Thomas Piketty's Capital in the 21^st Century won the 2014 Financial Times Book of the Year Award. The FT reviewer found many data problems but economists and businessmen agree with the French economist that inequality today is close to that of the era of Robber Barons. The top 3%, or 1%, or 0.1% or even 0.001% of the population in most capitalist countries owns more assets than the rest. And its share has risen sharply higher. One key reason is that the owners of assets, the rich, gained more from measures to prevent a recession in the wake of the global financial crisis since 2008.

But Piketty dates the rise of inequality earlier. He says that 60% of the rise in US national income since 1977 has gone to the top 1% of US earnings. The only segment of the population which beat the 1% was the 0.01%, and the 0.001% have done best of all. He links the rise in inequality not to wealth but to income.

One comment, from Warren Buffett, is “the lucky sperm club”. But that may not hold.

The Lucky Sperm Club?

Larry Summers noted that in fact the wealth of the very richest heirs wound up falling rather than rising. He dissed the Piketty formula for redistribution (which everyone agrees is unrealistic). Summers wrote that anyone who was among the Forbes list of the top 400 richest Americans in 1982 (near the start of Piketty's 30 years) would still be among the richest if they invested for a mere 4% annual return. But the 2012 top 400 only included 10% of the earlier ones. They weren't top 400 because they consumed too much. Summers also argues that the recent rise of the profit share of national income is not only the result of the Piketty factors but also of globalization and new technology.

But as I wrote yesterday quoting from stock analysts and GMO's Jeremy Grantham, it is still weird when the US rate of return on capital exceeds the rate of growth. Summers says the solution is that over time the lucky sperm club members will spend more than they reinvest and blow their edge. He may be right; he may be wrong.

Business Week, now that it is in the Bloomberg stable (and ran a cover showing not the usual CEO of a major company but Lord Keynes, once a bete noire) in its current 2015 special forecast issue includes several cogent comments from firm free-market capitalists on Piketty's insights.

Rabobank's international senior forex strategist Jane Foley says “rock-bottom” interest rate policies “probably increased the income inequality spread.” She adds: “At the end of the day, who benefits when the central bank buys assets? They tend to be the ultrarich, while at the same time it becomes more difficult to promote economic growth by monetary policy tools.”

Abby Joseph Cohen, the Goldman Sachs investment strategist, attributes the 30-year long concentration of wealth to “educational levels”. “Many good paying jobs [need] people who have better skills.”

The Inequality Trifecta

The best summary is by Mohammed El-Erian, a Bloomberg writer and the chief economic advisor for Allianz (but since early this year no longer advising its Pimco sub). Asked if wealth and income inequality are holding back economic growth, he said:
“It's a trifecta: inequality of income, wealth, and opportunity. We haven't had that combination for a long time. There's a growing recognition that inquality has gone from being pro-incentive—you need a bit to encourage entrepreneurship—to being antigrowth. That has to do with the fact that only the top 3% have experienced income growth, and the marginal propensity to consumer is much lower for the botom 97%.

“The inability to bounce back from the global financial crisis, long-term unemployment, youth unemployment, the extent to which we haven't been able to invest in the educational system, lack of labor mobility and social mobility—all that speaks to inequality of opportunity, a major concern, not just for this generation but for the next. That's new for the US. The US always prided itself on being one of the most equal societies in terms of opportunity.”

My reason for running this commentary is to highlight the degree to which inequality has negative effects for the global economy. Unlike currency trends or even politics, the seemingly inexorable inequality trend is not self-correcting. The tide doesn't go out again and excess is not pulled down by reversion to the mean.

More follows for paid subscribers including a pair of quarterly reports, some hot M&A news, and biotech and pharma updates.

Mixed Results Again

*CAE reported on its FY Q2 and beat on earnings which came in at C$42 mn or 16 loony cents/sh vs prior year's $38.2 mn or 15 cents. However, sales missed estimates at C$529.4 mn, although they were up from Q2 FY2013-4's $478.2 mn. CEO Marc Parent called results “in-line with our outlook for growth in civil and healthcare, and for resiliency in defense”. Civil aviation operating income rose 16% y/o/y. The consolidated unaudited numbers were released this morning.

Backlog fell despite the key JAL pilot training deal signed in the quarter and others with LatAm, Air Algerie, and unnamed others in the Middle East and Asia. Because the CAE-JAL jv goes live only next April, backlog fell sequentially to C$4.813 bn vs prior quarter's C$4.932 bn, which is simply misleading. Defense sales rose 9% y/o/y but were less profitable in terms of operating revenue, presumably because the USAF and Navy, and other contractors in Germany, Australia, and Canada demanded lower prices.

The healthcare business (simulators and audio-visuals for training surgeons and medical personnel) grew 37% from a low base and was earned 7.4% of sales in operating income vs prior year's 2.2%. Drops in non-cash working capital and higher tax rates resulted from changes in the income mix. I think they are mostly one-offs.

I am more worried about the impact of tighter contract terms from US budget-cutting. Another negative is the impact of a lower loony on CAE's US$ denominated debt, which rose ~10% y/o/y. Something like a third of the increase was from the falling C$.

The stock is flat so far today but there may be more moves this afternoon after the conference call.

*Abengoa (ABGB) of Spain reported flat earnings at euros 5.234 mn for the 9 months to date but net income jumped 38% to euros 100 mn. The figures are not really comparable because ABGB spun off Abengoa Yield in late Sept and dropped down some assets to it. The company raised its EBITDA (earnings before interest, tax, depreciation, and amortization) target to euros 885-900 mn, up 6.-8%. Its backlog depends on finance for the spinoff materializing for renewable assets in solar and wind in Spain and Latin America by year end. It expects EBITDA including Abengoa yield to reach euros 1.35 to 1.4 bn. That's the good news.

The bad news includes a cut in revenue forecasts for the full year to a rise of only 1-2%, well down from earlier estimates, to a level of euros 7.4-7.5 bn, mainly from weakness in its key markets, Brazil, and Europe.

Better Benitec and PT

*Although it fell slightly today, Benitec Biopharma has been on a roll lately. In response to pressures from investors and its board (and a bit from me), BTEBY has joined in US biotech congresses and assemblies to help spread the word about its technology for gene silencing through RNA interference. The meetings and conferences have been attended by CEO Dr Peter French and Dr David Suhy, sr VP for R&D. Dr Suhy has taken the lead in arguing that BTEBY's single jab cure for hepatitis C makes more sense than costly long-term drug treatments—if it works. The US phase 1-2 trials for TT-034, a ddRNAi-based potential Hep C cure has now been given to one patient who is being monitored closely, and a second one is waiting for his jab after 28 days of screening.

The current trials are at Duke U and the UC San Diego but other sites will be brought on by the newly named drug development director, Georgina Kilfoil, who has been managing clinical trials for 22 years. The recruitment is slow because the parameters of this first-ever injection in humans are very strict to avoid the risks of interference from other drugs or conditions which may hamper results or even result in adverse events. BTEBY also provided an update on sub-licensee Calimmune's HIV-AIDS clinical trial.

*Another day, another bid for Portugal Telecom SGPS, this time from a US jv of Apax Partners and Bain Capital at euros 7.07 bn ($8.08 bn), beating that of Altice. The bidding war that I have been anticipating since last summer has now well and truly begun. Like Altice, the AP-BC offer excludes African assets and the Rio Forte debt securities belonging to PT. It also includes an earn-out payment of euros 400 mn for future revenue generation and another euros 400 mn linked to future cash-flow (EBITDA.) While the funds and institutions owning PT shares have to report their trades private equity groups don't have to although once they place a bid on the table they are not allowed to add to their holdings, whatever they may be.

*GlaxoSmithKline (GSK)and its partner Ligand submitted an application to the European Union Medical Agency (CHMP) for revolade (eltrombopag, sold as promacta in the US) to treat patients with severe aplastic anemia (SAA) who have insufficient response to immunosuppressive therapy, a rare disease category of which some 40% of those afflicted die within 5 years of the diagnosis. The drug is already approved for SAA in the US. Its main approved use in the US and worldside is to treat thrombocytopenic purpura, and allow patients with chronic hepatitis C to be treated with interferon by treating thrombocytopenia. GSK stock fell sharply, by 7.6% in London trading.

*Galapagos NV has completed recruitment of rheumatoid arthritis patients for its “Darwin” phase 2B trial of GLP0634 (filgotinib), a JAK1 (Janus kinase 1 signalling pathway) inhibitor, after they fail to respond to methodtrexate but continue to take it. The trial tests 3 dose levels taken once or twice daily and is double-blind placebo-controlled (gold standard). The trials should end by next March. GLPGF is still recruiting for the drug as monotherapy for RA and for Crohn's disease. It has another JAK1 inhbitor licensed to GSK.

An anonymous writer on seekingalpha.com says that AbbVie desperately needs GLP0634 as a “blockbuster” successor for itsHumira drug. AbbVie has paid upfront euros 1 bn plus royalties and other payments once the drug reaches phase 3 trials for RA. IMHO the trials are even more desperately needed by GLPGY, the Belgian firm joined by our former Europe-based biotech maven.

Neiges d'antan

*Chris Loew writes to explain more about his call to sell Kubota yesterday. We got $77/sh.

“Domestic sales were off 10% but international increase by the same amount with farm machinery the main gainer. This comes on top of KUBTY's success with small rice paddy tractors, sold to Thailand and China in the past. These markets are now stagnant because of the end of Bangkok rice subsidies and politics with China. A slowing construction boom has also hit construction equipment, partly offset by sales to Britain and Southern Europe.

“Revenues gains but Kubota predicts a 2.4% decline in operating income for FY 2014-5 (ends March).”

*Our China Chaintek which your editor kept despite its being untradeable is up strongly on the news that Singles Day sales broke all records yesterday. Of course all those goods have to be shipped! Its London price is 66 pence this morning despite its being ex-div.

*Mellanox, the Israeli maker of high-speed Internet connections which we sold some months ago, today announced that it had to restate its financial statements going right back to the period when we owned MLNX. It told the SEC that its “internal financial reporting” suffered from “material weaknesses.”

*Medtronic (MDT) and Covidien (COV), both sold, are incurring higher costs to complete a less broad merger as the tax-inversion deal was delayed by regulators in the US, China, and EU. MDT, which I owned before I bought COV, a Minneapolis firm, now has had to borrow $16 bn to complete the deal without tapping the funds it holds outside the US, the original plan.

*Another former holding, Israel Chemicals, today announced that it was sacking many locals and investing outside Israel because of the threat of more Israeli natural resource taxes.

*Electrovaya, EFLVF, a Canadian maker of lithium-ion batteries which avoid risks to unborn babies by how they are made, signed up to sell forklift loading system batteries to WalMart (WMT). We got fed up with the hype at Electrovaya which continues. On Wednesday, an article on this deal was posted on the seekingalpha.com website by an Electrovaya board member and politician.

*Never say never. Yitzchak Tshuva is in Australia for further talks with Woodside Pete which withdrew from a plan to build a gas liquefaction plant over Israeli plans to tax the exported gas. It had planned to buy 25% of the output of the Leviathan offshore field. Tshuva controls Delek Group's offshore gas drilling there and at Tamar field through 2 subs. Globes Israel says the current talks are “for general purposes.” DGRLY may be seeking a non-Israeli partner for Cyprus, Egypt, and Jordan contracts. ISCHF's exit will help DGRLY avoid a similar tax increase.

*Agrium is over $100 in US trading. The company is gaining because of the perception that it is a tech firm as well as a broad maker of plant foods, not just the usual potash. AGU has taken a stake via a sub in CH Biotech, which develops plant nutrition systems. AGU gained, for an undisclosed sum, exclusive world-wide distribution rights to existing and new plant health products and technology and the two companies will do R&D together. AGU earlier took a controlling interest in Agricen, a firm doing biochemical plant nutrition research. It also took on commercialization and development of new soil and plant health nutritional products with Actagro. Despite a spate of inconsistent Canadian research on AGU we stuck with it.

Fund notes:

*Aberdeen Asia Pacific Income Fund, FAX, will pay a dividend of 7.18% this month (3.5 cents/sh, flat) but it will be made up only 56% of investment income (interest and capital gains) and 44% of return of capital, untaxed.

*Its stablemate Aberdeen Global Fund, FCO, will pay 7 cents, which is totally investment income. These figures are subject to change at the end of the tax year. FCO yields 8.14%.

*Market Edge Second Opinion has put a sell on Japan Smaller Cap Fund, JOF, arguing that smaller companies are less likely to be able to export than larger ones. While we added Japan Equity Fund, JEQ, also from Aberdeen, to gain from the boost in Japanese exports, we kept JOF. FEQ is trending up as the latest Abe-nomics whiz is to delay another sales tax increase and hold a snap election but JOF is down.