The Old Lady Of Threadneedle Street & Zika
Two countries produced big news last week. First, the Old Lady of Threadneedle Street (the Bank of England) slashed interest rates by half to 0.25% —the lowest rate in the 322-year bank history. The chief economist there said in July he would “rather run the risk of taking a sledge hammer to crack a nut than taking a miniature rock hammer to tunnel out of prison.” So the move was expected by the market.
It was accompanied by a quantitative easing move that was not as well signaled earlier: called the term funding scheme it amounts to £100 bn to buy bonds. Sterling and the London stock exchange rose.
Then good US employment figures came out, showing 255,000 new jobs created in July, much higher than the 180,000 forecast by economists. The US unemployment rate is now 4.9% according to the Bureau of Labor Statistics. The odds of another Fed rate rise have increased because of good performance of our economy on the job front, and one result was that gold fell and financial stocks rose.
From Neue Zuercher Zeitung, a progress report on the search for a vaccination against Zika virus: The US NIH has begun testing a vaccine in healthy humans after animal tests in rhesus monkeys of a triple virus protection jab against the Brazilian version of Zika.
This result was published on the home page of Science, a weekly publication which pointed out the need for a vaccination to prevent maternal Zika infection from leading to births of babies with brain damage. The experiments reported were by Dan Barouch at Harvard Medical School in Boston.
They used vaccines tested first on mice which produced total protection. Then they used 2 of the 3 vaccines on 16 rhesus monkeys (different pairs in each case) and then exposed them and the control group of another 16 rhesus monkeys to the virus. The monkeys which got the two vaccines did not get infected, but one of the control monkeys was infected. An autopsy found Zika virus not just in this poor monkey's blood but also in its cerebo-spinal fluid and in other cells.
Meanwhile the other inoculated 16 monkeys' blood showed the presence of antibodies against Zika. The 3 vaccines tested in combinations of 2 per monkey were the classics: inactivated full-length prM-env from the plasmid ring of the Zika DNA; transfer of purified lgG from vaccinated mice; and implantation of “Trojan horse” bits of Zika DNA (CD4 and CD8) to be transmitted by a harmless virus host.
*Germany's Allianz SE (AZSEY) had a rotten quarter with revenues down 2.5% from prior year (at euros 29.4 bn) coupled with ultra-low investment returns on its holdings from premiums and serious payouts for disasters. These included everything from US hailstorms to floods in Germany and France, to wildfires in Canada. Insurance firms are victims of global warming and central bank zero interest rate policies.
The result was that quarterly net income fell by 44% to euros 1.185 bn while EPS plummeted 46.3% euros 2.4 per share, and even worse for dollar stockholders.
The key P&C combined ratio was 96.4% vs 93.5% the year before. The combined ratio measures profitability by adding up incurred losses and expenses and dividing them by earned premiums. Lower is better. This shows that AZSEY has been able to recuperate some of its payouts by boosting premiums. It also hugely boosted premiums for new business in its life-health insurance lines, up 62.2% in Q2 and overall, new business came in at margins 2.6% higher than old.
It also shifted its life insurance business toward greater capital efficiency, which cut revenues but increased profits from new business.
Allianz also put at “held for sale” its South Korean sub which will generate euros 352 mn from buyer Anbang eventually. However the classification also cut Q2 net income. Its year ago income was also boosted from the sale of its US Fireman's Fund personal insurance line, which of course was not repeated.
And for US owners also, it finally got around to better integrating its Pimco fund management operations in San Diego with its parent fund management ones in Frankfurt, Germany. It has cut its wage bill with a spate of retirements and named Manny Roman, a Frenchman hired from Man Group in Britain, as Pimco CEO. It hired several new portfolio managers at Pimco, which still has $1.5 bn under management, luring them in with a chance to make a name for themselves and live in sunny southern California. In the quarter, operating profits dropped by 9.3% from continuing net outflows to the equivalent of euros 961 mn. Thanks to lower operating expenses, the profit in this area, at euros 498 mn fell 1.4% y/y but actually rose 8% sequentially. Way to go, guys.
CEO Oliver Baete said that “barring any unseen evens or unexpected turbulence in the capital amrkets, we cofnirm our goal of achieving and operating profits of 10.5 bn euros, plus or minus 500 mn euros, for the entire year. We remain strongly capitalized and our carefully managed risk profite allows us to withstand market shocks.” Its operating profit last year was euros 10.7 bn. Baete also aims to get sales up 5% on average per year over the enxt 3 years and to bet return on equity to 13% by 2018. Bloomberg quoted Thomas Seidl of brokers Sanford Bernstein as predicting a 70% chance of a 1-2 bn euros buyback of shares in H2 this year.
We bought into the German insurer after the Bill Gross exit judging that the parent was going to be able to recuperate from the loss of its US rainmaker. We were wrong. But I can see the potential in Germany and certainly like this evolving insurer better than others which do not have to deal with a crisis. The stock price fell over 4% today in Frankfurt and is down by about a quarter YTD, fractionally higher than the drop in overall European insurance stocks, 22%.
Mr Gross now runs Janus Global Unconstrained Bond Fund and warns, rightly, that “at the zero-bound rates offered by many central banks, [commercial] banks, insurance companies, pension funds, and 'Main Street' are strirpped of their ability to pay for future debts or retirement benefits.” He also expects central banks to roll over the debt they are buying rather than selling the bonds back to the market, which he expects will go on for 50 years.
Drug Stocks
*Teva (TEVA) is launching a generic of Novartis's (NVS) Gleevec/Glivec (imatinib mesylate) pills in various sizes in the US for treating various forms of leukemia, gastrointestinal stromal tumors, dermatofibrosarcoma protuberans, and other cancers. Back when I first was told about Teva by an analyst in Paris with Edmond de Rothschild Group of Switzerland, back in 1990, he predicted it would become as powerful as the Basel-based Swiss pharma giants (whose names were different then). Now it has come to pass and the EdRG is focused on drug startups.
*Novo Nordisk (NVO) fell over 10% in Danish trading today before recovering once Wall Street opened, down only 5.5%.
*To boost awareness of the need for 5-variant meningitis inoculation among young people, GlaxoSmithKline (GSK) has designated Jamie Schanbaum, a paralympic cyclist and meningitis survivor as spokeman. Suffering from what he thought was the flu in college, he wound up losing all his fingers and both legs below the knees to meningitis. The GSK jab, Take-5, protects against a, b, c, w, and y, while most competing vaccines omit the BV which causes about 30% of US meningococcal disease.
*Bloody bore Benitec Biopharma (BNTC) again is on an uptrend, for no good reason I think. BNTC is Australian.
Exceptions and Profit-taking
*The fertilizer firm with a difference (retailing, and offering a gamut of plant food) Agrium (AGU) of Canada was upped to underperform from sell after its results, by French Crédit Agricole.
*Institutional minority shareholders from insurance and pension funds in govt-controlled Ecopetrol have nominated an independent member to the board of directors to be considered at an extraordinary general meeting. This is a breakthrough measure in corporate governance agreed to by the the current board. The candidate is Juan José Echavarna Soto, an economist with a masters from Boston U, a PhD from Oxford, who helped create the Caricom trade group, and is a former director of the Colombian central bank, Banco de la Republica.
*While most India firms will gain from the eventual end of inter-state taxes voted by the Upper House of Parliament at last this week, the trucking industry will require fewer commercial vehicles because they won't all be queuing up at the state-borders to pay under a goods and services tax. That will hurt Tata Motors (TTM) which produces trucks and vans for the India market. Sell half of TTM at $38.7637 taking profits.
*With incredible difficulty I have begun exiting the Japanese small caps Chris Loew picked for us, now that they do not trade easily in the US. I sold Yamaya at $15.15. It took 3 phone calls and I couldn't have afforded this from Europe where E-trade no longer offers toll-free access.
*I also put in an order, not yet executed, for sale of Xin Yi Solar Holdings of Hong Kong which fell between the bid and the ask on a huge spread.
Funds
*Saba Capital Mgm of the Cayman Islands has invested in another 6.9% of the shares of our Advent Claymore Convertible Securities and Income closed-end fund, bring its stake to 12.87% of the fund, AGC.
*Panana's Copa Holdings (CPA) was downgraded to hold from buy by HSBC analysts. We sold earlier.
Disclosure: None.
"Insurance firms are victims of global warming and central bank zero interest rate policies." Just another reason to stop this zero rate nonsense. Interesting article all the way through.