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Vivian Lewis is editor and founder of Global-Investing.com, the daily blog newsletter for Americans and others seeking to internationalize their portfolios. She brings unique experience and competence to the business of picking foreign stocks.
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A Business Challenge in the Arabian Sands
Frida Ghitis writes: While Vivian explores the castles, convents and Pousadas of northeast Portugal, I will try to fill you in on the investing world from my perch on a troubled land in the jungles somewhere in the Indian Ocean. (More on this tomorrow.) On the way to South Asia I stopped over in the United Arab Emirates, a hub of business activity where the topic of the youm was the threat to the ever-present Blackberries. The popular smart phone, made by Canada’s Research in Motion (RIM) is facing a ban in the UAE, with Emirati authorities openly saying they don’t like the popular RIM device because it makes it difficult to spy on users. In this part of the world – just across the Gulf from Iran, down the road from Saudi Arabia -- security is no laughing matter. Before you rush to judge Emirati security officials, watch the international chain reaction following the UAE’s decision to ban the berry. One by one, other countries are hopping in the bandwagon, saying they, too, are going crazy trying to hack into emails from their country’s Blackberry users. Pity the spies.
In Dubai’s bustling gold souk, at the port, the six star hotels, and the glittering shopping centers, white-robed traders and shoppers expertly tapped their blackberries, pondering if the end was near. This was one more case of geopolitics and national security interfering with business. What better place for that than the Middle East? Even Hillary Clinton jumped into the fray, saying, “There is a legitimate security concern, but there's also a legitimate right of free use and access.” In this part of the world, security trumps privacy, but business may just trump everything. Dubai newspapers showed the voracious free market setting up for a feast. Competing cell operators are offering special deals to lure one million nervous Blackberry users in the UAE. But the men with the RIM cellphones under their Keffiyahs are starting to breathe easier.
Initially, the RIM bosses in Waterloo, Ontario, sounded defiantly proud of their oh-so-secure product. But when the UAE’s decision was followed by news that neighboring Saudi Arabia would also outlaw the handy phone, followed by murmurs that India, too, was pondering a ban, RIM decided to deal. The Saudi rulers have postponed their decision outlawing Blackberries while they discuss installing RIM servers in the Kingdom. Everyone in Dubai now thinks the profit motive will persuade the Canadians to strike a deal with the Emir’s men.
For paying subscribers, now some stock news from the global investment jungles of Brazil, Australia, Britain and Israel.
No Exit by the Glorious 12th
The Fed is not ready for its exit strategy yet. It is certainly not raising interest rates.
Moreover, reversing course, at the Federal Open Market Committee meeting yesterday, the central bank board opted to buy $2.05 trillion of securities, noting that 'the pace of the recovery is likely to be more modest in the near-term than had been anticipated'. The Fed will reinvest principal payments from its maturing portfolio of mortgage-backed securities and agency debt in long-term Treasurys at current levels. For the first time it is using a number target.
The tone of the FOMC statement was more cautious than in June, as soft economic data in the intervening period created fears of a double dip. Unemployment remain stubbornly high, sapping spending. Housing prices are soft. However Thomas Hoenig, president of the Kansas Federal Reserve Bank,opposed the decision to buy T-bills, arguing that the recovery was on track.
The stock market reacted positively, but not very and foreign markets are down today, but not very. The dollar fell modestly but recovered today. Gold sort of went up after a pre-FOMC fall and also reversed in moderate European trading today. Except for farmers in Kansas, it is vacation time, folks.
Tomorrow I'm celebrating the Glorious 12th . There will be no blog, to mark the opening of the grouse-hunting season. Nor for obvious reasons will there be one on Friday the 13th . I am flying off for a 5-day trip to the upper reaches of the Rio Douro (where port wine comes from). Frida Ghitis will be on duty early next week in case something happens while I am in the mountains of northeast Portugal visiting convents, stately homes, castles, and, of all things, a village up against the Spanish border whose inhabitants continued to practice rudimentary Judaism in secret from the 15th century when the Inquisition began in Portugal from Spain right until the 1920s when a Polish-Jewish dam engineer discovered them. Since then they learned about rabbis, cantors, bar-mitzvahs, and gefillte fish.
Note that there also will be no weekend update of our performance tables (for paid subscribers). Apologies to Tom McClellan for again getting the name of his publication wrong yesterday. It is McClellan Market Report and you buy it at www.mcoscillator.com
Fund flow trackers EPFR of Cambridge MA write:
Against a backdrop of disappointing US employment, manufacturing and housing markets data, investors steered their cash into emerging markets funds during early August as they sought protection from the dollar weakness they believe will follow. Flows into EPFR Global-tracked emerging markets equity funds hit a 38-week high during the seven days ending August 4, with global emerging markets equity funds having their best week since late 4Q08, while emerging markets bond dunds took in over $600 mn for the ninth consecutive week.
The prospect of fresh measures by the US Federal Reserve to stimulate credit, which include keeping interest rates extremely low, also helped high yield bond funds and real estate and commodity sector funds post strong inflows and prompted investors to take another look at Europe. The implications for yen-dollar exchange rates, however, ensured another week of outflows for Japan equity funds.
Here is some news from our Canadian, German, South African, Israeli, South Africa, Greek, and Chinese companies.
Waiting for Godot (and the Fed)
Today we are waiting for Godot or the Fed.
Michael Kurtz of Australia's Macquarie Research writes that Chinese demand for empty property units is “perversely rational”
* A Chinese Academy of Social Sciences study making the rounds lately has revived 'China bubble' fears by suggesting that a startling 64.5 mn urban housing units -- one for every four households -- is sitting empty, based on dormant electricity meter readings. Even if these numbers are accurate, fears of a property crash may be misplaced.
* The real risk to China's economy may not be a property price collapse, but the way in which the supply overhang inhibits economic restructuring. To understand why demand for even empty housing units is so resilient, one needs toconsider the poor savings alternatives available to Chinese households.
* Beijing raises funds from households largely via below-‘market' deposit interest rates in the state-owned banking system. The 12-month deposit rate is currently just 2.3%, meaningfully below CPI inflation about to pass through 3.0%, and not even in the same league with first-half nominal GDP growth of 16.7%. So bank savings is a losing proposition.
* This forces households to look outside the banks in search of better inflation-hedged investments. But with China's restricted capital account, savers are mostly confined to a domestic-only palette of alternatives, chiefly property. Local governments also have avoided levying value-based property ownership taxes, relying instead on revenue from land sales to developers -- so thus far the carrying cost of empty units is effectively zero.
…but overhang could inhibit financial & fiscal reform
* These distortions portend at least three difficult eventual reform passages for China's property market: 1) interest rate reform, which would increase returns to bank savings and reduce property's relative attractions; 2) capital account liberalization, which would broaden Chinese households' access to the world of cross-border investment alternatives; and 3) the introduction of value-based property ownership taxes (to reduce local governments' reliance on land-sale revenues), which would impose a carrying cost for empty housing for the first time.
* Tricky as these reforms may prove, each is central to the economic restructuring and efficiency improvement Beijing hopes to pull off in the next few years. So the true risk may be that by having allowed a potential property overhang to come into existence, Chinese policymakers paint themselves into a corner where essential reforms such as financial liberalization and fiscal restructuring seem too dicey to implement quickly. If so, China may be able to keep its firm property market, but at the cost of slower reform.
Michael's article appeared in the Wall Street Journal August 9. Reprinted with permission.
The ADR market is coming back with a vengeance. Here are some wonderful new shares you soon can buy at your friendly local brokerage:
NXP Semiconductors of the Netherlands, NXPI, underwriter Credit Suisse;
Ambow Educational Holdings Ltd of China, AMBO, JP Morgan;
MakeMyTrip Ltd., a travel agency, of Gurgaon, India, MMY, Morgan Stanley;
China Kanghui Hlgs of Chanzhou, maker of medical devices, KH, Morgan Stanley.
And the NYSE began trading Emerging Markets Local Debt Fund (Ticker: ELD). This wonder from Wisdom Tree enables you to buy local-currency-denominated paper (bonds, notes, or other debt) to benefit from the yield advantage for holding rupees or reais or rubles. Of course the yield is paid because of risk. You cannot currently own renminbi, however because of exchange controls, not that that they pay off well, also because of exchange controls, as per the article above. This is not a recommendation.
Writes Tom McClellan, our favorite chartist: “The bond traders who have been looking forward to a Fed announcement about upcoming purchases of additional bonds are going to be disappointed by Tuesday’s post-meeting announcement. The current bond price action seems to be pricing in perfection for both deflation and a Fed response to that deflation, setting the stage for a big tipover once reality comes home.” Tom writes the www.McClellanOscillator.com Today we are waiting for Godot or the Fed.
More for paid subscribers follows from Britain, where I am currently, Brazil, Canada, South Korea, India, Israel, Thailand, and Belgium.
Aligning Interests
Aligning the interests of executives of a company with those of shareholders is the motivation for the welter of forever-cheap share options, piled on overlapping benefits, flower and football allowances, indefensible private jets, stratospheric salaries, multi-generational pension programs, profit-sharing even if there are no profits, all goodies it is now fashionable to pay to top corporate brass. Boards shower senior executives with megabucks at the advice of headhunters and compensation consultants to keep them loyal. Since many board members are themselves top corporate executives they are keeping the payout high also for themselves.
But you cannot buy loyalty. Just in case you haven't noticed, these big bucks do not produce CEOs who are doing their best for the company. In fact, the focus on monetary perquisites attracts to businesses people whose motivations are mainly selfish greed. This has been displayed for the world to see in the most recent top level CEO blow-up, that of Mark Hurd from Hewlett-Packard. Mr. Hurd has departed, taking his options and pension overpayments with him with the agreement of the Board of Directors (why?)
This resignation was over a supposedly non-illicit relationship with an employee of a supplier to H-P. How can a CEO have any relationship with a supplier staffer, however talented and beautiful, without violating the terms of his office? The trysts Mr. Hurd had the ineffable chutzpah to fund out of his H-P expense account.
I do not expect companies to be run by Mother Teresa, out of saintliness and altruism. But exclusively playing the money card to lure in and keep the sinners seems wrong. You get a narrow crude person running your company with all that focus on loot.
Why not appeal to the executive's creativity, a chance to make a mark? Give him (or her) a crack at getting into the Harvard Business School casebooks for doing something well. Appeal to their ambitions to build a reputation. Give them a chance to make their mark. Let them build or repair a firm to become famous. Give them a challenge rather than a windfall.
In my opinion the disconnect between the top levels of the corporate sector and the interests of the very companies supposedly being served is encouraging and justifying state-sector meddling in business. In capitalist countries, there should be much more resistance to the overreaching arm of the government in running things. Statism feeds on the suspicion that the guys running the show are merely interested in lining their pockets.
And while I know I will get dumped on by my readers for saying this, taxing the benefits package at the statuatory rate would help right the balance too. Paying taxes does not necessarily make businessmen less good at their jobs. Today Bloomberg revealed that Sweden, the home of the highest-rate tax regime on earth just finished a quarter in which 80% of comapnies beat the analysts' consensus forecasts for their earnings. Clearly, the top Swedes are doing a good job running companies despite the fact that Stockholm is taking most of their salaries away to fund a panoply of welfare programs.
*More for paid subscribers from Israel, Britain, and Switzerland follows.
The Last Friday in August
This is the last Friday newsletter you will get in August. We may also cut out another day if there is nothing to say.
Yesterday here in London I lunched with a source on Greece who is about to hit the islands for a holiday to be followed by a meeting of the board of a company we recommend. He is surprisingly upbeat about the country's prospects. So too, he told me, are members of the Greek royal family, led by the deposed king, all of whom are buying properties in the country (except His Majesty's sister, Queen Sofia of Spain who already has lots of sunny vacation homes in Spain and is a current royal, not a pretender.)
The Greek royals are Saxe-Coburgs, related to Queen Victoria's consort, Prince Albert, and indeed to the present Queen's Elizabeth's husband, Prince Philip. Later we all went to the National Gallery exhibit about art fakes and learned that Prince Albert first invented the idea of using science to study how paintings were made over the centuries.
My host did not mention company news as we are in a quiet period.
Meanwhile I am not going to try to predict employment numbers, that about which all Wall Street is holding its breath.
More for paid subscribers follows about Greece, Belgium, Britain, Chile, Israel, Denmark, and Canada.
Bad News and Anchors
China's stress tests are proving more stressful than those in the USA or Europe. The Beijing version required that banks test for a 50-60% drop in real estate prices. This has spooked the share prices of China's banks and big property developers as well.
West China Securities analyst Wei Wei (too bad he does not talk Yiddish) told Bloomberg that this shows “that the government won't loosen its curbs on the property market.” Actually, it shows nothing of the sort. It may well be that Chinese authorities turn around and allow real estate investing to resume its growth. There are plenty of factors to support a switcheroo. First there is demand for decent housing. Then too local government authorities are encouraging new developments because they can get paid for the leasing of land for the new homes. And then too China does want to mop up some of that money flowing into its reserves domestically. The regime is not set on a crackdown against building, only against speculation by owners of multiple empty letting properties.
The news service also reported that Kireichow Maotai (a Chinese firewater maker) rose sharply in Shanghai trading today. No it was not the bankers and real estate agents seeking solace; it was because of strong earnings as China's consumers buy something they like to drink.
Meanwhile here in the East End of London, the pubs are falling like flies. At least three in a short distance from Mudchute Manor are now shut in seeking a new tenant or owner. The reasons: first the arrival of lots of Muslims in the area, who don't go to pubs. Then the smoking ban which drove clients away. And finally the downturn in the economy which meant it made sense to invite your friends to your house for a booze-up (and a smoke) rather than paying more to the inn-keeper.
Despite the claims of some rival newsletters, nobody can pick stocks which only go up and never go down. There is a trick we are aiming for, instead. To mostly pick stocks which do not go down. If we can find more shares rising than falling we will get ahead of the market.
More for paid subscribers follows from Israel, Switzerland, Britain, and South Africa.
Lies, Damned Lies, and Statistics
There are lies, damn lies, and statistics. Like about growth comparisons. Here is some upbeat news about Britain and downbeat news about the USA based partly on information from David Smith, the chief financial writer of Britain's Sunday Times (for which I worked 25 years ago).
Wrote Goldman Sachs: Britain “will grow faster than US, eurozone and Japan” after its Q2 growth of 1.1%. The USA grew a disappointing 2.4% in the same period.
My first reaction was “huh?” It turns out that measured in the same way as Britain’s data, USA growth was 0.6%, barely half Britain’s Q2 expansion of 1.1%. Read more »
China and Thailand (2nd try)
Have you eaten rice today? Or steak?
It's not just the Russian drought that is turning our eyes to agriculture. John Baron in The Investors Chronicle, a local stock market mag, writes:
The global population is set to increase from around 6.6 billion at present to 9 billion by 2050, and food demand will grow with it. But the relationship between population growth and increased food demand will not be linear. As living standards improve for hundreds of millions of people in the emerging economies, they are eating more protein. Meat is replacing vegetables. The massive shift we are presently seeing toward urbanisation, particularly in China, is also supporting this change in diet.
Michael Kurtz of Macquarie Securities writes with cautious optimism about China:
With July's start to a new investment quarter (and half), a bit of portfolio rotation into an under-performing market such as China H-shares was inevitable. Still, Beyond the Bund believes the H-share risk-return profile has undergone a substantial rethink over the past month, as shown by relative sector performance: July turned the second quarter's pattern on its head, with 2Q underperformers (mostly cyclicals) becoming the outperformers.
With Beijing's administrative property tightening apparently over, domestic liquidity conditions having improved, and renminbi flexibility offering some needed relief from trade frictions, we believe the balance of risks on HK-listed China equities has gone from negative back to symmetrical – leaving room for multiples to expand further from current still-discounted levels.Equity buy-back should continue…for now.
Elevated portfolio cash balances at a time of ultra-low returns to cash, plus the possibility of additional short covering by absolute-return managers, could drive another leg up for Hong Kong listed China stocks. A view to additional upside also jibes with the results of our latest quarterly China Macro Sentiment Survey, which revealed a shift in China investor appetite toward beaten-down cyclical names, the double-dipper next door.
At the fundamental level, a fairly conservative earnings consensus ahead of H-shares' just-begun 1H10 semi-annual results season could help sustain buying interest in the weeks ahead by leaving room for positive surprises. Market expectations are for “just” 16.8% YoY and 19.1% HoH earnings growth, respectively -- well below recent-years.
Meanwhile Thai stocks are in a formal bull market and are the biggest gainer in Asian major markets. The SET index is now up 20% from its level in May when our then contributor Paul Renaud and I told you to buy Thai. That is the definition of a bull market. Bangkok rose for 9 consecutive days and is now back to the level of May 23, 2008.
More for paid subscribers follows including a sexy update on our newest stock pick, the resolution of a confusion day trying to make out what happened to one of our British shares, news of sorts from Hong Kong and Holland, real news from Canada, and of course more gloating about Thailand.
China and Thailand
Have you eaten rice today? Or steak?
It's not just the Russian drought that is turning our eyes to agriculture. John Baron in The Investors Chronicle, a local stock market mag, writes:
The global population is set to increase from around 6.6 billion at present to 9 billion by 2050, and food demand will grow with it. But the relationship between population growth and increased food demand will not be linear. As living standards improve for hundreds of millions of people in the emerging economies, they are eating more protein. Meat is replacing vegetables. The massive shift we are presently seeing toward urbanisation, particularly in China, is also supporting this change in diet.
Michael Kurtz of Macquarie Securities writes with cautious optimism about China:
With July's start to a new investment quarter (and half), a bit of portfolio rotation into an under-performing market such as China H-shares was inevitable. Still, Beyond the Bund believes the H-share risk-return profile has undergone a substantial rethink over the past month, as shown by relative sector performance: July turned the second quarter's pattern on its head, with 2Q underperformers (mostly cyclicals) becoming the outperformers.
With Beijing's administrative property tightening apparently over, domestic liquidity conditions having improved, and renminbi flexibility offering some needed relief from trade frictions, we believe the balance of risks on HK-listed China equities has gone from negative back to symmetrical – leaving room for multiples to expand further from current still-discounted levels.Equity buy-back should continue…for now.
Elevated portfolio cash balances at a time of ultra-low returns to cash, plus the possibility of additional short covering by absolute-return managers, could drive another leg up for Hong Kong listed China stocks. A view to additional upside also jibes with the results of our latest quarterly China Macro Sentiment Survey, which revealed a shift in China investor appetite toward beaten-down cyclical names, the double-dipper next door.
At the fundamental level, a fairly conservative earnings consensus ahead of H-shares' just-begun 1H10 semi-annual results season could help sustain buying interest in the weeks ahead by leaving room for positive surprises. Market expectations are for “just” 16.8% YoY and 19.1% HoH earnings growth, respectively -- well below recent-years.
Meanwhile Thai stocks are in a formal bull market and are the biggest gainer in Asian major markets. The SET index is now up 20% from its level in May when our then contributor Paul Renaud and I told you to buy Thai. That is the definition of a bull market. Bangkok rose for 9 consecutive days and is now back to the level of May 23, 2008.
More for paid subscribers follows including a sexy update on our newest stock pick, the resolution of a confusion day trying to make out what happened to one of our British shares, news of sorts from Hong Kong and Holland, real news from Canada, and of course more gloating about Thailand.
Trading Alert
It has been a good day on Wall Street and this morning we bought another British smaller cap stocks. Moreover it is up marginally at the close. More for paid subscribers below.