Even as S&P 500 Rises, There Are Remaining Bright Spots Among DRs

by: Global Investing Editor

Gold hit another new high. The exchange-traded funds are buying the precious metal. But they may not be the best placement for investors.

An Asia reader criticized my failure to whoop and holler about the new Japanese CB measures (mistakenly called quantitative easing by the Japanese). Rhett Butler in Gone with the Wind is whom I would quote about this, except this is a family newsletter. For political reasons, Japan is trying to control its exchange rate and expansion, but half-heartedly. It will have to go with the flow of the rest of the industrial world. Much of the exchange rate intervention is Kabuki theater.

I also do not think there is much significance in the beggar-my-neighbor exchange rate cut for the Vietnamese currency. Vietnam is not exactly a major player but it is being hurt by the renminbi from over the border in China sinking faster than its local dong. Unless this starts a trend.

According to Citi (NYSE:C), in Nov. worldwide, depositary receipts went up 4.87% while the S&P 500 rose 5.74%. This reversed a trend for the year to date where DR shares did better than US ones. However, there were a few bright spots, notably Latin America, where DR shares rose 10.21%; Asia-Pacific ex-Japan where the rise was 8.67%; and Asian emerging markets where it was 7.71%. We discuss how to play this below:

  • Japan's NTT sub DoCoMo (NYSE:DCM) is the likely beneficiary and only way in for the unlisted Tata Teleservices launch in India, which yesterday announced three further areas for its GSM systems in southern India. That brings Tata to 19 of the 22 areas of the country. Tata uses DCM technology and DCM owns 16% of the Indian firm. Latin America whose economies are more closely linked to the USA has boosted gains more sharply than Asian emerging markets. This new trend is good for shares we recommend.
  • Cemex (NYSE:CX), expected to benefit as US recovery leads to more money flows from foreign workers to Mexico and Central America, used to build homes; and more cement demand here CX also supplies. CX is recovering from a disastrous foray into world cement-making which took it deeply into debt for ventures in Britain and Australia. It will now stay closer to home under the refinancing deal.
  • BNS, Scotiabank, is a major provider of financial services to Latin America, with a good regulator in Ottawa. While outfits like WalMex are going into credit cards and financial services for their shoppers, I think Mexicans and South Americans will eventually move to real banks where fees are much less onerous.
  • Banco Latino of Panama (NYSE:BLX) will finance increasing trade south of our borders. BLX is the stock I always tell people about when I am at parties where, after being introduced, I am asked for a stock tip. It scares the questioners off. But the conglomeration of export-import banks, private banks, and shareholders is excellently managed and pays a nice dividend. Unusually for Latin banks, it observes US reporting requirements, admittedly not a guardian of probity in the current market, except that in Panama they do it more seriously without off-balance-sheet stunts.
  • Post-merger Perdigão (PDA) dominates the Brazilian meat-packing industry. It will benefit from prosperity leading to more demand for poultry. PDA is a major exporter but I am waiting for more demand within Latin America. Drought and locusts in Argentina may force the land where you eat steak three times a day to consider an occasional paradilla of chicken.
  • SBS is awkward when dealing with its non-State of São Paulo shareholders like us, but it is a key player in cleaning up São Paulo sewage, providing drinking water, and now also electricity. These are desperately needed. Thanks to Brazil's receipts, it is raising money locally to finance projects, better than tapping US markets.
  • With gold up again, my preference is not to buy physical gold, although ETFs are the generator of higher prices for the precious metal. Mines are the way to go. UBS yesterday raised its estimates for Iamgold (NYSE:IAG) to $20.50 from 18.50, a nice boost for IAG. Natch after an initial jump the price fell back because of profit-taking. This is a small and illiquid stock.
  • Also boosted, this time with less international impact, was the rump Orezone (OTCPK:ORZCF), which Canaccord now expects will double from current prices to C$1.60 (Its earlier estimate was C$1.) ORZCF.PK is even more illiquid.
  • More gold. To play goldmines with a fund, ASA is probably the best way to do this easily. It pays a $1.30 dividend per share to boot. Like most closed-end funds, it trades at a discount to NAV, something you never get with a gold ETF.
  • Teva (NYSE:TEVA) and British pharma co. Shire plc (SHPGY) settled their latest lawsuit and Shire will now let Teva do an authorized generic of attention deficit drug Adderall XR. No money will change hands. As I keep saying, Teva, besides being the largest independent generic company in the world, has the best legal eagles in the generic industry. Both these facts give it an edge.
  • Sampo (OTCPK:SAXPY), the Finnish insurer, reported 9-mo pretax profits up 21% to euros 47 bn. While Nordic banking is consolidating, its new CEO said SAXPF will not take stakes of more than 22-23% in Nordica of Denmark. Financial consolidation will require other players. It already holds a stake in Top-Denmark as well. It plans to boost its dividend to close to 6% which is good news for shareholder.
  • Again I am trying to convert the Delek Group ordinary shares into the 10:1 ADRs now created. Delek (OTCPK:DGRLY) is an Israeli conglomerate with some resemblance to Berkshire Hathaway, as it too is funded by a diversifying insurance company placing premium income. The ADR is trading as DGRLY; the Israeli stock, DLKGF, now appears to be dormant on US market.
  • After telling reader LM yesterday to think hard about buying BCE, the Canada telco beaten down because of a failed buyout, I noticed that I misstated its yield in the model portfolio. It pays 6% not 9% as shown. This is a nice dividend and safer than houses. It is a yield play not a buy and hold, my error.