company rep at the airport, Hector, was supposed to find the case amongst more than 700 pieces of stray AA baggage accumulated in just on very busy day. I told him it was a distinctive and almost unique Burberry check soft roll-on case. This he did not understand so I explained that it was beige plaid. And then called him and the AA lost baggage department (in Texas!) virtually every hour.

Hector has lived in Miami for 14 years since emigrating as a child from Nicaragua and has no accent in English. But, alas, he misunderstood thinking my suitcase was “gray-black”, an interpretation of “beige plaid”. So he could not spot it and too proud to ask. Luckily I did find it in time to schlepp it with me to the next flight from Miami to Manaus.

Manaus is the leading port on the great river, and we had a frantic weekend in the hot, humid sun a few miles from the Equator. Thank goodness I did not have to replace my clothes. The shopping was frantic on the last weekend before Natal as Amerindians hit the town by boat and ferry with their gift lists. Manaus’s hot streets were nearly impenetrable with shoppers. Tackily decorated stores were played the usual carols, top volume, interrupted by the odd firecracker. Pitchmen helped me practice my Portuguese by shouting out news of the bargains and easy payments they were offering, a chorus line of T-shirted young people touted cellphone offers in word and song, and the chaotic mingling cars and taxis tried to warn off jaywalkers with their horns.

Notable sites are mostly from the rubber baron era, before the British figured out how to grow rubber trees in other parts of the world. One must-see is the Teatro Amazonas, the opera house where the nouveau riche gathered in the 19^th century to seek culture. While his lady could wear a low-cut gown, your 19^th century rubber magnate had to sport a frockcoat, white tie, and starched shirt, in an era when there was no air-conditioning. His exploited workers were revenged by what he went through to listen to Melba or Caruso.

The opera house was shipped in prefabricated chunks from Europe up the great river: steel for the structure and staircases from Scotland; marble columns and Murano glass lights and chandeliers from Italy; roof tiles, the theater curtain, and ceiling murals from France. Brazil’s contribution was the wooden parquet floors and the wooden seats.

The other great Manaus site is the Baltard-style Mercado Municipal, also shipped pre-fab from France, the only Les Halles variant left in place. (During his Mayorality, Jacques Chirac had Les Halles torn down to build a shopping mall.) Both the Teatro and the Mercado are being, slowly, restored by the Brazilian government. They are also building a bridge and gas pipeline across the Rio Negro there, quite a task. (I can see them flaring the gas as I write; better to use it.)

News about our companies will follow but first a note about some other developments in the southern hemisphere. Australia’s Competition and Consumer Commission (ACCC) surveyed competitors to make sure there would be no monopolistic growth in bank offerings of wealth management services after National Australian Bank won AXA Asia Pacific with a high bid. Canberra fears that too-big-to-fail banks will dominate financial services in competition with insurers and specialized firms.

This may mark further zeal to regulate banks, and not just in Oz. Unlike the situation elsewhere, the Australian banking sector did not receive a penny from bailout funds. But the regulators are ready to regulate, if not for the sake of solvency for the sake of consumer protection.

News affecting companies in our portfolios follows:

*Having reached new highs (in sterling if not in greenbacks), GSK (Glaxo) may see a reversal this week. Firstly, India has banned advertising for the British drug maker’s cervical cancer jab, treating it the same way as birth control pills. Glaxo disputes this decision.

There is also concern that the world has a surplus of swine flu vaccine which will be returned to the maker. Spanish at-risk populations (mostly in the medical field) are not having their vaccinations and sales are off 15% from estimates. The surplus H1N1 flu vaccine is reportedly being sent back to GSK. Also German inoculations are below estimates. And after a Canadian batch proved to cause allergies (and was withdrawn from the market), South Korea opted not to buy from GSK.

While the US (with different specifications) suffers a flu jab shortage, some European countries may have a glut. If it materializes, GSK can donate or sell the unwanted vaccine to developing countries. But it profits will be nipped.

Luckily GSK was very careful not to price the flu shots at a high level since the buyer in most cases was the government, again a holder of regulatory power.

While there have been some problems getting US FDA approval for GSK’s Revolate against chronic idiopathic thrombocytopenic purpura, the EU has just authorized the drug for both this disease and in other cases: when other drugs have failed, and for people who have lost their spleens in accidents or as a result of surgery.

*Nomura has reassured investors in Diageo with a complex report on monthly booze market trends. While sales are up only marginally in Dec. from Nov. levels, this marks a shift by consumers from ultra-premium to premium brands, not an end to alcohol consumption by humankind. DEO is particularly strong in premium. At this stage the marketing is aimed at retailers and suppliers rather than consumers so media costs are lower which Nomura says will support margin levels. It rades DEO as a buy at GBP 11.50.