Chinese Fiat Flops

Global stock markets were Shangai'ed again today. The second Chinese stock crash this week led to circuit-breakers halting trading less than a quarter hour after markets opened in Shanghai, where stock again fell by over 7%. After a 15-minute break, the market fell a total of 7.2% before it was shut for the day.

After the break, Chinese asset managers rushed to the exits liquidating their entire holdings because of a separate pending regulation limiting their ability to sell if shares fall further. Starting on Sat., funds and large investors will be allowed to sell only 1% of their total holdings during the next 3 months.

So Chinese funds this morning engaged in “preventive liquidation” of their entire portfolios, according to Bloomberg.

The yuan currency hit another new 5 yr low. The attempt by Beijing to interfere with markets and control selling was the primary cause of the rapid decline in share prices today. China, a Communist country, is trying to regulate and boost stock markets by executive fiat. This has perverse effects.

The resulting chaos took down other markets with Euro stocks down 3.6% and the FTSE off 2.6% although it recovered later to minus 2%. This pushed Wall Street into the red by 150 points before the opening. However the dollar is on a rise. And again the search for a haven has resulted in a boost to the price of gold.

Among the hard-hit currencies is the Mexican peso which fell to an all-time low against the dollar, at 17.4675 overnight. Other oil and energy producers, like the Northern peso Canadian dollar, are also off sharply. Some of this $ strength is the result of panic over geopolitical trends rather than mere yield-chasing and I expect it to reverse, but don't ask me when.

Beijing must reform its circuit-breaker and intervention systems to stop trying to boost stock markets with edicts. Common sense, and rational incentives rather than Marxist-Leninist-Maoist doctrine would led markets be markets.

A Tobin or transaction tax may be imposed by Iceland to prevent the “carry trade” to stop foreign investors buying Icelandic government bonds to get its 5.75% interest rate. A carry trade borrows a low-yield currency to place the money at a higher rate. About a quarter of Iceland's krona bonds are owned by foreigners.

Yesterday's Wall Street Journal reprinted an AP article about American Future Systems, publisher of business newsletters. AFS was fined $1.75 mn by the US Dept of Labor for violating the Fair Labor Standards Act. American Future employees were not being paid the $7.25 minimum wage because they had to clock out for short breaks to use the toilet. At least one contributor had the idea of offering me an affidavit stating that his free-lance contributions are paid for at current market rates.

We pay our writers the going rate because of $1.75 mn fine would wipe out our company entirely.

More from the worlds of banking, industry, energy, IT, pharmaceuticals, and funds.

Energy

*Oppenheimer analyst James Schumm said Schlumberger will have an edge as oil exploration recovers in H2 thanks to its high quality customer roster. SLB is a likely gainer if Saudi Arabia abandons its possibly self-defeating attempt to force oil prices lower to wipe out US frackers. At this stage both rivals, Iran and Saudi, are producing flat out.

*Apart from the talks over selling gas to BG-Shell for Egypt, and to Jordan, Turkey, and European users, the Delek companies are also negotiating for sale of Leviathan offshore output to Israeli industrial and utility firms. DGRLY.

*Cameco expects to produce 16 mn lbs of U3O8 (uranium concentrate) this year at Cigar Lake of which it will own half. CCJ.

*Cosan is the worst Latin energia stock down over 7%. Brazilian CZZ makes ethanol from sugarcane waste but it cannot compete with $33 oil.

*My account was credited with 1 Ferrari (RACE) share for every 10 shares of FCAU I owned before. I sold my RACE at $46.62 because the share is too racy for me.

War Industry

*Barclays Capital raised Renishaw plc to overweight from neutral today. RSW-London makes calibration equipment used to turn out Apple Watches as well as aircraft, and should gain from the war machine that is coming.

*Royal Bank of Canada upped BAE Systems to top pick from outperform. BAESY makes aerospace-defense equipment. It yields 4.2% and trades at 11.6x earnings. It is rated buy by Cantor Fitzgerald, Société Générale, Berenberg, and Investec.

Software

*In the China debacle, our Tencent fell 4% in Hong Kong before recovering to only down 3%. This fed into a drop in South African Naspers, which owns 30% of TCTZF, down 4.44% which turns out to be a lucky number in India, if not in China. TCTZF; NPSNY.

*Fear of China collapse also took down Finland's Nokia by 2.6% in European trading. NOK should have recovered after the takeover of Alcatel-Lucent was completed but now the theory that it can sell cellular systems to Chinese telcos is causing concern.

To Your Health

*Teva invested to license novel oral poly ADP-ribose (PARP) enzyme inhibitors being developed by NY's Checkpoint Therapeutics (part of Fortress Biotech) to treat triple negative breast and ovarian cancer, and solid tumors. They are CEP 8987 and 9722 respectively. TEVA will acquire world rights to the two when used in combination with other anti-cancer agents for an undisclosed sum but the Fortress sub will have worldwide exclusive rights to commercialize them.

PARP enzymes are used in normal cell DNA transcription and repair, and cell cycle regulation but also contribute to resistance of cancers to chemotherapy and radiation treatment. If PARP is blocked it can result in the death of cancer cells. Fortress buys or licenses develops biopharma businesses and then develops their R&D toward the market, using public and private finance.

*GlaxoSmithKline controlled ViiV is among the new partners of Johnson & Johnson over an injectable treatment for the pill regimen now required to keep HIV in check. GSK partners in Viiv with Pfizer and Shionogi of Japan. JNJ is using its Janssen Sciences Ireland sub to invest in phase III trials of Viiv's cabotegravir in combination with Janssen's rilpivirine. Zacks upped GSK to hold today.

*Reckitt Benckiser (RBGPF) was raised by HSBC to a buy with a GBX 7000 target price (that is British pence, not pounds.) The company makes condoms, household products like dishwasher soap, and OTC drugs.

Banks

*Bank of Nova Scotia is negotiating to sell C$1 bn of vendor and equity financing assets and a possible buyer is Element Financial, also of Canada. These were acquired 20 years ago with purchase of the Roynat unit by BNS which finances small and medium businesses with term loans, leasing, and asset-based lending according to Reuters.

*Old Mutual's Global Investors arm is publicizing its services for the British high-net-worth clientele. Today it revealed that it is cutting exposure to equities to 25% below the level allowed its recently launched “Generation” funds by prospectus, exiting shares from the US, Asia, and European markets.

Eventually fund manager Anthony Gillham wants to be 33% underexposed to equities and hold cash, bonds, real estate, and commodities in their place. The fund also uses futures to manage its portfolio. ODMTY is aiming to focus on the services it provides to rich Britons rather than its banking and insurance operations in Africa.

Fund-amentals

*Canadian General Investments closed 2015 with NAV/share at $24.37, down 7.3% for the year (with dividends reinvested). This beat the Toronto index which had a return of -8.3%. CGRIF had only 2.6% of its assets in cash. Its top holdings were Dollarama, CCL Industries, Canadian Pacific Railways, Bank of Montreal, Franco-Nevada, Element Financial (cf Scotiabank above), Open Text Corp, Enbridge, Royal Bank of Canada, and Gildan Activewear. Its price closed the year at $18.75, down only 2.7% in 2015, but still at a huge discount from NAV.

*I am still working out how to join the Yoma Strategic shareholder trip from Singapore which now will run from March 19 to 21 (3 nights rather than 2). My bank, HSBC, can pay the deposit of S$ 500 by check or cash by Jan. 14 and I can apply for a visa at the Myanmar mission to the UN in New York which provides consulate services. It charges more for a business visa than a tourist one, $36 vs $20 because this country is still in the dark ages. It takes 5 days with applications received in the morning and given out 5 days later in the afternoon. We will stay at the Sule Shangri-La Hotel which sound good, at a total cost of S$920 per person including flights. YMAIF seems to be aiming to stop us doing any real tourism during our stay, a bore as we are coming from very far away.

*SPDR Gold continues to rise with the panic. GLD.

*As is my wont during market drops, I am loading up with XIV, the Credit Suisse inverse VIX daily velocity ETF which goes down with markets and rises when they rise (and fund managers need to offload volatility.)