The Cross Of Lorraine

Consultant John Llewellyn wrote an email to me. “The present experience in the Euro area is more than a little redolent of Japan: a banking crisis addressed far too slowly; a burst of expansive fiscal policy followed by retrenchment; talk of structure policy reform [with] very little concrete action; deflation looming; and a long multi-year period of slow growth that risks becoming self-sustaining.

“The US under Bernanke looks as if it may – just – have pulled off a recovery. But in Europe, where animal spirits are somewhat less buoyant (part of the national character, I guess), expansivie monetary policy has not prove[n] strong enough to overcome that plus fiscal retrenchment.”

Dr Llewellyn is a founder and partner in London-based Llewellyn Consulting, www.llewellyn-consulting.com, 44-20-7213-0300.

John wrote to me before the European Central Bank cut its deposit rate to minus 0.1%, the first CB to use a negative (sub-zero) rate in the current crisis. The ECB also cut its refinancing rate by 10 basis points and its marginal rate by 35 basis points, both now 0.4% to fight deflationary trends. It aims to penalize banks which place money on deposit with it rather than lending it out.

The theory of Mario Draghi, the ECB head, is to stuff banks with liquidity to force them to lend to borrowers in the real economy. He also said the ECB may act to further cut rates.

While European stocks are up on the Draghi initiative, BNP-Paribas, with an ADR traded as BNPQY on the OTCQX market barely budged.

France is more exercised over a US court planning a huge fine (on the order of $10 bn) against BNP, a giant privatized French bank, for violating sanctions in 2002-9 by laundering money for transfers to blacklisted countries (Iran, Sudan, Cuba, and others) than it is about Russia seizing Crimea. The bank was mistakenly advised by its lawyers that if its US branch was not directly involved in the transfers to outlaw states of US$s, it would not violate US laws and could escape sanctions because it wasn't breaking French or European laws. BNP also will have to stop conducting business in dollars for a time.

Bon appetit. Now Pres. Hollande over a Paris summit dinner will lobby Pres. Obama to violate the US constitutional separation of power by blocking the court actions. Obama said earlier “the [US] tradition is that the president does not meddle in prosecutions.” Bloomberg wrote today: “banks that can't pay the fine shouldn't do the crime.”

France plays its own games. It also bans genetically modified foods to protect its traditional farm industry. It doesn't allow fracking within its borders. Moreover, despite events, France is delivering two Mistral aircraft carriers to Russia under a pre-Crimea contract by Oct., one of which will patrol the Black Sea.

France has a history of being a bad ally, dating back further than De Gaulle's exit from Nato in 1966. Even during World War II, France asserted its sovereignty in petty disputes leading Winston Churchill to remark: “Every man his his cross to bear, and mine is the Cross of Lorraine”, the symbol of De Gaulle's resistance movement when France was occupied by Nazi Germany.

Friday is the 70th anniversary of the D-Day landings, when allied troops fought their way ashore in Normandy with air support limited by the overcast skies. US troops landed at Omaha and Utah beaches and Canadians at Juno beach. Although you might not know it from movies like Saving Private Ryan, troops from Britain, Poland, Norway, and the Free French also were in the invasion forces which ultimately succeeded in beating back the German Panzer tanks.

France, in a momentary break with its history of going it alone, in 1944 was a team player. Even De Gaulle knew he had no alternative.

My husband and I lived many years in Paris, and as is normal there, we would be heckled at times with calls of “Yankee go home”. My husband, actually not a Yank but a Brit, would then quietly ask in his best French if he was to take home the bodies of his uncles, one killed on the River Somme in World War I and the other killed in the retreat from Calais after the German blitzkrieg wiped out the French forces in 1940.

In business life too, France likes to go it alone. I was present at the total purge of management at French government-controlled oil company Elf Aquitaine when Mitterrand took power and wanted to get his hands on its lolly for political use. Loïc Le Floch-Pringent in 1989 was named CEO despite having no experience in the oil industry. That ELF had an American Depositary Receipt trading on Wall Street was of no account I was told at the shareholder balloting. Le Floch was later indicated for fraud in France and imprisoned in Togo in the Putaine de la République affair which also hurt other Socialist worthies.

France is not a team player under either Gaullists or Socialists.

My favorite asset manager, State Street, a US bank with shares I own, likes global investing via index exchange-traded funds. Today it launched 4 SPDR ETFs tracking indexes: SMEZ tracking Euro Stoxx small cap; QEFA tracking MSCI EAFE Quality; QEMM tracking MSCI Emerging Market Quality shares; and QWLD tracking MSCI World Quality. I am not recommending these indexed ETFs mainly because I am not sure what “quality” means in an index-tracking ETF.

In pink sheet trading, companies like BNP-Paribas on the OTCQX are considered to be “quality” on a quality exchange.

More on Brazil, Spain, Canada, Britain, France, Colombia, China, Singapore, and Ireland.

*GlaxoSmithKline is paying fines totalling over $100 mn to 44 US states in settlement of charges it violated state rules in peddling its asthma and anti-depressant drugs. This follows a settlement in 2012 for $3 bn paid at the federal level for illegal marketing operations. The British company did not admit wrongdoing in any of the settlements which date back to the start of the 21st century. The drugs involved were inhaled Advair and Paxil and Wellbutrin. GSK will also end incentive payments to its sales force for encouraging “off-label” uses for its drugs, and to doctors paid to promote its drugs.

Separately, GSK is studying its losmapimod chronic obstructive pulmonary disease (COPD) drug as a fast treatment for acute coronary syndrome (heart attacks) in a phase III study of the 2x/daily oral medicine over 3 months, against placebo. GSK is British. Its earlier heart drug darapladif failed.

*Vale won regulatory approvals in New Caledonia (a Pacific Ocean French territory) to resume its nickel production after an acid spill. The Brazilian iron ore giant will carefully bring on the world's No. 2 nickel line, which covers 16% of world production. Indonesia has blocked exports of nickel ore to encourage downstream investment at home, and the resulting shortage pushed up nickel prices 37% at shortages loomed. VALE should do well in this sideline producing another metal needed for steel-making where 40,000 metric tonnes will be produced at a former French-owned site in Goro, Le Nickel.

*A Fredrik Arnold list (published by www.seekingalpha.com) includes two of our shares among the surviving 8 shares in his non-Dow dogs list. They are Vale and Ecopetrol, based on their dividend yields. Mr Arnold began 2014 with 10 foreign dogs but two fell out by cutting their dividends. I think both EC and VALE are unlikely to slash payouts among other things because they produce raw materials priced in US$s but generated in reais and Colombian pesos.

*Analysts are split over Cameco at Royal Bank of Canada. The bank forecast lower uranium prices for the next 2-3 years because of slow return of Japanese reactors to the market, slashed its price target for CCJ to a range of $18-27 (US). However, RBC Capital Markets rates CCJ outperform with at C$26.

*The beleaguered reps of Barrick Gold, one of whose US sub bonds we own, won over Chilean Diaguita tribal opponents to its mothballed border-straddling Pascua-Lama mine in the Andes by offering to obey strict environmental rules. The mine will also be in less-strict Argentina. However, unless the price of gold hits $1500, the mine remains uneconomic. The Canadian firm has written of $8.5 bn (US) spent on the project so far. Our bond is the 4.4% of May 31, 2012 which has cusip 06849RAF9. Neither euro falls nor crisis in the east have boosted gold prices of late, contrary to my expectations.

*IAM Gold common is up today on news that a wholly owned sub, Trelawney Mining, 90% owner (with Santana) of the Ontario Clam Lake Property, has determined that it holds significant gold at shallow depths. IAG is also Canadian.

*Banco Santander, up 2.5%, hit another 52-wk high.

*Making flight plans within Europe for our late June trip overseas, I discovered an appealing and cheaper alternative to Ryanair, the star holding of our New Ireland Fund. IRL owns the airline both in Dublin and via ADRs to double its weight. The airline I found is called Norwegian Air Shuttle. I immediately informed my sister-in-law of my find and learned that her husband had already flown with this carrier. Not to worry. One of the lesser lights in IRL is CRH, which serves the construction industry not just in Ireland and Britain, but also the USA, with aggregates. Under the new ECB rate cuts, it is expected to do well and the share rose 1.7% this morning.

*Covidien plc of Ireland is covered by 17 brokerage analysts whose consensus forecast on COV is buy.

*Abengoa rose over 5% today on the start of its IPO of sub Abendgoa Yield plc. ABGB is Spanish and has not (yet) topped its April high of $27.33. ABY is raising $600 mn and some high-yield ABGB holdings may be transferred to it in return for cash ABY raises. Mr. Market likes the ipo.

*Global Logistics Properties signed up 3 new companies in China to lease at its parks in Beijing, Shenzhen, and Shanghai: an IT firm leasing 11,000 square meters; a 3rd party logistics firm taking 20,000 sq m; and a global electronics firm 13,000 sq m respectively. GBTZF is Singaporean and also operates in Japan and Brazil logistics and warehouses.

I am worried that Motley Fool Singapore is now seeking 7-baggers, according to David Kuo, one of its reporters. Peter Lynch set out to find 10-baggers for Fidelity funds. Moreover it is easier for a website to get 10x its investments than it is for a huge mutual fund investing more money in the public eye.

*This am Greenwich time I acquired China Chaintek United Co Ltd. (CTEK) shares at GBP 1. They are now 1.06925, having closed at 1.025. No I didn't front-run readers; I put my limit order in later after the close of the Jewish holiday yesterday. I bought the sterling I needed on Monday.

What I didn't learn from Daniel Stewart, the London brokers who tipped CTEK, was that 68% of the shares in the Cayman Islands-incorporated logistics firm are held by institutions and company insiders like Shufang Zhuag and Daniel Lam.

*Do not scorn my housewifely instincts which led to our sale of Tesco. Its UK sales fell 3.7% in the quarter to May 24, losing TSCDY its No. 1 British supermarket position, nipped by Sainsbury and German chains Lidl, Aldi, plus Asda (Walmart) on the cheap end, and Waitrose and Marks & Spencer on the higher one. I have not yet made up my mind about Whole Foods which is also now across the pond in force, but if it is anything like the nearby NYC branch, it is too expensive for my taste and selling fresh produce in London where there are outdoor markets competing with it.

*In an interview with Scott Letter, a publication of Closed-End Fund Advisors, Cohen & Steers global portfolio manager Jason Yablon cited Latin American REITs as a target for C&S's Quality Income Realty Fund. RQI's manager noted that there are no direct ways to invest in REITs in Brazil, where the vehicle doesn't exist, but that Mexican REITs (Fibras) are bursting out all over. Neither George Cole Scott nor Yablon mentioned any Mexican Fibras by name but Fibra Uno (FBASF) was the first to ipo.