When in Europe part of my beat was the tiny Grand Duchy of Luxembourg, about which I have developed strong opinions. The mini-country looks very like Ithaca, New York, home of Cornell University, with deep gorges and dramatic scenery. And like Ithaca it has become highly dependent on outsiders, not students and faculty, but multinational corporations.

Like the townie mayor of Ithaca trying to keep the gownies happy, the government aims to make corporations, funds, and banks happy with low taxes. As one of the original 6 members of the Common Market with a Grand Duke to trot out for greeting big shots, Luxembourg seemed safe and chic and was not too near real capitalist centers.

The financiers came to what had been a steel-making center thanks to the Kennedy Administration decision to block access to US dollar bonds for the USSR by imposing a tax. A store-front in its capital, also called Luxembourg, was where the fledgeling market in eurodollars got its start. Luxembourg offered low taxes and multilingual services.

The country officially is run in French, the language of the Grand-Ducal mini-Court and the administration, based on Napoleonic rules. If you get a parking ticket it will be in French so you had better read the language to pay the fine. But the population speaks its own lingo, Letzerbuergisch, which sounds like nothing so much as Yiddish without the Slavic and Hebrew influences.

I write as a polyglot who speaks proper German rather than as a linguist. Officially they speak Platt- Deutsch. And they are over 95% Catholic. Luxembourg also welcomed Portuguese emigrants seeking to improve their lot but kept out Muslims who troubled its neighbors, Germany with Turks and Belgium with North Africans.

After steel declined some more the Luxembourg clones of the Ithaca Mayor opted to lure in more finance business, starting with investment funds buying eurodollar and other bonds. They then lured in more fund managers also offering equities, plus a little ipo market and a stock exchange. There would be no taxation at source and no reporting to the homeland (initially next-door Belgium) where the shareholders lived. But later Germans came too.

Then the Luxembourgeois innovated more, working out how to offer the borrowers on their markets ways to create finance subsidiaries. The subs of foreign companies could avoid taxes on capital they raised in eurodollar bonds. The way it worked is that the lawyers and advisors received from the PM of Ithaca a comfort letter stating that they would not be subject to taxes above a certain often derisory level. This was enough to get them to incorporate subs in the Grand-Duchy.

The government's finance and prime ministers crafted deals to allow major European companies with assets greater than Luxembourg's GNP to set up operations there. At least one of them was a fraud, the holdings of the Portuguese Espirito Santo family. And US firms also joined up.

The Mayor of Ithaca (Luxembourg's Prime Minister and former Finance Minister) however decided aim for higher office. Jean-Claude Juncker, who had cobbled together many tax deals to lure financial subs of large mostly US firms to incorporate in his country, immodestly decided to run to become head of the European Commission. Despite opposition from David Cameron, the British PM, the Luxembourg PM got the job.

He has been as disastrous as the Ithacan would have been, messing up long-term negotiations over a Greek financial bailout and the EU response to the inflow of refugees from Syria and elsewhere. Juncker has no experience dealing with refugees as opposed to Portuguese seeking to better themselves, and none with Muslims. He also was very establishmentarian finance minister which did not help on Greece.

More an Antique Roman Than a Dane

Now the whole kaboodle is under attack from within the Commission, by competition commissioner Margrete Vestanger who is 1) a woman; 2) a Dane with Scandinavian belief in fair taxes; and 3) not even a member of the inner circle because Denmark has rejected using the single currency, the euro, and persists with its kroner. Ms. Vestanger has brought into play rules dating back to the original European Union where Luxembourg was a founding member, the Treaty of Rome, articles 85 and 86. They were written to prevent the 6 member countries from giving companies special government benefits not available to their private rivals.

The original target of the articles was companies that themselves were owned by one of the six countries. But the Treaty of Rome has been extended and broadened at new members signed up. I am not sure the Vestanger interpretation would hold up in a court of law. But it sure embarrassing to Commission President Juncker.

Luxembourg is accused by the Competition chief of giving Fiat Chrysler's (FCAU) finance sub a special deal allowing it to use an artificially low value for its capital. This reduced its taxes for about a decade. FCAU says there was no preferential treatment. But they almost certainly did get the famous comfort letters before moving their financing operations to Luxembourg.

Will FCAU have to take a provision on its accounts because of the claims? Will Ms Vestanger go for getting the principal of fair taxes accepted or will she demand real money? Will the US get involved (because her other big target is Starbucks)?

Fiat so far has only stated in high legalese that there would have to be compensation adjustments for any crackdown on its payments in Luxembourg in other tax jurisdictions which these tax collectors and Luxembourg would have to agree upon. The claims go back a decade.

*To conclude the FCAU saga, (RACE) closed on its first day of trading at $55 while its parent sagged on the EU attack. to $15.165 after going over $16 in the Ferrari IPO run-up.

*Vale (VALE) stock samba'ed up despite its earnings and sales miss yesterday. Vale net loss hit $2.117 bn, nearly 50% higher than its loss in Q3 2014. Cashflow fell 38% to $1.875 bn.

Sales were down 28% y/y at $6.62 bn hit by the lower prices of iron ore and other raw materials it produces. They were down 7% sequentially, not so bad. More losses came converting into the reporting currency, the US$, from the sinking real which was barely worth 25 US cents at the end of the quarter, down from 35 cents at the end of Q2, hit by political scandals and government deficits. The less-than-royal real also caused some side effects, like a $1.2 bn loss from derivatives trading. VALE's attempts to cut its dollar debt were undermined by the currency impact and its debt topped 3.5x its cash flow at the end of Q3 vs only 1.6 times a year earlier.

Net loss compared to a prior quarter's positive result of $1.675 bn.

So how do we explain the stock going up? The main reason is that analysts were expecting these results which were already in the price. Also, The main reason according to CFO Luciano Siani for the huge loss was that “our income statement is recording the increase in [foreign exchange] debts was recorded as a loss.” Vale's new Amazon mine project is saving money for mining, shipping and other expenses. Vale shipped iron ore to China at a total cost of $34.2/metric tonne, vs $58.5 in Q3 2014. These levels are unbeatable.

Gross debt fell 2.4% in the third quarter from a year earlier to $28.675. Net debt (deducting cash) hit $24.213, off 9% sequentially form Q2. But due to a plummeting cash flow, this amounted to 3.6 times Vale's long-term adjusted Ebitda, up from 1.6 in the third quarter of 2014.

Vale said it could deliver iron ore to China, its main market, at a total cost of $34.20 per metric ton in the third quarter, down from $58.50 a year earlier. Vale sold the ore for an average of $46.48/mt vs $68/mt a year before. The spread was actually higher this year!

*Posco (PKX) stock rose despite its appalling results yesterday for a couple of reasons. First its brass and staff will invest 10% of their salaries in its shares, supporting the price in a traditionally Korean way. Also it will divest 89 affiliated companies to reduce overhead and debt. This is needed as debt is 4x its Q3 earnings before interest, taxes, depreciation, and amortization (cash flow.) Finally PKX will inaugurate an un-traditional quarterly dividend, the first Korean firm to do this. it yields 4% but is not earning that much.

Drugs

*Benitech Biopharma (BNTC) issued an abstract of clinical data on its Phase I/IIa study of TT-034 for hepatitis C which will be fully presented in the ‘late-breaking poster’ session at the 66th Annual Meeting of the American Association for the Study of Liver Disease (AASLD) in San Francisco on Nov. 13-17. The news appears to be that the first-in-man treatments is safe and works against hepatitis C.

The abstract published on the conference website gives interim results from patients in the first three cohorts in BNTC’s Phase I/IIa study of TT-034, a DNA-directed RNA interference agent (ddRNAi). Phase I is to get information on the safety of the agent, by doubling the dose of sequential recipients with hepatitis C of the gene silencing gene therapy.

Apart from no serious adverse effects, the trials are very positive. The lowest initial dose resulted in very low levels of transduction as expected. The second doubled dose resulted in substantially higher levels of TT-034 in the hepatocytes, the predominant cell type in the liver, yielding 0.48, 3.65 and 10.44 copies of TT-034 DNA per cell in the three patients respectively.

The first subject administered with the third dose had 17.74 copies of TT- 034 per cell, indicating that a significant portion of their hepatocytes may have been transduced, and expression of anti-HCV shRNAs was clearly detected in the transduced hepatocytes.

This means that as the dose escalated the genetic makeup of the liver cells changed to block hepatitis C. BNTC is Australian and speculative.

*Novartis (NVS) is upping its cancer research by buying more startups: for an unpublished amount Boston's Admune Therapeuutics which is working on increasing the cytokine interleukin-15 immune attack on tumor cells; and for $15 plus milestones to Spain Palobiofarma for a new product which blocks adenosine receptors which bind cancer cells and immune cells. It licensed an antibody for TGF-beta earlier from Xoma, which also unleashes the immune system against cancer, for up to $517 mn including milestones. It also has a house immuno-oncology drug in phase II, CTL019, a CAR-T treatment which teaches patient immune cells to attack cancers. The idea is that the quartet can be tried in various mix-and-match combos to see what works.

*Opinions are mixed on Reckitt Benckiser (RBGLY). To start with RBGLY upped its revenue target when it reported yesterday, by 5%. Now for the analysts.

Barclays rates RBGLY underweight with a GBX 5400 target price. JP Morgan Cazenove rates it overweight with a GBX 6300 TP. GBX stands for sterling pennies.”Tempus” in The Times (of London) calls RB “old reliable”, noting that it continues to beef up Chinese and emerging market sales of its branded goods like condoms, cough mixtures, and cleaning products, up 10% YTD before currency effects. He also wrote that in China 25% of sales on via the internet. Margins are up 14% which the company, he says, called “moderate to nice”, “over which one must be a bit of a Kremlinologist”. The shares are up 20% YTD but now are at 26x earnings. So he says to consider “taking profits and finding a better income elsewhere.” RB made another new high in London trading this morning after The Timescame out. I think CEO Rakesh Kapoor is nothing like Putin and want to let my profits run.

Non Luxembourgeois Finance

*Eduardo Garcia writes from Mexico City that Bank of Nova Scotia (BNS), via its local Scotiabank Inverlat, will issued a 3-yr market-listed yield instruments for up to 25 bn Ps or $1.5 bn. A first peso bond tranche for 2 bn ($120 mn) has already hit the market. The next will be for stock-exchange listed instruments in either currency. The breakdown will depend on the market. For the straight peso bonds, BNS will pay a quarter percent over the Mexican interbank rate which works out to 3.55% for the first interval after the sale takes place tomorrow. The bonds are rated AAA. Next Monday there will be yet another offering of pseo investible units linked to the Mexican consumer price index. Eduardo edits www.sentidocomun.co.mx/ I think his complex offering is a way to pioneer new ways to raise money for future corporate clients

*Israeli Delek Group (DGRLY) has taken control of the Canadian Ithaca Energy Inc firm by a private placement at C$1.05, a 19% premium. It took a minority stake in the Canada firm's North Sea sites. DGRLY meanwhile used a shelf registration to raise NIS 800 mn from institutional investors at 97.7% of par value by Dutch auction.

Separately, DGRLY announced that it has postponed the drilling of another Block 12 test well in Cyprus until next May 23 which is also the date when the concession runs out. The two sides are working on an amendment and also trying to square away Israeli govt concerns about developing the existing Aphrodite gas field next to Leviathan (and possibly joined to it.) Jerusalem and Nicosia are both playing political hard ball.

*Now that it has all the regulators lined up for its merger with Alcatel Lucent, Finnish Nokia (NOK) is up ~2.5%. NOK.

*British chartists Investors Intelligence wrote Irish CRH “We highlight CRH as a Bull. Finds price and relative support at 1,700. Trend Score:55.” They are writing about the London share which trades in GBX.

Fund Fun

*I should admit up front that the reason I bought into Pershing Square Holding (PSH) a Dutch-listed closed-end fund manged by activist Bill Ackman, was to learn how it is done. Yesterday PSH took a hit as Valeant, the share Mr Ackman boasted was his ultra-fave, which may be been as much as $2.8 bn according to Bloomberg.

VRX was hit by investigative reporters of Southern Investigative Reporting

​ Foundation (which earlier did a number which led us to sell Brookfield Renewable in Canada, unjustifiably it turned out), and short-seller Citron Research. Apart from the rhetoric (“Enron part II” mainly because both firms were headed by an ex-McKinsey advisor) the main new negative about the Canadian drug firm was the charge that it was boosting its sales by “channel stuffing”. It was selling to controlled specialty pharmaceutical entities, SIRF wrote, Philio RX and R&O Pharma, because they all had similar offering statements and used a single toll-free 855 number.

As the stock plummeted, PSH bought over 2 mn shares, competing with the shorts who were covering.

The real question is whether Citron and SIR​F are onto something. The main reaction among stock analysts, again according to Bloomberg, was that VRX had already responded to these issues in its conference call and that they were not new. “Sell first and ask questions later” the UBS team covering VRX commented. “Investors in this market are ultra-cautious.”

Nomura analysts flatly said “our own diligence suggests [it is] not accurate” to allege “that these specialty pharmacies were created to book revenues for products not sold.”

JP Morgan noted that revenue generated by the specialty pharm channel is only booked when the prescriptions are filled. And they have modest inventory of only $15 mn.

Merrill Lynch added that “VRX presents an enhanced buying opportunity” because of its “diverse businesses and sticky durable asset base”, but “will remain volatile.”

They all have buys on VRX but even Morgan Stanley which rates it hold said “depressed VRX shares present a buying opportunity.”

There was a downgrade from BMO to neutral from outperform: “Valeant's structure may not be illegal but we find it aggressive and questionable. The downside from here is not limited to the specialty pharmacy business (that is priced in). What else is there out there that we don't know?” And even the they then added “the stock is unquestionably cheap in our view.”

PSH closed with a per share NAV of $23.41. VRX opened yesterday at$110 after falling as low as $88.5 the day prior. It then fell back again by over $21 and is now $97 and change. Officially there are 7 mn short sales but I suspect they took profits by now.

At the end of the day, VRX closed at over $111.