Global Stock Market BLOG - Mike Burnick

S&P 500 Finally Makes It Over the Hump – After Seven-Years of Trying

Finally! Yesterday, the blue-chip S&P 500 at last made it to a new all-time closing high, eclipsing its previous high-water mark set more than seven-years ago at the end of the dot-com era on Wall Street in 2000.

I didn’t notice much celebrating on the trading floor of the NYSE however and perhaps for good reason. Global equity markets have remained on a pretty steady upward trajectory for some time now – fueled by rapid global growth, abundant liquidity and a world-wide buyout frenzy.

S&P 500, Late to the Global Equity Party

In fact, most major stock indexes around the world (and many in the U.S.) moved on to higher levels years ago, leaving big-cap U.S. shares in their wake.

For instance, since October 2002 when the current global bull-market was born, the S&P 500 has gained almost 100% in value, but the Morgan Stanley EAFE index of international stocks (excluding the U.S.) is up more than 160% over than period!

It’s also worth noting that in spite of the S&P 500’s new record high, which was preceded several months ago by the Dow Jones Industrial Average, somebody is still left out!

Nasdaq Continues to Lag Far Behind

The Nasdaq 100 Index remains today at just half it’s peak level reached more than seven years ago – the obvious laggard among major global markets.

Many of the companies (Dell, Cisco, Amazon) that make up this wayward index have many miles to go before reaching a new peak. In fact, the Information Technology sector of the S&P 500 (many of these companies reside on the Nasdaq) is still down nearly 61% since March 2000.

So it’s perhaps not surprising that the Nasdaq, heavily weighted toward tech, continues to lag far behind other indexes. Stock market leadership in the U.S. has clearly shifted.

Selective Global Investing Still Key to Success

Energy sector stocks in the S&P 500 for example have gained over 150% since 2000, and the basic materials sector is up 84%, while the index as a whole is now finally back to par – breakeven performance over the better part of the past decade.

This is a big reason why I have consistently cautioned subscribers in my service, Global Market Investor, to be selective with the countries, and sectors they invest in.

In recent months, I have told you about sector-specific ways to play the global energy sector; and another way to hedge your portfolio, and earn nice potential profits from the Nasdaq’s under performance.

So far, these bets are looking good.

Yet Another BRIC Joins the Trillion Dollar Club

“India became the third emerging stock market after China and Russia to surpass $1 trillion in value,” according to a Bloomberg news item published today.

The Sensitive Index of the Bombay Stock Exchange (Sensex) – the rough equivalent to Wall Street’s Dow 30 index – climbed just under 1% yesterday to reach this milestone level.

In fact, this accomplishment occurred in spite of rapid appreciation in the local currency, India’s rupee, which has gained the most among Asia’s major currencies so far this year, compared to the U.S. dollar.

The media reports these facts in casual cause-and-effect manner; as if it makes perfect sense that an appreciating currency should always go hand-in-glove with rising stock prices. But it’s not that simple.

In fact, China’s currency (the yuan) remains loosely pegged to the buck and hasn’t moved up much this year. Meanwhile, India’s rupee has gained about 8% vs. the dollar on a year to date basis. Yet, China’s mainland stock market has left India share prices in the dust -- nearly doubling already this year – while India’s Sensex Index is up barely 5%.

India’s economy has been red-hot, growing on average 8.6% annually over the past four years, and corporate profit growth “has been phenomenal” according to a Hong Kong based asset manager.

But the Sensex is now trading “at 23 times reported earnings, the highest in Asia after China and Japan”, according to Bloomberg. And India is already showing some signs of slowing growth, thanks to ongoing interest rate hikes, which ironically help boost the rupee's value.

In fact, India’s appreciating rupee may end up being a double-whammy for India stocks. That’s because a higher rupee makes India’s exports less competitive in global markets, which may weigh down booming export sales. And corporate profits earned overseas end up buying fewer rupees when converted back into the local currency at year end.

It’s worth noting that China’s market value has more than doubled in the past year to $2.47 trillion – so it would take a massive market correction for it to fall out of the $1 trillion club. However, the other BRIC in the club: Russia, saw its stock market value dip back below this mark in recent weeks, as stocks in Russia continue to under perform in 2007.

India is a member in good standing of this coveted club, at least for now... but I wouldn't be surprised to see a better buying opportunity in the Sensex; perhaps soon, and somewhere south of the $1 trillion level.

Private Equity Going Public

On Wall Street this week investors are anxiously awaiting the initial public stock offering of private equity titan the Blackstone Group.

This IPO provides not only another rare glimpse into the world of private equity, but should also provide a current temperature reading on this red-hot (or perhaps over-hyped) sector of high finance.

In February, shares of private equity firm Fortress Investment Group (FIG) became public in a frenzied IPO that saw its shares surge from a price of $18.50 per share to $35 – on the very first day of trading. Judging by Blackstone’s filings with the SEC prior to its own IPO, returns on this private equity firm may prove to be even more lucrative.

Biggest in the Business

Blackstone Group, with a war-chest of about $80 million in assets, is about twice the size of its private equity rival Fortress, and carries a higher profile in the industry. Private shareholders have also been richly rewarded.

Blackstone’s private equity funds have returned 23% annually on average since 1987; for comparison, that’s about twice the average return for the S&P 500 Index over the same period. The firm’s 2006 net income soared 70% to $2.3 billion, and first quarter 2007 profits more than doubled to $1.1 billion. Talk about firing on all cylinders!

The IPO will raise about $4 billion total, in exchange for a 10% to 15% stake in Blackstone. The company said it plans to sell as many as 133.3 million shares for $29 to $31 each, but if Fortress' debut is any indication, Blackstone's shares may be quickly marked-up much higher in aftermarket trading.

The Blackstone-China Connection

Adding another layer of intrigue and hype (pilled on top of hype) to this IPO; Blackstone announced recently that another $3 billion will be raised in conjunction with the IPO by selling non-voting common shares to the State Investment Company of China in a separate transaction.

China has of course publicly stated its desire to seek alternative investments to diversify its state-held assets, and they obviously like what they see in Blackstone. China will own an equity interest of just under 10% in Blackstone. Just imagine the possibilities!

Proceeds from this deal will be earmarked for “general corporate purposes”, which of course means more fuel for the current buyout spree of mergers and acquisitions that are helping push global share prices higher.

So even if your broker can’t get you a piece of the action, with an allocation of Blackstone’s IPO; your overall equity portfolio may still benefit as a result of even more buyout activity.

Hong Kong “Buzzing” from China’s Latest “Gift”

China is in the news again this week (when is it NOT) as high ranking officials visit Washington; while the People’s Bank back in Beijing announce yet another series of policy measures aimed at reigning in rampant speculation.

People’s Bank of China Governor Zhou Xiaochuan – Fed Chairman Bernanke’s Chinese counterpart – visited with politicians this week and said all the right things. Mr. Zhou pledged that China intends to “follow the three principles of exchange-rate reform and increase the flexibility of the yuan.”

Of course actions speak louder than words, so late last week and certainly timed to coincide perfectly with the Chinese road-trip, the People’s Bank increased the “official” range in which its currency (the yuan) is allowed to move each day against the U.S. dollar. The currency trading band was increased to 0.5% above the official target exchange rate, up from 0.3% previously.  Not a very big move – or a real big surprise.

People’s Bank Knows How to Talk the Talk

Perhaps the People’s Bank has taken a page from former Fed Chief Alan Greenspan’s playbook. They’re getting good at jawboning, accompanied by well-timed policy moves, while at all times remaining very cryptic about their real intentions.

In addition to the exchange-rate move, China also raised bank deposit reserve requirements, while raising both official lending rates, and bank deposit rates. In doing so, China is still trying to quell the speculative froth building in mainland asset markets. But their method is the same as always – moving in baby steps.

The People’s Bank hopes to soak-up some of the excess money sloshing around China and redirect it into bank deposits – rather than stock brokerage accounts. But so far, there’s little sign of success, as most stock indexes continue to surge to record highs. 

Meanwhile, Chinese savers still receive only 3% interest on the Chinese equivalent of a one-year CD, which isn’t much of an incentive compared to stock market gains of 130% last year.

The Real China Show is Changing Channels

The increase in deposit and lending rates, just like the widening of its currency exchange rate, looks a lot like window dressing to me. It’s a circus side-show designed to entertain the media, because they just can’t get enough of the China story.

But as I stated in a previous post (China (Finally) Moves to Help Level the Playing Field for Mainland Investors) the real story in China is Beijing’s recent move to significantly relax investment restrictions on hundreds of millions of mainland investors – and that’s where the real money can be made too.

China’s CSI 300 Index, of mainland listed A-shares is up nearly 90% year to date, but performance has been uneven in recent weeks. In fact, the more speculative Shanghai B share index, which can ONLY be traded by domestic individuals and overseas investors, plunged 5% the other day; the steepest drop in three months.

Expect a Great Wall of Chinese Cash to Move Offshore

The reason appears simple; China’s investment authorities recently cleared the way for mainland investors to move up to 50% of investment assets into overseas markets, through qualified institutional accounts. And it would appear that millions of Chinese investors are already making this move. And why not; after all there is a very big valuation incentive to do so.

China’s A-shares are trading at more than 43 times earnings, which looks rather pricey when compared to the recent past. But in Hong Kong, China’s H-share index trades at just 20 times last year’s profits – and only 15 times next year’s expected earnings. What a bargain!

I estimate that Chinese firms listed in Hong Kong are now about 50% cheaper than the very same company shares listed in Shanghai. That’s like a half-off sale in Hong Kong equities compared to Shanghai. And I expect this valuation gap between the two markets to start closing fast – and in favor of Hong Kong.

After all, with such a glaring valuation advantage - and with China’s mainland investors funding nearly nine million new brokerage accounts in the first-quarter alone – where do you think most of this cash is likely to flow?

The “Mad Rush” into H-shares

In the month of April alone, Chinese retail investors pumped about 175 billion yuan of fresh-cash into stocks! My contacts in Hong Kong recently weighed in with their views on what this means for investing in China going forward.

Ushe Koh, VP of private banking at DBS Bank Ltd believes these moves will “ABSOLUTELY” (his emphasis) lead to increased flow of investment assets to Hong Kong. In Ushe’s worlds, it’s all “part of the whole mad rush for investments” in China, and he sees most of this windfall directed at Hong Kong’s blue-chip shares.

My colleague Jack Flader, CEO of Global Consultants and Services in Hong Kong, tried to subdue his enthusiasm stating wisely that “the hype is always bigger than the reality”.

BUT, Jack went on to say that even if you were to discount the hype by half, the reality could mean cash inflows to Hong Kong shares equivalent to one-third “of the current total stock exchange market cap. HUGE!!!” Again, the emphasis is all his.

The bottom line, as Jack aptly puts it, is that “Hong Kong is buzzing from China’s latest ‘gift’.”

As I explained to my Global Market Investor subscribers recently, Hong Kong is a wonderful, yet often overlooked back-door into the vast profit potential of China. And it’s a market that’s also a much better value than Shanghai.

In fact, I just recommended two very attractive ways to invest in Hong Kong’s H-share market. These ETFs are still a screaming bargain right now compared with the A-shares – and will definitely participate in the long-term upside gains from China’s tremendous growth.

London’s Latest Financial Innovation: Islamic Style

The media had a field-day early this year when it was revealed that the London Stock Exchange (LSE) was elbowing out it trans-Atlantic rival the New York Stock Exchange for the title of top dog in the world of global finance.

Wall Street seems to have lost its way, while new public stock offerings in both London and Hong Kong stole the show last year. In fact, IPOs in Europe raised $86 billion in 2006, compared with just $48 billion raised in the U.S. There were also more bond deals denominated in euro last year than in U.S. dollars for the first time ever.

Tighter U.S. securities regulation is partly to blame, thanks to the Sarbanes-Oxley anti-fraud legislation, and other measures designed to clamp down on Wall Street excesses in recent years.

But the London stock exchange also has financial innovation on its side, which is no doubt a big reason why it’s doing such brisk business these days.

London Leads the Way in Cutting Edge Securities Trading

It was the LSE that was the first to list a wide array of commodity-backed ETF-like products designed to track individual physical commodities.

London also dominates the $2.7 trillion-a-day foreign exchange market, accounting for nearly one-third of all trades compared with a a market share of just 18% for Wall Street.

Recently the LSE announced yet another financial first: Islamic bonds. In fact, the UK may become the first to issue bonds that comply with Islamic, or “Sharia law”, which potentially means another capital market windfall coming London’s way.

Catering to the Muslim Masses

The UK boasts a large population of immigrant Arabs and Pakistanis. In fact, the nation has such a large Muslim community, that Islam is Britain’s second-largest religion. So London has a plan to make itself the global hub for Islamic Finance. But to do so, requires certain financial flexibility to stay in compliance with the teachings of the Quran.

The UK has modified lending laws to make it easier for Muslims to take out mortgages and consumer loans. But now, London’s high-financiers are going even further: they plan to issue UK government backed “Sharia bonds” whose covenants are compliant with Islamic law.

The teachings of the Quran, the basis for Islamic law, include prohibitions against gambling and alcohol among other things. One of the more difficult items in Islamic law, at least when it comes to fixed-income investing, is that the payment of interest is outlawed.

Interest Income vs. Capital Gains

To get around this sticking point, the UK backed Sharia bonds may be structured such that investors get paid a larger capital gain upon redemption, instead of periodic coupon payments.

London’s Islamic bond trade could add up to very big-business for British bankers. According to one, the current size of the Islamic finance industry is more than $750 billion — and it is growing at 15% to 20%.

London may end up attracting many hundreds of billions more from oil-rich Middle Eastern nations; many of them already looking to diversify out of their dependence on U.S. dollars.

A Shot in the Dark: Why India’s Growth May Get Short-Circuited

There are many reasons to be bullish on India in the long-run. This rapidly developing emerging market (the “I” in BRIC) boasts a well-educated population over one-billion strong.

The country also enjoys a booming economy, with annual GDP growth close to 9% at the end of 2006, just a shade behind China’s blistering pace of 11%. What’s more, India’s industrial production is expanding at the robust rate of nearly 13% year over year, compared to just 2.3% in the U.S.

These are all very positive signs pointing toward a bright future for India; but it’s too bad that so many of its citizens and businesses are being left in the dark.

Many Indian’s are Off the Grid

It seems that growth in India’s infrastructure – particularly the electric utility sector – just isn’t keeping pace with the overall economy. And that spells trouble for India going forward. In fact, according to a recent article in the New York Times, about 600-million Indians (roughly half its population) are OFF the electric grid altogether.

Therein lays a dangerous short-term roadblock to this country’s growth. India today is “a portrait of ambition bumping up against reality, namely an electricity crisis that represents one of the major hurdles to India’s ability to hoist itself into the front ranks of the global economy.”

In the suburbs of New Delhi, for instance, a quick glance at the rooftops of buildings shows evidence of this disconnect in stark relief. What you’ll notice are multiple smokestacks huffing and puffing black diesel exhaust into the humid air.

India’s Smokestack Industry

The smokestacks you see, are used to channel the exhaust from countless generators, which must be switched on when India’s power is turned off – sometimes for eight-hours at a time – during the hot summer months. And you thought California’s rolling black outs were bad.

According to a survey by the World Bank, 60% of Indian companies have diesel backup generators installed in their office buildings or factories – a necessity to provide uninterrupted power when India’s unreliable electrical grid goes offline. Many households in India are also forced to rely on diesel generators to provide power.

The chronic electricity shortages throughout India are a painful reality of modern life, in spite of the fact that Indians are very frugal consumers of energy, using up only 600 units of power per person each year, or just 20% of the juice burned up by a typical American.

But if India desires sustainable growth at it’s current rate of nearly 9% - or anywhere close to that level – it certainly must solve its power outage problems first.

Solutions to the Electricity Crisis Proceeding at a Snail’s-Pace

As far as practical solutions go, “India has stepped up generation in recent years at the pace of about 6% a year,” according to the Times article, but that’s merely a drop in the bucket “compared with what neighboring China adds each year and in any case insufficient to keep up with India’s galloping demand.”

One resident of suburban New Delhi, who suffered through a recent 11 hour power outage, says: “We’re living in the Dark Ages.” In a more distant suburb of town, where new construction proceeds at a rapid clip, an 800-unit complex of new row houses and apartments curiously named “Nirvana Country” promises “air-conditioning in all rooms.”

Nirvana is still under construction, but 20% of units are already occupied, and yet the complex hasn’t even been connected to the electric grid yet.

Residents are forced to burn 6,000 gallons of diesel fuel each week to power their generators. Call it a snapshot of modern middle-class life in fast-growing India.

Snapshot of an “American Nightmare” in North Florida

I was on the road again this weekend; but not overseas this time. Instead, I was traveling with my family to spend the weekend with my wife’s brother and his family near Jacksonville, Florida. The occasion was the high-school graduation of my niece - his oldest daughter – the first of three to depart the nest. Naturally, always thinking in terms of potential investments, I came away from this weekend’s fun with two observations of investment interest.

Sports without Exercise

First, I was amazed by just how captivated my kids, ages 12 and 10, and their cousins were by their new Nintendo Wii game console. My young nephews (ages 14 and 10) are already experts at the games including tennis, baseball, golf, bowling, etc. In fact, they can play all these sports and more – without even breaking a sweat – literally!

I was amazed watching my girls and their cousins returning serve after serve – with merely a flick of the wrist – while sitting cross-legged on the living room floor – barely moving at all, much less getting their heart rates up into cardio range.

Call me old fashioned, but I’m very suspicious of these virtual reality sports – which become more realistic with each passing day.  Today, our kids can become proficient at multiple sports without getting any exercise at all. Of course the obvious immediate beneficiaries of this trend from an investment perspective are the game consol makers themselves, including Nintendo, Sony, and the many makers of hit video game software.

But longer term, the more sustainable investment trend worth looking into may be the fast-growing dietary industry. Former Miami Dolphins star quarterback Dan Marino, as well as his old coach Don Shula are now spokesmen for NutriSystems Inc.(Nasdaq: NTRI).

The common stock of this company has performed very well over the last few years, based on booming sales of NutriSystems’ pre-packaged foods that can help you eat right and shed pounds at the same time. As soon as I see NutriSystems brand kids-meals for sale; I’ll be sure to send some to my nephews.

Snapshot of an “American Nightmare” in North Florida

While my nephews sharpen their “athletic” skills with Nintendo’s Wii, their father (my brother in law) supervises luxury home construction for a big builder in North Florida. Business remains surprisingly strong for his company, which is in the process of building a large self-contained community near St. Augustine.

However the headlines in Jacksonville’s local paper told the story of a housing sector in trouble. “The Map of an American Nightmare”; was the gripping title of a story in Sunday’s Jacksonville Times-Union.

It seems that this city, the largest in North Florida leads the nation in foreclosures, with one for every 123 homes. Currently in fact, there are more than 3,000 homes in the Jacksonville area that are in some stage of the foreclosure process, and another 1,100 houses classified as REO (real estate owned) by lenders after a home has been foreclosed.

High-priced Homes Getting Swept Up in Foreclosure

What’s surprising in the official statistics is the number of high-priced homes being caught up in the foreclosure process. In Jacksonville nearly one-quarter of all homes in foreclosure are valued above the median home price for the area, and many of these are homes priced from $300,000 up to $2.2 million.

All of this is more evidence that convinces me that housing is a multi-tiered market, not as homogeneous as economists would have us believe. In fact, there are very different dynamics at work, not just in different regions around the country, but among different kinds of home buyers. The fact is, many American homebuyers over the last five or so years are sitting pretty with homes that have appreciated nicely since purchase.

The current housing slump is being felt most at the individual market level – and even more so at the individual homeowner level. Home prices in Florida and many other high-demand areas around the country went up a lot over the last few years. Price gains ran well above the historic average for several years in a row.

Real Estate is still Local – so are the Problem Loans

There were of course homes purchased at or near the top, as is always the case. But many of the properties currently labeled as “distressed” were either purchased for outright speculative investment purposes; or by those who couldn’t qualify for the American Dream of home ownership with conventional financing, due to either sub-par credit histories, or perhaps due to escalating home prices.

Now the market boom is over; but is this really a bust? Or, are we simply giving back some of the outsized gains in recent years, and unwinding the speculative excesses?

Many millions of American home owners are merely watching this unfold from the sidelines, and are largely unaffected by the so-called “American nightmare”. These are the vast majority of Americans who never subscribed to the “flip-this-house” school of home buying speculation; and who didn’t need interest-only mortgages to swing the purchase.

It will certainly take awhile longer for America to work through the excess inventory of homes resulting from the current recession in housing. And this will continue to impact our home values for a period of time.

But it is only a nightmare for the small minority of those who made poor investment decisions or poor choices in their mortgage loan terms.

The Politics of Oil … Leads to Declining Production

What do energy firms Chevron, Exxon, and BP all have in common?

All three companies were recently forced to participate in Venezuela’s energy “nationalization” program; with each company compelled to fork-over a big share of their oil operations in the country to the government.

These giant oil companies also have something else in common; they are very much in the minority in the battle for control of crude oil supplies worldwide.

In fact, according to a recent report from industry advisor PFC Energy, 80% of the world’s oil is in the hands of national oil companies – such as Venezuela’s PDVSA. This leaves only about 20% of proven reserves in the hands of private oil companies such as Exxon for instance.

Dysfunctional State-Run Oil Firms Control Most of World Supply

Several of these state-run energy firms are quite technologically savvy, efficiently run and respect private capital investment to help expand production. Companies such as Saudi Arabia’s Aramco fall into this category. But unfortunately, too many giant state-owned oil firms operate like PDVSA – and their crude oil output suffers greatly as a result.

Political meddling, if not out-right confiscation of private assets (as in Venezuela or Russia) leads to a double-negative of less private capital investment and bureaucratic inefficiencies in the vast majority of state-controlled energy companies.

Most national oil companies simply lack the profit-motivating incentives to properly allocate capital to reinvest in increased oil production. As a result, many of the world’s leading oil producing regions are experiencing steady declines in output as aging oilfields run dry.

Considering today’s sky-high crude oil prices, nations that are rich in oil reserves should be attracting a windfall of investment from large multi-national firms like Exxon and BP, to help unlock new reserves and bring more crude production online.  But in fact the reverse is true.

Lack of Investment, Corruption, and Inefficiency Leads to Falling Output

PFC Energy singles out several countries with huge energy reserves where output is in steady decline. Besides Venezuela, other nation’s with dysfunctional state run oil operations includes: Iran, Iraq, Mexico, and Nigeria – all major global producers.

And in Kuwait and Russia, oil production has stagnated due to corrupt and inefficient national oil firms.

Just these seven oil producing countries combined account for more than 40% of total global oil production. In other words, two-fifths of total world supply is in decline!

Crude oil production in Venezuela is down about 27% since 1997. Since the U.S. led “liberation” of Iraq, oil production there is down by one-third. In Iran, political tensions and a disdain for western capitalism has led to a lack of investment and declining production.  Civil strife in Nigeria is to blame for its output problems, where an estimated 20% of crude production is shut in due to violence in the Niger delta.

National Oil Companies Prohibit, or Frighten Away Capital

In Mexico, it’s the politics of oil that’s to blame. The country’s constitution expressly forbids foreign ownership of national oil assets. This means a lack of investment and expertise from multi-national firms that would likely boost production in Mexico’s giant Cantarell field, which is instead declining rapidly.

A recent article in Newsweek describes the global oil crunch this way, “The world is not running out of oil, but it will run out of production capacity if the national companies, the new rule makers in this business, don't invest.”

The large multi-national oil firms have both the engineering expertise, and the access to capital, that’s needed to turn around declining global production. But it’s difficult to imagine them doing so in an environment where national oil companies are openly hostile toward outside investment, confiscating the capital that could help boost output.

It's the Return OF Investment that's in Doubt

To paraphrase the great American humorist Will Rogers, when it comes to doing business with national oil companies, it’s not so much the return ON investment that worries western firms – it’s the return OF their investment.

For these reasons, it’s clear that declining global production will continue to keep upside pressure on oil prices. To profit from this trend, I recently recommended several energy sector exchange-traded funds to readers of my Global Market Investor service.

These ETFs provide a great way for you to prepare your investment portfolio for even higher energy prices ahead.

Waltz of the Wiener Börse

My colleague Mark Nestmann recently wrote in nostalgic terms about Vienna, the picturesque capital of Austria.  This city does indeed have a lot to offer; opera, architecture, parks (some, clothing optional), waltzes, and of course the beautiful blue Danube river which flows through this fine city.

Long a haven for private banking in Europe, due to its strategic location in the very heart of “old Europe”, Vienna these days is attracting offers from investors who would like to waltz away with Austria’s booming Wiener Börse – the thriving local stock exchange.

Strategic Location gives Wiener Börse Easy Entry to East Europe

Because of its great location, Vienna has always enjoyed very strong commercial ties to Western Europe, particularly with Germany, the EU’s largest economy.

Vienna also has age-old connections to Eastern Europe too, forged during Austria’s glory-days under the imperial rule of the Habsburgs. And it is these connections that are now paying handsome dividends for Vienna’s stock exchange.

Just a few days ago in fact, the Vienna exchange revealed that it had been approached several times by “various parties, some with firm offers” to buy-out the exchange. These suitors are obviously attracted by the Vienna exchange’s strong growth, due in large part to its unique position as a cross-roads financial market between old and new Europe.

Becoming a Major Regional Exchange

Many of the leading firms listed on the Wiener Börse are banks and insurers who are doing a land-office business expanding financially into fast-growing Eastern European countries, which lie just across Austria’s borders.

The Wiener Börse is forging close ties with many smaller but rapidly expanding financial markets to the east. In fact, the Vienna Exchange is in the process of making a bid for a 44% stake in Bulgaria’s Sofia stock Exchange, which is being privatized by the government.

Vienna’s stock market, in concert with local banks, has a long history of such strategic partnerships. In 2004, Wiener Börse bought a majority stake in the Budapest Exchange, Hungary’s main bourse.

And Vienna also has partnerships with eight other regional exchanges including: Bucharest, Belgrade and Sarajevo. In March, Vienna forged an agreement with the Ukraine to help restructure the country’s financial exchanges.

Sizzling Financial Results, But Exchange is “Officially” Not-For-Sale

As a result of these deals, business is booming on Wiener Börse. Average monthly trading volume surged nearly 50% higher in just the first four months of this year alone, to EUR15.3 billion, up from EUR10.5 billion for all of last year. The exchange’s market cap climbed 36% last year to an all time record EUR145.8 billion.

These numbers help explain why Wiener Börse is attracting so much attention from outside investors who would love to tap into this growth potential. Officials in Vienna claim their exchange is not for sale, saying “it’s not a question of price. Both our owners and management think the market can develop much further.”

In the current supercharged M&A environment, financial exchanges the world over have the urge to merge – we’ll see if Wiener Börse is the next hot-prospect to get snapped up.

Private Equity Firm Takes the Wheel in Auto Finance

In yet another sign of the times, the declining fortunes of American industry were once again placed front and center on the world stage, as DaimlerChrysler AG agreed to dump the Chrysler name – along with the money-losing U.S. auto operation that’s attached to it.

In fact, Chrysler’s business prospects have apparently deteriorated to the point that its German-based parent company is literally willing to PAY someone to take Chrysler off its hands. Take my car… please!

This brings full-circle a transaction pulled off by Daimler, less than a decade ago, that was questioned almost from the very start. As far back as 1998 when the deal to buy Chrysler was announced, shareholders wondered what one of the world’s leading makers of luxury cars (Mercedes-Benz) could possibly find appealing in a declining Detroit automaker that had already suffered a previous brush with bankruptcy.

Luxury Carmaker Pays a High Price to Sell Chrysler

But Daimler AG plunked down its money – US$36 billion worth of it – and took its chances. To be sure, the Chrysler division has generated some profits over the years for its shareholders, but overall it’s been a major money loser, and constant albatross around Daimler’s neck.

The way in which Daimler was forced to cut and run from Chrysler speaks volumes about the economics of the U.S. auto sector. It’s also interesting to see who is stepping in to snap up Chrysler, and why.

According to the official press release, Daimler is selling an 80% stake in Chrysler to Cerberus Capital Management, one of the world’s biggest private equity firms, in exchange for a “capital contribution” of $7.5 billion by Cerberus. But that cash doesn’t go into Daimler’s pockets; it gets pumped back into Chrysler instead. Talk about an acquisition that funds itself!

To swing the deal, Daimler was even forced to pony-up financing for part of the purchase price. In fact net-net, Daimler is spending about $650 million just to get Cerberus to take Chrysler off its hands.

Will Chrysler Get Stripped and Flipped on the Road to Going Private?

Of course Daimler also gets to jettison $18 billion in pension and health-care liabilities as well, so there  is some upside in this deal for the Germans. Still, it’s not a lot to show for a $36 billion investment - so much for German efficiency and managerial prowess.

On the other hand Cerberus, which beat out several other private-equity suitors in the bidding for Chrysler, thinks it’s come away with a pretty sweet deal for its own inside investors.

Although Cerberus’ long-term intentions with Chrysler aren’t completely clear, the automaker has produced decent profits in the past, most recently in 2005. And Chrysler has some attractive assets, including a valuable global brand in the Jeep division.

But some have speculated that Cerberus may simply be planning the typical private-equity “strip it and flip it” transaction, in which some valuable assets are sold off piecemeal, then the remainder of the company gets taken public again at a fat profit for Cerberus.

Cerberus Gets Crowned King of Consumer Finance

The real crown-jewel in this deal for Cerberus however, is Chrysler Financial, the automaker’s captive lending division. Cerberus knows something about profiting from the consumer finance business – after purchasing a 51% stake in GMAC Financial Services from General Motors Corp. last year.

Combining Chrysler Financial with GMAC makes Cerberus the #1 player in auto loans, with a market share nearly twice as big as Ford Motor Credit, its closest rival. That kind of clout in the consumer finance business can pay handsome dividends.

Cerberus will benefit from greater scale in lending, with a much larger base of borrowers, and it can earn lots of extra profits by cross selling add-on services like insurance and extended warranties.

Private equity firms have become big investors in financial businesses over the past few years and this deal for Chrysler, with favorable financing terms thrown in by Daimler, may have just catapulted Cerberus Capital into the driver’s seat in auto financing.