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Interesting Stories That You Missed

Posted by rantaboutit on March 19, 2007

Over the past few days i came across some interesting news/facts which deserves some limelight.
Basic Material ETFs
ETFs that focus on large-cap companies with exposure to basic materials have had nice returns for the year. Why is that so ? Analyst believe U.S. economy is growing and a growing economy needs materials. Returns on the 2 popular ETFs are
  • Vanguard Materials ETF (VAW) = 8.3%
  • Materials Select Sector SPDR (XLB) = 7.5%
Top companies in both of these ETFs are: Du Pont (DD), Dow Chemical (DOW), Alcoa (AA), Monsanto (MON), and Phelps Dodge (PD).

Tax Efficient ETFs
Many of the newer ETFs are more specialized which could effect their tax efficiency in different ways.
Here are 5 funds that are top-rated for consistent returns and tax efficiency:
  1. iShares MSCI Austria Index (EWO): 5-year return of 36% and over that time lost 0.4% to tax costs.
  2. iShares Russell 2000 Value Index (IWN): 5-year return of 13% and over that time lost 0.5% to tax costs.
  3. Vanguard Small Cap Value Index (VBR): 3-year return of 14% and over that time lost 0.5% to tax costs.
  4. iShares Russell Mid Cap Value Index (IWS): 5-year return of 15% and over that time lost 0.7% to tax costs.
  5. Vanguard Value Index (VTV): 3-year return of 13% and over that time lost 0.5% to tax costs.
China Raise Interest Rates
China’s central bank said it would raise both its lending and deposit rates by 0.27 % points to bring investment and credit growth in check and help balance the economy. The one-year benchmark yuan deposit rate would rise to 2.79% from 2.52%. The one-year benchmark lending rate is to rise to 6.39% from 6.12%.

Energy Market
John Segner, manager of the AIM Energy fund, which has 17% average returns over the last decade said that the energy market will see a temporary improvement in the supply-demand balance in 2007, but will then return to a supply shortage in 2008 and 2009. Demand will continue to rise, driven by India and China, but supply from non-OPEC countries, particularly Venezuela, Nigeria, Iran and Iraq, won’t rise sufficiently.

No Wal-Mart Bank
Wal-Mart Stores Inc. (WMT) is dropping its bid to establish a bank after months of heated debate over whether the world’s largest retailer should be allowed to gain the added financial power of a federally insured bank. Wal-Mart announced that it was withdrawing its application for a bank charter, which aroused widespread opposition from banks, lawmakers and consumer groups, and spurred debate within Congress and before the Federal Deposit Insurance Corp.

Top Subprime Mortgage Lenders With Q4 Originations

  1. HSBC Finance (HSBC) – $12.3 billion
  2. New Century Financial (NEWC.PK) – $12.2 billion
  3. Countrywide Financial (CFC) – $10.1 billion
  4. WMC Mortgage (GE) – $9.0 billion
  5. First Franklin (Merrill Lynch) (ML) – $7.8 billion
  6. Wells Fargo (WFC) – $7.4 billion
  7. Option One (H&R Block) (HRB) – $6.1 billion
  8. Fremont Investment & Loan (FMT) – $6.0 billion
  9. Washington Mutual (WM) – $5.7 billion
  10. CitiFinancial (Citigroup) (C) – $5.0 billion
Life Cycle ETF for Investors
TD Ameritrade (AMTD) plans to offer an ETF that rebalances frequently. The ETF will be a life cycle ETF with a target date for the investor, who will choose a year close to when he plans to retire. Life-cycle funds invest in multiple asset classes and become more conservative as time passes.

Cisco buys WebEx

Cisco (CSCO) bought WebEx (WEBX) for $3.2 billion. WebEx is a specialist on online conferencing and collaboration, and one of the most successful players in the software as a service segment. Buying WebEx creates a new point of competition with Microsoft (MSFT) which offers various collaboration tools of its own.

Microsoft buys Tellme Networks
Microsoft (MSFT) will buy privately held voice-recognition software company Tellme Networks for a estimated price of $800 million. The purchase will give Microsoft several promising new capabilities, particularly in mobile search. Tellme Networks already does more mobile search support than Google and Yahoo combined. Microsoft already offers a product that combines e-mail, instant messaging and VoIP into one voice-activated client; but the Tellme acquisition gives it advanced, enterprise-class speech recognition technology.

Wal-Mart Movies
Wal-Mart Stores (WMT) will team up with Fox Broadcasting to offer movies and television shows on its new online download service, and the collaboration between Amazon (AMZN) and TiVo (TIVO) to offer recordable content for download. This is bad news for competitors Netflix (NFLX) and Blockbuster (BBI).

Emerging markets ETFs
During the recent meltdown emerging markets ETFs were hit bad, but Russia seemed to be one of the hardest hit. The Russian RTS index is now down 9.6% for the year. This makes Russia the worst performer year-to-date among major global benchmarks. Falling commodity prices, particularly oils and metal puts more pressure on the Russian market as well as other emerging markets which tend to have a commodity-driven economy.

Posted in Asia, China, Exchange Trade Funds, Oil, Walmart | 2 Comments »

China Gets Aggressive With Forex Reserves

Posted by rantaboutit on March 13, 2007

Did you know China has more than $1 trillion in foreign currency reserves after posting huge trade surpluses year after year !! Add to that China’s reserves is growing at $20 billion every month !! For China, that is simply spectacular, for U.S. well…sigh*

So what does China do with the 1$ trillion ? Right now they have invested approximately 75% in low-yielding U.S. Treasury securities and other dollar-denominated assets. The rest in euros and a small amount in yen. Returns on this investment has been less than 3% last year. Not quite exciting. But that is going to change….

Need a Change
China now plans to make better use of their reserves and reap in more profits. One way to do that is create an investment company, and that is exactly what they are upto. China will soon create one of the world’s largest investment funds, with diversification in global stocks, bonds and commodities markets. It is estimated that they will allocate somewhere between $200 to $400 billion to this new venture. The company named Lianhui will buy 20-25% of forex reserves from the central bank for investment.

Why the Change ?
China wants to invest its reserves to support an economy that grew 10.7 % last year, without causing large swings in global markets. The trade gap has increased driving reserves to a record. The surplus and China’s foreign-currency holdings have left the economy awash with cash, making it difficult for the government to slow lending and investment to curb asset bubbles. The nation is trying to slow investment and lending to curb inflationary pressures and asset bubbles in property and stock markets. The surge in money flooding in, forces the central bank to drain billions of dollars from the economy every month by selling bonds in order to reduce inflationary pressures.

Temasek Model
China intends to follow the model of Singapore’s Temasek Holdings, which manages nearly $90 billion in government pension funds and other assets. Temasek Holdings average returns has been 18%. China would love to cash in on such returns.

Where to Invest ?
Chinese economists have suggested China might adopt more unusual investment approaches, ranging from stockpiling oil and other raw materials to spending more on social programs in order to encourage Chinese consumers to spend more and reduce dependence on exports. Energy firms such as China National Offshore Oil Corp, China Petroleum & Chemical might be good investment grounds too.

Is there a problem for U.S. ?
The U.S. Treasury who is responsible for the revenue of the U.S. government will take a hit if China plans to shift its investment strategy. A hit could be in the form of less assistance to finance multi-billion budget deficits and perhaps led to higher interest rates. Is this something U.S. needs to be concerned about ?

Probably not…with $20 billion a month in growing reserves, China can afford to keep buying U.S. government bonds while also channel a part into new investments. Analyst believe China is unlikely to diversify massively away from U.S. Treasuries to prevent the yuan from strengthening. The central bank buys dollars to prevent the value of the Chinese currency from rising from the inflows of export earnings. Diversifying away from U.S. Treasuries would mean selling dollars. They have a policy that they will allow gradual appreciation of the yuan, but no more than that. They don’t want to see the dollar crash.

Conclusion: China is one unstoppable dragon. With $20 billion in growing reserves every month, they could diversify without affecting their investments in U.S. Treasury. By following the Temasek’s model their returns will be in double digits. That just adds more to their cash reserves. However what is still unclear is what portion of their reserves will be diversified and what kind of adverse effects that would have on U.S. markets ? Any takers ?

Stocks/ETFs to watch: CNOOC (CEO), PetroChina (PTR), China Petroleum & Chemical (SNP) ETFs: iShares Trust FTSE-Xinhua China 25 Index Fund (FXI), PowerShares Golden Dragon Halter USX China Portfolio (PGJ). Bonds: iShares Lehman Aggregate Bond (AGG), iShares Lehman 1-3 Year Treasury Bond (SHY), iShares Lehman 7-10 Year Treasury (IEF), iShares Lehman 20+ Year Treas Bond (TLT), iShares Lehman TIPS Bond (TIP). Currency: PowerShares DB G10 Currency Harvest Fund (DBV), Euro Currency Trust (FXE)

Recommended Books:

(Source: Seeking Alpha, Bloomberg, ShanghaiDaily.com)

Posted in Asia, Bonds, China, Dollar | 1 Comment »

Foreign Investment in United States

Posted by rantaboutit on March 7, 2007

In 2004, the total foreign direct investment (FDI) in the United States (U.S.) stood at $1.5 trillion, equivalent to $2.7 trillion in today’s market value which represents approximately 10% of the total current market value of all publicly traded companies in U.S.

Geographic Breakdown

  • European companies made up 65-70% of direct investment in the U.S., with United Kingdom (UK) leading the way. 1/3rd of the total investment from Europe came from UK, with $250 billion invested in 2004. UK, Germany, Netherlands and France were the top four investors in U.S. in that particular order.
  • Asian and the Pacific firms had the next highest level of investment in the U.S., at approximately $219 billion in 2004. Japan accounted for 75% of the investment. Chinese & Indian investments in 2004 were minimal. However that is bound to change with a number of acquistions by Chinese and Indian firms.
  • Canada finished in the third spot.
  • Direct investment from Latin American investors totals $86 billion. The biggest presence from South American firms came from Panama due to it financial hub status. Brazil ranked #4 behind Mexico and Venezuela respectively.
  • Investment from Africa and the Middle East were less than $10 billion, only 1-2% of the total foreign investment. Israel was the largest investor from the Middle East, with some $4.1 billion in investments. Kuwait follows with $1.2 billion.
Sectoral Facts
  • 1/3rd of FDI in the U.S. is held in the manufacturing sector.
  • 14% of FDI is invested in the financial services sector.
  • Asian and Pacific FDI holdings in the U.S. manufacturing sector amounted to 12.3% in 2004.
Quick Review on Benefits of Foreign Investment
  • Creates New Jobs: U.S. affiliates of foreign companies employ 5.3 million U.S. workers.
  • Boosts Wages: U.S. affiliates of foreign companies tend to pay higher wages than U.S. companies. Foreign companies support an annual U.S. payroll of $318 billion. Some studies have found that foreign companies have paid wages in the past that were as much as 15% higher on average than wages paid by U.S. companies.
  • Strengthens U.S. Manufacturing: 41% of the jobs related to U.S. affiliates of foreign companies are in the manufacturing sector.
  • Brings in New Research, Technology, and Skills: Affiliates of foreign companies spent $30 billion on research and development in 2003 and $109 billion on plants and equipment.
  • Contributes to Rising U.S. Productivity: The increased investment and competition from FDI leads to higher productivity growth, a key ingredient that increases U.S. competitiveness abroad and raises living standards at home.
  • Contributes to U.S. Tax Revenues: In 2002, foreign affiliates paid $17.8 billion in taxes, which represented 12% of U.S. corporate tax revenues.
  • Increase U.S. Exports: U.S. companies can use multinationals’ distribution networks and knowledge about foreign tastes to export into new markets. Approximately 21% of all U.S. exports come from U.S. subsidiaries of foreign companies.
  • Helps Keep U.S. Interest Rates Low: The inflow of foreign capital also decreases the cost of borrowing money for domestic entrepreneurs, especially in the small- to medium-sized enterprise sector.
Some Major Acquisition In Recent Years
  • Acquisition by Lenovo, the largest personal computer company in China, of IBM’s personal computer and laptop unit.
  • State-owned China National Offshore Oil Corporation’s attempted acquisition of UNOCAL.
  • State-owned Dubai Ports World’s planned acquisition of P&O, the operator of many US ports.

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(Source: US Dept of State, Bureau of Economic Analysis, TickerSense)

Posted in Asia, Middle East, Sector, South America | Leave a Comment »