Sunday, December 3, 2006

US Trade Deficit?

A Financial Times article published last year correctly pointed that "roughly one-third of the current account deficit results from U.S.-owned subsidiaries abroad: Ford importing cars made in Mexico, for instance, or a U.S. bank using call centres in India" . Moreover, the same article added "sales through U.S. foreign affiliates abroad have topped $2,900 billions, roughly three times the value of U.S. exports. These sales generated $134 billions in income for their U.S. parent companies in 2002, and added nearly $3,000 billions to their market capitalisation.". Assume that somehow that $6,000 billions is a grossly exagerated number, by a factor of, say, 10... and you still end with a roughly neutral current account, even without taking into consideration the already stated one-third of the deficit results from U.S.-ownded subsidiaries abroad. Take that into account, and even by a factor of 10, the U.S. carries, thank you, a nice account surplus. Assume a factor of 5, and the account surplus is staggering large.

In summary, the "trade account" is actually a strong competitive advantage, helped by globalization, in augmenting sales and market capitalization of US-company goods, inside and outside of the Unites States.

Tuesday, November 21, 2006

Dow 36,000 and Emerging Markets Investing

The best-selling book Dow 36,000 was published on September 20, 1999 . The book made the case that stocks had been undervalued for decades and that, for the next few years, investors could expect a dramatic one-time upward adjustment in stock prices. That day, the Dow closed at a precise 10,823.90.

On November 24th 2006, the Dow closed at 12,280.17, for an appreciation of 1446.27 points or 13.4% in seven years. Almost every asset class outperformed the Dow. The massive stock market appreciation prediction however was fullfiled, just not in the United States.

The Bovespa (Brazil's stock market - ticker ^BVSP) was hovering at around 10,000 at the end of 2002. On November 24th 2006, while the Dow still traded in the low 12,000s, the Bovespa closed at 41,757.72, for an appreciation of over 400%. I suggest that this example of Emerging market appreciation was largely possible by the exposure of more thinly traded markets to a host of new instruments, mainly ADRs and ETFs.

A US-traded Brazilian ADR, UBB, may serve as a good example. In 1998 UBB traded at the $6 level, only to come roaring back in the early 2000s to the mid-30s range. The next low wasn't far however, and in late 2002 UBB was again back to the $6 level.

Current upward momentum has lifted UBB to over $80. I will let you calculate the ROI, if you had bought UBB at about $6 in 2002, and sold at the recent 52-week high 0f $90...

I will however compare the $707,782 Volume to a Developed-market stalwart: Citigroup's Volume in contrast is 14,781,900. Citi's P/E is 10.67, while UBB's exhibits a relatively rich 33.97. Conversely, Citi's appreciation over the last 5 years took the stock from around $30 to the current $50 level, versus the already covered UBB's appreciation.

I suggest that high voltaility may continue to be expected from relatively thin Volume, accentuated by the emergence of global capital instruments (and their need to capture alpha).

In summary, if you can pick the right point in the cycle, go ahead, buy low and sell very, very high.... If you can't, well... I will let you decide... but you may want to consider the less volatile shores of the S&P.

Monday, November 13, 2006

My "preferred" investment

With the stock market peaking, and the 10-year Bond paying a paltry 4.6%, I am finding the 6.2% to 6.8% yields of "hybrid preferred securities" quite attractive.

Hybrid preferred securities tend to behave like bonds (price fluctuation linked to credit quality and interest rate direction) but trade like stocks. Some even offer the dividend-like tax treatment of 15% (at least for now). Those can be held in regular accounts, while others are best used in tax-deferred accounts (e.g. IRA).

You may want to research the several industrial and financial companies that offer these vehicles (and the specifics of each); in the meantime, several examples can be found in this useful website

As brokers say, "This post shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any State in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such State"

Saturday, November 11, 2006

It Takes Two

On January 3rd, 2001, the FED began a long string of rate cuts that would eventually bring the Fund rate to 1% by mid-2003. The impact felt by the housing market is now conventional wisdom, but the Stock market remained stubbornly unfazed long after. In fact, the S&P was close to 1,200 in early 2002, but could still not break away from the 800s by early 2003.

The Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA), was signed on May 28, 2003. Many, and count me in, view JGTRRA as a key catalyst for the Stock Market rally, which took the S&P from 800 to past 1,380, a gain of over 70% in only two and a half years.

The Stock Market has remained undeterred by the 17 FED rate increases since June of 2004. Housing however has once again proven to be an early indicator, one alas very susceptible to the vagaries of interest rate direction. In fact, just last month, housing prices saw its biggest drop in 35 years.

As the Democratic Party, which rejected JGTRRA by a wide 96.6% margin (House vote), regains control of Congress, one could expect that JGTRRA will sunset, as currently planned, by the end of 2008.

Without regard to political views or macro-economic factors (e.g. fiscal deficit), I suggest that the S&P will see a reversal back to 1,200 during 2007. This correction will be triggered by the opposite factors that brought the 2003 rally - higher rates and JGTTRA sunset.

Moreover, I suggest that the concomitant stock and housing market corrections will be catalyst to a mild recession, one which will last through the 2008 election cycle.

The political ramifications of "It Takes Two" will be the subject of a different post.