On Friday, a technical outage took down the OTC markets in the US for over two hours and prices could not be quoted. This kept the recovery in stock prices late in the day from boosting the shares of small caps.

Blue Chip Blues

Meanwhile there is no joy in big stocks. First Dutch Philips Lamps, BritishMothercare, and German SAP, and then American champ IBM, reported rotten results. Blue Chips are in trouble.

The transmission belt to the rest of the market is margin trading. Low margin interest is one result of low interest rates overall. But actually the US Fed has a role in this area: setting how much margin has to be posted for a trade is up to the US central bank. Now that the excesses of optimism about stocks is being deflated for owners of the 2014 version of the Nifty Fifty, they are getting margin calls from supposedly stable and non-volatile shares. That means they have to sell other stocks.

According to today's Financial Times, margin debt peaks are “a precursor to bear runs in the past”. The newspaper says that NYSE margin levels were barely off their peak YTD hitting $463 bn in August (from an all-time high of $466 mn in Feb.) In unwinding positive positions, the borrowers spread the contagion.

It's not over yet. There is still Ukraine, Ebola, Hong Kong unrest, deflation in Europe, and stock slumps to worry about. It may be time to think again about that classic safe haven, gold. Adrian Ash writes that it is not that simple:

The Case for Gold

“As the stock market slumps, gold's unique appeal stands out again, Gold has risen nearly 4% so far this month. Major world stock markets have dropped up to 10%. Hot-money hedge funds pile back into gold futures and options. Headline writers proclaim the return of 'safe haven' gold.

“If you want insurance against wars, plagues, or financial woes, a lump of metal won't work. But if you want to insure your own savings, reducing losses, and boosting long-term returns, then history says gold really can help.

“Over the past 4 ½ decades, gold has risen in each of the 5 years when the S&P has lost 10% or more, averaging 34% gains. Adding gold to a standard portfolio split between equities and bonds would have reduced your risk and boosted your returns as well.

“Short term gold often leaves pundits and hacks scrating their heads. When the US stock market tanked, in short order gold often went with it.

“The S&P 500 index on 8 occasions since 1969 [sank] 10% or more in one month. Gold has fallen alongside it 4 times, including the Lehman's crash of October 2008, and lost a monthly average of 4.5% overall.

“Longer term, beyond the horizon of newspaper headlines, gold haa helped smooth losses and boost returns.

“Start with a simplified model of 60% in US shares and 40% in Treasury bonds. Since 1969, that has earn[ed] 9.7% annualized with a maximum 1-yr loss of 14.2%.

“Switching 1-tenth of your money into gold and holding 55% stocks, 35% bonds, and 10% gold would have earned 10% annualized with a maximum 1-yr loss of 12.8%. Equity dividends and bond interest are included but [not transaction costs or ] taxes. You rebalance to keep your target allocation each new year.

“Or go plumb crazy and put 20% of your savings into gold. Your split of 50% stocks, 30% bonds, and 20% gold would have earn[ed] 10.1% annualized since 1969, with a maximum 1-yr loss of 11.6%.

“According to regulatory warnings, the past is no guarantee of the future.”

World Gold Council Line

Adrian Ash is head of research at www.Bullionvault.com, our London-based advertiser, which offers a cheap and taxable way to buy and hold physical gold. His data on adding gold to a portfolio is based on studies by the World Gold Council, which owns shares in bullionvault and the SPDR Gold ETF, GLD.

When it ran out of water because of drought, we sold our Saneamento de São Paulo state-controlled waterworks shares. Now cornered by revelations of corruption at Petrobras, which funded her party under her watch, Pres. Dilma Rousseff is using the SBS water supply cuts to attack Aécio Neves, her opponent in the Oct. 26 runoff vote. Neves heads the state govt of São Paulo which sought to cut water consumption by offering price breaks for people and industry using less. She may get away with it as the latest polls show the race is neck and neck. Unlike corruption, droughts are Acts of God. 

New Pipeline

Across the eastern edge of Canada a new pipeline is growing, Energy East. It is an alternative export route for Canadian Athabasca oilsands to the still-contentiousKeystone XL which would head for US Gulf ports, and will remain totally on Canadian soil on its way to St John, New Brunwick, a distance of over 3000 miles. The Energy East partners are TransCanada and Irving Oil. It will handle only about 1/3 as much heavy crude as Keystone and will cost more to build. With other alternatives ranging form safer railway oil-shipment tankcars to an export port in Hudson Bay, all plans depend on the price of oil not falling as far as anticipated Saudi Arabian oil chiefs, to $80.

What this means for one of our stocks is discussed below.

*Canadian small cap Pure Technologies, PPEHF, is hurting because it was to create sensors to find leaks in the Keystone XL pipeline which may never be built. Despite this negative, PPEHF is still riding high in its main business, water transmission pipeline inspection. It won a 5-yr $20 mn contract from Baltimore MD to inspect water and waste pipelines in the city and Baltimore County, a follow-up to work in this area for nearly a decade. Baltimore will use its patented leak detection and pipeline integrity assessment technologies using acoustic and physical monitoring. PUR in Toronto.

Oil Pipeline Reversal

*Delek Group yesterday announced that two subs had signed a letter of intent to negotiate to supply natural gas from the offshore Israeli Tamar field to Egypt by reversing the flow of the Trans-Sinai pipeline of East Mediterranean Gas. Subject to a binding agreement, the Israel firm (headed by billionaire Yitzchak Tshuva, a Misrahi Jew of Libyan ancestry) will ship 250,000 mn BTU of gas daily for 7 years from Askelon, where the gas can be landed. It is intended for industrial use and the price will be linked to that of a barrel of Brent oil, but with a floor. The buyer is Dolphinus Holdings, a consoritum of major Egyptian industrial and commercial gas consumers, distributers, and businessmen. Delek subs control 31.25% of Tamar whose leading 36% shareholder is Noble Energy (of Texas). (Ha'aretz got the percentages wrong today.)

This is addition to a deal to sell 4.5 bn cu m of gas for 15 years to Union Fenosafor its LNG plant in the Egyptian Nile Delta. Fenosa is a jv of Gas Natural of Spain and ENI of Italy. Jordan gets 1.8 bn cu m over the next 15 years as well.

*Zurich Insurance, a pink sheet stock in the US, was strongly tipped in today'sBarron's by staff Europe reporter Jonathan Buck who told the story of the CFO's suicide (which led us to double up on the share before selling half to restore it to normal weight after it rose ~5%.) The stock sports a 6.3% dividend. His sources say the stock can rise if on Nov. 6 with its quarterly ZURVY gives shareholders a higher payout and perhaps forecasts higher earnings for the rest of this year and next. It has a lot of surplus capital it can pay out without affecting regulatory or prudential limits. Excess capital tends to draw hedge fund managers aiming to extract it for themselves and other shareholders. But perhaps not in Switzerland.

*Unfortunately Mr. Buck used Allianz figures to make the case for ZURVY. I omitted the ticker symbol for AZSEY in the weekend table by error. It will be corrected. Allianz pays only 4.4% in dividends but its p/e ratio is 8.7 vs 9.7 for ZURVY. With the kerfuffle over Pimco, the share is lower. However Allianz has higher operating margins than Zurich, at 9.7% and higher net margins of 6%. We own both. Its last quarterly reports, before the Gross walkout, showed revenues up 10% to euros 2.73 bn, with operating income up 17% to euros 1.96 bn. For 2015 it expects operaing income to come in at euros 7.9 bn to 9.1 bn. More on Allianz below.

*In his commentary on the last quarter, Schlumberger CEO Pall Kibsgaard last week said that demand for oil was not down and it is expected to rise by 1.1 mn bbls/day in 2015. He expects Brent prices to “recover and stabilize” so exploration and production spending levels will rise. “If we see recovery, we also see a limited cost inflation in the exporation and proudction value chain. These are factors that would support further spending growth.” “SLB has further to go” the weekly writes.

Today's Barron's “Fall Big Money Poll” says “analysts are forecasting an 18% rise in 2015 earnings per share” as oil prices recover. The share has falled 20% so far in H2 and trades at 14.6x forecast 2015 eps of $6.64/sh. Even the dividend at 1.65% is exceptionally high.

*GlaxoSmithKline shares fell nearly 3% in London trading today, mainly because analysts expect its Q3 results (to be released Oct. 22) to be rotten, sales at GBP 5.72 bn, off 8.,8% from prior year, and nat profit and EPS to be GBP 1.136 bn, or GBP 24/sh, both down 16%. Most of the analysts polled by Dow Jones have a hold on GSK.

Vienna Bowel Conference

*Galapagos NV which employs our former European biotech maven (now replaced by Patti, an American) created a new plan to issue warrants (Euroland terminology for options) to reward a newly hired CFO, Bart Filius. The 8-yr options will have a euros 11.93 strike price and cannot be exercised until 2017. The 150,000 warrants to Filius come on top of another 3,471,378 options already issued to other staff. The total number of current shares out is 30,292,604 so these issues amount to ~12% of shares outstanding. GLPGF/GLPYY is doing phases 1-2 and preclinical research into samll molecule and antibody action in cystic fibrosis, inflammation,antibiotics, and metabolic diesease, notably JAK-1 against rheumatoid arthritis and Crohn's disease licensed to GSK and another against a cystic fibrosis gene licensed to AbbVie. Today at the European Gastoenterology Week in Vienna, GLPYY reported on phase 1 results with GLPG1205 against inflammatory bowel disease. It also has another drug, GPR84, which led to this compound (licensed to a sub of Johnson & Johnson) but which may lead to other used against IBD.

*Novartis has created a personalized treatment of childhood acute lympholastic leukemia which is 90% effective in creating a complete remission. The CAR-T program at U of PA Perelman Medical Cchool now is producing long-range results and the kids are being tracked after 6 months. FiercePharmma.com forecasts that NVS will apply to the FDA for the breakthrough-designated treatment as soon as early 2016. The therapy is based on extractign T-cells from the patients and arming them with chimeric antigen receptors which train the immune system to track down and kill tumor cells. NVS with Gleevac and Tasigna specializes in leukemia meds which it should be noted may cease to work if patients develop resistance, and which have nasty side effects.

However, NVS faces competition in diabetic macular degeneration from Eylea, a drugRegeneron licensed to Bayer AG.

*We like Shinhan Group, a bank which is seeing off global players who cannot build traction in Korea, like Citigroup and HSBC. More on Korea below. SHG is not reacting to home-grown political risk but to losses by ambitious foreign banks in its bailiwick.

*Our Irish share CRH is up 3.6% in the last two days. It is a play on US and European infrastructure spending.

*Vale accepted a revised contract for nickel mined in Indonesia (which incidentally also installed a new president today). This will rquired it to pay more royalties and allow another 20% of the stock to be sold locally. In return VALE gets to run the mine to 2045. Vale is down on the latest polls by 2.6%.

*Also down for the same reason by about the same percentage is Cosan, CZZ. Dilma now is using her control of the airwaves to hit her opponents, as she did against Marina Silva in the first round.

Fund Notes

*Yes, we recommend GLD, an Exchange Traded Fund, ETF.

*Korea Fund, run by Allianz, is presenting on the Closed-End Fund Association's podcast today. As a matter of record, we like CEFs more than ETFs when they exist. KF is our preferred Korea stock.

*Mexican REIT Fibra Uno will present Q3 earnings on Friday Oct 24 at 1 pm my time. Call in is 1-877-407-9205 in English and Spanish (simultaneously) and replay at 1-877-407-9205 for CEO Andre El-Mann and his team. I suspect it is an error. Hasta la vista, FBASF.