Tango-terapia and Dog Walkers

    Argentina is not given enough credit for its contributions to world culture. We all know about the tango, but did you know about tango-terapia, which helps overcome autism and depression by sexy dancing? Tango-terapia gaves a legitimate function to the national dance.

    It was in Buenos Aires that dog walking was invented, after people stopped going home for lunch. Fido could not be left all day without making a mess on the carpet, so trusted youths from the neighborhood were employed to walk the dog. For the unemployed, it certainly beat sorting people's garbage, another source of funds in B.A.

    Now Cristina Fernandez, the Argentina Presidente, has worked out a new breakthrough for economics to go with the tango and the pooch-walkers: nationalizing private pension funds. The closely-regulated Argentina fund administration industry will be taken over by the state. Pension funds had been required to keep 60% of their assets in bonds (and allowed only a maximum of 40% in shares). Given the shortage of peso private sector bonds, in fact the FPPs have 55% of people's pension money in government debt.

    If the state takes over the funds, it can write off the debt, the beleagured Peronista president figured. She presented the measure as of a piece with interventions in foreign markets to stave off the crsis. The Casa Rosada was only copying the White House and the Fed.

    Unfortunately, the Bolsa and the bonos markets didn't agree. The stock market fell 11% on the news and the yield on bonds rose to 24% as their prices plummetted. Only hefty intervention kept the Argentine currency from falling too.

    The good news is that after Argentina's last default, there are few foreign holders of Argie bonds, most of them investors who refused the derisory buyout of 2001.

    *Argentina does impact the world. Our Santander, a Spanish bank with an Argentine network and an Argentine pension plan sub, was zapped by 6.5% in European markets today. STD is not alone among Spanish majors hurt by developments on the River Plate.

    *With Galp of Portugal, Companhia Vale do Rio Doce bought Repsol's stake in a Santos oil field under exploration. CVRD is benefitting from the impact of Argentina messes on Repsol, a Spanish oil company which produces a lot of gas with its YPF sub in the south Atlantic offshore Argentina. RIO also will invest $150 mn in a new open pit iron mine in Serra Leste (northern Brazil) to produce 2 mn metric tonnes/yr.

    *In Brazil, there is talk (according to O Estado newspaper) of China's CNOOC investing in the huge "pre-salt" petroleum fund off the coast, and in sugarcane ethylene production on land. This could pay off for beaten down BRGGY.PK (BG of Britain, partner in the offshore fields) and CZZ (Cosan), the leading producer of ethylene from sugar. The U.S. corn ethylene boondoggle is not the only venture in this area. 

    *OAO Gazprom publishes its accounts ad lib; the Russian gas company, controlled by the State, does not operate like a normal business. So today we got the figures for OGZPY.PK's Q1 of 2008. It earned 273.44 bn rubles in net profits, up 30% from prior year levels. Today that works out to $10.34 bn, although the sum was higher back when the money was earned. (The ruble is sinking fast with the sinking price of oil.)

     Besides the rubbished ruble, the price of oil (and therefore natural gas) is off since the end of Mar. too. Then higher domestic gas prices, sustained domestic demand, and higher priced exports fed the energy shock which made Gazprom money. Today its debt, a total of $55 bn, is viewed as "distressed" in the collaterized debt market, incurring 1.14% charges for coverage. The current program is for OGZPY to repay $6.6 bn in 09 and 12.5 bn in '10. But this presumes that oil remains over $70/bbl.

     I kind of hope the Kremlin will send the cavalry to help. But the Russian state also depends on high oil prices for its budget. Unlike conservative Saudi Arabia, whose budget assumes the price of a barrel of oil will be $50, Putin too needs high priced oil. So all that talk about a gas OPEC (reported yesterday) and today's visit of OPEC's head to meet in Moscow with deputy energy minister Igor Sechin is about as convincing as Cristina Fernandez.

      Mr. Sechin is talking about Russia creating reserves (i.e. keeping oil and gas off the market) in order to become a "swing producer" to stabilize prices, a function ow being performed by the Saudis. But unlike the desert kingdom, Russia has no rials for this ploy. Having said all that, I still think Gazprom is so cheap I won't sell it now. But I wish I had taken profits earlier.

     *GlaxoSmithKline reported Q3 results today in London. GSK was of course hurt by the association of its Avandia diabetes drug with heart disease, however ill proven. Sales were off 23% for that, but it nonetheless reported net profits of GBP 1.03 bn ($1.72 bn) or 20 British pence per share, down 21.5% from prior year levels. In dollars the drop was only 17%. Revenues rose 7% to GBP 5.88 bn.

    Moreover, if you exclude the costs of restructuring and taxes, the number analysts try to figure, GSK reported per share earnings of 25.2 pence, up 6%. This beat the consensus which was 24.3 pence/sh according to Bloomberg. Sales of Advair (against asthma) rose 7% to GBP 982 mn. However, generic copy-cat drugs threaten future sales of Lamictal (for epilepsy), Wellbutrin X (for depression), Coreg (for high blood pressure) and even Requip (for restless leg syndrome.)

    To riposte, GSK has a bundle of programs. First of all, it is increasing sales in developing countries (like Egypt) but buying drug firms; it is also increasing its own ability to make copy-cat drugs with buys for example in South Africa. Then too it is focussing on consumer products liek teh oral purchase reported yesterday. It is focussing on vaccines, a growth area. It is also going to take advantage of the current financial crisis to buy up companies starved for cash in the genetic and biotech areas, Andrew Witty, GSK's new CEO forecast. And it will continue to cut back on in-house pharmaceutical research in facvor of outsourcing. It is cutting 650 R&D jobs mostly in the U.S. Research Triangle area. 

    GSK is also considering cutting down on frequent visits to U.S. doctors of its drug sales team; the high frequency sales model is not typical of other GSK markets and its time may have come. These cuts will save GSK GBP 700 mn next year, double current levels, according to GSK.

    GSK maintained its forecast of single digit sales and provit growth this year supposing that currencies do not move much. (It sells 45% of its drugs in the U.S.). It willstop its share repurchase (buy back) program next year, in part I think because analysts don't track it properly, and instead increase its divided to 14 pence/share.

     Excuse me. Yesterday I mistakenly said Goldman Sachs had removed GSK from its conviction buy list. In fact, it was removed from Goldman's conviction sell list. GSK was rated a 'buy" today by Peter Cartwright of GGA, a British broker. He expects eps to hit GBP 105.6/sh this year and 106.8 next year.

     *Another error pointed out from Mexico City by Eduardo Garcia in yesterday's blog: Asur is not builind a new airport in Huatulco on the site purchased from the Mexican govt. agency which owns the land. The airport already exists and is being run by ASR in the Mexican Pacific coast. The site will be used to build a hotel.

    *Crucell won a buy recommendation today from an analyst at UZA in Holland. He expects it to lose 11 eurocents/sh this year and 10 eurocents next year. CRXL is the kind of company that will be confronting GSK bargain-hunting in the future.

     The blog is late because I went back to sleep after the GSK conference call.