Markets Sinking: Global Report

A year ago my checking account was hacked and I had to open a new account at the same bank. This required hours of work to transfer automatic debits and payments to the new account. Now despite having filed out the forms required to move my US Treasury bond interest payments to the new account, it turns out that this did not apply to the proceeds of a bond maturing. Only Uncle Sam in its search for more work for hillbillies in West Virginia could have split the payment of interest from the repayment of principal.

So today's blog is late because four US T-bonds matured and I had to get a bank official to sign off on the forms I downloaded. My personal bank, whose branch is closing, refused to guarantee the signature and I had to hit Chase, the bank my company uses. Otherwise I would have had to trek to near the NY Public Library where my bank relationship manager has an office.

As I keep saying, I want to go back to the 20th century.

The stock market is being crushed. This is all the fault of China. But I am not sure I agree with analysts like Michael Kurtz (of Nomura), about why China unpegged its currency from ours. I do not think an experiment in free-market exchange rates or “monetary autonomy” is being imposed by Beijing. Freeing up the financial system is not really possible in a country where the government props up the stock market, and where the state-owned banking system is a mechanism for financing state owned enterprises. Together they make investments without economic sense, but which are required to retain traditional political control for the Communist regime and its satraps, Mandarins, and rent-seekers. That many of these actors are corrupt comes with the territory.

Back in 2005, there were good reasons for China to link its renminbi or yuan to the US$. First of all there was a trade surplus. China wants to invest abroad, and it bought US T-bonds just like I did. Then it wanted to stabilize the prices for its necessary imports, notably petroleum, but also metals, which are normally priced in US dollars. Then too it wanted to keep its export businesses humming, which was a lot easier if it could count on steady-Eddie exchange rates.

These justifications have lost their logic since then. China is no longer running the huge surpluses of a decade ago. Its labor costs have risen along with inflation, in part because of the dollar linkage. The prices of raw materials are now responding to Chinese demand (or the lack of it) rather than western country dollar orders. There is more petroleum on the market than buyers can figure out what to do with. China has built out a network of mines and plants in Africa and other emerging markets to get away from the very dollar pricing it sought a decade ago, now proving costly.

And its export prowess is being sapped by Asian competitors which have cheaper currencies than the yuan, in part because they are not handcuffed to the greenback.

A week ago the China Securities Regulatory Authority said while it wants stability in the markets, it also wants them to be markets. Now the Chinese indexes closed a week of drops (except for yesterday) and Chinese share prices are back to their March 2015 level, still doing better than Wall St.

More  from places further away follows, with news from Britain, Switzerland, Israel, Denmark, Mexico, Canada.

Drug Makers

*GlaxoSmithKline is selling its multiple sclerosis drug to Novartis after offloading its cancer drugs last year. The Swiss firm will pay $300 mn plus milestones for GSK's ofatumumab, an antibody, which has only got to phase II trials for MS. The drug was part of the package GSK sold last year, as it also is an oncology drug. It will add another $200 mn when it goes into phase III trials and then up to $534 mn when it hits the market, if it does. NVS is seeking a successor to the MS drug Gilenya it bought last year which will go off-patent in 2019. It already has another possible MS play with secukinumab which has won approvals for treating psoriasis but which may also work against MS.

The target for Swiss NVS is probably the surprisingly robust MS treatment from Teva, Copaxone, now exiting patent but still booking good sales against generics and other MS drugs because patients and doctors are comfortable with it. Moreover the Israeli firm has developed a new 3x/wk regimen in place of the 5x/wk former protocol. TEVA is off today but since Tel Aviv is closed, this may not mean much.

*A study of drug shares by EvaulatePharma found that Novo Nordisk, a specialist in diabetes drugs, beat most big drug firms in H1. Danish NVO's shares rose 40% whereas the majors gained in the single digits or even lost value (GSK stock fell in H1 and is down another 3.5% Friday). We are only here for the dividends.

*Still holding up is Reckitt Benckiser, RBGLY. The UK firm makes OTC drug items and household products.

*Zurich Financial (ZFSVF) is up against a UK Takeover Panel deadline of Aug. 25 for making a firm offer for Britain's RSA, and has called in reinforcements: Evercore Partners and Morgan Stanley. It was forced to make its £5.16 bn offer public because of leaks. However, its Swiss shareholders do not want to see the offer raised to nail down the troubled UK insurer.

*Even Agrium (AGU) and CRH, our stand-out Canada and Ireland stock picks, are in the red Friday. AGU is now below $100.

Fund News

*Fibra Uno (FBASF), the Mexico REIT, is down 3% Friday.

*Now that the Fed may delay the rate hike expected in Sept., the ETF for dollar investors wandering into foreign markets, Powershares USD Bull or UUP, opened off both Thursday and Friday, while foreign currency plays on the euro or the yen are up. However, non-US dollar country currencies are down because most of them are commodity-linked, like the C$ and the A$.

*Pershing Square Holdings(PSHZF) is trading at $25.53 while its NAV is $28.32, a nice discount. However, as a hedge fund it incurs debt which may nip its NAV.