Category Archives: Securities regulation

buying Sands China (1928:HK): why, trouble, and recent developments (ll)

December 5, 2010 By in Casinos, Current Market Thoughts, Entertainment, Hong Kong, Industry Analysis, Securities regulation, Trading Tags: , , , , , , , , , Leave a comment

As I mentioned in my last post, I think Fidelity has the best international operation for individuals in the US to buy foreign stocks. The commissions are very reasonable. The traders are generally knowledgeable. And the Fidelity software allows you to trade in real time in foreign markets—meaning at midnight Eastern time for Asia or 5am for Europe.

I also have a tendency to trade in relatively less-known names and have rarely had difficulties. When I moved my main foreign account to Fidelity, the firm wouldn’t accept my holding in 2432:JP, the Japanese social networking firm DeNa (pronounced D-N-A). The transfer people mixed this security up with the Dena Bank in India. I haven’t really kept up with developments in India, but at the time foreigners could only hold Indian securities if they were institutional investors who had registered with, and were approved by, the Indian government.  So it couldn’t be in a non-registered account.  It took quite a while to straighten that one out!

An (eminently skippable) aside on Schwab

I tried for a while to use Schwab for international trading, but had a very bad experience with them. I (stupidly) placed an order to buy a Hong Kong stock without checking on the commission I would pay. Instead of the $100-$200 I had expected, the bill came to around $2,000, or 4%-5% of the principal amount of the trade. Yikes! (To boot, the stock was one of the worst picks I’ve ever made.)

When I got no satisfaction from the Schwab trading department over the phone, I decided to test the “talk to Chuck” exhortation I’d seen in advertisements. I wrote a letter addressed to the personal attention of Mr. Schwab, detailing my complaint.

To be brutally honest, I had no case. I had left myself open to a $2,000 charge by not determining the commission rate in advance. On the other hand, this is not a great way to treat a customer.  The most straightforward interpretation of the bill was that Schwab didn’t particularly want my business, or at least this business.

Anyway, I got a call from a woman who said she’d look into the matter and get back to me. A month later, having heard nothing from her I wrote a second letter to Mr. Schwab, enclosing a copy of the first. I got a second call, from a different person. He said, somewhat indiscreetly :

–when we hung up, my first caller had marked my file “closed” and not done anything,

–he would explain to me how the commission and fees were calculated.  But he couldn’t get the numbers, commission + fees, to get as high as $2,000 (he said he’d get back, but it’s been over three years, so I don’t expect he will)

–people misunderstand what “talk to Chuck” means. It doesn’t mean anyone actually gets to communicate with Mr. Schwab himself–as taking the commercials literally would lead you to believe. Instead, it means that all Schwab employees are so imbued with the principles of their founder that talking with any of them is just like talking to Chuck himself. Given I deduced my two conversations with “Chuck,” that an axiom of the Schwab credo appeared to be to ignore my complaints, if not everyone else’s.  So I took most of my money away.

Back to Fidelity.

At about 10pm one recent night, I turned on my computer, logged onto the Fidelity site and placed an order to buy shares of 1928:hk. Whoops. Error message. The stock trades in lots of 400 and I had inadvertently entered an odd lot order.

Easy to fix. I added 200 shares to the order and hit enter again. (Incidentally, Fidelity allows you to settle the trade either in the local currency or US$ and lets you buy currency on the spot, if you need to.  Pretty neat.)

Error message again. This time Fidelity said this order had to be placed with a broker, because it had a Reg-SHO issue.

Strange. Reg-SHO has to do with short-selling and the uptick rule, so it didn’t apply to my trade.

I called the 800 number contained in the message.

Whoops. Fidelity’s international department is only open between 8:30 am and 4:30 pm, New York time.

I called again the next morning. The trader I talked with said I didn’t have a Reg-SHO problem. I had a Reg-S problem.

Hmm. My understanding of Reg-S is this.  It allows a company  incorporated in the US to issue new securities to foreigners without having to file a registration statement with the SEC. Such shares are electronically marked (in the old days, there’d be a warning written on the physical share certificate), and can’t be sold to Americans.  Well, 1928 is incorporated in the Cayman Islands (typical for Hong Kong stocks).  Its home market is Hong Kong.

The Fidelity trader politely said there was more to Reg-S than I understood, exactly what being open to question. But neither of us really knew for sure. He said he’d check with his third-party data source to see if the Reg-S warning was correct or not.

When I called back the following morning, another trader told me S&P and FT had both confirmed that 1128 is a Reg-S security.  Therefore, the company couldn’t accept the trade.

a “mature” reaction

For all their talk of rational fundamental analysis, most Wall Street people, myself included, are deeply superstitious. I think it comes from operating in an environment where so many factors are out of your control.

At any rate, at this point I realized that, for me, the trade was cursed and I shouldn’t do it.

Now, there is an unsponsored ADR for 1928. So you can buy it on the pink sheets. The bid-asked spread, which can often be as much as 10% on smaller stocks, was within a couple of percent the day I looked. But the ADR is, to my eye, very illiquid, meaning it might be tough to sell if you needed to.

Just out of curiosity, I phoned and emailed the LVS investor relations department to see if they could explain what was going on with 1928 and Reg-S. They had no idea what I was talking about.

What did I end up doing?

A secondary consideration in my thinking about 1928 was that the stock had sold off about 15% from its recent high. It had made up about half its losses while I was trying in vain to buy it, making it a bit less interesting. 1128 had also fallen by about the same amount and hadn’t rebounded. So I bought a little bit of that.  That didn’t help me with my too-many-eggs-in-one-basket problem  But I figured it would give me time to look at the 1928 ADR more carefully, to decide if I could put up with the liquidity risk.

My gut feeling, however, is what I said earlier—the trade is cursed and I’ll only lose money if I buy Sands China. You’ll be able to tell if I override my better judgment and buy the ADR. You’ll see the Hong Kong shares crater soon after.

Actually, as you may be able to tell, I wrote this on Wednesday December 1st.  Sands China was suspended from trading on December 2nd in Hong Kong, pending dissemination of information.  The news was that the firm’s application for approval to build on two sites in Cotai had been rejected by the government.  On Friday, the stock opened down about 5% but recovered throughout the day.

More on this development in my next post.

bondholders’ responsibility for banks: contingent convertibles and Anglo Irish Bank

October 29, 2010 By in Banks, hybrid bonds/contingent convertibles, Industry Analysis, Securities regulation Tags: , , , , , Leave a comment

Europe seems to want to change the culture of their banks and bondholders from one of “gentlemen’s understandings” that governments and equity holders will suffer all the pain in the case of bank failure to one where legal and covenant obligations will be enforced–meaning bondholders, too, will participate financially in bank restructuring.

One vehicle being pushed in the contingent convertible, an instrument that I’ve regarded as a top-of-the-market gimmick that looks good on paper but has the potential to end in tragedy.  European governments appear to be pushing it as a concept, however, because COCOs spell out explicitly what the bondholders’ obligations are in case the issuer has difficulties.  There’s no room for negotiation, no ability for a politically connected holder to put pressure on the bank regulator to take a soft stance on a certain tranche of bonds.

Europe appears to me to be taking this new attitude a giant step farther in the case of debentures of the failed Anglo Irish Bank, a property-oriented institution that proved to be a monument to opacity in lending.

The Irish government is offering to issue new, Dublin-guaranteed, bonds to holders of about €3 billion of various tranches of AIB debentures.  The rate of exchange would be: 1€ of the new issue for every 5€ of the old debt.  Holders of the affected AIB bonds, many of whom will, I think, prove to be hedge funds that bought in the secondary market after AIB failed, have squawked.  Their expectation apparently was to receive new bonds at something more favorable than a 4/1 rate.

Voting on the Dublin/AIB proposal will take place in December.

None of this is too surprising.  The rest of the government’s plan is, however.

According to the Financial Times, Dublin also wants accepting bondholders to agree to change the bonds’ covenants to provide that any holders who do not accept the offer will be forcibly redeemed at .001% of par–basically nothing.

Again, according to the FT, a result in favor of the exchange at the initial meeting requires that holders of two-thirds of the bonds vote and the 75% or more of the votes say yes.  If less than the required two-thirds attend the initial meeting, a second can be called at a lower quorum level.

Bloomberg says that investment bank Houlihan Lokey, representing a large enough proportion of the affected bondholders to defeat the proposal, intends to vote no.  The Irish legislature has also chimed in, suggesting it will pass a law allowing the exchange to occur without regard to the vote results, should bondholders reject the offer.  Houlihan Lokey apparently wants to negotiate with AIB, but the bank has refused.

This should be interesting.  Stay tuned.

US corporates lobby for a new tax amnesty

October 20, 2010 By in Cash position, Constructing a Portfolio, Current Market Thoughts, Portfolio management, Recent Market Action, Securities regulation Tags: , , , , , , , , , , 1 Comment

Yesterday’s Financial Times contains three (count ’em, three) articles, one on the front page and prominently above the fold, talking about recent efforts by US corporations in lobbying Washington to allow them to repatriate foreign cash holdings while paying little or no income tax.

This appears to be the start of a public relations campaign by the US Chamber of Commerce aimed at persuading Congress to pass a tax amnesty bill like the Homeland Investment Act (HIA) of 2004.

US tax law, unlike that of many other countries, makes multinationals incorporated in the US pay domestic income tax (less a credit for foreign income taxes paid) on any foreign earnings repatriated here.  This can be a big deal.  For a US company recognizing Asian profits in Hong Kong, for example, the corporate tax is zero.  This means a firm bringing money like this back home would typically have to pay 35% of it to the IRS.  The funds are probably going to be reinvested in growing Asian businesses.  But even if not, unless the funds are crucially needed in the US it would be financially foolish to repatriate it.

HIA allowed firms to pay a maximum of 5.25% tax on any money brought back to the US during a specified period of time.  Companies were required to use the repatriated funds only to hire new workers or to invest in plant and equipment.  The idea was that this would reduce unemployment and spur new investment.  None could be used for stock buybacks, dividend payments or executive compensation.

According to forthcoming research, the reality of the HIA was quite different.  Corporations repatriated around $300 billion from abroad.  Strictly speaking, all the money was used for the purposes intended.  But aggregate employment and capital investment didn’t increase.  The funds simply freed domestically generated profits to be used for dividends etc..  In fact, some firms actually used the repatriated funds to replace domestic profits that they shipped abroad.

Proponents of  HIA II, which the FT says include Cisco, GE and Microsoft, are not making strong claims this time around.  They label the cash, which is estimated at about $1 trillion, as being “trapped” abroad.  They argue that maybe $400 million would be repatriated under HIA II, giving the government $20 billion or so in tax money it wouldn’t otherwise have.  And the repatriated funds would likely slosh around doing something–presumably economically good–in the US.

So far the Obama administration is saying no, seeing that it’s in enough trouble without advocating a big tax break for cash-rich corporations.

investment implications (there actually are some)

1.  I wrote about this topic a bit last April, specifically regarding the large buildup of cash on the balance sheets of technology companies.

2.  To be able to pay it out in dividends, a US-incorporated company has to have the cash available in the US.  But most publicly-traded companies don’t disclose enough about where there cash balances are, or the cash generating/cash using characteristics of their US and foreign businesses for an analyst to see how well a given dividend is covered.  This didn’t make any difference when dividend yields were very low and investors were interested in capital gains.  But it does now.

3.  It takes a US$1.50 earned pretax in the US to give the same lift to the reported earnings of a US company as US$1 earned in Hong Kong.  So a corporation concerned with maximizing eps might well choose to recognize profits in Hong Kong rather than the US, assuming it had a choice.  Similarly, a decision to shift the profit stream to the US in order to may dividends–again, assuming this were possible–would mean a structurally lower level of eps.  I suspect that at some point, investors will ask for earnings estimates that are “normalized,” in the sense of adjusted to what they would be under a standard 35% tax rate, in order to get a more apples-to-apples comparison.

4.  Why lobby for HIA II?  The paper I linked to above argues that it makes very little difference to corporations in the aggregate.  But there may be firms–most likely in the tech area–who will be forced to borrow or to repatriate foreign cash balances (and pay tax on them), either to be able to maintain the current dividend or raise it.  The strongest advocates of a new HIA might well be in this position.

Prada listing–in Hong Kong?

October 8, 2010 By in Asian economic development, Current Market Thoughts, economics, Hong Kong, Industry Analysis, Luxury goods, Retail, Securities regulation, Stock ideas Tags: , , , , , , , , Leave a comment

The family owned European fashion house Prada (Prada, Miu Miu, Church’s) is talking again about going public.  That in itself is no surprise, since the firm has begun the process of listing several times during the last decade, only to withdraw at the last moment, citing unfavorable market conditions.

Maybe the  real stock market lesson is that we should expect a period of turbulence ahead.  In its desire to obtain the maximum price earnings multiple, Prada has made a habit of waiting until close to a market peak before calling its investment banks.  On the other hand, maybe it has leaned something from its unsuccessful past listing tries.

What I think is more interesting, though, is that the company is considering both London and Hong Kong as venues for its debut.

Lots of factors go into choosing a home market, including the regulatory environment and listing costs.  The two primary ones, in my opinion, are where the listing firm will get the highest price and where the publicity surrounding being a public company–the financial media coverage, the attention generated by periodic earnings reports, and the ability of present and potential customers to become shareholders–will have the post positive effect on the company’s business.

A decision in favor of Hong Kong would be a strong statement by Prada that that’s where it sees the growth in its customer base coming from.  I think it would also give Prada a clear advantage over other European luxury goods brands by giving itself a direct emotional link with Asian buyers.  And, of course, it would be a coup for Hong Kong as well.

Selecting Hong Kong may also be a bit less chancy since the debut of L’Occitane, a French perfume and cosmetics company, on the Hong Kong exchange earlier this year.  That stock, 0973, is up almost two-thirds in price since then and is now trading at 33x current earnings.

Prior to L’Occitane, Hong Kong has had companies listed there, but they have mostly been local brands, or companies whose apparel have mass market appeal–and which would tend to trade at lower PEs than luxury brands.

While it’s impossible to say without examining Prada’s balance sheet and earnings history for possible blemishes, it’s possible that Prada, a higher-end firm than L’Occitane, could IPO at around 30x.

Coming on the heels of a report by London-based consulting firm Z/Yen, that London, New York and Hong Kong are all of equal stature as the leading world stock markets, the Prada story will be an interesting one to watch.

 

world financial center survey: London, New York, Hong Kong tied at the top

September 23, 2010 By in Asian economic development, Banks, economics, emerging markets, Industry Analysis, Investment firms, Securities regulation, Surveying Tags: , , , , , , , , Leave a comment

Z/Yen

A London-based consulting group called Z/Yen (the name is supposed to mean risk/reward) has been compiling rankings of the world’s financial centers semiannually for the past four years. The first seven lists were underwritten by the City of London, the latest by the Financial Center Authority of Qatar.

The results

The September 2010 shows a virtual dead heat for first place among global financial centers among:

–London

–New York, and

–Hong Kong.

The remainder of the top ten, in descending order, are:

–Singapore

–Tokyo

–Shanghai

–Chicago

–Zurich

–Geneva

–Sydney.

The bottom of the pile of 75 cities rated are, again in descending order:

–Athens

–Tallinn

–Reykjavik

patterns

Although the survey has been going on for only a short period of time, a number pf patterns have begun to emerge:

the steady rise of Asian centers.

— Z/Yen predicts that Singapore will soon emerge as a world co-leader with the present top three.

–Hong Kong and Shanghai have shown the most improvement from list to list

–survey participants name Shenzhen, Shanghai and Singapore as their picks for the cities with the most upward potential

tax havens losing favor

–The Cayman Islands and the Bahamas are among the havens showing the greatest falls in ranking, all all tax-favored centers are declining. Oddly, Scandinavia is the other area on the wane.

methodology

The ranking is obtained by combining the results of an internet survey of financial professionals with an analysis of “instrumental factors” selected to describe the objective working conditions in a given city.

For this list, Z/Yen obtained input from 1,876 survey participants, who made a total of 33,023 city rankings.

The instrumental factors fall into five groups: people, business environment, infrastructure, market access and general competitiveness. Specific factors include things like office rents, personal and corporate income tax rates, and indices of corruption and regulatory opacity.

quirks

All of the top names on the list—down almost to the middle, in fact—exhibit a reputational glow. That is to say, the ratings derived from the online survey questionnaire are significantly higher than those obtained from statistical analysis of the instrumental factors alone, although the rank order remains the same. My guess is this is because the survey participants rank on average just shy of twenty cities. How can they know that many?

The perennial question about internet surveys (see my posts on surveying) is that there’s no way of telling whether the respondents to the survey are characteristic of the overall group whose opinion you want to obtain. Relative to the survey results that, say, the Census Bureau, get, online surveys have to be regarded as not 100% reliable.

On particular items in the survey, one section looks at the regional breakdown of favorable and unfavorable ratings. Everyone agrees that London and New York are the top two financial centers. Europeans, however, are very skeptical of Asian financial cities. The US joins Europe in worries about Shanghai. No one likes the tax havens other than the havens themselves.

my thoughts

My guess is that the list is fairly reliable.

The rise of Hong Hong doesn’t surprise me too much, since that entrepreneurial city has constantly reinvented itself over the years. It still has an advantage over the mainland in support services for financial professionals.

I find the emergence of Singapore interesting, although that city-state has been undergoing a thorough makeover during the past decade.