Gold Gamble from Adrian; Guy and Warren
Long-term readershave met my occasional contact Guy Spier, who like my husband is an Oxford grad. Guy, based in Zurich, manages the Aquamarine Fund, a value investor. My husband invests in the US-taxable variant of Aquamarine, which also has an offshore version. Thanks to this link, I get to join Aquamarine presentation in New York and sometimes get investing ideas from Guy, like our Fiat play which I closed out early this year at a loss after it spun out Ferrari. Selling both enabled me to avoid complicated tax reporting required had I kept Fiat.
Guy is frequently in the news when he talks about the impact of a luncheon he bid for with Warren Buffett on his investing style. But now he is being featured in The New York Times over another matter, the Feb. bankruptcy of Horsehead Holding, a zinc and nickel producer from Pittsburgh. It was valued by auditors KPMG before its filing at $1.1 bn. Now its management is trying to settle for around $330 mn, a valuation writing off its Mooresboro (NC) project to zero. This estimate, by Lazard, would favor the firm's major creditors leaving equity owners like Aquamarine and other foreign funds with a huge loss. So Aquamarine, Hong Kong's Boswell Capital Mgm, whose fund owns 250,000 shares of Horsehead are suing in a Delaware federal court. Over a thousand US retail investors also own Horsehead shares.
And they are getting some traction.
In May, Judge Christopher Sontchi raised questions about the reduced valuation and allowed creation of an equity committee to take part in Horsehead's valuation. This is not provided for under US bankruptcy law, which favors creditors and management over shareholders. The committee then discovered that Horsehead turned down attractive offers for assets received before it filed under chapter 11 in Feb., which greatly exceeded the valuation now put on them. The motive for the lowball bankruptcy filing may have been to get management a percentage of Horsehead shares as an incentive and a possible future IPO of the restructured metals firm later.
Gretchen Morgenstern broke the story in Sunday's New York Times, and her article is a plea for changes in bankruptcy proceedings to protect shareholders as well as debtors and management by giving them a voice in the process.
My husband found the article a bit of a shock as Guy Spier had not told his shareholders about this potential drain on Aquamarine's performance before it appeared in the newspaper. Has Warren Buffett ever tangled with bankruptcy lawyers? Would he have told his shareholders?
Adrian Ash writes from www.Bullionvault.com today that “gold output from Australia, the world's No. 2 gold-mining nation, is hitting a 15-year high in the first half of 2016, defying analyst forecasts of a global slowdown.” He attributes the rise to “the surge in prices from last winter's half-decade lows. That came thanks to 2016 investment demand thanks to professional investors finally realizing” that interest rates will not rise to “any meaningful level.”
He then adds that data from the World Gold Council says that “global demand for gold set a new half-year record between January and June.” “Led by shareholders piling into exchange traded trust funds, investment demand beat even the first half of 2009 as prices jumped 25%, the fastest pace in more than 3 decades in US dollar terms.” Meanwhile consumer demand for gold jewellery, coins, and small bars bell, while mining stocks outperformed even after some of them were hit by profit-taking during the summer.”
Adrian, who runs the bullionvault.com website which advertises on our website, sponsored by the World Gold Council, thinks a chance to buy gold cheaply is coming on Friday. “A strong number will hit gold hard because traders will bet it means a strong chance of the Fed raising rates at its September meeting. A weak US jobs number, in contrast, could fire the autumn starting gun which sent precious metal prices higher in every year of the early 2000s' bull market.”
Meanwhile last week gold posted its biggest weekly decline in a month. And while British markets are closed for the August bank holiday (Adrian writes from London), the price of the yellow metals is rising elsewhere today.
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A First for Paraguay
Today Nemak announced it would buy Cevher Döküm Sanayii, reports Eduardo Garcia from Mexico City. You may well wonder what this is about.
Nemak is a listed Mexican company HQ'd in Monterrey, Mexico'ss largest maker of aluminum auto parts. This MNC is buying the Smyrna (Izmir) supplier of aluminum wheel bases, transmission components, camshafts, supports, and other complex parts to European car firms from a plant in the second largest port in Turkey. While the price has not been revealed, analysts believe it will be around $70 mn which Nemak can apu using its $123 mn of cash on hand. The price may well have been lowered because of Turkish risks, after the failed coup earlier this month.
CDS was founded in 1955 and supplies European auto assembly plants of GM, Ford, Audi, VW, BMW, Fiat, Nissan, Toyota, Peugeot, and Seat. Nemak already operates in Spain, Austria, Germany, Hungary, Czech Republic, Poland, Slovakia, and Russia. Four years ago, Nemak bought J.L. French Automotive Castings of the US giving it US market access, now to be balanced by more European presence. (Eduardo edits www.Sentidocomun.com.mx, a newsletter with which we exchange ideas.)
The deal is scheduled to close this year, probably after the US election where one of the candidates is fiercely negative and rude about both Mexicans and Turkish Muslims and against free trade. This south-south deal between two multinational corporations trumps Trump. Free trade and investment go on despite what the US gets up to.
More for paid subscribers today from The Netherlands, India, Britain, Brazil, Britain, Ireland, Belgium, Israel, and various Latin and European countries including 3 company reports. And a first note about Paraguay ever. I was in Paraguay the last time I visited Argentina and it was a dump, but may be improved by what we report.
Passive Investing and the Composition Fallacy
Brokers Sanford C Bernstein have warned that passive investing is more dangerous to capitalism than Marxism ever was, in a note to investors. Called The Silent Road to Serfdom, it was written by European equity strategy head Inigo Fraser-Jenkins. He charges that “a supposedly capitalist economy where the only investment is passive is worse than a centrally planned economy.” It is also worse than an economy with active market-led capital allocation. Passive investing using exchange-traded funds had collected $3 to 4 trillion in funds by the end of last year. But this investment mode suffers from the composition fallacy: what's good (and cheap) for the individual investor turns out to be bad for the economy as a whole.
Fraser-Jenkins says that “active investment decisions form a crucial part of the capital allocation process in an economy.” So “there is a clear and distinct social worth in their aggregate action.” Marxism tries to do the same thing with planning. The trouble with passive investment is that capital allocation is that the flows of capital to the real economy uses neither planning nor the search for profits. It is therefore sub-optimal... and will end in tears. Thanks to Citywire of London which plans a US newsletter for this note.
After 4 years of negotiation the Colombian government and the leading guerilla movement, the FARC, or Revolutionary Armed Forces of Colombia, have reached a peace accord in Havana, Cuba, which may end 52 years of civil war. The deal still has to be approved by a Colombian referendum, which will be contested by the previous president who opposed the talks. Many Colombians may vote no, because former guerillas who killed and banished opponents now can often avoid jail time and have their civil liberties restored. Current Pres. Juan Manuel Santos, who took over in 2010 and authorized the deal, faces opposition led by prior president Alvaro Urribe. Urribe, whose family suffered murders by the FARC says that guerillas are being given an amnesty which is unfair to the victims.
The rebels have to give up their weapons, and the lucrative cocaine trade, supplier of about 60% of the drug sent to the USA. In addition to Marxism and free love, what kept the FARC going was money from narcotics and kidnapping people for ransom.
We have a couple of stocks for Colombia, discussed for paid subscribers below.
Chile's Atacama Desert, the driest pace on earth, a high plateau, from which astronomers discovered the planet circling Proxima Centaurus, a nearby star in our next-door galaxy, is in the news for a different reason among investors.
The first case of Zika virus in hot and humid Hong Kong was reported today, not caused by a local mosquito, according to the authorities.
We have a stock for that and, because it is not a foreign issue, here's what I know. The New York biotech firm Chembio Diagnostics Inc, CEMI on Nasdaq, today g$5.9 mn and perhaps as much as $13.2 mn to find a rapid point-of-care test for the Zika virus. The grant is form the US Dept of Health's BARDA (Biomedical Advanced R&D Authority). Existing Zika lab tests only work during a brief interval between exposure to the virus and sero-conversion, when the patient develops antibodies to it, after which antibodies show that there was infection. CEMI will use its genetic tests which work before the antibodies develop, using its DPP Zika lgM/lgG assays with a tiny blood sample which shows if the virus is present even if antibodies have not yet appeared. It takes 15 minutes and will help stop the virus spreading from people without symptoms. CEMI also markets early diagnostic tests for HIV. I met some of its managers at a drug conference I was covering in search of foreign ideas. But I don't say no to American stocks.
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Irresistable Kangaroo Express
Your editor, commissioned by an Irish publisher, has completed a commentary on the UK referendum vote to leave the European Union. It covers not only the political and banking sequels of the surprise vote June 24, but also ways to gain from the event and its sequels by investing in selected stocks and yield instruments.
I was surprised by how many reprints this US newsletter has won for its coverage of the Brexit events from places I would consider relatively plugged in to Great Britain like Ireland or Canada.
I went to London for the vote because my British husband (who spent years covering the EU from Brussels and later Paris as a foreign correspondent for the Financial Times and then the New York Times) insisted on voting. The British do not give non-residents an absentee ballot. (The US is barely better.) Despite our different conclusions he liked the report.
In contrast to our usual policy of sharing special reports with paid subscribers, as this 25-page report is being sponsored by an outside firm, we have to charge for it lest we undermine their marketing, mostly across the pond.
However, anyone who subscribes to this newsletter before September 2 or any subscriber renewing in advance will get the $49 report as a bonus. Our site is www.global-investing.com/
Our tech stocks are reporting important developments so we do have the makings of a bare-bones issue today. We have news from Israel, Britain, Finland, India, Mexico, Myanmar, the Cayman Islands, The Netherlands, Canada, South Africa, Hong Kong, China and Germany, including a new stock pick. The headline on this blog refers to the stock.
Schulen in Germany
As I am off to Germany next month to visit my father's high school in Bad Hersfeld and the Mikva (ritual bath) in Rottenburg a.d. Fulda, I have mixed feelings about the creation of new Jewish high schools in Germany. The one in Berlin will soon be a model for the new “Albert Einstein Hochschule” in Düsseldorf. Later another Jewish high school will be opened in Munich.
My first objection is to naming the school after Einstein, who was from Ulm and raised in Munich where he initially attended a Catholic high school before transferring to a secular one. Einstein has become respectable now, but he was not a model student. However he also had nothing to do with Düsseldorf, whose most famous Jewish product was the poet Heinrich Heine, a greater iconoclast than Einstein, who mocked both Judaism and Germany.
Religious affiliated schools were maintained in Catholic parts of Germany, like Bavaria, after unification in 1870. The privilege of running schools was granted to the Catholic church during the Wittelsbach reign which also provided for Protestant and Jewish high schools. Such schools also were created in Berlin. But by high school age, most German children attended secular schools between the World Wars.
In some German towns and villages, there were religious schools for Jewish and Huguenot children, usually only to age 14. These were granted by local minor lords to settle their territory during the 17th and 18th centuries by attracting refugees from France after Louis XIV repealed the Edict of Nantes (no longer allowing religious liberty). Then Jewish schools were founded to lure in Jews escaping from big city ghettos which were overcrowded, and where heavy taxes kept people from marrying.
My mother's area (the Sinnthal, near Schlüctern) was settled by Jews and Huguenots attending separate co-ed “Volkschule” founded by the local ruling family. The Huguenot Dominie was the inspector for the Jüdische Volkschule my mother attended well after Germany had been unified and the Hesse-Nassau ruling family deposed. He would set the children to translating parts of the Old Testament from German into Hebrew and visa versa. The Jewish teaching was strictly Orthodox although the teachers were often secular or even sinners. The Jewish teacher in my mother's village was having an affair with one of the local Jewish women, which everyone knew about, including the kids.
Starting in 1933 when Hitler came to power, a quota of only 1.5% of school and university places was imposed on Jews. The Nuremberg laws Hitler passed in 1935 formalized separate but equal schools and universities for Jews, who were ousted from others. Jewish schoolmasters were sent to concentration camps and the schools and synagogues in the villages and many cities were attacked on Kristallnacht, Nov. 9, 1938, along with Jewish homes and businesses. In 1938 Jewish schools stopped after 10 years. In 1942 Germany Jewish schools were shut and any education at all was denied the pupils.
During the Third Reich, the Nazis could prove Jewish ancestry based on ancestral enrollment in Jewish schools. Being an alumnus or descendant of one led to discrimination and ultimately annihilation. Jewish ancestry could also be detected in peoples' old tax returns where they had volunteered for a religious tax deduction for Jewish schools, Kosher certification, and other community needs.
I am a product of the New York City School system. My father was a product of the German state education system, attending what is called a Gymnasium, a secular school focusing on Latin and Greek for male students who might go to university (as my father never did in his youth.) His sisters attended a Lyceum, a high school where girls were taught modern languages rather than classic ones. They all attended schools with non-Jewish children and learned from each other.
The sex discrimination is gone now. But replacing it with religious separatism seems dangerous, given the arrival of so many Muslims in Germany. The teaching of religion should take place away from the public schools. Mixing children up regardless of their race or religion is better than”separate but equal” schools, and will teach Kinder tolerance of differences, keenly needed in Germany today.
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Trump Prevents World War III
The Trump candidacy is preventing World War III. Seriously. I mean it.
As the dog days of summer wind down the thing I am most terrified of is the guns of August, 102 years after the world stumbled into a devastating world war. Then European rulers failed to think through the impact of decisions made almost automatically. Reacting to China's enigmatic Xin and Russia's recklessly ambitious Putin has to be carefully calibrated to not lead to another dreadful war.
Ironically enough, there is one reason for optimism. The Russian president, who has reshuffled his advisory team, may be restrained, not by the risk of western reactions to his interventionism, but by the fact that he has leverage over candidate Trump. The Republican anti-Nato anti-trade anti-immigrant New Yorker, were he to gain the White House, would back a Russian anti-western agenda. So Vladimir Vladimirovich can lighten up on his support for Bashir Assad and the eastern Ukrainian separatists.
The same for China, given that the real estate magnate owes so much money to the Chinese state-owned banking sector that some might count him as “The Manchurian Candidate”.
Why upset the apple cart in eastern Ukraine or snatch a reef in the Pacific Ocean if you just have to wait a few months to have your man running the USA?
Here is some more counter-marketing about our moves following the global financial crisis:
*We sold India's ICICI Bank at $1.70 and it is now $7.35.
*We sold Allied Irish Bank at $2.89 and it is now $7.13 but it required a refinancing at $0.07. Oh, skip that one.
*We sold Barclays at $13.87 and it is currently $8.48. Oh, skip that one.
*We sold Australia's Westpac Bank at $22.19 and it is now $22.97. Oh, skip that one.
Another Hot Sunday
Today I was woken in the wee hours by a thunderstorm, a follow-up to the one which flooded the neighborhood yesterday, temporarily took out our Internet-TV connectivity, and brought out the fire engines to try to control the rising waters. So as a result I had time enough to do my tables as the Internet was restored.
Visit www.global-investing.com to view our tables. Click for printer friendly viewing.
I made a few technical changes in our tables, like moving a REIT to the funds part of the portfolio, and of course adding a pair of new yield plays as well. The fund pays zero yield but it may come right. More for paid subscribers follows. Join them to make money with our picks.
Today's newsletter is a counter-marketing report.
Because we tend to boast about how we exited some crashed stocks in time, I decided to tell the world about some upward-rocketing shares we exited too soon. What this shows is that my crystal ball is as cloudy as that of any other stock forecaster—sometimes. But thanks to our focus on individual smaller cap companies from foreign lands, we are more likely to win than to lose. Here are some errors:
*Australian wine-maker Treasury Wine Estates, spun out by by Fosters Brewing in 2011, was sold too soon. It has grown its Asia business which led to doubled net profit for the full year to June 30 (the Oz growing season) and the share popped 10%. We left 3 years too soon. TSRYY was a Martin Ferrera pick along with its former parent. Because wine is fun to drink and write about I was too quick to sell.
Buybacks vs Dividends
Should shareholders cheer buybacks or insist of dividend increases? This debate, once confined to the USA where buybacks are common, has now spread to Britain. British firms like a bank, HSBC, a telco, BT, luxury fashion-maker Burberry, and retailer Sports Direct have all announced buy-back programs this year, and with Brexit there may well be more. The UK requires firms listed on the London Stock Exchange to announce each purchase, not the case in the US. Moreover, British companies have to pay stamp duty of 0.5% on these share purchases.
There are plenty of reasons to criticize buybacks, starting with the artificial impact a lower number of shares outstanding has on earnings per share. This often favors executives with options linked to EPS. A particular grievance of some analysts is when companies borrow (cheap) money to finance buying back their shares. This boosts prices in the short-term but it is hard to know whether the impact lasts. Raising a dividend, on the other hand, tells the market that business is growing. Once boosted, it is unusual for companies to then turn around and cut the dividend a few quarters later. (To get around this risk, special one-off dividends may be declared. Even they are more transparent than buybacks.)
Now British brokers Beaufort Securities as done a study of buybacks vs dividends, by comparing two exchange-traded funds: ProShares S&P 500 Dividend Aristocrats (NOBL) and SPDR S&P 500 Buyback (SPYB). A dividend aristocrat is a company which has increased its dividends for at least 25 consecutive years. NOBL holds 40 stocks while SPYB owns the 100 with the highest buyback ratio in the prior 12 months. Both funds were available from Feb. 4, 2015, a relatively short period.
Head to head, the two funds tracked each other closely until the autumn of 2015. Then the returns began to diverge, with NOBL taking the lead.
During Q1 this year, as markets became more fragile, the NOBL lead over SPYB began growing sharply. As of August 1, the share price of the buyback fund was down 2.5% while the dividend increasing fund was up 9.6%. (Data from www.dharesclope.co.uk.)
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