As I forecast, Japan is rushing to fill the quantitative easing gap and this has boosted equities and further depressed gold yesterday. I bought back the common shares of Barrick Gold, ABX, but since I am not sure that my timing is right, I have not put this into the model portfolios but into my IRA. It was upgraded by analysts at Mackie from a "sell" rating to a "hold" rating.

While gold shares are idiosyncratic, their ultimate valuation depends on the yellow metal, and there are forces pulling its price both ways. The price in other currencies goes up when the US$ rises, which discourages buyers up to a point when it looks cheap to them. I cannot predict when this will occur in gold-loving places like India, China, and the Middle East. I am not sure how the Swiss will vote about backing their franc with bullion. So I will scale in.

As promised, here is some of what I learned about Israel indexes at my quantitative analyst session on Tuesday. It has been delayed because of the press of news. The club is called Qwaffafew.

Israel came into focus for analytical experts when it was moved from the emerging markets group to the main MSCI EAFE index which pushed down its market impact. Israel presents many problems for index creators, according to exchange-traded fund strategist Steven Schoenfeld from Blue Star Global Investors LLC, our speaker. His work on indexing Israel has resulted in a new ETF from market vectors, ISRA, using Blue Star's benchmark to manage over $50 mn to date.

The first major switch by Blue Star was to redefine Israeli so that companies listed only in the US or Britain and not on the Tel Aviv Stock Exchange (TASE) get counted. We owned in the past one of these Israeli shares, Mellanox (MLNX), listed only on Nasdaq. We own another couple today listed below for paid subscribers.

Including listings from the “galut” (exile) boosts the liquidity of the benchmark for those seeking to track Israeli stocks. Only about 20 of the shares on TASE are liquid enough for institutions to buy.

Moreover, the top Israeli stock, Teva Pharma (TEVA), accounts for an average of 60% of TASE volume so it has to be subject to a haircut in any index. BlueStar sets the ceiling at 12.5%. The situation applies to other markets as well, notably the Nordic countries or Canada where a single stock like Nokia or Nortel dominates the market.

Getting More Israelis

It uses several criteria to add more Israeli companies to the index mix: where they are HQ'd; where they were founded; where they get at least 75% of their revenue or their operating expenses; where their management or R&D are run from. The index also includes foreign-listed controlled subsidiaries of Israeli companies. A company which is 70% exposed to the shekel counts as Israeli, like Perrigo (PRGO). A firm where the majority of the board is made up of Israelis also gets counted. The result is that the weighting of Israel in the MSCI EAFE (EFA) is doubled by the Blue Star exercise, from 0.19% of the non-US developed world stock index to 0.37%. There are more Israelis! Check Point Software (CHKP) becomes Israeli, as if anyone doubted. So does embattled Soda Stream (SODA).

Blue Star has a total of 114 companies that it counts to better reflect the Israeli stock market. Only about 20 are in other indexes.

The recalculation also better reflects Israeli strengths in small caps and electronic, telecom, and biological technology, the very Israeli sectors investors want to get into via funds, private placements, endowments, and other indexed strategies. And if somebody wants to boycott Israeli companies (as opposed to multinationals which operate big time in the Jewish State), they can find a better list of divestiture targets, although Mr. Schoenfeld and I hope they don't.

Now all this might be of only minor interest, except that Israeli index conundrums also apply to other countries, starting with the Middle East region itself. Our Jordanian-incorporated Dubai- and London-listed Global Depositary Receipt (GDR) favorite would count as from Amman under Blue Star index rules. In fact many frontier markets have the same indexing problems as Israel does.

Many Russian stocks are not listed in Moscow, but trade as GDRs or ADRs in London or NY. They would reveal their Russian soul under Blue Star Rules. We recently sold Coca Cola Hellenic, a bottler, which delisted from the NYSE and only traded (rarely) in London.

Chinese firms trading as H shares in Hong Kong, pending the again-delayed link with Shanghai, would count as Chinese, along with other stocks listed only in Singapore or New York. The latter would include Alibaba (BABA), a recent Chinese newcomer. Or Baidu (BIDU), listed in Singapore. While it is less pronounced, there are similar cases in India.

Mr. Schoenfeld thinks Singapore is a “reverse Israel” because it is a favorite listing site for companies from around the Asia region with almost no operations there: by tradition from Malaysia, but also from Thailand, China, and Indonesia. They could be removed from the Straits Times index. In fact other havens have similar exotic listings, among them another one of our stocks, which started out being listed in Singapore but then moved to Luxembourg. Details on these stocks that we sent to paid subscribers, below.

Results from Bermuda and Colombia today and news from many lands like Italy, Mexico, Spain, Portugal, Brazil, Luxembourg (all about one single company!) plus Ireland, Britain, Australia, Chile, Norway, Jordan, Dubai, Canada, Japan, Australia, Argentina, Luxembourg, Finland, Israel, Denmark, and Singapore.

• Bermuda re-insurer Validus Hldgs Ltd (NYSE-VR) reported Q3 net income of $39.7 mn, or 41 cents/sh, down sharply from prior year Q3 $183.4 mn, or $1.77/sh. Net operating income available to Validus was also sharply lower. However, book value per diluted closed Q3 at $38.70, up 1.2% inclusive of dividends.

Commenting on the results, VR Chairman-CEO Ed Noonan explained VR strategy:

"Validus' results for the quarter were impacted by $61.4 mn of losses concentrated in the classes of aviation war and energy. Despite these losses, the company still generated $92.1 mn in underwriting income, $77.3 mn in net operating income and an 8.3% annualized operating return on average equity.

“Validus takes on volatile business as we get paid more for assuming the risk. By definition this means that our results will sometimes be lumpy, but I'd rather have a lumpy high return on equity than a lower consistent one. Our thoughtful underwriting of these classes of business is what has allowed Validus to create strong growth in book value since the company's formation."

Acquisition Western World results were not included.

• Ecopetrol reported a 2.6% drop realized in Q3 crude oil prices which offset higher production, leading to a loss when combined with EC's dollar-denominated debt charges. Consolidated net income dropped to COP 2.279 trillion, off 18.2% and the cash-flow margin (earnings before interest, taxes, depreciation and amortization) came in at 30% of sales vs 38% a year earlier. Some 2013 figures were restated for comparison and nothing was audited. Oil prices were off $9.40 per barrel in the quarter and they are still falling.

CEO Javier Gutierrez did note that oil production improved to 754,000 bbls/d thanks to better operational conditions, meaning fewer guerilla attacks I think.

Portugal Telecom

Four is a bad number in Chinese as it sounds like death. And in a pre-Hallowe'en move in Brazil, Spanish Telefonica (TEF) via Vivo, America Movil via Claro, and Oi SA all joined together to dismantle a 4th telco, Tim Participações or TIM. TIM belongs to Telecom Italia (TI).

They have to get together to make sure that the breakup meets competition rules. Claro will get about 40% becoming No. 1 in Brazil, an ambition of Carlos Slim Helu, the Mexican magnate, and Vivo and Oi shareout the remainder, with Oi perhaps holding less.

To finance the deal, despite denials to date, Oi will have to sell its stake in PT, Portugal Telecom, and the PT share is rising on the news. The PT assets are worth at least euros 7 bn according to Reuters. This doesn't include African telecom interests which may be worth about $1.6 bn. And of course it doesn't include the possibility that PT will collect from the Rioforte Luxembourg holding company of the Espirito Santo family which made off with a billion dollars of its wealth before declaring bankruptcy.

Analysts say the Brazil mobile market will grow fast as there are already around 280 mn mobile-phone lines in service, in this country with only 200 million people. TEF has a 29% market share, followed by carve-up target TIM with 27%, Claro with 25%, and Oi with 19%, according to official figures.

TIM has a market value of 30 bn reais ($12.2 bn) but the Italians may hold out for more.

Last-ranked Oi last summer hired Brazilian investment bank BTG Pactual to look at potential deals in Brazil, including TIM. Oi, which runs the largest Brazilian fixed-line network, but was slow to offer mobile.BTG Pactual is also acting for Oi in the sale process of the PT.

Betting on Paddy

Today Fast FT, the UK pink paper's blog, reports on how Paddy Power plc got an edge in the giant gambling market of Australia 5 years ago. It aimed to buy IASbet, a small Oz firm, when it got a phone call from Matt Tripp, CEO of its rival, Sportbet, which had earlier turned down a takeover bid from PDYPF. But now he had beaten them to IASbet and needed cash.

“It was a ballsy move by Tripp that gave us a 3-year head start on our rivals,” says Cormac Barry, Sportsbet’s chief executive, who at the time worked for Paddy Power. “Sportsbet had the best management and brand in Australia while we had the technology, international experience and trading expertise.” So Paddy got a stake in Sportbet.

Now the British invasion of Australia’s bookie market is in full cry, the blog writes.

“In April, Ladbrokes bought online bookmaker BetStar for A$25mn, building on its A$22.5mm purchase of Gaming Investments last year. In the space of 18 months William Hill [another Brit bookie] spent more than A$700m to acquire three Australian companies. Bet365 has entered the market organically with a glitzy advertising campaign chalking up losses of almost A$80m in 2013 and 2014.

“'Australia is an attractive market for foreign bookmakers because it is well regulated, online and mobile gambling is growing rapidly, and it offers them diversification at a time when a new online gaming tax in the UK is likely to hit profits,' [the FT was told by] says Killian Murphy, an analyst
at CIMB.

“Seven out of 10 Australians enjoy a flutter at least once a year and, according to UK consultancy H2 Gambling Capital, they are the biggest gamblers in the world, losing US$18.4bn in 2013 – the equivalent of $1,037 per resident.

“Under Australian law foreign bookmakers can provide online and phone betting on sports and racing. They cannot open retail outlets; these licences are held exclusively by former state-owned incumbent operators which have since been privatised. Nonetheless, foreign operators are well placed to compete, according to Mr Murphy, because they have strong mobile technology platforms, the fastest-growing segment of the market. They also have a deep understanding of fixed-odds betting and sports betting, which are growing more rapidly than the traditionally popular racing and tote betting platforms in Australia.

“Internet and phone betting market in Australia attracted bets of roughly A$12bn in 2013. As of end-June, the country’s three biggest operators by market share were [bookie shop operator] Tabcorp with 37%, Sportsbet [Paddy!] with 21%, and William Hill with 15%, although William Hill maintains it has 21 per cent of the market, equal with Sportsbet.”

We bet on Australia with Paddy and may gain from more share-buying after this articles.

• Current GlaxosmithKline CEO Andrew Witty in 2008 joined forces with US rival Pfizer (PFE), which also had a lacklustre HIV portfolio, and co-founded ViiV Healthcare, still majority owned by GSK, writes The Investors Chronicle today.

”The jv hit a turning point last year with the approval of a new drug, Tivicay, which analysts believe could push ViiV's revenues to £2.5bn by 2018. Taken in combination with two other medicines, the once-a-day treatment has reported improved efficacy and reduced side effects, another successful step in the streamlining of HIV treatment. Why [has] GSK has chosen to float the business considering its recent growth-spurt?

“Analysts suspect GSK is offloading ViiV to unlock some value for shareholders, after [GSK] stock took a battering this year due to sluggish sales and bribery scandals. [It] is undergoing a wider restructuring in an effort to recoup £1bn in costs, and the IPO of ViiV is part of the process. ViiV is run as a separate company under the GSK umbrella, and so little should change in the day-to-day running of the business.

“GSK has not been shaken by the recent collapse of confidence surrounding the IPO market. Given the re-ignition of growth at ViiV, GSK directors have also claimed they are in no rush, and will carefully consider the timing of the float relative to market conditions.

“ViiV analysts appear wary. Some have pointed to ViiV's impressive portfolio of future products, ~11, with another in clinical trials. It also raked in £373m in the third quarter, representing an 18% increase on sales in the same period last year. But others are wary of the nature of HIV medicines. As a virus, HIV eventually builds resistance against all antiretrovirals and a vaccine or cure has long-eluded the industry. ViiV's hopes lie with a long-lasting medicine, injected once a month, which has delivered encouraging results in mid-stage trials.”
 

•Salmon prices started rising last year and will continue rising until 2017, according to the global head of animal protein at Dutch Rabobank, speaking at a conference in Chile. Wholesale prices will remain above NOK 38/kilogram ($2.60/lb) and may even rise to NOK 40.

Salmon farmers, on average, break even at 25 kroner. “The high-price environment is here to stay,” the bank analyst said. “Profitability will be strong.”

Rising demand in emerging markets comes as richer consumers seek a healthier diet, with more fish. Chilean farmed salmon supply won’t grow over the next two years as the farmers meet regulatory requirements to get rid of lice infestations.

And Norway’s farms are producing close to peak capacity, according to Marine Harvest, Norway’s biggest operator., which we own as MHG. Our Thanksgiving feast this year will feature gravelax, made by our part-Swedish hostess, before we hit the Big Bird.

• Royal Bank of Scotland will delay its privatization still longer because it had to create GBP 400 mn in reserves for fiddling exchange rates and mis-selling loan insurance to UK clients. We own its US$ preferreds.

• Deutsche Bank rerated Reckitt Benckiser RBGLY to buy with a GBP 60 target price. We probably will get RB Pharma shares and they will be sold off by index-trackers (as they will not be in the FTSE.) Depending on the valuation we may be buying more, writes Martin Ferera.

• Novo Nordisk opened a new Danish research center focused on diabetes and weight loss today. NVO.

• Agrium hit a new 5-yr high. AGU had a good quarter and as I wrote yesterday there is a good future for fertilizer growing now.

Filling in Index Gaps

• To fill in the gaps, our Jordan stock is Hikma Pharma, a fast-growing generics pharma stock, listed in Dubai and London as a GDR.

• Among the Israeli stocks not included in the TASE index but covered by Blue Star's is Caesarstone Sdat Yom, the kitchen-counter maker run from an Israeli kibbutz, but listed only here. CSTE.

• We own Nokia (NOK) which again dominates the Helsinki exchange.

• Our Luxembourg-listed former Singapore stock is l'Occitaine en Provence, LCCTF, which listed first in Asia for marketing reasons. We converted it free when it added a Luxembourg listing.

• Yandex counts as Dutch rather than Russian. YNDX.

• And thank goodness Orocobre counts as Australian rather than Argentinian. OROCF.

Fund news

• Japanese stocks and funds rose sharply on the increased QE levels. We recently doubled down on Japan  adding Aberdeen Japan, JEQ, to our Japan Small Cap holding, JOF. Both are closed-end funds.

• We own 3 funds to hedge the rising dollar which otherwise would penalize our global portfolios. These are recommended for all US readers: Powershares DB US$ Bull, UUP; ProShares Ultra Short Yen, YCS; and for non-Canadians, Horizon US$ DLR-Toronto.

• Buying gold or gold mining shares also hedges against the $ rise but less efficiently.

• Fibra Uno is paying NIS 0.248 in dividend to its shareholders as of Oct. 7. FBASF is a REIT.

• Herzfeld Caribbean Basin Fund extended the expiration date of its previously announced non-transferable 3:1 rights offering to purchase more shares of the fund to December 4. CUBA.