S Musings And Global Markets

For the record, I did not compare Donald Trump to Hitler yesterday. I compared my reaction to his victory to what my parents and grandparents must have felt after the Nazis won the 1933 election in Germany. I carefully spelled out the key differences, that President-elect Trump is neither anti-Semitic nor planning to become a dictator.

“I am so grateful for our country and for all it has given to me. I count my blessings every single day that I am an American, and I still believe as deeply as I ever have that if we stand together and work together with respect for our differences, strength in our convictions, and love for this nation, our best days are still ahead of us.” This is from Hillary Clinton's concession speech and I agree with her sentiments entirely. President Obama, a true gentleman, received his successor at the White House.

The other day I knocked off earlier to go to the dentist and on my way back to Sutton Place there were huge trucks bringing concrete barriers to the edge of the southern side of our local main thoroughfare, E. 57th Street, between Fifth and Park Avenues. Even crossing the street required that you ask permission from a policeman. I guessed it had something to do with protecting Trump Tower which is on the other side of the block from the barriers and the cop told me I was right. He said, “It's to protect Donald Trump from falling over his ego”.

The cop was funny but I think Americans need to do better than that crack from one of NY's Finest. Mr Trump's ego is now satisfied by his winning the White House. And obviously he needs to be protected from demonstrators (so far peaceful) upset by his victory. Get over it. Wherever we were before Tuesday night we now have to get together to do the best we can for the USA. This does not mean giving up on international investing and international security and (what the heck) international marriages, of which Donald Trump our future president has done his fair share (2 out of 3). Trump himself is a relatively international American himself, with his paternal grandparents both German-born and his mother a former Scot.

Many years ago, President Richard Nixon said “we are all Keynesians now.” He was referring to the theory that economic stimulus and running deficits were needed to extract economies from slumps. It has fallen by the wayside since the 1970's mainly because the Republican side of the US used fear of deficits and inflation to justify their dismantling of New Deal social programs. It is not only the Democrat Party side of the aisle which has to recognize that there is now a new normal in US politics and economics. The Republicans too will have to accept deficit spending by their man in the White House.

It is this prospect which has boosted stock markets over the post-election days. Let's see if a Trump presidency can't produced growth for Americans left behind by balanced-budget advocates. I want to be sure to let President Trump try this.

I also would like to give him a chance to reset relations with Russia. However negative his diplomatic positions during the campaign sounded, I expect that our country will continue to support its allies. But whatever our diplomats have done since Michael Gorbachev stepped down, it is clear that it is not the right way forward for dealing with Moscow.

To anyone preparing tax returns (even with a CPA helping) it is obvious that the US tax code is an abomination. Let's see how it can be improved and made fairer. Again there is no reason to stick with the orthodoxies of the past decades going forward. As a beneficiary of some stupid tax concessions and exemptions (as was Mitt Romney), Donald Trump may do better than supposed experts in fixing the mess.

Almost as impenetrable as our tax laws are rules on banking, generating electricity, overtime, and just running a business. Give the new man a chance to examine, simplify, and improve our regulatory overkill. Deregulation is needed. Many current regulations amount to confiscation.

Healthcare needs work. The cobbled-together program to provide it to Americans created by President Obama (with a few nods to Hillary Clinton during her wifely time in the White House) is not the answer, because the costs are way too high for the benefits to American health. So let's give President Trump a crack at reforming Obamacare.

As for naming judges who will reverse Roe v. Wade, for whatever it is worth the people who held their noses and voted for Trump may have been misled by their priests. Trump has supported a full range of positions on abortion, ranging from backing abortion in the first trimester of pregnancy to calling for punishing women who have had abortions. So I think he may not be as firm as the future vice-president on this issue.

A retired elementary schoolteacher neighbor says that she blames the erratic way that Donald Trump handled the debates to a learning disability, probably dyslexia, which he can overcome in office. It was not diagnosed well during my childhood or Trump's. Another famous dyslexic is Charles Schwab, chairman of the eponymous brokerage, who sold $21.015 million shares of SCHW after the election results came in. I hope he's sorry now.

Another company tried to pull the 9-month trick today, by not reporting on the last quarter but instead writing about results from Jan. 1 to Sept 30. This was Veolia Environnement, the French water and sewage giant, which delisted its ADR but which has plenty of US followers. Dow Jones did not restate the earnings using prior releases for the half year as I did yesterday for Bavarian Nordic which has the excuse of being a small Danish share with little US following. VEOEY is a global major in environment and waterworks and I am not willing to cut it any slack.

Pour que cela vaut, in the 9 months it produced revenues down 1.2% to euros 17.7 bn, of course off much more for us dollar investors. Its before tax earnings rose 5.1% to euros 2.2 bn but much of its international business is in Britain where the last quarter would have hurt much more than the first of this year, with sterling down. It also claimed that its margins before taxes rose 7.3% to euros 979 mn and its net earnings rose 8.81 mn, despite lower revenues. This demands more detail. Then to top off funny money it said its net earnings came in up 8.81% to euros 421 mn—but that if you exclude exchange capital gains (qu'est-ce que c'est???) they rose 21.5%.

My reaction is to ditch the stock. VEOEY is not a rinky little Danish firm but a global leader in its sector and the quarterly result may keep the French happy but I want more granular reporting. I told Bavarian Nordic's IR Seth Lewis (no relation) as much after filing yesterday. SELL VEOEY AT $18.

Brazil and US Nationalism

Brazil's Cosan reversed its losses and cut debt and leverage in Q3, but it failed to match analyst forecasts. CZZ reported net income of Reais 328 mn vs a prior year loss of Rs17.2 mn, o5. n revenues which inched up 2% to Rs 11.75 bn. Its cashflow (EBITDA, earnings before interest, taxes, depreciation, and amortization) rose 50% to Rs 1.42 bn. Its free cash flow as a function of shareholder equity hit Rs 908 mn vs a negative 135 mn the year before. Net debt was lowered 3.4% to Rs 11.2 bn and leverage was only 1.9x vs 3.2x in Q3 2015. It also confirmed selling part of its stake in air L-band radar to Thalesand Radar results were separately recorded under “discontinued operations”.

While this boosted CZZ performance, it failed to gain from a sugarcane harvest 6% higher because crush fees collected fell 6% and did not feed into the CZZ bottom line. Moreover the amount of begasse (cane waste) used to make ethanol did not rise either as lower prices fed Brazilians' preference for gasoline.

Note that with its Raizen Combustiveis, CZZ was able to meet that demand and the sub's EBITDA rose 29% y/y. Its highly regulated Comgas ub produced Rs448 mn in EBITDA, up 18% y/y because of greater sales volumes, mostly in the consumer market and to a lesser extent to stores. However, sales to industry were down on economic weakness in Brazil although margins were higher. So far good with a bit of mixed reporting. However, there is more, from Chicago.

Today Zacks writer Brian Bolan of Stocks Under $10 wrote: “Sell CZZ. I know I just bought this stock but it is getting killed today. Nationalism is on the rise so let's invest in something stateside for the time being.” I wrote to Mr Bolan, “Nationalism has nothing to do with selecting investments. You do not sell Cosan at the current price because it is suffering from being 'green' and competes with the Iowa corn used to make ethylene. That boosts the price of meat in the USA.”

Cosan fell 12.2% today perhaps on Mr Bolan's call. That is when you buy more, boys and girls.

However Vale again made a new 52-wk high in London trading up 2.5% to $8.04. Its prefs, sold, are only up 2%.

Israel

Mazor Robotics reported Q3 recurring revenues rose 30% Y/Y to $4.3 mn and its revenues hit $7.6 mn, up 53% y/y. However the revenues missed analyst forecasts of $7.69 mn and 75% of it was in the USA. It lost $5.2 mn in both years. Eps was minus 11 cents/sh vs analyst forecasts of minus 19 cents.

MZOR received seven major orders for its new and existing spine surgery robotic systems-- all from the USA—plus further single system orders from Germany, Thailand, and Australia where it already sold four systems earlier. Orders for a further 15 systems came from Medtronics, its US investor and partner. It also booked another six orders last month after the quarter ended at the North American Spine Society which added to the quarter-close backlog of two systems.

Gross margins fell from 75.9% of sales last year to 65.7% because of a lowball price charged to Medtronics for three demonstration systems, because of higher distributor margins in global markets, and because of a list price reduction for the Renaissance system because of the new Mazor X launch. Operating expenses rose 1.3% mainly from marketing spending and more R&D spend. MZOR plans a major effort in marketing which will require hiring sales reps and these will be funded by Medtronics, its partner in the Renaissance back surgery.

It has cash on hand of $64.3 million including $20 million received from Medtronics in Q3 and $12 million received in Q2.

I missed this result report yesterday for obvious reasons.

Teva rose 3% at the opening today. It is gaining from the removal of fear of price controls and investigations called for by Bernie Sanders, if not by Hillary Clinton.

Delek Group rose because its sub DKL Investments won a bid for offshore exploration license off Newfoundland, Canada. Delek owns 70% of the jv with Navistas Pete which won a 6-yr license to explore Block 7, a 2000 square mile area 4,500 meters below sea level. It can be extended by a further three years if they find oil or gas. The bid was C$48 million ($36 million) and the jv will also have to pay for good works and environmental cleanup.

The overall potential of the offshore area, not for Block 7 alone, is 25.5 billion bbls of oil and 20.6 trillion cu ft of gas. DGRLY.

Canada

The other NAFTA market is also in focus as CAE, a maker of aviation and medical simulators reported C$37.1 million of earnings in its Q2, equivalent of 14 cents/sh. Adjusting for one-off events brought EPS up to 16 loony cents. Revenues hit C$635.5 million missing analyst analyst forecasts of C$664 million.

CAE expects modest growth in defence (sic; that's how it's spelled in Canada) and double-digit percentage growth in healthcare. CAE also forecast total capital expenditures in fiscal 2016-7 to be stable with last year, at C$117.8 million, not counting an additional ~$100 million for the US Army Fixed-Wing Flight Training program which will go live at the end of the FY (Mar. 31, 2017). Management said the estimates are based on the prevailing positive market conditions and repeat customers. This stock, recommended by our Patti the Biotech Maven, is a brilliant performer even in US$s, but even more so for Canadians,up 30% YTD and 26% in the past year, not counting the 1.76% gain it produced in Toronto today.

Agrium made a new 52-wk high (in loonies) up 2.52% today in London trading, mainly because its merger with Potash of Saskatchewan looks like it's getting done before any US crackdown or protectionist measures can be put in place. AGU and POT shareholders approved the merger which is intended to counteract the low prices of fertilizer at present, mainly the result of temporary factors. Farmer states voted heavily for Trump. Ironically enough if forgotten US economic laggards get more pay, this will boost their consumption of food—helping AGU and POT. You cannot grow more soy beans without adding more nutrients to the soil.

Gold-miner Barrick is offering to buy back our ABX bonds (cusip 06849RAF9) and if you want to tender you must do it tomorrow, They will pay back $1000 plus a $30 early ternination premium per bond. No tenders for under 2 bonds will be accepted. The final offer without the extra $30 is next Wednesday, Nov. 16. Payments will be on Nov. 29 which is the “Thereafter tender”. I am not tendering because I like the yield.

Veresen FCGYF closed on its expected 5-yr 3.43%C$350 million senior unsecured medium notes issue today whose proceeds will be used to repay 2-yr notes early, costing 3.95%.

The State of California Dept of Insurance is investigating the use by Valeant of a fake independent specialty drugstore, Philidor, to boost its earnings under former CEO Mike Pearson. VRX is a Canadian tax exile company which tried to settle with the Feds. It is now having to deal with Sacramento.

Mexico

I missed today's Investor Day for Fibra Uno because of overwhelming other obligations. The REIT acquired a plot of land covering 43,607 square meters in Metropolitan Guadalajara (Jalisco) for 440 million pesos. It will be used along with investments of a further 3,928 billion pesos to develop a mixed use development including 225 hotel rooms plus shops and offices, expected to produce an annual net operating income of Ps 492.5 million, a return of nearly 9%.

Mexico is a buy starting with FBASF. I did not buy yesterday because it was going off dividend, but will invest today.

The country's CB and finance ministry held a big confab yesterday morning but did not intervene in markets. Pres. Pena Nieto congratulated Donald Trump and arranged to meet him again before he takes office, aiming perhaps to prove that Mexicans are not rapists and murderers. Mexico will not pay for the Great Wall along the Rio Grande.

Eduardo Garcia wrote in www.Sentidocomun.co.mx about Mexichem, the under-the-radar Mexican multinational chemical firm. He cites it as an example of the fact that 97% of Mexican companies in the stock index South of the Border grew their earnings in Q3 in double digits since Q3 2015. The reasons vary of course but he quotes analysts at UBS as crediting foreign sales accounting for nearly half the profits.

MXCHF, the leading Latin American maker of fluor-plastic tubing (used mostly from agriculture), grew its operating profits by 99% year/over/year, in dollars! It was cited as a buy by Intercam, a stock house in Mexico City despite an explosion in its Pajaritos jv plant earlier this year, operated with Pemex. The disaster, which killed 30 workers, resulted in a huge payment from Mexichem's insurers in Q3, a one-off. But its earnings in foreign markets including European and Latin American ones, and even in Los Estados Unidos will continue because it is meeting market needs.

Financial Crackdowns and Havens

China has banned use by its citizens of ChinaUnionPay (the only Mainland credit cards allowed) to buy Hong Kong life insurance. This is usually done as a way to move cash offshore into a dollar-linked currency by purchasing an annuity policy as an investment. Among those gaining was AIA which while HQ'd in the former Crown Colony was set up to operate all over Asia. About 20% of its premium income, and the same proportion of new business come from the Mainland. In recent quarters AAIGF booked 40% of its policies in Hong Kong itself. Some Chinese still buy these investment products with cash but this is risky and inconvenient. HK:1299/AAIGF is down 4%.

Allianz SE is reporting Morgen fruehbefore the opening and may have something to say about this. AZSEY is German and tomorrow is Armistice Day. It rose today by 2.8% Heute.

India is also cracking down on black money and on the anonymity of gold purchases. The gold loophole is being closed by recording trades, which may expose holders to robbery, but which is standard in most countries. The money loophole is more contentious. Abhimanyu Sisodia writes:

“PM Narendra Modi in a surprise move to curb 'black money' banned using notes of Rs 500 [~$7.50] and Rs 1000 [~$15], requiring that they be converted into wads of 100 rupee notes. ATMs which used to issue Rs15000/day now have a 1000 rupee daily limit. This is an inconvenience as Indians consider queues an alien concept and bank staff will be overwhelmed.”

Today's market action may not reflect a reconsideration of Trump's victory so much as a search for havens, with Japan up 6.7%, Hong Kong up 2%, and European markets up 0.6% (London), 1% (Frankfurt), and 1.1% (Paris.) Gold was sold off yesterday late in US trading but is back in focus overseas. Japanese shares are up because the yen fell below its 200-day moving average yesterday to 106.6 per US$. The main reason cited by Brown Bros Harriman analysts is that US 10-yr bond yields are at a 2 ½ year premium over Japanese ones, of 2.12% and 2-yr note yields at an 8-yr premium of 1.17%. This leads yield seekers to leave Japan and buy still more dollars.

It also leads to more foreigners buying Japanese shares likely to gain from more exports and lower prices in whatever currency they start with.

Rest of the World

Ecopetrol EC of Colombia is down 2.9% today probably in reaction to US talk of protecting our homeland energy sector.

The jv of Golar LNG and Schlumberger Ltd of the Dutch Antilles signed an agreement with British Ophir Energy (an exploration firm) to develop a floating LNG project in Equatorial Guinea. SLB-Golar will own 2/3 of the business. SLB earlier dropped out but it came back after the new partner came in and the total price was halved to $450 mn.

GlaxoSmithKline is down 2.5% today as a likely bounceback from its rise yesterday. GSK is British but earnings are mostly in the USA. It also may have suffered from the realization that in addition to the Feds, there are also US states which look out for drug price gauging (ct VRX above.)

Down also is Roche, RHHBY, but by 1%.

Finnish Nokia which plans to boost its US presence in telephone exchanges rose 3.22% today in Helsinki. NOK here rose half as much.

Banco Santander SAN which will benefit from less US banking regulation (and which is a major foreign player in USA markets) rose 2.89% today in Spanish trading after crashing yesterday. 

Other banks with Latin American business like Bladex and Bank of Nova Scotia also rose. BNS was rated buy by BofA-Merrill Lynch.

Disclosure: None.

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