Buy the Emerging Markets, Part II

September 23rd, 2010

What’s wrong with this picture?

US vs. Brazil Annual Government Budgets

This chart shows the comparative fiscal trends of the US and Brazil during the last decade. Back in 1999, the US was running a budget surplus and Brazil was running a deficit equal to about 9% of its GDP. Over the ensuing 11 years, those conditions flip-flopped. Brazil is now running a very slight deficit and the US is running a very large one.

Brazil is representative of many Emerging Markets. If we broaden out our analysis, what we find is not just a relative improvement in government finances, but also a dramatic improvement in the private sector. Half of global GDP is now produced by what we call the Emerging Markets. Looking farther out, the IMF expects the Emerging Markets to produce more than 60% of the world’s GDP growth over the next four years – or about five times the growth the G-7 countries will contribute. The IMF is not omniscient. It has been known to make a mistake from time to time. But its forecast is probably close to the target in this case.

BRIC GDP Growth vs. G-7 GDP Growth

And yet, despite data like these, many investors – both professional and individual – carry massively “overweight” positions in US stocks. They just can’t seem to break that bad habit.

Why? Because US stocks are familiar! They are IBM and GE and McDonald’s.

The argument in favor of Emerging Markets is easy to embrace clinically, but not easy to implement emotionally. US stocks simply feel safer than Emerging Market stocks. In response to such anxieties, William Shakespeare’s Measure for Measure provides an insightful counterpoint: “Our doubts are traitors, and make us lose the good we oft might win, by fearing to attempt.”

The time has come to cast aside our fears and to embrace the world as it actually is, not as we might like it to be. In the world as it actually is, for example, Emerging Market stocks are performing much better than Developed World stocks – both in absolute terms and in so-called “risk-adjusted” terms. Emerging Market stocks aren’t just producing higher returns, they are producing these returns with very modest amounts of volatility.

Over the last decade, for example, the MSCI Emerging Markets Index has tripled, while the S&P 500 Index has produced a loss…including dividends. More recently, if we compare these indices from the bear market lows of March 2009 to the present, we see that Emerging Market stocks are up more than 120%, compared to a gain of only 60% for the S&P 500. But despite producing double the return of the S&P during the last 18 months, the MSCI Emerging Markets Index was only slightly more volatile than the S&P 500.

More intriguing is the comparison between Emerging Market stocks and the traditionally risky sectors of the US stock market – things like homebuilders and bank stocks. It used to be that these risky assets would all trade very closely with one another. Emerging Markets were considered risky, just like homebuilders and bank stocks. So they all went up and down together…especially down.

That’s not happening anymore. The risky stuff in the US is still plenty risky…and doing poorly. But the “risky” Emerging Markets are doing very well. This divergence has become particularly acute over the last four months. Since the first week of May, the MSCI Emerging Markets Index has advanced 10%. But over the same timeframe, the ISE Homebuilders Index is down 15% and the KBW Bank Index is down 20%.

Net-net, it has become more important now than perhaps at any other time during the last 30 years to ask, “What am I getting for the risk I am taking?”

For the last 10 years, the US stock market has delivered lots and lots of bumps, lots and lots of volatility, and absolutely zero return. That’s not good. There is no way of knowing, of course, whether this recent past will also be prologue. But there is a way to guess…intelligently. Simply stated, the economies of many, many Emerging Markets are performing much better than their counterparts in the Developed World. And this trend seems very likely to continue for many years.

And yet, Emerging Market valuations remain below those of the Developed World. At the current quote, the MSCI Emerging Market Index sells for about 13 times earnings, while the MSCI EAFE Index (non-US Developed World stocks) sells for 16 times earnings. For additional perspective, the NASDAQ Composite Index currently trades for a hefty 25 times earnings. Thirteen times earnings is not what one could call “dirt cheap,” but it is certainly “cheaper than” the EAFE Index or the NASDAQ Composite.

There are many ways to capitalize on the future relative strength of the Emerging Market economies: Foreign stocks and/or real estate are a couple obvious examples. That said, please invest very selectively. Do not invest in Emerging Markets – or in any market – because you feel like you have to, or because you have some vague idea that you ought to. Invest in the Emerging Markets only when – and if – you recognize a very specific opportunity that is worth taking a very specific risk.

Thank you.

Eric J. Fry
for The Daily Reckoning

Buy the Emerging Markets, Part II originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
Buy the Emerging Markets, Part II




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Real Estate, Uncategorized

The Illusion of Prosperity Driven by Debt

September 23rd, 2010

Michael Hirsh, author of Capital Offense: How Washington’s Wise Men Turned America’s Future Over to Wall Street, recently appeared on Morning Joe to talk about Wall Street’s pre-crisis, decades-long encroach upon Washington that would eventually end in financial crisis.

In his estimation, the gradual takeover was about 30 years in the making. It got underway when the ideals of free market revolution were sweeping mainstream economics and all common sense of boom and bust cycles — how markets are prone to wild swings of manias and panics – was abandoned to instead funnel increasing power to financial services in hopes of ever-greater returns and economic growth.

The outcome he describes is a “hollowing out of the middle class,” where Wall Street and Washington both played key roles in creating the “illusion of prosperity” while actually force-feeding the public with debt and artificially inflating asset prices. Until finally, the duped middle class — expected to sustain the US economy and even serve as “consumer of last resort for the whole world” — ended up broke.

This insightful clip came to our attention via a Naked Capitalism post covering Hirsh’s perspective on the roots of the financial crisis.

The Illusion of Prosperity Driven by Debt originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
The Illusion of Prosperity Driven by Debt




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Uncategorized

What’s to be Done with the Current Stock Market?

September 23rd, 2010

If you’ve been feeling skittish about buying stocks lately, you’re hardly alone. A poll of investors commissioned by the Associated Press and CNBC finds…

  • 61% are less confident about buying and selling individual stocks, owing to recent market volatility
  • 55% believe the market is fair only to some investors.

Over the last two-and-a-half years, investors have pulled a net $244 billion out of stock mutual funds, adds the Investment Company Institute. Meanwhile, they’ve poured $589 billion into bond funds during the same period.

My how times change. Ten years ago – just as we were recommending gold as an alternative – the mantras among middle-class investors were “invest for the long run” and “stocks always go up.” The following chart, helpfully assembled by economist David Rosenberg, shows how daft that idea was, indeed:

10-Year Returns Based on Asset Class

Yep, you could have parked your money in 90-day Treasuries and rolled them over continuously…and you’d have made nearly as much money as you’d have lost buying an S&P 500 index fund.

One single investment decision in 1999 – to put your money in gold – would have paid 10 times that return. Of course, gold was the province of cranks and kooks back then…so very few people made that choice.

Even corporate insiders are headed for stock floor exits these days. Last week, as the S&P posted a nice 2% gain, corporate officers and directors bought $1.4 million in shares of their companies. A tidy little sum…

But they sold $411 million – a ratio of $291 of stock sold for every $1 purchased. But hey, it’s an improvement over the week before, when the ratio was 652-1.

With data like this, we’re struck by how equally irrational a bust can be…

“Odds are if your neighbor knows anything at all about the stock he just bought beyond its ticker symbol,” says Mayer’s Special Situations’ Chris Mayer, “it is probably the price-to-earnings (P/E) ratio.

“The P/E ratio is the most well-known (but not best) measure of how cheap or dear a stock may be. The market overall, too, has a P/E that rises or falls dramatically. It has fallen 35% in the last 12 months. Earnings surged in the second quarter, but the stock market was lower.

“I say get used to it.”

Chris recently reread Humble on Wall Street, the 1975 memoir of investor Martin Sosnoff. Like many in those era, Sosnoff got burned by the bear market that set in after the Dow hit 1,000 in 1966.

“It is worth saying,” Sosnoff wrote, “how difficult it was for any professional investor in 1965 to conceive of the Dow Jones industrial average heading toward 7 times [earnings] when it was then at 17 times.

A handful of people did, like A.T. Mahan, who toiled in a now-defunct brokerage called Delafield and Delafield. He saw prices advancing more slowly than profits – and the inevitable compression of P/Es that would follow. “We are currently in an early phase of an ebb tide,” he wrote in late 1965.

“We are in a Mahan-like market,” Chris concludes. “We are on the ebb tide. Stocks will rise more slowly than earnings as P/Es compress.”

“But don’t let that discourage you,” Chris urges, always the optimist in the bunch. “‘For the enterprising investor, this should be a challenge, rather than a cause of discouragement,’ Mahan wrote. ‘In good times, almost anyone can make a profit. But the years ahead should separate the men from the boys by placing a high premium on stock selection.’”

In other words, “It’s a good time for stock pickers,” says Chris. A basket of carefully chosen stocks is about your only choice right now if you don’t want to flee to strictly gold and/or cash.

Addison Wiggin
for The Daily Reckoning

What’s to be Done with the Current Stock Market? originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
What’s to be Done with the Current Stock Market?




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Mutual Fund, Uncategorized

The Problem with “Policy Measures” and “Quantitative Easing”

September 23rd, 2010

The Federal Open Market Committee (FOMC) is worried. Very worried. It is worried that it is not destroying the dollar fast enough.

“Measures of underlying inflation are currently at levels somewhat below those the Committee judges most consistent, over the longer run, with its mandate to promote maximum employment and price stability,” the FOMC declared Tuesday. “Inflation is likely to remain subdued for some time before rising to levels the Committee considers consistent with its mandate.” In other words, as every Ivy-League-educated economist understands very well, the Fed must nourish inflation if it is to have any hope of reviving the economy.

Possessing merely a bachelor’s degree from UCLA, your California editor naively maintains his low-brow economic ideas. He still suspects – poor, brutish lad – that debasing the currency is an ill-advised means toward a dubious end. Rather than debasing the dollar to repel the natural forces of creative destruction, as Chairman Bernanke and his colleagues advocate, your editor suspects that the best means toward sustainable economic growth is to allow failing enterprises to fail, so that stronger enterprises may take their place. (And leave the poor greenback alone, please).

But the Ivy League intelligentsia sees it differently. The intelligentsia embraces an agenda of mere expedience, dressed in the eloquent vernacular of financial euphemisms. To wit: “Money-printing” is now “quantitative easing,” while “throwing spaghetti against the wall and seeing what sticks” is now a “policy measure.”

Harvard grad, Ben Bernanke, insists that the Federal Reserve’s most important near-term mission is to combat deflationary pressures by any and all “policy measures” available. The mission, in other words, is to produce inflation. (We’re not making this up). In the FOMC’s own words, “The Committee will continue to monitor the economic outlook and financial developments and is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate.”

Your California editor is from Missouri on this one. The US economy does not need more inflation; it needs less intervention, coddling and do-gooding by central bankers and legislators. The US economy needs to suffer whatever wounds it must suffer, so that it may heal and resume growing. There is no shortcut…and there will be no shortcut, no matter how many Treasury bonds the Fed buys, nor how many FOMC meetings it convenes.

And by the looks of things, the US economy still has a bit of suffering left to do. Housing prices and sales volumes continue to fall, foreclosures continue to soar, unemployment refuses to drop and business spending refuses to rise. Instead, we Americans are, collectively, retreating into our foxholes and trying to fortify our personal finances. We are saving more and borrowing less. But at the same time, our government is going on an unprecedented borrowing and spending binge…which makes all of us poorer, no matter what we do.

These conditions – private sector caution, household frugality and government profligacy – rarely produce national prosperity. Instead, some form of stagnation usually results. We should not be surprised, therefore, if the US economy continues to muddle along for a while…and maybe for a long while.

Eric Fry
for The Daily Reckoning

The Problem with “Policy Measures” and “Quantitative Easing” originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
The Problem with “Policy Measures” and “Quantitative Easing”




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Uncategorized

The Problem with “Policy Measures” and “Quantitative Easing”

September 23rd, 2010

The Federal Open Market Committee (FOMC) is worried. Very worried. It is worried that it is not destroying the dollar fast enough.

“Measures of underlying inflation are currently at levels somewhat below those the Committee judges most consistent, over the longer run, with its mandate to promote maximum employment and price stability,” the FOMC declared Tuesday. “Inflation is likely to remain subdued for some time before rising to levels the Committee considers consistent with its mandate.” In other words, as every Ivy-League-educated economist understands very well, the Fed must nourish inflation if it is to have any hope of reviving the economy.

Possessing merely a bachelor’s degree from UCLA, your California editor naively maintains his low-brow economic ideas. He still suspects – poor, brutish lad – that debasing the currency is an ill-advised means toward a dubious end. Rather than debasing the dollar to repel the natural forces of creative destruction, as Chairman Bernanke and his colleagues advocate, your editor suspects that the best means toward sustainable economic growth is to allow failing enterprises to fail, so that stronger enterprises may take their place. (And leave the poor greenback alone, please).

But the Ivy League intelligentsia sees it differently. The intelligentsia embraces an agenda of mere expedience, dressed in the eloquent vernacular of financial euphemisms. To wit: “Money-printing” is now “quantitative easing,” while “throwing spaghetti against the wall and seeing what sticks” is now a “policy measure.”

Harvard grad, Ben Bernanke, insists that the Federal Reserve’s most important near-term mission is to combat deflationary pressures by any and all “policy measures” available. The mission, in other words, is to produce inflation. (We’re not making this up). In the FOMC’s own words, “The Committee will continue to monitor the economic outlook and financial developments and is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate.”

Your California editor is from Missouri on this one. The US economy does not need more inflation; it needs less intervention, coddling and do-gooding by central bankers and legislators. The US economy needs to suffer whatever wounds it must suffer, so that it may heal and resume growing. There is no shortcut…and there will be no shortcut, no matter how many Treasury bonds the Fed buys, nor how many FOMC meetings it convenes.

And by the looks of things, the US economy still has a bit of suffering left to do. Housing prices and sales volumes continue to fall, foreclosures continue to soar, unemployment refuses to drop and business spending refuses to rise. Instead, we Americans are, collectively, retreating into our foxholes and trying to fortify our personal finances. We are saving more and borrowing less. But at the same time, our government is going on an unprecedented borrowing and spending binge…which makes all of us poorer, no matter what we do.

These conditions – private sector caution, household frugality and government profligacy – rarely produce national prosperity. Instead, some form of stagnation usually results. We should not be surprised, therefore, if the US economy continues to muddle along for a while…and maybe for a long while.

Eric Fry
for The Daily Reckoning

The Problem with “Policy Measures” and “Quantitative Easing” originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
The Problem with “Policy Measures” and “Quantitative Easing”




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Uncategorized

Recession Officially Over… Someone Tell the Unemployed

September 23rd, 2010

Yesterday, the Fed’s FOMC group announced that it was standing pat. Yes, it might have to do something in the future. But for now, it is neither exiting its stimulus monetary position…nor is it adding to it.

The stock market didn’t know whether that was good or bad…so it didn’t do much of anything. The Dow went down 24 points. But gold soared to a new record – up $17.

Officially, the recession is behind us. That’s the good news. Officially, it ended in June of ’09.

The bad news is – so what? Recession or no recession, people are having a hard time finding jobs and making ends meet. The US economy continues rumbling and trundling along. It is a Great Correction…

According to the latest figures, there are more people without jobs today than there were when the recession ended. On Tuesday, the Labor Department announced that total joblessness fell in 3 out of 4 states during August. Overall, the US economy lost 54,000 jobs, net, driving the unemployment rate up to 9.6%.

Those who lack work are unlikely to enjoy their leisure; they have too much of it. The jobless today are likely to stay unemployed much longer than any in US history. In the ’70s downturns, the typical unemployed person remained without a job for 10-15 weeks. In the ’80s, it was more like 20 weeks. Now, idleness has stretched to 35 weeks. The young are traumatized by it for life, says a new study cited by The Telegraph. For the old, it is like baldness or arthritis; they may be stuck with it for the rest of their lives, says The New York Times.

Even since the recession officially ended, more people have gone into the poorhouse than have come out of it. Not only do they lack jobs, their major asset – the value of their homes – is falling. And it will probably fall much more, as inventories of foreclosed houses are dumped onto the market. Here’s the latest report from Bloomberg:

US home prices dropped 3.3 percent in July from a year earlier, the eighth consecutive decline, as foreclosed properties flooded the market.

Prices fell 0.5 percent from June, the Federal Housing Finance Agency in Washington said in a report today. Economists had projected prices to fall 0.2 percent from the previous month, based on the average of 15 estimates in a Bloomberg survey. The agency revised the previously reported May-to-June decline to 1.2 percent from 0.3 percent.

Foreclosures are boosting the supply of available properties and reducing prices, even as mortgage rates tumble to record lows. The time it would take to clear the market of homes for sale was 12.5 months in July, the highest in more than a decade of data, according to the National Association of Realtors. Banks seized a record 95,364 properties from delinquent borrowers in August, according to RealtyTrac Inc., an Irvine, California-based seller of housing data.

Nationally, sales of existing homes in July plunged 27 percent to a 3.83 million annual pace, the lowest level on record, NAR said Aug. 24. July sales of new homes dropped to an annual pace of 276,000, the fewest since data began in 1963, the Commerce Department reported Aug. 25.

“I had a house a couple of blocks from here,” said a friend in Delray Beach. “I sold it in 2006 for $295,000. It wasn’t much of a house. On the edge of a bad neighborhood. But I fixed it up.

“Well, the guy who bought it couldn’t pay his mortgage. So another friend is buying it back. Guess how much he’s paying for it? Seventy-five thousand. I’m glad I sold that when I did.”

Dear readers may wonder at a definition of growth so slippery that it permits people to grow poorer, even as the numbers are positive. Is it a paradox, an oxymoron or a damned lie? How come the economy is “growing” while the key measures of a household’s financial situation have not improved or are getting worse? Joblessness is the same or worse than it was a year ago, depending on how you measure it. Housing prices are clearly going lower. People are not earning more money. And their major assets – their homes – are declining in value. So, what does it mean to say the economy is improving?

It is merely an outward sign of an inner rot. Last week, just to remind regular readers, we touched upon the institutional imperative. Nothing wants to die. Not a hound dog. Not a bank or a business. Nor even a whole profession. Given an opportunity, it survives by cunning…and it uses a crisis to expand its influence, power, and wealth.

The SEC, for example, is clearly incapable of preventing major fraud – as in the Madoff case – even when you rub its nose in it. The regulators are also incapable of noticing the biggest bubble in human history.

Of course, that could be said of the Fed too, which not only failed to spot the bubble, it – along with Fannie Mae and Freddie Mac – had a hand in creating it.

Well, now the SEC has new enforcement powers, says a headline. And the Fed does too. They’ve “adapted” to the new challenges, say the news reports. Progress has been made. Yes, progress on the road to Hell!

If the NBER is to be believed, the longest correction since the Great Depression caused a total backsliding of only about 4% of GDP – maximum. Piddly… So the authorities have to get credit for that too. As Charlie Munger puts it, the “bailouts were absolutely necessary to save our civilization.” And they worked.

And Munger’s partner Warren Buffett is ready to give them credit for another great success. There will be no double dip, he says. Another big success for the home team.

To these wonders you can add further improvement. The world’s central bankers and Treasury secretaries agreed on new banking standards at what is known as “Basel III.”

In light of these achievements, who can help but be optimistic for the future of the human race?

Readers are encouraged to see the process in a new light.

More to come…

Bill Bonner

for The Daily Reckoning

Recession Officially Over… Someone Tell the Unemployed originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
Recession Officially Over… Someone Tell the Unemployed




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Uncategorized

Recession Officially Over… Someone Tell the Unemployed

September 23rd, 2010

Yesterday, the Fed’s FOMC group announced that it was standing pat. Yes, it might have to do something in the future. But for now, it is neither exiting its stimulus monetary position…nor is it adding to it.

The stock market didn’t know whether that was good or bad…so it didn’t do much of anything. The Dow went down 24 points. But gold soared to a new record – up $17.

Officially, the recession is behind us. That’s the good news. Officially, it ended in June of ’09.

The bad news is – so what? Recession or no recession, people are having a hard time finding jobs and making ends meet. The US economy continues rumbling and trundling along. It is a Great Correction…

According to the latest figures, there are more people without jobs today than there were when the recession ended. On Tuesday, the Labor Department announced that total joblessness fell in 3 out of 4 states during August. Overall, the US economy lost 54,000 jobs, net, driving the unemployment rate up to 9.6%.

Those who lack work are unlikely to enjoy their leisure; they have too much of it. The jobless today are likely to stay unemployed much longer than any in US history. In the ’70s downturns, the typical unemployed person remained without a job for 10-15 weeks. In the ’80s, it was more like 20 weeks. Now, idleness has stretched to 35 weeks. The young are traumatized by it for life, says a new study cited by The Telegraph. For the old, it is like baldness or arthritis; they may be stuck with it for the rest of their lives, says The New York Times.

Even since the recession officially ended, more people have gone into the poorhouse than have come out of it. Not only do they lack jobs, their major asset – the value of their homes – is falling. And it will probably fall much more, as inventories of foreclosed houses are dumped onto the market. Here’s the latest report from Bloomberg:

US home prices dropped 3.3 percent in July from a year earlier, the eighth consecutive decline, as foreclosed properties flooded the market.

Prices fell 0.5 percent from June, the Federal Housing Finance Agency in Washington said in a report today. Economists had projected prices to fall 0.2 percent from the previous month, based on the average of 15 estimates in a Bloomberg survey. The agency revised the previously reported May-to-June decline to 1.2 percent from 0.3 percent.

Foreclosures are boosting the supply of available properties and reducing prices, even as mortgage rates tumble to record lows. The time it would take to clear the market of homes for sale was 12.5 months in July, the highest in more than a decade of data, according to the National Association of Realtors. Banks seized a record 95,364 properties from delinquent borrowers in August, according to RealtyTrac Inc., an Irvine, California-based seller of housing data.

Nationally, sales of existing homes in July plunged 27 percent to a 3.83 million annual pace, the lowest level on record, NAR said Aug. 24. July sales of new homes dropped to an annual pace of 276,000, the fewest since data began in 1963, the Commerce Department reported Aug. 25.

“I had a house a couple of blocks from here,” said a friend in Delray Beach. “I sold it in 2006 for $295,000. It wasn’t much of a house. On the edge of a bad neighborhood. But I fixed it up.

“Well, the guy who bought it couldn’t pay his mortgage. So another friend is buying it back. Guess how much he’s paying for it? Seventy-five thousand. I’m glad I sold that when I did.”

Dear readers may wonder at a definition of growth so slippery that it permits people to grow poorer, even as the numbers are positive. Is it a paradox, an oxymoron or a damned lie? How come the economy is “growing” while the key measures of a household’s financial situation have not improved or are getting worse? Joblessness is the same or worse than it was a year ago, depending on how you measure it. Housing prices are clearly going lower. People are not earning more money. And their major assets – their homes – are declining in value. So, what does it mean to say the economy is improving?

It is merely an outward sign of an inner rot. Last week, just to remind regular readers, we touched upon the institutional imperative. Nothing wants to die. Not a hound dog. Not a bank or a business. Nor even a whole profession. Given an opportunity, it survives by cunning…and it uses a crisis to expand its influence, power, and wealth.

The SEC, for example, is clearly incapable of preventing major fraud – as in the Madoff case – even when you rub its nose in it. The regulators are also incapable of noticing the biggest bubble in human history.

Of course, that could be said of the Fed too, which not only failed to spot the bubble, it – along with Fannie Mae and Freddie Mac – had a hand in creating it.

Well, now the SEC has new enforcement powers, says a headline. And the Fed does too. They’ve “adapted” to the new challenges, say the news reports. Progress has been made. Yes, progress on the road to Hell!

If the NBER is to be believed, the longest correction since the Great Depression caused a total backsliding of only about 4% of GDP – maximum. Piddly… So the authorities have to get credit for that too. As Charlie Munger puts it, the “bailouts were absolutely necessary to save our civilization.” And they worked.

And Munger’s partner Warren Buffett is ready to give them credit for another great success. There will be no double dip, he says. Another big success for the home team.

To these wonders you can add further improvement. The world’s central bankers and Treasury secretaries agreed on new banking standards at what is known as “Basel III.”

In light of these achievements, who can help but be optimistic for the future of the human race?

Readers are encouraged to see the process in a new light.

More to come…

Bill Bonner

for The Daily Reckoning

Recession Officially Over… Someone Tell the Unemployed originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
Recession Officially Over… Someone Tell the Unemployed




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Uncategorized

Diversification, Momentum and Sidestepping the 2008 Panic

September 23rd, 2010

While most trading systems I know – including my own – struggled to eke out a profit during the 2008 financial crisis, it is certainly worth investigating which sort of strategies and approaches might have allowed investors not just to sidestep the 2008 panic, but to profit from it.

Using some functionality recently released by ETFreplay.com, I assembled a portfolio of ten ETFs from multiple asset classes and tested that portfolio in ETFreplay’s Portfolio Moving Average backtesting tool, which evaluates each ETFs relative to a moving average and goes long if the ETF is above the specified moving average (MA) and is in cash when the ETF is below the MA. I experimented with a variety of moving averages up to 12 months and from time periods going back to 2003 (recall that most ETFs do not have an extensive history) and came up with some interesting results.

The chart below shows the Multi Asset Class ETF portfolio since the beginning of 2007, using a 6 month MA (results were better using a 7-10 month moving average) as the evaluation period. Note that even during these tumultuous times, the long/cash strategy over the ten ETFs suffered a maximum drawdown of only 7%, had volatility that was only about 1/3 as much as the S&P 500 index (SPY) and managed to return over 42% per year while stocks in general were putting up double-digit losses.

Of course my point is not that the strategy described below is the holy grail when it comes to risk-adjusted returns, but that investors should take advantage of tools like the one mentioned above to tinker with ideas and tactics in order to refine existing strategies or perhaps devise new ones.

ETFs offer incredible diversification across all asset classes and in today’s markets, every little extra edge helps.

Related posts:

[source: ETFreplay.com]

Disclosure(s): none



Read more here:
Diversification, Momentum and Sidestepping the 2008 Panic

Commodities, ETF, Uncategorized

AdvisorShares Finalizes Global Tactical And Active Bear ETF

September 23rd, 2010

AdvisorShares recently made two separate filings with the SEC providing finalized and updated prospectus for two of its proposed actively-managed ETFs – the Active Bear ETF (HDGE) and the Cambria Global Tactical ETF (GTAA). Plans for both these funds had previously been indicated by preliminary prospectus being filed for each ETF. AdvisorShares provided important expense structure details for each fund that was previously undisclosed.

Active Bear ETF (HDGE)

The primary strategy that will be followed by the appropriately named HDGE, will be to short US traded equities in search of capital appreciation. The portfolio managers, Ranger Alternative Management, will target mid-cap to large-cap equities by utilizing a bottoms-up, fundamentals driven security selection process that will identify firms with poor earnings quality or aggressive accounting methods. The managers also try to anticipate negative earnings events such as downwards earnings revisions and negative forward outlooks. The short sale proceeds are generally invested in fixed-income securities of short maturity.

HDGE follows an investment strategy not seen in any other actively-managed ETF that could be used by investors to translate a bearish outlook on the market into a specific investment choice. The fund will target holding 20-50 short positions, with each position comprising 2% – 7% of the portfolio. The prospectus provides comparative performance on a composite called the “Range Short Only Portfolio” from Oct 2007 – Mar 2010, during which time, the Short Only portfolio returned 16.55% where the S&P500 returned -8.01%. The 1-year returns are more telling of how the strategy will behave in different markets. In the 1-year period, the S&P500 was up 49.77% while the Short Only portfolio was down -38.47%. That’s a massive difference in performance that indicates that HDGE’s fortunes will likely be very dependent on the general market direction, more so than on individual security selection. With correlations between individual stocks and the general market at an all time high, any moves in the market are very much seen in individual stocks too, regardless of fundamentals. As such, HDGE could be particularly susceptible to short squeezes that have been commonplace in the markets of the last 2 years.

The Active Bear ETF will charge investors a whopping 1.85% in total expenses, which beats any existing actively-managed ETF on the market right now. That expense ratio includes 1.50% in management fees, out of which 1.00% is passed on to the sub-advisors. Total gross expenses for the fund actually stand at 1.88% but AdvisorShares has provided a fee waiver of 0.03% to bring the net expenses down to 1.85%.

Cambria Global Tactical ETF (GTAA)

The Global Tactical ETF will invest across asset classes in US and foreign equity, fixed-income, commodities and currencies. The fund will primarily implement its investment views through investments in other ETFs, much like how the Dent Tactical ETF (DENT: 19.828 -0.54%) operates. The fund will be sub-advised by Cambria Investment Management, which is a relatively young investment manager that was formed in 2006 and had $24 million in assets as of Sep 1, 2010.

Essentially, GTAA will utilize a trend-following strategy that is based on a quantitative model to actively manage the portfolio and no effort will be made to forecast future market direction or conditions. Instead, the managers will look to capture these trends as and when they appear. Such a philosophy is the crux of many trend-following strategies because the managers do not believe they can forecast future markets accurately, so they instead focus efforts on spotting a change in trends and capitalizing on them. The performance of a Global Tactical Asset Allocation composite presented in the prospectus is impressive as the portfolio manages to avoid the strong volatility of 2008 and 2009 while delivering a steady return. Since inception in March 2007 till April 2010, the composite returned 4.39% while the S&P500 returned -2.95%. The strategy will likely underperform the market in strong positive trending periods, but will also be able to avoid the volatility of returns in strong down periods. Investors will be able to gain access to what could be best summarized as a trend-following global macro strategy.

The fund will charge investors a total expense ratio of 1.35%, including a base management fee of 0.90%. Both the fund manager, AdvisorShares and the fund sub-advisor, Cambria, have a tiered fee structure established that will depend on level of assets in the fund. The total expenses include “Acquired Fund Fees” of 0.30% to account for the expense ratios of all the underlying ETFs that the fund will invest in. AdvisorShares is providing a fee reduction of 0.16% to bring the expenses down from 1.51% to 1.35%.

Commodities, ETF

Measuring Current SPX Market Internals After Strong Rally

September 23rd, 2010

What do market internals say about the current structure of the S&P 500 (broader stock market)?

You might guess they’re diverging and you would be correct, but let’s pull the perspective back and see the complete rally off the recent August low of 1,040 to the present September peak at 1,140.

S&P 500 with Market Internals:

There’s an interesting lesson you should be aware of before we discuss current internals.

Look closely at the spike up to new highs in all three market internals at the beginning of September when price launched off key support at 1,040.

I call this specifically a “Kick-off” – which is when Market Internals make new visual highs but price does NOT.  It usually occurs in conjunction with a breakout or powerful move off key support – like this.

It’s a great lesson.  It suggests that higher prices are yet to come in a new short-term trend burst – which is exactly what happened.

But since then, market internals have not reached the indicator peaks they met at the start of September.  That’s not necessarily a bad thing, just a caution signal.

More recently, I highlighted the price high so far on September 21st at the 1,144 level as a result of the Fed Decision Reaction.

Despite this new high in price, none of the three market internals – Breadth, TICK, nor Volume Difference of Breadth – made new indicator highs.

That’s your classic non-confirmation and ‘market internal’ divergence.

It suggests weakening and deterioration of the mature short-term impulse move that began in September and bulls should thus be on guard.

That doesn’t necessarily mean bears should rush out to short… that is, unless we get a firm price move under the trendline I’ve drawn at the 1,125 level.

A price breakdown under 1,125 or 1,120 would be a signal that the divergences were ‘working’ and the market was unwinding to the downside to correct (retrace) the upward move.

With the divergences in place, be careful and be on guard for any sudden downside move… or on the flipside, any sudden strengthening of market internals (which would be a bullish confirmation).

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

Read more here:
Measuring Current SPX Market Internals After Strong Rally

Uncategorized

Measuring Current SPX Market Internals After Strong Rally

September 23rd, 2010

What do market internals say about the current structure of the S&P 500 (broader stock market)?

You might guess they’re diverging and you would be correct, but let’s pull the perspective back and see the complete rally off the recent August low of 1,040 to the present September peak at 1,140.

S&P 500 with Market Internals:

There’s an interesting lesson you should be aware of before we discuss current internals.

Look closely at the spike up to new highs in all three market internals at the beginning of September when price launched off key support at 1,040.

I call this specifically a “Kick-off” – which is when Market Internals make new visual highs but price does NOT.  It usually occurs in conjunction with a breakout or powerful move off key support – like this.

It’s a great lesson.  It suggests that higher prices are yet to come in a new short-term trend burst – which is exactly what happened.

But since then, market internals have not reached the indicator peaks they met at the start of September.  That’s not necessarily a bad thing, just a caution signal.

More recently, I highlighted the price high so far on September 21st at the 1,144 level as a result of the Fed Decision Reaction.

Despite this new high in price, none of the three market internals – Breadth, TICK, nor Volume Difference of Breadth – made new indicator highs.

That’s your classic non-confirmation and ‘market internal’ divergence.

It suggests weakening and deterioration of the mature short-term impulse move that began in September and bulls should thus be on guard.

That doesn’t necessarily mean bears should rush out to short… that is, unless we get a firm price move under the trendline I’ve drawn at the 1,125 level.

A price breakdown under 1,125 or 1,120 would be a signal that the divergences were ‘working’ and the market was unwinding to the downside to correct (retrace) the upward move.

With the divergences in place, be careful and be on guard for any sudden downside move… or on the flipside, any sudden strengthening of market internals (which would be a bullish confirmation).

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

Read more here:
Measuring Current SPX Market Internals After Strong Rally

Uncategorized

Japan Agrees With US on Chinese Monetary Policy

September 23rd, 2010

The euphoria in the currencies and metals carried through yesterday morning, with the euro (EUR) bumping up to 1.3425, and the Aussie dollar (AUD) bumping up to 0.9568… But the profit taking began to step in, and soon all the lofty levels that the currencies and metals had gained for the previous 24 hours were seeing slippage, and that slippage soon became hard selling.

I had told the boys and girls on the trading desk here, yesterday, when the euro traded above 1.34, that the euro had “gapped” through 1.32, and 1.33, and I wouldn’t be surprised to see the currency go back and fill in those gaps, which is another way of saying that 1.3435 wasn’t going to last… And it didn’t!

The one currency that is kicking tail and taking names later this morning is the Swiss franc (CHF), which is trading above parity to the dollar once again. And versus the euro, the franc is really strong!

Besides the profit taking, we’ve had some soft data reports around the world that have put a damper on things. For instance, Yesterday in Canada, their July retail sales unexpectedly fell, causing selling in the loonie (CAD).

In addition, overnight, New Zealand’s kiwi (NZD) had a rough go of it, after the government printed a very weak second quarter GDP of just 0.2%… The thing that has scared kiwi holders is the fall off of GDP in the second quarter was before the earthquake that occurred earlier this month. With the fall off of GDP since the earthquake, there are fears that New Zealand’s third quarter GDP could dip negative… And that would be the telling blow to any thoughts that the Reserve Bank of New Zealand (RBNZ) would hike rates this year… Instead, I see the rebuilding after the earthquake pushing fourth quarter GDP to strong levels, and the RBNZ coming back to the rate hike table in 2011…

And in the Eurozone this morning, the Eurozone PMI (manufacturing Index) was disappointing, as it remained at 53.8, when it was expected to rise to 55.7! And the really disappointing data was in Germany, where manufacturing is king… The German numbers were weaker than previously… So… The euro has seen a 1-cent fall off its price overnight… OUCH!

The euro IS still trading above its 200-day moving average though, and that’s a good thing…

Yesterday, in the US… We had home prices data that really should have shook the markets to the core, but there’s too much periphery stuff going on these days… But for those of you keeping score at home… US house prices fell 0.5% in July to the lowest level in nearly six years, according to data released from the Federal Housing Finance Agency.

Recall… I’ve contended for some time now that we would see another 10% drop in home prices before reaching the bottom that the US government told us we reached a year ago!

There’s not much in the data cupboard for us to see here in the US today, but we will see the Initial Weekly Jobless Claims.

So, that leaves us to the BIG TALK overnight… And that is the saber rattling going on between the US and China… The US is now demanding that China allow a 20% appreciation in the renminbi (CNY) versus the dollar… China barked back saying that a 20% appreciation of the renminbi would be devastating to them and cause many bankruptcies…

Here’s the wild card in this whole thing… Now Japan is siding with the US and suggesting that China needs to allow appreciation of the renminbi… That’s all they need in Asia right now, is for these two giant economies to get into a hot debate…

Well, the President will be meeting with China today, and also Japan… Let’s hope he beats on Japan, as much as he beats on China… But in the end, isn’t this really a bunch of theater? This administration, like the administration before it, doesn’t have the answers, so they “deflect” and blame China for our problems… When in reality they should be thanking China for taking on so much of our debt the past decade! If China’s economy hadn’t woken up a decade ago, the problems for the US deficit spending would be even greater than they are right now!

There are reports this morning that The Bank of England (BOE) might roll out another round of stimulus to boost the struggling recovery, according to minutes of a Monetary Policy Committee meeting. Some committee members expressed concern that headwinds to private-sector demand are “somewhat stronger than previously thought.” The financial market has taken the language as a signal that the central bank is warming to more quantitative easing.

All I’ll say to that is, that’s another reason to believe the FOMC will be rolling out their own quantitative easing (QE) because… For over two years now, the stuff that happens in the UK is a precursor to what will happen here in the US.

Before I head to the Big Finish, I want to point out a story I was reading on the Bloomie this morning, about the Aussie dollar… Commonwealth Bank of Australia made a bold comment last night, saying that the Aussie dollar will reach 97-cents by the end of this year, and $1.02 by next March 2011… WOW! They also said they thought at the same time in March 2011 kiwi would be 76-cents…

Of course, you have to be careful about reading too much into reports like this, as you never know, what their motives are for writing this… Most of the time, I take these with a grain of salt… But Shoot Rudy, this one is so bold!

And speaking of bold… Gold went up, then it went down, then it went back up yesterday, and this morning, while the currencies have sold off their lofty levels, (except Swiss francs), gold is trading at the same level it was yesterday morning!

Then there was this… I saw this in The Washington Post yesterday… In order for the United States to recoup all of its $50 billion investment in General Motors, it must sell its ownership stake at $134 a share, according to the special inspector general of the government’s bailout programs. The estimate comes as the automaker readies itself for a public stock offering, setting the stage for the government to withdraw from its majority stake in the company.

The price needed for a full recovery of the US investment is far higher than shares of the automaker have ever reached, and some analysts and government officials have expressed doubts that the United States will be able to recover the money.

To recap… The currency euphoria hit a roadblock yesterday afternoon, and overnight, as profit taking has turned to hard selling. Soft economic data is adding to the currencies’ problems this morning. Home prices fell 0.5% here in the US, and there’s a ton of saber rattling going on between the US, China, and now Japan has been added to the mix!

Chuck Butler
for The Daily Reckoning

Japan Agrees With US on Chinese Monetary Policy originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
Japan Agrees With US on Chinese Monetary Policy




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Uncategorized

For Income and Diversification, Have You Considered International Bond ETFs?

September 23rd, 2010

Ron Rowland

In these turbulent times, plenty of investors just want steady income. Others realize they need to look outside the U.S. as they ride out the storm. Yet in a world where some once-stable economies are starting to look like emerging markets, they also see the need for diversification.

Here’s an answer that ought to satisfy both needs: International bond exchange traded funds (ETFs). These offer a quick, easy way to round out your income portfolio with an asset class you may not have considered.

So today we’ll begin with a closer look at …

Bonds from Around the World

When you loan your money to someone — which is what you are doing when you buy any kind of bond — you expect to get a return on your investment. This is called the interest rate or yield, and is determined mainly by the amount of risk you’re taking.

If you loan your money to someone whom you are pretty sure will be around to pay you back, your return will be lower.

But when you loan your money to someone who may disappear before repaying you, you demand a higher interest rate. This is why people with no cash and no steady income get raked over the coals by lenders.

The same principle applies to governments and companies …

The U.S. government is a good example. Treasury bond interest rates are lower than just about everything else because the federal government isn’t going anywhere.

On the other hand, those that are considered riskier have to pay more when they borrow. For instance, nations like Greece with very high spending and a crumbling tax base are considered high-risk borrowers.

chart For Income and Diversification, Have You Considered International Bond ETFs?

And some nations are in between. They aren’t nuclear superpowers like the U.S. — but they’re still relatively stable. Brazil, Poland, South Africa, and Malaysia are good examples. Their bonds have a good balance of limited risk and attractive reward.

Currencies Add to the Allure

Foreign currencies add the potential for additional risk and reward.
Foreign currencies add the potential for additional risk and reward.

With international bonds you also have an added twist: Currency values. You’re starting with dollars, and eventually you’ll need to withdraw dollars, too. Therefore, if you buy bonds denominated in a foreign currency and that currency appreciates against the dollar, your return will be higher. But any losses can be aggravated if the dollar gains on your chosen currency while you are in it.

As a lender, you have to find a balance between lower risk, lower return assets and riskier assets with potentially higher returns. The exact answer depends on your particular goals.

If international bonds look like a good fit for you, then ETFs are an excellent way to participate! You get a quick, inexpensive portfolio with one easy trade. Here are a few of the ETFs in this category you may want to consider:

  • iShares JPMorgan USD Emerging Markets Bond (EMB) is the biggest international bond ETF and one of the most heavily traded by U.S. investors. True to its name, EMB holds government bonds from emerging market nations — but only bonds that are issued in U.S. dollar terms. That means this ETF has limited currency risk.
  • Market Vectors Emerging Markets Local Currency Bond (EMLC) and WisdomTree Emerging Markets Local Debt (ELD) are a lot like EMB but with a huge difference: Both are composed of bonds issued in local currencies. By adding foreign currency exposure to the bond exposure, these two ETFs are doubly risky. But if the U.S. dollar declines, they could outperform as well.
  • SPDR Barclays International Treasury Bond (BWX) sounds similar to EMB, but in fact there are big differences between the two. BWX has a broader scope and thus includes bonds from developed market nations like Japan, U.K., and Germany. These bonds are also issued in their local currencies. Whether this is helpful or not can vary. Over the last year, BWX severely lagged the performance of EMB because of weakness in the euro and British pound.
  • SPDR DB International Government Inflation Protected Bond (WIP) is an interesting twist on this theme. WIP holds inflation-protected government securities from around the world. These are bonds that have an adjustment factor to compensate investors for any increase in the issuing country’s inflation benchmark.
  • PowerShares International Corporate Bond (PICB) and SPDR Barclays International Corporate Bond (IBND) hold higher-yielding investment grade bonds issued by international companies rather than governments. Unfortunately, both these ETFs are quite small and illiquid. I hope this niche grows because it could be very useful in building balanced global portfolios.

One other innovation I’d love to see, but which doesn’t exist yet, is an international “junk bond” ETF. My guess is that at least one sponsor is working on the idea, although none have filed with the SEC for such a fund yet.

Several more international bond ETFs are out there, but the ones listed above cover most of the current menu. Take a closer look. With ETFs like these, you can transform your fund holdings into a worldwide portfolio.

Best wishes,

Ron


About Money and Markets

For more information and archived issues, visit http://www.moneyandmarkets.com

Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Nilus Mattive, Claus Vogt, Ron Rowland, Michael Larson and Bryan Rich. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Andrea Baumwald, John Burke, Marci Campbell, Selene Ceballo, Amber Dakar, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau, Jill Umiker, Leslie Underwood and Michelle Zausnig.

Attention editors and publishers! Money and Markets issues can be republished. Republished issues MUST include attribution of the author(s) and the following short paragraph:

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.

From time to time, Money and Markets may have information from select third-party advertisers known as “external sponsorships.” We cannot guarantee the accuracy of these ads. In addition, these ads do not necessarily express the viewpoints of Money and Markets or its editors. For more information, see our terms and conditions.

Commodities, ETF, Mutual Fund, Uncategorized

For Income and Diversification, Have You Considered International Bond ETFs?

September 23rd, 2010

Ron Rowland

In these turbulent times, plenty of investors just want steady income. Others realize they need to look outside the U.S. as they ride out the storm. Yet in a world where some once-stable economies are starting to look like emerging markets, they also see the need for diversification.

Here’s an answer that ought to satisfy both needs: International bond exchange traded funds (ETFs). These offer a quick, easy way to round out your income portfolio with an asset class you may not have considered.

So today we’ll begin with a closer look at …

Bonds from Around the World

When you loan your money to someone — which is what you are doing when you buy any kind of bond — you expect to get a return on your investment. This is called the interest rate or yield, and is determined mainly by the amount of risk you’re taking.

If you loan your money to someone whom you are pretty sure will be around to pay you back, your return will be lower.

But when you loan your money to someone who may disappear before repaying you, you demand a higher interest rate. This is why people with no cash and no steady income get raked over the coals by lenders.

The same principle applies to governments and companies …

The U.S. government is a good example. Treasury bond interest rates are lower than just about everything else because the federal government isn’t going anywhere.

On the other hand, those that are considered riskier have to pay more when they borrow. For instance, nations like Greece with very high spending and a crumbling tax base are considered high-risk borrowers.

chart For Income and Diversification, Have You Considered International Bond ETFs?

And some nations are in between. They aren’t nuclear superpowers like the U.S. — but they’re still relatively stable. Brazil, Poland, South Africa, and Malaysia are good examples. Their bonds have a good balance of limited risk and attractive reward.

Currencies Add to the Allure

Foreign currencies add the potential for additional risk and reward.
Foreign currencies add the potential for additional risk and reward.

With international bonds you also have an added twist: Currency values. You’re starting with dollars, and eventually you’ll need to withdraw dollars, too. Therefore, if you buy bonds denominated in a foreign currency and that currency appreciates against the dollar, your return will be higher. But any losses can be aggravated if the dollar gains on your chosen currency while you are in it.

As a lender, you have to find a balance between lower risk, lower return assets and riskier assets with potentially higher returns. The exact answer depends on your particular goals.

If international bonds look like a good fit for you, then ETFs are an excellent way to participate! You get a quick, inexpensive portfolio with one easy trade. Here are a few of the ETFs in this category you may want to consider:

  • iShares JPMorgan USD Emerging Markets Bond (EMB) is the biggest international bond ETF and one of the most heavily traded by U.S. investors. True to its name, EMB holds government bonds from emerging market nations — but only bonds that are issued in U.S. dollar terms. That means this ETF has limited currency risk.
  • Market Vectors Emerging Markets Local Currency Bond (EMLC) and WisdomTree Emerging Markets Local Debt (ELD) are a lot like EMB but with a huge difference: Both are composed of bonds issued in local currencies. By adding foreign currency exposure to the bond exposure, these two ETFs are doubly risky. But if the U.S. dollar declines, they could outperform as well.
  • SPDR Barclays International Treasury Bond (BWX) sounds similar to EMB, but in fact there are big differences between the two. BWX has a broader scope and thus includes bonds from developed market nations like Japan, U.K., and Germany. These bonds are also issued in their local currencies. Whether this is helpful or not can vary. Over the last year, BWX severely lagged the performance of EMB because of weakness in the euro and British pound.
  • SPDR DB International Government Inflation Protected Bond (WIP) is an interesting twist on this theme. WIP holds inflation-protected government securities from around the world. These are bonds that have an adjustment factor to compensate investors for any increase in the issuing country’s inflation benchmark.
  • PowerShares International Corporate Bond (PICB) and SPDR Barclays International Corporate Bond (IBND) hold higher-yielding investment grade bonds issued by international companies rather than governments. Unfortunately, both these ETFs are quite small and illiquid. I hope this niche grows because it could be very useful in building balanced global portfolios.

One other innovation I’d love to see, but which doesn’t exist yet, is an international “junk bond” ETF. My guess is that at least one sponsor is working on the idea, although none have filed with the SEC for such a fund yet.

Several more international bond ETFs are out there, but the ones listed above cover most of the current menu. Take a closer look. With ETFs like these, you can transform your fund holdings into a worldwide portfolio.

Best wishes,

Ron


About Money and Markets

For more information and archived issues, visit http://www.moneyandmarkets.com

Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Nilus Mattive, Claus Vogt, Ron Rowland, Michael Larson and Bryan Rich. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Andrea Baumwald, John Burke, Marci Campbell, Selene Ceballo, Amber Dakar, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau, Jill Umiker, Leslie Underwood and Michelle Zausnig.

Attention editors and publishers! Money and Markets issues can be republished. Republished issues MUST include attribution of the author(s) and the following short paragraph:

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.

From time to time, Money and Markets may have information from select third-party advertisers known as “external sponsorships.” We cannot guarantee the accuracy of these ads. In addition, these ads do not necessarily express the viewpoints of Money and Markets or its editors. For more information, see our terms and conditions.

Commodities, ETF, Mutual Fund, Uncategorized

WisdomTree Preps Commodity Currency Active ETF Launch

September 23rd, 2010

WisdomTree Investments is preparing for the launch of a new actively-managed ETF called the WisdomTree Dreyfus Commodity Currency Fund (CCX), listed on the NYSE. WisdomTree filed a Form 8-A for registration of the securities for the fund, which is one of the final stages in development, prior to an ETF hitting the market.  Just last week, the company known for its array of currency ETFs, had filed a detailed prospectus for CCX as well.

Fund Details

The Commodity Currency Fund aims to provide investors with returns that are reflective of money-market rates in commodity-producing countries and changes to the values of those countries’ currencies relative to the US dollar. The “commodity-producing countries” that CCX will be looking to provide exposure to include Australia, Brazil, Canada, Chile, Indonesia, Mexico, New Zealand, Norway, Russia and South Africa. Each of these countries is a major commodity producing nation, relying heavily exports like metals, livestock, energy and agriculture. A notable caveat is that the portfolio managers, Dreyfus Corporation, will not invest in currencies that follow a fixed-exchange rate regime. In other words, if the currencies are pegged to the value of another currency like the US dollar, than the fund will not invest in them – examples include China, Saudi Arabia and the UAE.

CCX will have an expense ratio of 0.55% and will achieve its currency exposures primarily through investments in forward currency contracts, currency swaps and interest rate swaps. The fund will essentially be much like the existing WisdomTree Dreyfus Emerging Currency Fund (CEW: 22.67 0.00%), which invests in a basket of emerging market currencies. Except that CCX will invest in a different category of currencies, in this case, currencies of commodity-producing countries.

What’s in it for the investor?

CCX will help investors achieve dynamic exposure to money-market returns from commodity-producing currencies. Investors will be earning two distinct returns – the first will be money-market rates of return in the country being targeted, and the second will be the return on the local currency of that target country. By targeting those countries which are commonly identified with the production and export of commodities, investors expose themselves to currencies with positive commodity exposure. As demand and price for these commodities rises, more money would flow into these economies, from higher priced commodity exports. The increased demand for the currency and positive growth resulting in those economies would generally be supportive of appreciation in the currency.

Of course, if investors have a bearish outlook on the commodity sector, this product could also be a useful instrument as part of a short play on currencies of commodity-producing countries.

CCX has a unique proposition to offer investors, much like the Emerging Currency Fund (CEW), and will likely attract investor assets once it’s launched.

Commodities, ETF