Give to Harvard?

Thu, 2014/08/28 - 12:21pm | Your editor

Give to Harvard, Give to Harvard,

With your blood and your sweat.

She needs more, millions more.

Give to Harvard, Give to Harvard,

With your blood and your sweat.

She needs all she can get.

Your editor will attend a family gathering with at least 6 Harvard alumni over the holiday weekend, so we may discuss whether or not to donate to our Alma Mater. Harvard's overpaying its endowment managers is a reason not to give, according to members of the class of 1969 who are preparing for their 45th reunion. Some members of the class of 1969 published an open letter to Pres. Drew Gilpin Faust after they found that compensation by Harvard Mgm in salary, bonuses, and benefits had more than doubled in 3 years to $132.8 mn for FY 2013 (the last for which Harvard has reported). Bloomberg and the Boston Globe got a copy of the letter.

Harvard's expensive investment managers didn't invest very well. Its endowment gained all of 11.3% last year, despite the heavy spending. Meanwhile Yale gained 12.5%. Another Ivy League college, the U of PA, gained 14.4%. Harvard's total endowment closed the FY at $32.7 bn. To quote the alumni, staff salary and benefits were “increasing at a much faster rate than the endowment.”

Harvard is still trying to get back to its glory days before the global financial crisis when it had so much money at hand (nearly $37 bn) that in mid-2008 it planned a Crimea-style takeover of Allston, a town across the Charles River, now backburnered by Pres. Faust, if only temporarily after the endowment fell by $11 bn in the following year. About $1.25 bn was to unwind debt derivatives hit by lower interest rates, and another large sum for getting out of under-water real estate.

It replaced Mohammed El-Erian, an American, who had headed the Endowment for 2 years between two periods as a Pimco senior manager. El-Erian resigned to live in a more congenial California climate. Early this year he was ousted by Pimco's Bill Gross while remaining as a non-resident on the executive and advisory committees of its German parent, Allianz Versicherung. He now also writes a very good widely-syndicated column in The Financial Times.


As forecast, the mere hint of a weaker euro led to boosts in the price of the yellow metal and gold mining shares yesterday. More for paid subscribers including two poorish quarterly reports, one of them published in advance because of my efforts from Britain, Denmark, Hong Kong, China, Israel, Ireland Australia, Singapore, Canada, Portugal, France, Brazil, Argentina, and Ireland. There will be no blog Friday or Monday.

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The Donald and A Buffett-y Israeli

Wed, 2014/08/27 - 11:51am | Your editor


The SEC is planning to allow a wider nickel spread between the trading bid and the ask, called the tick size, to increase market liquidity for small-cap shares traded infrequently. The regulator plans to test the easement for a year with a pilot program for stocks priced at $2 or more which trade less than a million shares/day. The test covers shares which have a market capitalization of under $5 bn.

The SEC will test 4 groups of 400 shares each, with different increments: the first with 5 cents minimum increments for quotation, but trades at any price now permitted; the second with 5 cent minimum increments allowing a few exceptions; and the third with the same increments and exceptions as the second, but subject to a trade-at requirement. A trade-at means more access for small investors because it removes minimum order size limits. The fourth group will be a control, using existing rules at penny bid-ask increments. The idea is to see if wider spreads produce more trading.

The way Wall St. is developing, making markets is not where intermediaries make money these days. They are too busy front running and doing high-speed trading.

When the 21-day period for public comment opens, I would like to make sure that foreign stocks which have low US market cap or trading be included in all 4 categories.

Our most popular article in the last couple of weeks was about how the Israeli Warren Buffett was doing a deal with the daughter and son-in-law of Donald Trump. This has a follow-up today for all you gossip-mad readers. It you are a paid subscriber, it is below; if you are a pre-subscriber with a taste for hot celebrity news, pay for a subscription which may also produce some stock gains to fund your retirement or your autograph collection.

More on this for paid subscribers along with news from Britain, China, Portugal, Singapore, Brazil, Canada, Australia, Israel, Switerland, and the Netherlands.

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Vive la France!

Tue, 2014/08/26 - 11:47am | Your editor

The upheaval in France brings to the fore an economic debate taking place in many countries: whether to launch deficit spending to exit the wake of the global financial crisis, or whether to stick with budget-balancing austerity. In France the issues are not as clear-cut as, say, in the USA. The Japanese 20-yr sag has been studied less seriously across the pond than here.

A French or Euroland anti-deficit hard-line amounts to accepting the policy of Germany's Angela Merkel (AKA Bismarck) while higher government spending (including for social programs which have no stimulus impact on growth and may interfere with it) is considered to be more purely French or European. More spending is the platform of the Socialist left-wing in my countries.

M. Montebourg also added to his red appeal by public attacks on French and foreign business leaders, mostly gratuitous. An element of the French population hates either business or foreigners or both. So populist left and far-right (like Marine Le Pen) like to show how ant-business they are.

In Paris, to criticize balanced budget belt-tightening as leading to renewed recession is not just an economic judgment; it is also a political statement. That is why Arnaud Montebourg had to be removed from the cabinet yesterday in a 2nd switch for 2014 under unpopular Pres. François Hollande.

However, offsetting that move toward hawkishness in France was the statement by European Central Bank president Mario Draghi calling for more stimulus and growth in Euroland. He made these remarks at the Jackson Hole bankers' conference, but they herald new policy in the EU. Lower interests rates, a proto-QE policy of buying longer-term bonds, and above all, a drive down of Euroland exchange rates will offset the rules “Mme. Bismarck” has imposed on the ECB. It will also help businesses which export.

If Draghi's ECB starts buying bonds, particularly longer-term ones, so as to lower borrowing costs and weaken the euro, this should boost business without the capitals, like Paris, having to get into deep deficit spending as Montebourg wants. The ECB can make policy on behalf of the entire euro-block of countries, including Germany, where business surveys show that the outlook is poor despite Merkel's popularity.

Countries facing lower output or negative growth include Italy, France, Cyprus, and (ja) Germany. Annualized H1 growth of 0.1-0.2% (a statistical error?) was reported by Finland, Belgium, and Austria. For the EU as a whole growth in H1 was 0%, down from 0.2% a year earlier. It did not meet the lowball consensus estimate of 0.1%.

Leaving it to the Draghi at ECB depoliticizes stimulus, while removing the temptation to use the money to reward supporters. In France that would mean unions which help finance the Socialist Party of Pres. Hollande. It can prevent rewarding regions or sectors with boondoggles for political ends which might defeat the stimulus being sought. It may even allow a cross-party coalition govt. It will also make some traditional alternative investments more appealing.

Apart from European stocks, on which our writer Harry Geisel is working, we also think that the trend favors more Euroland buying of the classic alternative to stocks and bonds and protector against currency falls, gold.

More for paid subscribers follows along with a quarterly report from France, Canada, Brazil, Israel, Ireland, Mexico, Switzerland, and Britain. There will be no blog on Friday as I am off for the weekend for a family event, and no blog next Monday which is Labo(u)r Day in the US and Canada.

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Portfolio vs Direct Investment

Mon, 2014/08/25 - 12:26pm | Your editor

Your editor is an old friend of Bob Hormats's, so I was curious about the following e-mail I received:

“Larry Edelson predicted a great bull rally in gold just before it exploded to over $1,900 per ounceand now, in his newest video briefing, he's making a prediction that will shock you ...

“Dear Investor,

“It's one of those factoids that experts often overlook ... or misunderstand.

“But it could help make you rich in the next two years.

“It comes from Robert D. Hormats, Under Secretary for Economic, Energy and Agricultural Affairs. He was speaking at the World Investment Forum in Xiamen, China when he said:

'Foreign investment has accelerated at a breathtaking pace and shifts in the flow of this investment are now reshaping the global landscape. We have seen inward foreign direct investment stock [in the U.S.] roughly triple worldwide over the past decade.'

“Did you get that? We're talking about trillions in capital, from all over the world, flowing into U.S. equity markets, driving up stock values.

“It's just one of the reasons why I'm convinced that the Dow will rocket up to 31,000, and possibly beyond, by 2016. This represents the play of a lifetime for you ...”

There is one simple problem with Mr Edelson's commentary. Foreign direct investment doesn't go into stocks on Wall St. That's called portfolio investment. When foreign company funds flow to the USA for direct investing, the money goes not to Wall St., but to Main St. Anyone who ever dealt with balance of payments statistics knows the difference. Bob Hormats, by the way, is no longer at State, but works for Kissinger Associates. He worked with Kissinger when he was at the National Security Council as senior international economist when Kissingr headed it, back in the 1970s. He is now out of govt again.

And as for predicting the price of gold rising to $1900, look at where it is today! You have to know when to hold them and when to fold them. This is gee-whiz marketing aimed at people who have no economic background and are innumerate.

One of large holdings is up 7.7% in the last week according to today's Financial Times. More importantly for long run gains, 4 stocks we sold were among the FT's worst performers last week or last mongh: China Minsheng Bank, Barrick, Tesco, and Nintendo. The listing is only of large-cap shares, and our real forte is small-to-mid-size company picks.

More for paid subscribers follows from Singapore, Ukraine, Russia, Israel, Ireland, Finland, Australia, Japan, and Portugal.

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Tables Posted

Sun, 2014/08/24 - 12:15pm | Your editor

I have just posted the latest performance tables on

Please visit to see the tables you have access to: all three for paid subscribers, and closed positions only for pre-subscribers. To view the spreadsheets more easily, use the printer-friendly button even if you don't want to print.

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Oil and Liquidity

Fri, 2014/08/22 - 11:35am | Your editor

The news from Bloomberg yesterday was astonishing. This July, the US imported 12% less oil (crude and products) than it had in July, 2013, 9.06 million barrels per day (mbpd). In fact, the imports were the lowest in any July since 1995, according to data from the American Petroleum Institute, an industry body. The reason was the surge in domestic crude production.

In July the US produced at home 8.5 mbpd. That was the highest domestic production in any July in19 years, since 1986. And in the prior 6 months, starting in February, another record was hit: the US produced at least 8 mbpd of oil every day.

These record production highs and record import lows are not because US drivers bought less oil, or cut demand. In fact, oil deliveries rose 1.3% this July from last year, and demand for gasoline was up by nearly as much. The figures signal a shift in “black gold” production for our market away from foreign fields, be they OPEC, Canadian, or Venezuelan, and toward the USA.

This marks major macro-economic and geopolitical changes:

  1. US Middle East policy is liberated from the need to maintain the power of Saudi and Persian Gulf autocrats and dictators, the Sultan of Brunei, Siberia, the Caspian Sea coast, Iraq, sub-salt Brazil, Colombia, Venezuela. We still have global interests but they do not include continued dependence on their crude oil;

  2. King Coal has been dethroned. This is bad news for Harlan County where the mines are the chief employer. But a sensible Appalachian development program is affordable if government and the private sector together focus on unmet national needs which the region can fill: elder care, education, wildlife conservation, organic food production, back-office staffing, tourism and sports facilities to name a few off the top of my head. The beautiful hills can also be the site of clean new refineries the US needs to process ligher shale crudes. More US refineries east of Appalachia which can deliver to the US Gulf Coast, Atlantic ports, to the Great Lakes are needed to refine lighter shale crude for eastern US demand and to export refined products rather than crude to major deficit markets, starting with Europe. Kentucky is in the sweet spot;

  3. Oil companies will explore and drill in new regions of the world with geology similar to our Bakken and other tight oil and shale gas sites: Mexico, Indonesia, Poland, Bulgaria, Britain, Colombia, even Ukraine. It is a brave new world out there;

  4. The strong dollar is not a fluke. Lower imports cut the trade deficit sharply, and our normal services surplus count for more. The US June trade deficit in goods (the latest reported) was down $3 bn from the May level of just over $60 bn, a 5% drop. The overall goods and services deficit was $41.5 bn, also down $3 bn because of plummeting petroleum imports;

  5. The current US system of taxation and protectionism in oil needs reform if alternative fuels are to gain or retain a foothold. We do not need solar, nuclear, wind, or geothermal power to cut our dependence on imports. We still need them because of the threat of global warming. So the price of low-carbon energy has to be supported.


More for paid subscribers follows from Jordan, Israel, Switzerland, Argentina, Hong Kong, China, India, Britain, Australia, Sweden, Finland, and Canada plus some vital information on liquidity:

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Tightening Impact

Thu, 2014/08/21 - 12:43pm | Your editor

It is not just the Bank of England where a minority of policymakers support tightening of credit. At our Fed too the hawks are swooping led by Kansas City Fed Chief Esther George. She has no vote at the main Fed.

Fund managers John P. Calamos and Gary Black of Calamos Investments analyze of the prospects for higher interest rates and how they will affect high yield funds:

We present four scenarios that forecast one-year returns for the U.S. high yield bond market in varying market environments. The scenarios examine changes in default rates, recovery rates, spreads, and Treasury yields to depict forecasted returns for the overall U.S. high yield market. These returns do not represent actual performance, are not guaranteed, and serve only to illustrate possible total returns for changes in the four variables. An investor’s actual performance may differ dramatically from these forecasts depending on many factors.

Scenario 1: The economy expands quicker than expected, leading to lower defaults (1.5%), while recoveries maintain long-term averages (40%). With an improving economy, spreads tighten to +300 in this scenario but are offset by 5-year Treasury rates rising to 2.25% as the taper continues unabated and more talk of the first Fed rate hike intensifies. In this bullish scenario, the high yield market generates a hypothetical total return of 6% over the next 12 months.

Scenario 2: Default rates are in line with Moody’s projections (2.5%) and recovery rates maintain long-term averages (40%). In this scenario, spread tightening of 22 basis points to +350 is offset by 5-year Treasury rates rising by 37 basis points to 2%. This scenario generates a hypothetical return of 4.4% for the next 12 months.

Scenario 3: Defaults and recovery rates are the same as [in] Scenario 2 but 5-year Treasury rates ratchet up to 2.5%, while spreads stay fairly constant and widen by 3 basis points to 375 bps. In this scenario, the carry return more than offsets loss from defaults and interest rate increases to generate a hypothetical return of 1.3%, which would generate positive excess returns over Treasurys with comparable maturities.

Scenario 4: In our worst case scenario, the economy does not expand as expected and default rates tick higher to 3.5% while recovery rates decline to 35%. Spreads widen significantly to 600 basis points and five year Treasury rates rally back to 1.25%. In this scenario, the hypothetical return would be -2.9% .

The combination of stable Treasury yields, moderate economic growth and extremely low volatility continues to be supportive of the high yield asset class. We still expect Treasury yields to migrate higher as the year progresses.

(Thanks to Nicolas Bornozis of capital link, publisher of Closed-end Fund Newsletter, for sharing this paper.) In addition to the Calamos closed-end fund group inputs on the USA, we publish more for paid subscribers about other markets today. Plus more from China, Japan, Singapore, Hong Kong, Britain, France, Spain, Switzerland, Finland, The Netherlands, Australia, Israel, Egypt, and Canada.

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Flak and Bleeding Brass in Canada and Finland, Israel and Argentina

Wed, 2014/08/20 - 12:44pm | Your editor


Argentina is trying an end-run which may result in its being held in contempt of court, to avoid having to negotiate seriously with the hold-out hedge funds over its debt. These owners of ~10% of the bonds refused to join in the 2005 and 2010 deals to extend duration and cut yield on the bonds. They had been issued by Argentina under US law during the prior Argentina government of Nestor Kirschner, whose widow, Cristina Fernandez, now runs the country.

Cristina yesterday proposed a law that would make Banco de la Nacion, a govt-controlled local bank, trustee for the refinanced bonds, in place of Bank of NY-Mellon. A US judge has ruled that BNY is not allowed to make payments of $539 mn on the refinanced bonds unless it also paid the holdouts. As a result, no payments can be made, putting Argentina into default. Read more »

Flak and Bleeding Brass in Canada and Finland, Israel and Argentina

Wed, 2014/08/20 - 12:44pm | Your editor


Argentina is trying an end-run which may result in its being held in contempt of court, to avoid having to negotiate seriously with the hold-out hedge funds over its debt. These owners of ~10% of the bonds refused to join in the 2005 and 2010 deals to extend duration and cut yield on the bonds. They had been issued by Argentina under US law during the prior Argentina government of Nestor Kirschner, whose widow, Cristina Fernandez, now runs the country.

Cristina yesterday proposed a law that would make Banco de la Nacion, a govt-controlled local bank, trustee for the refinanced bonds, in place of Bank of NY-Mellon. A US judge has ruled that BNY is not allowed to make payments of $539 mn on the refinanced bonds unless it also paid the holdouts. As a result, no payments can be made, putting Argentina into default. Read more »

Right of Reply in Missouri

Tue, 2014/08/19 - 12:31pm | Your editor

WS, a long time Missourian reader exercised his right of response to my note on Ferguson yesterday:

“I object to the phrase 'schoolboy error.' We in Missouri are closer to the situation than you. Some graduates of my high school, Normandy, the worst high school in the state, with just 8% of students competent in math, still have parents living fairly close to the W. Florissant area; we shopped and played on these same streets before the dysfunctional Missouri tax system rewarded wealthy taxpayers for putting up these massive Cabrini-Green type complexes that breed crime.

“I agree with you, this is not a simple error by the police; it involves tragically excessive force. But let's talk about your wording 'schoolboy error.' Did you see the police video or frames from the video? Is this just a schoolboy error, grabbing the storekeeper's shirt and practically lifting him off the ground?

“This was not just shoplifting.And you are right about the immigrants being amazed. St. Louis immigrants from Korea, Bosnia, and elsewhere have been amazed to discover the risks from working in American convenience stores. They had to bury relatives whose only crime was to work the late shift and were shot by thieves in the convenience store, who like Brown were using force.

“Just to be sure, you wouldn't call those armed robberies that turned fatal schoolboy errors, would you?

“He can vote, he's not a kid. If your kid dropped out of college, hung out at night on the street, was arrested multiple times, and was bullying storekeepers, would you sum this up by saying, 'he's not perfect?' This is a different culture than we had before. But still, I grieve right along with the mom.”

Your editor thinks the Missourian is wrong about the late Michael Brown dropping out of college or having an arrest record as I have not seen this reported. Hedy Epstein of St. Louis, a 90-year-old Holocaust survivor, was arrested yesterday for blocking the entrance to Gov. Jay Nixon's office yesterday. She was protesting the shooting by police of Michael Brown.


We don't currently recommend BHP (dual-listed in the UK and Australia with ADRs on both, BBL and BHP respectively). A strong sell-off followed the announcement that it would spin off assets into a new global mining and metals company, but the Oz version sold off more sharply than the British. Broken Hill Proprietary that was combined with Britain's Billiton in the days when big was big; now they are undoing the merger.


To add your voice against massive addition of antibiotics to animal feed which helps keep down meat prices while adding greatly to the risks that drug-resistant germs will infect human beings, please visit the Consumer Union website,;js


A note called “The Mitzvah Factory” was posted by the Southern Investigative Reporting Foundation on the website to which I also contribute. By Roddy Boyd, it's about a US insurance group and its foundations to help Belzer Chassidic causes. It is outside my remit. News today from Portugal, Australia, Canada, Mexico, Singapore, Brazil, South Korea, and Pakistan.

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