The Real Bottom Line

Sweden has reached the real bottom line yesterday. Their central bank has cut interest rates it charges to banks to zero for 0.25%. The Riksbank yesterday surprised markets by opting to hit the “zero bound” although it had been expected to delay this. No other central bank has pushed the cost of borrowing to zero in the quantitative easing period since the global financial crisis, but now others may follow.

Our Fed targets keeping interest rates at 0.0% to 0.25%; the Japanese CB rate is 0.10%. The Bank of England charges 0.5%. The European Central Bank cut its charges to 0.05% last month.

But the Riksbank rate is now fixed at 0.0%. Zero. Nada. Nichts. Nichevo. Rien.

Adrian Ash thinks this may lead to paying lenders to take Riksbank loans, the next step beyond zero interest rates. The Swedish crown fell sharply on the news, as could have been expected.

There are two real problems with the trend.

Firstly, however cheap money may become, if governments and homeowners and companies do not want to borrow because they do not want to risk investing in infrastructure, homes, or expansion, then cheap money will not create growth. In Sweden or in the European Union, in Britain or Israel.

Secondly, as with any excessive move in a single country, there is an element of “beggar-my-neighbor” in rate cuts. This can go badly wrong, and did so in the recovery from the Great Depression. I fear its return because of what Sweden is.

Stockholm Syndrome

Sweden is a Scandinavian regional financial powerhouse. It is the home of major multinational corporations like Ericsson, Electrolux, Scania, Sandvik, SCA, Atlas Copco AseaAbb, SKF, Aga, Volvo, Hennes & Mauritz, and Alfa Laval. These firms make it a major exporter of cars, telecom equipment, chemicals, phrama, machinery and precision equipment, appliances, wood, and iron and steel. It also remains the banking and investment capital of the Nordic countries. And then there is ABBA!

If you did not read The Financial Times, the Wall Street Journal, or NZZ today, you might believe the European banking sector mostly passed the stress test over the weekend. Beware. Firstly, the ECB ran the results past national regulators (except in the case of Poland which simply was omitted entirely because of delays). That means German banks' solid reputation was boosted by deliberately un-updated inputs from the Bundesbank, which thereby downplayed Deutsche Bank's litigation risks.

Because European Union member countries have different and inconsistent accounting rules for handling bank tax loss carry-forwards and goodwill (both of which are hard to reconcile across borders), the ECB stress tests simply included them in itspublished tallies as part of bank capital. Under the Basel rules which will go into effect in 2017, these numbers will count, and many banks which passed the latest exercise would fail under a full audit.

Israel is expected to again cut interest rates as it last did in August. To help understand what that is all about I am attending a Qwafafew quantitative analysts' session tonight on how to index the Tel Aviv Stock Exchange. This at a Times Square gastro-pub. The lengths I will go to get information for you!

*Novartis reported Q3 profits which beat analyst forecasts collected by Bloomberg by a nickel/sh thanks to new drugs. Its earnings excluding some items came in at $3.35 bn or $1.37/sh, up 9%. Sales rose 4% from Q3 2013 to $14.7 bn. While its best-seller drugs face generic competition soon or now, NVS has new drugs like Gleevac/Glivac against leukemia. It also has new drugs on the market: Gilenya against multiple sclerosis, and cancer drugs Afinitor and Tasigna. Their sales all rose 20-21% year/yr. Novartis reports in US$ but its primary listing in in Zurich.

Its new heart drug combining Diovan (now ex-patent, a bood pressure drug) with LXZ696 which works well against heart failure and can produce sales of $2bn to $5bn when approved. CEO Joe Jiminez deliberately cut back on higher estimates for the new drug in the conference call but confirmed that it is expected to win US FDA approval for marketing before the end of the year and called it “a multi-blockbuster.”

The giant Swiss drug firm again forecast that full year sales will grow in lowish single digits (excluding currency effects) and said core operating results will grow faster. Novartis stock trades in hefty volumes and the share rose 2% in Zurich trading this morning. It has gained about 25% YTD beating most pharma stocks, although we haven't owned it that long. NVS is engaged in selling off non-core businesses including its flu vaccine arm (sold to CSL of Australia yesterday) and veterinary and other vaccines. It is buying GlaxoSmithKline's oncology drug unit and may buy other businesses.

We bought NVS as a play on new brooms after its former greedy management sought to dominate all areas of pharma, eye care, and generics. NVS still is in generics, which adds to its clout. Jiminez, an American exec formerly at Heinz, took over in 2010 from the expansion-mad Swiss Dr. Daniel Vasella whose exorbitant pay and pension package was ultimately voted down by shareholders. Jiminez aims to focus on core businesses and dump others.

Average Down!

*Because both my local drugstores opted not to accept Apple-Cash I decided that there was hope after all in Franco-Dutch Gemalto, GTOMY, recommended by Harry Geisel last month. I don't actually use an Apple phone. Gemalto's business is making passports, currency, identity documents, and credit and debit cards more secure using digital software plus advanced data management.

GTOMY was raised to buy from hold by Société Générale, a French bank. But it was cut to underperform from neutral by Crédit Suisse. It is little wonder Harry doesn't know what to do. The answer is: Average down! I paid $36.78.

*To finance this buy I sold my Dena Co ADRs at $12.76. DNACF is Japanese and the rumor of its acquistion never panned out. It is not really part of my DNA.

*Anton Oilservices is down another 18% today on news that China is buying cheap crude from Colombia. The link between oil prices and spending on exploration is not as iron-clad as ATONY sellers believe. China needs to develop its home-grown shale beds, which offer a necessary long-term solution rather than merely picking up cheap spot oil.

*Just as I remain firmly in favor of owning Schlumberger through oil gluts and shortages, I would do the same with Anton, in which SLB owns 30%. Hong Kong trigger-happy trading and short-selling should not influence us smart round-eye investors. SLB is up despite today's lower oil price.

*On Monday the Canadian pension plan upped their funds under management in Brazil to C$1.92 bn thanks to a new C$445 mn investment in logistics, office, and retail assets there. This move by Canada Pension Plan Investment Board came right in the midst of the Dilma dump after the PT candidate won a narrow re-election vote.

Dynamic Canadians put $226 mn of the total into more stakes in its JV with Global Logistic Properties of Singapore to fund the 32 sites acquired from BR Properties SAearlier, taking the CPPIB stake in this holding to 30%. It also committed another C$103 mn to another jv, GLP Brazilian Development Partners I, alongside GBTZF with 40% and Govt of Singapore Investment Corp at 20.4%, putting CPPIB at 39.6%. The remaining CPPIB investments were through different firms in Brazil itself. MD Peter Ballon also heads the CPPIB Americas real estate investment arm.

*In the wake of the Dilma dump, our Brazilan shares are all over the map. Vale is barely up (less than 1%) after a good try earlier. VALE.

*But Cosan is up 5.67%. What are the differences? Vale is a major exporter which gains from a lower Real. CZZ exports sugar cane and ethanol made from begasse (cane waste), neither of which is doing well but is expanding into infrastructure like the Canadians. And if Petrobras succeeds in getting govt permission to raise prices, something that was inconceivable before the election, then Cosan can benefit from supplying biomass to generate electricity in place of imported oil subject to price controls. Brazilian hydroelectric dams cannot generate power because of drought. The assumption is that post-election Dilma Rousseff will listen to economists. I am not sure.

*Separately, another Brazil play is up today along with standard issue Brazilians: Portugal Telecom, up to $1.4 per share. I sold my oldest shares in PT yesterday. The lastest boost may not mark a trend. I am not buying more because of the wash sale rule.

*Infosys was a major destination of foreign investors into India in Q3 according to Shili Ren in Barron's Blog yesterday. She is writing for the weekly's new Asia version which is free to current US subscribers.

*Abengoa Yield is raising euros 200 mn in 5-yr notes to buy 3 renewable assets from parent Abengoa, ABGB, which we own. It is up sharply on the news but still below our entry price.

*Another reason for sticking with Reckitt Benckiser despite a poor quarter is that it has just appointed a new independent non-executive director to its board, the Canadian-American chairman of International Flavors & Fragrances and a former exec at Cadbury Schweppes. So he has lots of experince in global marketing. But what I like best about the new appointee is his name: Doug Tough.

*Guangshen Railway has, finally, risen over our sales price to $20.24. We sold. It is up on rumors that railways are being merged by Beijing diktat to stop them undercutting each other when bidding for overseas projects, reported on also inBarron's Blog by Shuli Ren. I think the railways can be forced to work together in international bidding without having to merge.