Thursdays are when you want to report your results, especially in the summer when people head off early for the weekend or for August if they are French. So here are two more results published today. As I travel tomorrow and am about to pack up my laptop for the journey, you get another blog today.
How to Share With Shareholders
What is the best way for companies to share with shareholders? Dividends, buy-back, or growth?
Bank of England’s chief economist Andrew Haldane earlier this week called attention to the significantly lowered levels of investment by UK companies—and foreign ones. To keep shareholders off their backs, management deluges them with cash. Money previously used for funding investment today often is paid out via inflated dividends. To prove his point, Mr Haldane said that, a generation ago, dividends absorbed roughly 10% of profits. Today that figure is nearer 70%. He concluded, “we are eating tomorrow’s seed corn”.
He also noted that after WW2, shareholders stayed with their stocks for about 6 years. Today the average share is held less than 6 months.
The seed-corn eaters are led by value investors, retirement funds, and yield-seeking rentiers who can no longer live from their bond yields. US hedge funds in particular attack cash-rich companies to demand that they pay more dividends, as with robot-maker Fanuc of Japan, attacked in the name of corporate governance and shareholder rights. (I own FANUY but kept it out of our model portfolio because I am not sure which side is right in this.)
But there is a rational backing to demanding dividends. Life is uncertain so you want to eat desert first. Growth may come to an end but investors can be sure that their current payouts come from real earnings. Companies moreover do not raise their dividends unless they can be sure that future ones will not fall short.
That is one reason why stock buy-backs are favored as a way to boost share prices rather than dividends. A buy-back does not have to be done again the following year. Buy-backs boost earnings per share because there are fewer shares dividing the earnings, but they are a fake way to achieve growth. To quote Michael Skapinker in today's Financial Times, they are “using the cover of shareholder primacy to put themselves first.”
Real growth performance requires much management time and thinking, to work out the strategies and implement them. It is never a sure thing as conditions and markets can change rapidly. The best growth managers try to find an innovative niche or a potential blockbuster; a new product or way to make an old one; an unmet or unknown need; a new technology or structure; or a way to avoid taxes and raise money more easily. But of course as a result their growth stocks are among the riskiest.
And then there are the stakeholders like employees who are not gaining much compared to CEOs in the 21st century. And moreover, eating your customers is wrong.
Mr Skapinker concludes that the real problem raised by Haldane is that CEOs of big companies are essentially answerable to no-one since the designated boardroom overseers does not control managers. Directors come from the same managerial and business pools and react to the same incentives and therefore leave the exec-suite alone.
More for paid subscribers follows from a few British companies trying strategies different to that of their fellows, plus other news from India, Mexico, Canada, Finland, Israel, and There will be no blog Friday as I will be flying home and recovering from today's huge news load.
Martin Ferera leads off with 2 results, followed by me, and then Abhimanyu Sisodia and then me some more.
The English-Language Press and Others
About 40 years ago my husband left The Financial Times, which he had joined right after college, hired by the legendary Gordon Newton, to join The New York Times from which he retired a few years ago. Last night we dined with a former senior colleague of his from his old paper, and naturally the talk was all about what the new Japanese owners from Nikkei of Japan would do with their new acquisition. Of course nobody has any idea what will happen. Our reporter in Japan has resisted my attempts to extract a forecast from him, if only because he has to maintain good relations with his Japanese colleagues.
Venerable publications do attract buyers.
About 5 years ago, Rupert Murdoch, a second generation Australian media baron, bought the Dow Jones publications, including The Wall Street Journal and Barrons. The deal was ringed around with rules and requirements to maintain their objectivity and independence, to protect staffers from political pressures. These safeguards all mostly fell by the wayside in Year One of Murdoch. However the US arm of the global press empire was spared the scandals over rogue investigations involving phone hacking, sensationalism, and bribing cops that led to editor arrests and the closing down of some of his British tabloids.
Nikkei probably suffers more from the reverse problem: a too great respect for political and business power in Japan. The free-wheeling ways of the English-language business press are not typical in many other countries where press barons and business barons socialize and invest together.
Not just Japan, but most Latin European and Latin American countries have a less independent business or general press than the US and Britain. In foreign eyes, it is almost unimaginable that a Mexican businessman with a block of The NYT shares or a Silicon Valley millionaire controlling The Washington Post or a politician owning Bloomberg nonetheless gives these outfits editorial independence.
What is astonishing is not that Nikkei is buying The FT, but that the seller, Pearson, owned Lazard Freres, an investment bank and it made no difference in how Lazard was written about. At The Economist, where Pearson wants to sell its 50% stake, the likeliest buyers are those holding the other half: the Rothschild bankers, the owners of Fiat, and other moghuls.
More for paid subscribers follows from Switzerland, Britain, Bermuda, Norway, Brazil, Finland, Spain, Mexico, Canada, and Denmark including two company results.
Fragile China stock markets fell further today after extreme volatility during the market day. Analyst Tom de Mark says it will not be over until China retraces the 1929 US stock market crash.
Shanghai closed down 1.7% after falling as much as 5% and rising as much as 1% earlier. The People's Bank of China (their CB) announced that it would encourage pension and insurance companies to invest in stocks, which sounds like a bad idea. It also said it would investment RMB 50 bn into money markets and “use various monetary tools” to boost market liquidity.
In Chinese schools, pictures of Marx, Sun Yat-Sen, and Mao hang on the walls above the blackboard. JP Morgan, who intervened to shore up markets early in the last century is not portrayed. |It is worth considering who gains from Beijing's policies today?
One winner may be the stockbrokers of Shanghai and Shenzhen who are making obscene profits from wild trading and the opportunity to finance margin accounts.
To quote an old Wall Street adage: Where are the customer's yachts?
After delaying the addition of Chinese markets to its index, MSCI now plans to add a dozen Chinese companies like Alibaba, Baidu, Netease, JD, Ctrip and others to an emerging markets tech list now only including Chinese shares traded in Hong Kong. For some reason, MSCI regrets its failure to add Chinese traded stocks to its general emerging markets tracker earlier this summer.
Since many exchange-traded funds track indexes, this will force them to buy some of the Chinese tech high-flyers. So their owners and controlling shareholders will also be able to avoid the results of the sell-off. Analysis showing that some of these shares are overpriced value traps will be ignored by robot funds to copy the indexes.
Where are the customer's yachts?
Adrian Ash, who writes for our advertiser, www.bullionvault.com, notes that Chinese shares have lost far more for dollar or sterling investors than buying gold would have done. As for people who bought gold for euros, yen, or Mexican pesos, they are actually ahead. It might be worth recalling that China shares have been fashionable among investment advisors, while gold is considered to be hopelessly past its use-by date.
More for paid subscribers follows from South Africa, Israel, Britain, Switzerland, Australia, Hong Kong, The Netherlands, Jordan, Dubai, Germany, Colombia, and India including a quarterly report.
Bear In A China Shop
The bear has replaced the bull in the China shop today. Shanghai fell 8.5%; Shenzhen 7%; and Chinext (the small-cap exchange) 7.4%.
The government announced the first arrests over alleged short-seller plots, nabbing one Wang Chuanhua of Yanggu Chua Huatai (whoever he may be) plus 4 other corporate biggies from even smaller companies. This was not enough to stop the rout. Read more »
In cold and rainy London today, it was a good time to update our tables. It is also a traditional bad day in the Jewish calendar. Because the 9th of Av fell on a sabbath this year, it is being observed on Sunday. It is the anniversary of the destruction of the first and second temples in Jerusalem and also, incidentally, the day of the outbreak of World War I, AKA The Guns of August, also according to the Jewish calendar which uses a lunar month to get on track with the sun. So besides falling on a Saturday, the 9th of Av also falls in July this year.
Since my new brokerage account uses local markets wherever possible rather than US marketmakers for American Depositary Receipt shares, I have been working hard at restating our initial prices in moveable currencies. I only updated the HK$ prices in my last tables, because that currency is essentially fixed to the greenback. I am grateful to Chris Loew, our man in Japan, who updated the Yen prices of our shares traded there.
Because this was a major statistical effort, I have omitted figuring out the net asset values of our closed-end funds portfolio this week. I will do it next weekend when I expect to be back in New York with Barron's at my elbow for looking these up easily.
More for paid subscribers follows:
Springing High and Jewish Art
Springer failed to spring high enough and the Nikkei group won control of The Financial Times at the 11th hour yesterday. Walking to the Jubilee underground line heading for “Out of Chaos” the Somerset House exhibit on Jewish art (whatever that may mean) we could see the Reuters ticker tape reporting that the FT had been sold to Axel Springer Verlag, a denial from Springer, and another article saying Nikkei had paid £844 mn, about $1.3 bn yesterday (it's less today), all alternatively circulating the Canary Wharf tower in confusion.
This was about 28x earnings after deductions for pensions, cash, and tax. The high price reflects the Japanese media group's desperation to build out globally from its Japanese base with a shrinking population of investors and people. Nikkei's likely target is the growing US market for the FT. It has 737,000 US subscribers, 70% of them digital, according to the Neue Zuericher Zeitung, and their number rose 30% in the last 5 years.
Back to the exhibit, of works from the Ben Uri collection. It featured not one but two crucifixion paintings, one by Chagall and the other by the unknown (to me) Emmanuel Levy, actually more “Jewish” and I think better, showing Christ wearing phylacteries on his arms and head and wearing a tallith or prayer-shawl.
There was also a wickedly feminist Torah mantle in the form of a transparent woman's body corset by British artist Jacqueline Nicholls, called Torah Imecha, Torah of Our Mothers.
All of which does not answer the question of what Jewish art may be. However, of the 3 art shows we visited in London on our trip (the Whitechapel Gallery new media one; and the Royal Academy of Arts Summer Exhibit) this was the best (and moreover free.)
We also had a Jewish musical experience at St. Alfrege's Church in Greenwich, a performance by strings instrument students of Malcolm Stringer's Suite from the Stetl, written for Yehudi Menuhin. Being a Yecke (German Jew) by origin, I only recognized one of the tunes, a Jewish variant of “Old King Cole” called “Rebbe Abimelech” about the joys of playing the fiddle. Most of the strings music performed was by Bach.
I am not sure why London is featuring so much Jewish arts but I am happy to join in, despite not quite being sure what artists who happen to be Jewish have in common besides that fact.
Wall Street is now formally below where it started 2015, and for all our disasters in Portugal, which I admit were awful, our portfolio is plainly in the black.
More for paid subscribers from Britain, Sweden, Mexico, Canada, Singapore, India, China, Finland, France, Israel, Portugal, Spain, and The Netherlands.
Politics Over Economics
Economists John Llewelyn and Russell Jones of www.Llewellyn-consulting.com of London write on the political risks in Europe, Europe's Tragedy. They begin by summarizing the problem to turn their attention to their subject. “European countries need to learn from the US how to run a large monetary union “:
The Greece issue has been appallingly handled: the latest programme changes little;
The euro area’s present institutions are collectively unfit for purpose;
Enforcing the ‘single country model’ is not the answer;
Europe is at a fork in the road: it will have either to progress or retreat.
European monetary union is bottling up powerful forces, with the risk that ultimately they are unleashed with malign and destabilising results. This is not just our view. It is widespread in the US, an economy that has outperformed since the 2008 crisis.
Some US out-performance has been due to the animal spirits of its entrepreneurs, and its sudden and unexpected transition from net oil importer to exporter. The US is a lucky country. But Europe cannot put all its travails down to bad luck. The differences are too great. After World War II, Europe learned from the US about the institutions needed to manage and develop individual modern, diverse, open economies. Today it would do well to learn how successfully to run a monetary union.
Reform of Europe’s economic institutions, while necessary, will never be enough. For monetary union to be enduringly successful will require not only closer financial and fiscal arrangements, but also political union, including a more ascendant European Parliament and Council of Ministers to provide the political legitimacy for the mutualisation of debt, and a single Treasurer and Finance Ministry to oversee significant transfers from the strong to the weak.
All this implies a significant loss of national sovereignty. But it is becoming clear that major countries in Europe are far from ready to cede this. Mr. Hollande, it is true, has called for political union in Europe. But could he deliver France? And even more fundamentally, does Germany’s Bundestag look like a parliament ready to relinquish its sovereignty?
The euro area (and Europe in general), progressed some way since the over-hasty creation of monetary union in 2000. But it has been a wrenching and piecemeal process, and the danger is that this is no longer enough. The root and branch political reform that is now the priority is much harder to achieve than economic reform. And Europe may not have time on its side. Another large shock, such as a renewed global downturn, could destroy the edifice, as hitherto suppressed, but fomenting, forces erupt.
My husband's first employer, The Financial Times, is up for sale by its owners, Pearson Group, according to Reuters. Potential buyers include financial news giants Thompson (of Canada, which already has a jv with Reuters) and Bloomberg. My first journalist job was with Business Week, now also in the Bloomberg stable.
The only major American novelist I knew personally, E.L. Doctorow, another volunteer to help our Alma Mater, the Bronx High School of Science, has just died aged 84. We did not overlap as students. He left high school when I entered the first grade. But we shared something important: being Bronx-born immigrant offspring attending a selective but free public school system which worked. We both are therefore aware of the importance of history. Doctorow's novels (including his last, Andrew's Brain, which he signed for me at a reading a half-year ago, about among other things 9/11 and W's presidency) always referred to the past, even when set in the past. He also charted a sensible leftish viewpoint on American history, including the very success that Messrs Llewellyn and Jones refer to above. It is not a bad background for writing an investment advisory.
More for paid subscribers follows from London, where I am at present, on Iran, Israel, South Korea, Mexico, Cuba, Britain, Ireland, Australia, and Japan, including a company result and a stock sale, starting with a historic moment:
Your editor met socially yesterday a diplomat involved in the 6-power deal with Iran. I asked him about Ayatollah Ali Khameini saying he would block the ban on nuclear development after year 10. My source says it is not worrying his country because the ayatollah has at most 2 years to live (he has prostate cancer). Khameini cannot run the country from the grave. Western countries expect the future Iranian balance of forces will favor moderation as Iran opens up to ideas that have been banned for decades.
The mutaween enforcing “proper hijab” and separation of the sexes are falling under the pressure of the Internet. The western powers expect that the power of pro-regime bazaaris who got subsidies and tax breaks from the mullahs while also making profits from evading sanctions will be diminished by future greater free movement of goods and ideas into Iran.
But my source admits that the obverse is also true. With western companies rushing to develop oil in Iran, they will become hostage to its political future. And the profits they earn will make it harder for their countries to reimpose sanctions if Iran violates the treaty.
My conclusion: It is not a slam dunk, whatever Messrs Kerry and Obama may think, nor is it a Munich as Netanyahu and many Republicans claim. Like all good treaties, it requires that both sides give something up for something they want.
Now for company news, for the paid amongst you:
The Queen, 6 or 7
Readers want me to comment on The Sun's pictures of Princesses Elizabeth (aged 6 or 7), Margaret, and their mother giving Fascist salutes some 80 years ago. Last year I wrote a review from London of the Great Britain satire about the Murdoch press phone-hacking scandal. In the course of the play the female editor (modeled on Rebekah Brooks of News of the World) is presented with pictures of the Queen playing drums at a Hitler Jugend rally which she has to decide whether or not to publish. An editorial conference votes to print, and in the play this triggers Rebekah's downfall. In real life she got off scot-free.
That the Prince of Wales, David (later Edward VIII) was pro-Nazi is well-known. And that the later consort and queen mother did not understand just what fascism amounted to in 1933 is hardly surprising. If her husband made the home movie before he was George VI is also unimportant. That two little girls would mimic their uncle's gestures is perfectly normal.
Between the wars royals, above all British ones, were anti-Bolshevik because Lenin had murdered their cousins, the Czar's family. They were closely related to dozens of minor German aristocrats and petty princelings, often pro-Nazi or at least pro-German at the start of Hitler's regime.
What saved the royal family from ignominy over the four Hitlerite sisters of Prince Philip (who were not invited to his wedding to the future queen) was his aunt Edwina Mountbatten, the granddaughter and sole heir of a billionaire Jewish financier (also German), Ernst Cassel. She married (and funded) Lord Mountbatten, as well as cheating on him by having an affair with Nehru.
More for paid subscribers follows from Switzerland, Germany, Britain, Israel, Panama, India, Finland, Israel, Canada, Brazil, and Colombia. If you are a presubscriber and want to view a full issue of this newsletter, you can see yesterday's edition at www.,talkmarkets.com/