Posts Tagged ‘Last Decade’
Monday, July 2nd, 2012
Emerging Markets Radar (July 2, 2012)
- China may lower the bank reserve requirement ratio “soon,” China Securities Journal reports on its front page this week. It seems further reserve requirement ratio reduction is the market consensus.
- Singapore’s industrial production increased 6.6 percent year-over-year in May, rising for the first time in three months as increased production of pharmaceuticals and petroleum offset a decline in electronics.
- Korea’s industrial production rose 1.1 percent year-over-year in May, the most in four months as a weaker currency supported exports.
- The Philippines is spending more on roads and schools, though it resulted in a budget deficit of $469 million in May.
- China’s benchmark power-station coal price at Qinghuangdao port declined the most in more than three years amid inventories that are almost a third higher than 12 months ago, which is probably pointing to weak power generation.
- Korean manufacturers’ confidence dropped to 84 for July, a four-month low.
- The Czech Republic’s central bank cut interest rates by 25 basis points from 0.5 percent from 0.75 percent previously, in an effort to spur the slowing economy.
- Indonesia has been able to attract increasing foreign direct investment (FDI) in the last decade, and the momentum may continue due to vast business opportunities in the country. The money inflow from FDI should help mitigate currency risk.
- Eurozone made a step toward genuine economic and monetary union by introducing a deposit insurance scheme for the European banks, sparking a strong positive response from the financial markets. Spanish and Italian yields contracted, while equities rallied.
- The cement sector was met with profit warning by H share listed companies due to a decrease of cement prices and a margin squeeze, indicating over capacity and weak construction demand in the first half of 2012. For the cement price to rebound, it needs more infrastructure projects.
- Hungary is on the verge of replacing its special banking tax with a so called transaction tax, with the government sharing in banks’ income generated from fees and commissions.
Tags: Basis Points, Budget Deficit, Cement Prices, China Securities, Coal Price, Construction Demand, Currency Risk, Deposit Insurance, Economic And Monetary Union, Economy Opportunities, European Banks, Fdi, Foreign Direct Investment, Insurance Scheme, Korean Manufacturers, Last Decade, Market Consensus, Profit Warning, S Central, S Industrial
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Friday, May 25th, 2012
Via Nic Colas of ConvergEx Group
There’s been a lot of hand-wringing about busted Initial Public Offerings of late, but the process itself is hardly rocket science. Like Tolstoy’s comment about families, every “Happy” IPO is essentially the same, while every miserable one is different in its own way. There are rules to the successful IPO, and today we offer up Nic Colas’ manual, a step-by-step checklist for investors to assess if an offering is on track. From maintaining the illusion of scarcity to managing company and investor expectations, the road from salesforce “teach-in” to final pricing is narrow but well-marked.
I spent the better part of a decade as a senior U.S. equity research analyst at Credit Suisse in the 1990s, covering the auto and auto parts sector. This was in many ways the heyday of the equity research function at large investment banks, largely because analysts were so deeply involved in capital markets transactions as well as mergers and acquisitions. In my nine year run I did a variety of lead and co-managed Initial Public Offerings as well as secondary equity issuances for the likes of Chrysler, General Motors, Budget and Dollar Thrifty Rent-a-Car, Goodyear Tire, Ducati, as well as a variety of lesser-known auto aftermarket parts companies and foreign automakers and suppliers.
The process of raising capital in U.S. equity markets has changed very little in the last decade – far less than other parts of the market such as electronic trading. Companies still choose bankers based on formalized pitch meetings with positioning and valuation discussions. Analysts do play a smaller role at the front end of the process, but their buy-in is every bit as critical during the marketing of the deal. And equity salesforces still have an important position in the workflow, pitching the investment merits of the company at hand to first get a meeting and then an order from a long-only or hedge fund client. Issuing stock is still a basically a specialized house-to-house search for appropriate owners, setting market expectations for near term performance, and getting the equity story out in a consistent and accurate manner.
At the same time, mistakes still happen in even the most well established business processes, as we have seen over the past week. No need to “Name names” here, because it is not the point of this note to rewarm the leftovers of an already well-publicized failure. Rather, as I watched the drama unfold in all its can’t-look-away-from-the-car-accident glory, it occurred to me that the wounds of the past week were somewhat self-inflicted. There are rules to doing an Initial Public Offering. By and large, investment banks follow these “Commandments” to the letter. But when they don’t, well, that’s when someone loses an eye.
As I reminisced about the various transactions I witnessed during the 1990s, I started to jot down what I realized are the unwritten, but critical, rules to a successful public offering. They apply reasonably well to both IPOs and secondaries. And – conveniently – there are ten of them.
Our “Ten IPO Commandments” are as follows:
1) Create The Illusion of Scarcity. The biggest challenge to a successful stock offering is to convince the base of buyers that there is much more demand than supply. Raising the price range of an offering a good sign. Increasing the number of shares is much more problematic and requires a “Measure twice, cut once” approach. It is, after all, a signal that the sellers – who are almost always better informed than buyers – think the price of the offering is compellingly attractive versus their knowledge of the company and its prospects.
2) Maintain a Consistent and Improving Narrative about the Business. For an IPO, there is a fairly long window between when you FedEx the initial documents to the Securities and Exchange Commission and the pricing of the deal. Months, in fact. Investors’ initial contact with the company comes when they read that initial filing. From that point on, they want to see and hear an improving story about the business and its prospects. If that means keeping expectations and commentary about the business modest at first, so be it. Trajectory is everything.
3) Make Management Available To Investors. Chairmen/women and Chief Executive Officers rarely achieve those positions without a healthy dose of self-esteem. And they often bridle at being quizzed about their company by investors who know much less about the business than they do. Fair enough, but it is part of the process and investment bankers need to deliver that message and get the most senior people to travel on the roadshow. My most memorable experience with rocks-star management was Lee Iacocca, the former Chairman of Chrysler, and a bigger-than-life personality. The key to making sure he was happy on the roadshow was to simply book the biggest hotel meeting space in all the major cities on the agenda. We called him “Sinatra” and he enjoyed the nickname. And he was happy to go anywhere and meet anyone after selling out the big rooms. Investors appreciated that, and I believe they cut the company a lot more slack over time because they had seen Sinatra up close and personal.
4) Talk to your fellow underwriters. The best capital markets officers I worked with always maintained an open dialog with their fellow lead and co-manager counterparts. More information about how the market hears a story is always helpful. And yet certain investment banks have a reputation for keeping things very close to vest. Caveat emptor there.
5) Know Who is Buying. “Building a book” is the tough part of any stock offering. How much is “Real” – legitimate orders from institutions who want to own the stock – and how much are “Flippers?” Sadly for many capital markets desks, buy-and-hold institutions now trade far less than faster-moving hedge funds. As deals heat up, customers will try to leverage their importance to the day-to-day trading operation of the underwriters in return for better a allocation.
6) The IPO is Just the “First Date.” Many companies think of the IPO as the end of a long journey, which may have started in a dorm room or a garage and ended by ringing a buzzer or a bell. But for investors, that sound is the beginning of their involvement with the company. No matter how great the business model or convincing the management team might be, the goal posts have shifted. Bottom line – as a company, want your IPO to work on day one, week one, and month one. It will pay dividends when you come back to the capital markets. And, trust me, you’ll be back.
7) Know Who is Selling. No matter how carefully constructed the deal book might be, some significant portion of the accounts will be sellers. The underwriter needs to have a home for those shares (see Commandment #5).
8) Retail Is Different. Most equity offerings allocate 20-30% of the deal to what investment banks call “Retail.” This term connotes individual investors, but can also mean smaller institutions. If the business is consumer-focused, it will be at the higher end of the range, since these buyers are thought to be customers as well. And retail is considered “Sticky” money, less likely to sell into any initial stock price pop. The relationship, however, cuts both ways. A poorly executed IPO stands the chance to alienate customers and damage the company’s brand. All of which means retail-heavy stock offerings need to be especially well run.
9) Bankers – Manage Your Client. The best bankers I have worked with over my career had one thing in common: they established themselves as a financial expert with their clients and never let go of that position. This is not an easy thing to do, but the reason bankers add value to the process of raising capital is not their ability to socialize or play golf or feign enthusiasm for a company in a pitch. Their value is that they know more about the intersection of business analysis and capital markets than the clients they serve. If the client comes to feel that they know more about the process than their bankers, and is allowed to act on that impulse, you can turn out the lights and head home. The deal isn’t going to work.
10) Don’t be Afraid to Walk Away. This applies to both buyers and bankers alike. The stock market in the U.S. is open from 9:30am to 4:00pm every day. If you are unsure about the deal, you can still buy it the next day, or the next week, or the next month. The illusion of scarcity is just that.
And for my hustling banker friends, a story to close out this note…
The most stressful 24 hours of my professional career occurred when I found out a company I was working to take public had inadvertently hired a senior person with falsified credentials. I took the information to the head of equities, a tough as nails West Point grad. He immediately called the head of the firm and said the deal was off unless the individual with the fake resume was removed from the transaction. This was a courageous move, for the deal was extremely high profile and we were the lead manager. No one argued. I never saw the fellow again. I think he is a potato farmer somewhere.
Tags: Auto Aftermarket, Automakers, Capital Markets Transactions, Colas, Credit Suisse, Electronic Trading, Equity Research Analyst, Goodyear Tire, Initial Public Offerings, Investment Banks, Investment Merits, Investor Expectations, Issuing Stock, Last Decade, Managing Company, Mergers And Acquisitions, Rocket Science, Secondary Equity, Step Checklist, Thrifty Rent A Car
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Wednesday, April 18th, 2012
by Russ Koesterich, iShares
The Federal Reserve may be the best friend gold investors ever had.
The most important factor for gold is actually not inflation or the dollar, but rather the level of real interest rates. In fact, the relationship between gold and real rates is so critical that since 1990, the level of real rates explains roughly 60% of the annual performance of gold.
Gold generally does best in an environment in which real rates are low to negative as this means no opportunity cost to holding gold. Since 2003 – when gold began its long-term outperformance – we have been in just such an environment. Real long-term yields have averaged 1.3%, half of their long-term average, and over the past year, real rates have fallen into negative territory.
And given that the Fed has made it clear that monetary conditions will remain accommodative for the foreseeable future, the low to negative real rates that have supported gold for most of the last decade will likely stay in place.
So what does this mean for investors? It’s important to keep in mind that despite gold’s expense and the current cheap valuations of gold mining company stocks, gold miners are not a good substitute for physical gold from an asset allocation perspective.
First, while it’s true that miners and gold tend to be highly correlated, these are different asset classes. As a commodity, gold is diversifying to a portfolio. Second, over the long term, gold has been a much better inflation hedge. Third, while many investors believe that miners are due for a spell of outperformance given their recent under performance versus the metal, miners have actually been trailing gold since 2003. Finally, real rates have historically had little to no impact on equity returns.
As such, I wouldn’t advocate selling gold to buy gold miners, and I continue to advocate maintaining a strategic allocation to gold through funds that access the physical metal such as the iShares Gold Trust (NYSEARCA: IAU).
Copyright © iShares
Tags: Asset Allocation, Asset Classes, Commodity Gold, Company Stocks, Federal Reserve, Foreseeable Future, Gold Gold, Gold Investors, Gold Miners, Gold Mining Company, gold stocks, Investor Question, Last Decade, Monetary Conditions, Negative Territory, Opportunity Cost, Outperformance, physical gold, Term Yields, Valuations
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Friday, April 13th, 2012
by Axel Merk, Merk Funds
April 10, 2012
The global economy is healing, so we are told. Yet, the moment the Federal Reserve (Fed) indicates just that – and thus implying no additional stimulus may be warranted – the markets appear to throw a tantrum. In the process, the U.S. dollar has enjoyed what may be a temporary lift. To make sense of the recent turmoil, let’s look at the drivers of this “recovery” and potential implications for the U.S. dollar, gold, bonds and the stock market.
In our assessment, what we see unfolding is the latest chapter in the tug of war between inflationary and deflationary forces. During the “goldilocks” economy of the last decade, investors levered themselves up. Homeowners treated their homes as if they were ATMs; banks set up off-balance sheet Special Investment Vehicles (SIVs); governments engaging in arrangements to get cheap loans that may cost future generations dearly. Cumulatively, it was an amazing money generation process; yet, central banks remained on the sidelines, as inflation – according to the metrics focused on – appeared contained. Indeed, we have argued in the past that central banks lost control of the money creation process, as they could not keep up with the plethora of “financial innovation” that justified greater leverage. It was only a matter of time before the world no longer appeared quite so risk-free. Rational investors thus reduced their exposure: de-levered. When de-leveraging spreads, however, massive deflationary forces may be put in motion. The financial system itself was at risk, as institutions did not hold sufficiently liquid assets to de-lever in an orderly way. Without intervention, deflationary forces might have thrown the global economy into a depression.
The trouble occurs when the money creation process takes on a life of its own, because the money destruction process is rather difficult to stop. However, it hasn’t stopped policy makers from trying: in an effort to fight what may have been a disorderly collapse of the financial system, unprecedented monetary and fiscal initiatives were undertaken to stem against market forces. Trillion dollar deficits, trillions in securities purchased by the Fed with money created out of thin air (when the Fed buys securities, it merely credits the account of the bank with an accounting entry – while no physical dollar bills are printed, many – including us – refer to this process as the printing of money).
Will it work? The Fed thinks it might. But nobody really knows. We do know that a depression works in removing the excesses of a bubble. However, the cost of a depression may be severe, both in social and monetary terms. Critics of the “let ‘em fail” argument say that businesses and jobs beyond those that have engaged in bad decisions will be caught by contagion effects and may ultimately be bound to fail too. Fed Chair Bernanke, a student of the Great Depression, frequently warns against repeating the policy mistakes of that era. So does the reflationary argument work, i.e. does printing and spending money help bring an economy back from the brink of disaster? We cannot find an example in history where it has. As Bernanke points out, policy makers have learned a great deal by studying crises of the past. Our reservation comes from the following observation: central bankers at any time have always been considered amongst the smartest of their era, yet – with hindsight – they may have engaged in terrible mistakes. While we certainly wish that Bernanke is right, we nonetheless maintain a degree of skepticism and believe it is any investor’s duty to take the risk that the world does not evolve the way he envisions into account. Our policy makers also might be well served to be more humble, as they are putting the world’s savings at risk.
Yet, the reason central bankers are bold, not humble, is because they fear hesitation will lead to deflationary forces taking the upper hand yet again. Bernanke’s contention, that one of the biggest mistakes during the Great Depression was to tighten monetary policy too early, stems from that fear. In its recently released minutes, the Federal Reserve Open Market Committee (FOMC) placed that fear in today’s context: “While recent employment data had been encouraging, a number of members perceived a non negligible risk that improvements in employment could diminish as the year progressed, as had occurred in 2010 and 2011, and saw this risk as reinforcing the case for leaving the forward guidance unchanged at this meeting.”
In our view, the reason why the Fed is committed to keeping rates low until the end of 2014 is precisely because the Fed does not want to be perceived as tightening too early. Why the end of 2014? Well, because it’s not today or tomorrow. We believe nobody – not even at the Fed – knows whether the end of 2014 is the right date. The problem with that policy will be when the market no longer buys it. The market just needs to see one member of the FOMC turn more hawkish, as a result of improving economic data, to interpret that we may be starting down the road of monetary tightening. Yet, if the market thinks the Fed may tighten, deflationary forces take over, possibly unraveling all the “hard work” the Fed has done.
Will tightening ever be bearable for the economy again? U.S. financial institutions are in a stronger position than they were in 2008. Conversely, governments around the world – not just the U.S. government – are in far weaker positions, given the large amounts of debt they have incurred, in an effort to manage the financial crisis. Many consumers have downsized (read: lost their homes / filed for bankruptcy), but there continues to be downward pressure on the housing market, as millions of homes remain in the foreclosure process and are only slowly making it to the market. Bernanke may have chosen the end of 2014 as the earliest time to raise rates because it represents a date when the housing market may have freed itself from much of the foreclosure pipeline. Indeed, Fed research suggests that residential construction won’t fully recover until 2014. We don’t think that is a coincidence. To Bernanke, a thriving home market appears to be key to a healthy consumer and thus a healthy and sustainable recovery in consumer spending.
Tying monetary policy to the calendar has created alarm with economic “hawks” – not just the Fed itself, with the lone hawkish voting FOMC member, Richmond Fed President Jeff Lacker, openly dissenting. But if one follows Bernanke’s line of thinking, what’s the alternative? The alternative would be to firmly err on the side of inflation, as the Fed thinks inflation is the one problem it knows how to fight. Except that a central bank must never communicate that it wants to induce inflation, as it may derail the markets. So the 2nd best option, from Bernanke’s point of view, may be to commit to keeping rates low until the end of 2014; the “risk” that the economy might perform better than expected (and thus earlier tightening warranted) appears to be shoved aside. Just to make sure the markets behave, the Fed also introduced an inflation target, assuring the markets not to worry, all will be fine on the inflation front.
Unfortunately, we don’t think Bernanke’s plan will work. The reason is that inflation may not be as easily fought as Bernanke thinks. The extraordinary policies that have been pursued have not only planted the seeds of inflation, but have re-introduced leverage into the system. While Bernanke claims he can raise rates in 15 minutes, we believe there is simply too much leverage in the economy to raise rates as much as former Fed Chair Paul Volcker did in the early 1980s to convince the markets the Fed is serious about inflation. Given the increased interest rate sensitivity of the economy, much less tightening would likely be necessary. We are not as optimistic as many current and former Fed officials that it will be possible to engineer a sustainable economic growth while adhering to the Fed’s inflation target. The Fed is ultimately responsible for inflation; however, we have also learned that the modern Fed is unlikely to risk severe economic hardship to achieve its price stability mandate.
What does it all mean for the markets? Deflationary forces have favored the U.S. dollar and been a negative for gold. As indicated, however, we don’t think the Fed will sit by idly as the markets price in tightening before the economy is “ready”. As such, a flight into the dollar out of gold might be an opportunity to diversify out of the dollar into a basket of hard currencies, including gold. With regard to the bond market, we are rather concerned that the long end of the yield curve has been extraordinarily well behaved until just a few weeks ago. The reason for our concern is that periods of low volatility in any asset class usually means that money has entered the space that might leave on short notice: we call it fast money chasing yields. We don’t need a crisis for investors to run for the hills in the bond market; we may just need a return to more normal levels of volatility. As such, investors may want to consider keeping interest risk low, i.e. staying on the short-end of the yield curve, both in U.S. dollars and other currencies. With regard to the stock market, it may do well should the Fed think of another round of easing, but let’s keep in mind that the stock market has had a tremendous rally in recent months.
If investors consider investing in the stock market because of the Fed’s monetary policy, why not express that same view in the currency market? After all, currencies – when no leverage is employed – are historically less volatile than domestic (or international) equities. Currencies may give investors the opportunity to take advantage of the risks and opportunities provided by our policy makers without taking on the equity risk.
Please subscribe to Merk Insights by clicking here to be informed as we analyze the global dynamics playing out. Also, please click here to register for the Merk Webinar: Quarter 1 Update on the Economy and Currencies which will take place on Thursday, April 19th at 4:15pm ET / 1:15pm PT. We manage the Merk Funds, including the Merk Hard Currency Fund. To learn more about the Funds, please visit www.merkfunds.com.
Manager of the Merk Hard Currency Fund, Asian Currency Fund, Absolute Return Currency Fund, and Currency Enhanced U.S. Equity Fund, www.merkfunds.com
Axel Merk, President & CIO of Merk Investments, LLC, is an expert on hard money, macro trends and international investing. He is considered an authority on currencies.
The Merk Hard Currency Fund (MERKX) seeks to profit from a rise in hard currencies versus the U.S. dollar. Hard currencies are currencies backed by sound monetary policy; sound monetary policy focuses on price stability.
The Merk Asian Currency Fund (MEAFX) seeks to profit from a rise in Asian currencies versus the U.S. dollar. The Fund typically invests in a basket of Asian currencies that may include, but are not limited to, the currencies of China, Hong Kong, Japan, India, Indonesia, Malaysia, the Philippines, Singapore, South Korea, Taiwan and Thailand.
The Merk Absolute Return Currency Fund (MABFX) seeks to generate positive absolute returns by investing in currencies. The Fund is a pure-play on currencies, aiming to profit regardless of the direction of the U.S. dollar or traditional asset classes.
The Merk Currency Enhanced U.S. Equity Fund (MUSFX) seeks to generate total returns that exceed that of the S&P 500 Index. By employing a currency overlay, the Merk Currency Enhanced U.S. Equity Fund actively manages U.S. dollar and other currency risk while concurrently providing investment exposure to the S&P 500.
The Funds may be appropriate for you if you are pursuing a long-term goal with a currency component to your portfolio; are willing to tolerate the risks associated with investments in foreign currencies; or are looking for a way to potentially mitigate downside risk in or profit from a secular bear market. For more information on the Funds and to download a prospectus, please visit www.merkfunds.com.
Investors should consider the investment objectives, risks and charges and expenses of the Merk Funds carefully before investing. This and other information is in the prospectus, a copy of which may be obtained by visiting the Funds’ website at www.merkfunds.com or calling 866-MERK FUND. Please read the prospectus carefully before you invest.
Since the Funds primarily invest in foreign currencies, changes in currency exchange rates affect the value of what the Funds own and the price of the Funds’ shares. Investing in foreign instruments bears a greater risk than investing in domestic instruments for reasons such as volatility of currency exchange rates and, in some cases, limited geographic focus, political and economic instability, emerging market risk, and relatively illiquid markets. The Funds are subject to interest rate risk, which is the risk that debt securities in the Funds’ portfolio will decline in value because of increases in market interest rates. The Funds may also invest in derivative securities, such as for- ward contracts, which can be volatile and involve various types and degrees of risk. If the U.S. dollar fluctuates in value against currencies the Funds are exposed to, your investment may also fluctuate in value. The Merk Currency Enhanced U.S. Equity Fund may invest in exchange traded funds (“ETFs”). Like stocks, ETFs are subject to fluctuations in market value, may trade at prices above or below net asset value and are subject to direct, as well as indirect fees and expenses. As a non-diversified fund, the Merk Hard Currency Fund will be subject to more investment risk and potential for volatility than a diversified fund because its portfolio may, at times, focus on a limited number of issuers. For a more complete discussion of these and other Fund risks please refer to the Funds’ prospectuses.
This report was prepared by Merk Investments LLC, and reflects the current opinion of the authors. It is based upon sources and data believed to be accurate and reliable. Opinions and forward-looking statements expressed are subject to change without notice. This information does not constitute investment advice. Foreside Fund Services, LLC, distributor.
Tags: Central Banks, Cheap Loans, Deflationary Forces, Dollar Gold, Financial Innovation, Future Generations, Global Economy, Gold Bonds, Goldilocks Economy, Investment Vehicles, Last Decade, Liquid Assets, Matter Of Time, Money Creation, Plethora, Rational Investors, Sidelines, Stimulus, Tantrum, Tug Of War
Posted in Markets | Comments Off
Tuesday, April 10th, 2012
by Dr. Scott Brown, Ph. D, Chief Economist, Raymond James
April 9 – April 13, 2012
The stock market has risen nicely this year, partly on improving economic data, but are such gains justified by the earnings outlook? The level of the S&P 500 Index does not appear to be out of line with earnings expectations, but there may be some pressure on profits over the longer term. As the election approaches, we may hear more about class warfare.
In the late 1990s, share prices rose more than was justified by the earnings outlook. In hindsight, the market was clearly in a bubble. In the last decade, the market rose roughly in line with earnings. However, the Great Recession sent earnings sharply lower, and the stock market followed. Since the recession has ended, earnings have more than recovered. Bottom-up earnings estimates for more than a year out, compiled from analysts’ forecasts of individual companies, still look a bit giddy, but that’s typical. Top-down estimates, provided by economists and strategists, are more moderate – and consistent with some slowing in corporate earnings relative to the last few years. That’s to be expected. Much of the rebound in earnings has reflected the bounce-back from the recession. Firms have a tendency to cut too many jobs and overly curtail capital expenditures near the end of the downturn and there’s some catch-up as conditions begin to improve.
Part of the strength in corporate profits in the recovery has been due to the restraint in labor costs. Given the large amount of slack in the labor market, wage pressures are relatively subdued. Moreover, since the labor market slack is expected to remain elevated for some time, corporate profits are likely to stay relatively strong. As a percentage of national income, corporate profits are very high and labor compensation is relatively low. The share of national income going to profits and the share going to labor cycles back and forth over time and at some point the pendulum seems likely to swing back in the other direction, but probably not anytime soon.
It’s hard to have an intelligent discussion about the distribution of income. One side sites “corporate greed,” the other sites “class envy.” For the most part, economists have generally shied away from income distribution issues. This is mostly a question of politics. It’s difficult to say what an “appropriate” distribution of income should be and what steps should be taken to achieve it.
However, there’s no doubting that the distribution of income has widened significantly over the last thirty years. Real wages have stagnated. A lot of that is due to the decline of union membership. In the early 1970s, 25% of private-sector jobs were union jobs. Now unions account for less than less than 7% (note that 37% of public-sector jobs are union, but many of these are teachers and the dynamics are a lot different). In the late 1960s and early 1970s, we typically had more than 300 work stoppages per year, involving millions of workers. We had 19 last year, involving 113,000 workers.
It’s unclear what role the distribution of income will take in this year’s election, but investors should pay attention.
Tags: Capital Expenditures, Chief Economist, Class Warfare, Corporate Earnings, Corporate Profits, Downturn, Dr Scott, Earnings Estimates, Economic Data, Hindsight, Individual Companies, Labor Compensation, Last Decade, Raymond James, Recession, Share Prices, Slack, Stock Market, Strategists, Wage Pressures
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Monday, March 19th, 2012
Featured: GUGGENHEIM CHINA SMALL CAP ETF – Ticker: HAO / NYSE
China is aging and as it leaves its youthful days of high-energy growth behind, the middle kingdom will settle into a more genteel, more comfortable middle-aged existence. The implications for investors are many and require a re-think of your investment strategy.
Middle-age has been a few years coming but the joint pains were especially sharp this week. Speaking at the annual National People’s Congress meeting, Premier Wen Jiabao lowered China’s target growth rate and said it would gradually reduce its dependence on capital-intensive growth in favor of strengthening domestic consumer demand.
Markets reacted instantly. The Shanghai Shenzen 300 Index fell nearly 3% and the iShares FTSE China 25 Index ETF (FXI/NYSE) fell more than 6% on the announcement. But beyond the instant, is this policy shift really a bad thing? We don’t think so.
My vision of China, shaped by travels and by Edward Burtynsky’s horrifying photography, is one of dirty, heavy industry consuming mountains of resources – people, steel, oil – to produce cheap baubles for export to the world. To have this present give way to a kinder future would be wonderful.
Nor is the present model sustainable. The last decade of lopsided trade relations between China and the rest of the world were doomed to fail, especially with demand from China’s biggest customers, Europe and the United States, falling in recent times and austerity cuts as far as the horizon.
Then there are China’s internal pressures: Ethnic hatreds spark hinterland riots that are fed by idle poverty; Urban housing is in crisis, with a modest apartment in south China priced at about 45 times the average salary (they joke that a peasant would need to have worked from the end of the Tang Dynasty in 907 AD to afford a Beijing apartment today); iPad and Dell PC assemblers at Foxconn routinely use suicide as a bargaining chip. If China did nothing, how long would this pressure cooker remain intact?
Premier Wen confronted these tensions. He announced higher minimum wages in the big cities, a 20% increase in education, health and welfare spending, and allowing more rural folk to migrate to the cities. The boost in consumer spending from these changes will help offset the loss in demand elsewhere. He also committed to keeping a tight rein on property prices by controlling speculation and by building more public, subsidised housing.
The evolution underway in China is not unique. Early industrial England with its hellish factories and impoverished masses eventually emerged as a more diversified economy producing more wealth for more of its people. Could China achieve the same over the next decade? DDB, the ad agency behind Volkswagen’s cute-kid-as-Darth-Vader ad, thinks so. It is moving its creative office to China.
What about for investors? China will still have heavy industries but demand for their outputs will fall over several years. And the export-oriented factories churning out everything from telephones to teddy bears will need to target domestic consumers. Consumer-oriented sectors will benefit: Retailers; makers of refrigerators, cars and other durables; health-care and pharmaceuticals.
There are several China ETFs available but few reflect this future China. The biggest ETF is the iShares FXI, with about $7 billion in assets, holding 26 large cap stocks with market caps of near $100 billion. More than half the ETF by weight is in financials and real estate – two areas of the Chinese market that are best avoided right now. Another 30% is in other large energy, mining and industrial firms.
For a more Chinese consumer-oriented ETF, consider instead the Guggenheim China Small Cap ETF (HAO/NYSE). It holds 230 companies and a quarter of its allocation is to firms like retailers, hotels, and food and beer makers. Another quarter is in industrial firms making trains, planes and automobiles. Its exposure to banks and real estate is a tolerable 16%. Overall, HAO offers a more diverse slice of the Chinese economy and especially the parts that will benefit from a stronger consumer. Other metrics – dividend yield, price-to-earnings and returns – are also positive compared to FXI and others.
Aging is rarely pleasant but with an ETF like HAO, it can at least be somewhat profitable.
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Tags: Average Salary, Bargaining Chip, Dell Pc, Edward Burtynsky, ETF, ETFs, Fxi, Internal Pressures, Ipad, Ishares, Joint Pains, Kinder Future, Last Decade, Pc Assemblers, Policy Shift, Premier Wen Jiabao, Shenzen, South China, Steel Oil, Tang Dynasty, Target, Youthful Days
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Tuesday, March 13th, 2012
A contrarian who has been proven right over the last decade. Great Investor Robert Kessler explains why, after 40 years of out performing the stock market, much vilified U.S. Treasury bonds will continue to be the safe haven investment for the foreseeable future.
Monday, February 20th, 2012
TOP 15 Stories of February 2012, According to You
Tags: Austerity, Bill Gross, Bond Market, Business Insider, David Einhorn Greenlight, David Einhorn Greenlight Capital, David Rosenberg, Dividend Yield, Dreman, Insider Radio, Jeremy Siegel, Last Decade, Love Affair, O Neill, Obama, Puppetmaster, Radio Shack, Time David, Volatile Stocks, Warren Buffett
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Tuesday, February 7th, 2012
In the Barron’s Streetwise column this weekend, Michael Santoli featured a list that we provided of the ten least volatile S&P 500 stocks over the last decade. Below is a table that expands the list to the forty least volatile S&P 500 names. These are current S&P 500 stocks that have the smallest difference between their high price and low price over the last decade.
As shown, Wal-Mart (WMT) has been the least volatile stock over the last ten years with a 10-year hi/lo spread of just 54.07%. Its 10-year high is $63.94, while its 10-year low is $41.50. Just six other S&P 500 stocks have a 10-year hi/lo spread that is less than 100% — KMB, PGN, JNJ, SCG, KO and ED. Other notables on the list of least volatile stocks include Microsoft (MSFT), UPS, Verizon (VZ), 3M (MMM), Procter & Gamble (PG), and Berkshire Hathaway (BRK/B).
Tags: 3m, Amp, Barron, Berkshire Hathaway, Brk B, Kmb, Last Decade, Last Ten Years, Msft, Notables, Procter Amp Gamble, Santoli, Scg, Streetwise, Ups, Volatile Stock, Volatile Stocks, Vz, Wal Mart, Wal Mart Wmt
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Friday, February 3rd, 2012
The Economist put together a comprehensive dateline, charting which year China overtook or will overtake the U.S., using 21 indicators of consumption, GDP or spending.
It summarizes the significant milestones reached over the last decade or so, reminding us how far China has come. One significant milestone marking the road of economic growth began when China became the largest consumer of steel, then shortly after, copper and energy, as the government focused on its massive buildout of infrastructure projects to support expected urbanization growth and rising incomes.
By 2001, China was buying more mobile phones than the U.S. as Chinese consumers spent rising discretionary income on the latest technology. Spending in mobile computing has also continued, as China also has the largest number of Internet users, the biggest personal-computer market and the largest smartphone market.
Looking into the next decade, The Economist also plots an estimation of when China’s GDP will be larger than that of the U.S. Using the assumptions of an average real GDP growth of 7.75 percent in China and 2.5 percent in America, inflation averaging 4 percent and 1.5 percent in China and the U.S., respectively, and yuan appreciation of 3 percent per year, China stands to be the largest economy by 2018.
However, if China grows faster with all the other factors remaining the same, the country’s GDP could be larger than the U.S.’s GDP by 2017. The magazine lets you change these assumptions for yourself so you can see when China will be the world’s largest economy. Go there now.
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All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.
Tags: China Gdp, Chinese Consumers, Dateline, Discretionary Income, Estimation, GDP, GDP Growth, Incomes, Infrastructure Projects, Last Decade, Latest Technology, Milestone, Mobile Computing, Number Of Internet Users, Personal Computer Market, Real Gdp, Smartphone, U S Global Investors, urbanization, Yuan
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