Global Stock Market BLOG - Mike Burnick

Asset Protection Strategy – Euro-Style

After several days of great global investment insight from the many experts in attendance at the Sovereign Society European Advantage Tour, we got to hear a wealth of information about the various ways to structure an investment portfolio for maximum asset protection. Here are some of the details.

On Wednesday, we traveled from our Zurich hotel to picturesque Vaduz, in the Principality of Liechtenstein, although views of the Prince’s storybook castle perched high up on a hilltop were somewhat marred by the presence of a construction crane – the royal residence is apparently being remodeled.

Liechtenstein is one of Europe’s smallest nations at just 62 square miles and with only 35,000 citizens. In fact, many of those working here commute to their jobs from the bordering countries of Austria, Germany, and Switzerland. The Principality of Liechtenstein is politically and economically very stable; and is well-known for being a leading offshore financial center, with strict asset protection and privacy laws dating back to the 1920’s!

The Eye-opening Advantages of Liechtenstein Foundations

Our hosts in Liechtenstein included Swissfirst Bank of Liechtenstein and First Advisory Group. Attendees heard presentations from Dr. Johannes Gasser a leading international attorney in the Principality of Liechtenstein; and from Philipp Schmid Director of First Advisory Group, a leading trust company based in the Principality.

The wealth of information provided is too great to fully address here, but the highlights include details of Liechtenstein’s strict banking and financial secrecy, which is guaranteed here by law. Also, the Principality of Liechtenstein guarantees bank deposits here against loss – similar to FDIC protection back home.

Also, I was surprised by how affordable Liechtenstein can be as an offshore banking and investment destination; it’s not just for the rich and famous! In fact, a Liechtenstein Foundation, the most popular asset vehicle here, can be established for as little as 30,000 Swiss francs (or about US$35,000).

There is ZERO withholding tax on distribution of profits from the Foundation, and the only local tax is an annual 1% of assets – a small price to pay for this type of asset protection and financial privacy.

The European Advantage Tour concludes here today, and so I’ll be on a plane headed back to South Florida on Friday, but check back soon for more on the growing volatility in global equity markets.

The Keys to Global Investing: Integrity, Discipline, and Being There in Person

The Sovereign Society European Advantage Tour continues today from Zurich, Switzerland. According to our own Bob Bauman, Switzerland is one of the world’s finest financial havens.

This has to do not only with Swiss mountainous topography, which insulates the country from its European neighbors, but also from the fact that it has isolated itself from European meddling over the years.

Switzerland is well known for its neutrality during war time, but it has also remained neutral amid a world of growing banking regulations that threaten our privacy. A few years ago, a major accounting firm produced a survey that indicated reputation and integrity were the prime factors in choosing to do business with any bank; and Switzerland has both in abundance.

Integrity, discipline, secrecy; and about $3 trillion in global offshore assets held in Swiss bank accounts as a result.

Pearls of Wisdom from Our Investment Director

Today, the Sovereign Society’s investment director Eric Roseman provided his insights investment insights from around the wide-world of investment markets. He began by saying the commodity boom isn’t over, just resting temporarily, but the easy money in natural resources has already been made.

I tend to agree, but I also see more gains ahead for commodities, especially energy, and agriculture.

Eric also pointed out a universal rule of value investing: “don’t chase investments trading near 52-week highs. Instead, look for markets that have been washed out and are trading near their lows.” This strategy can provide you with an important extra margin of safety at a time when many markets around the world have already enjoyed big gains.

Go Global for Bigger Gains, and Less Risk

Another rule of thumb Eric pointed out is that to be successful in the markets today, investors must look farther a field – and take a truly global approach to investing in exchanges around the world. Of course, he’s preaching to the choir with me in this instance.

Right now, Eric’s finding the best bargains in Asia where he’s focusing on some of the most undervalued, and yet fastest-growing global markets. Current favorites include: Japan, Taiwan, Thailand, and certain real estate plays in the region.

Here’s another valuable tip for today’s global investor: traveling the world provides a key value-added factor in your investment process. There’s just no substitute for being there in person to check out emerging investment trends around the globe.

Personally, I’m a big advocate of this first-hand approach to international investing – as my still jet-lagged body will attest!

Why Zurich is a Major Hub of International Business

We arrived late yesterday afternoon in Zurich Switzerland, our next stop on the Sovereign Society European Advantage Tour, after a very comfortable and picturesque ride by luxury motor coach from Zermatt.

Zurich is Switzerland’s largest city, and is widely regarded as the commercial and cultural heart of this nation. This city, with its heavy Germanic influence, offers quite a cultural contrast to the largely French-speaking city of Geneva.

While Geneva is known for many boutique private banking firms, Zurich is the institutional headquarters for many of the world’s largest banks including UBS, Credit Suisse, and Swiss Re, among others. The 150 year-old Swiss Stock Exchange (SWX) is also headquartered here.

In 1996, fully electronic trading replaced the traditional floor trading system at the SWX, which is well known for its international bond trading platform. In addition, the SWX is a hot spot for ETF and derivatives trading; and offers Europe's largest market segment for listed and exchange-traded warrants.

Unique Investment Strategies are a Specialty

Many multi-national businesses and wealthy individuals are attracted to Zurich due to its very low tax rate (there’s also no inheritance tax in Switzerland as a whole). As a result, Zurich’s financial sector accounts for about one quarter of the city’s total economic activity.

In addition to the giants of financial services located in Zurich, where you are never treated like just another number (as in numbered bank accounts), Zurich is also home to several of the Sovereign Society’s council of experts, who manage specialty investment programs, that constantly bring fresh and unique investment ideas to our members.

For example, Rob Vrijhof is the President of Weber, Hartmann, Vrijhof & Parners in Zurich. Rob brings decades of Swiss banking experience to the table for our members. He and his firm are committed to a conservative investment style focused on diversification and asset protection.

Another Zurich-based financial expert joining us on our tour is Marc Sola, the managing partner of NMG International Ltd. Marc, holds a law degree from the University of Zurich and specializes in providing sophisticated investment structures for private investors – who wish to keep it that way.

Later today, we’ll be treated to the latest ideas from both of these experts; what a treat.
I’ll keep you posted…

The Profit Potential in This Sector Will Have You Seeing Lots of Green

I'm in Switzerland all this week for the Sovereign Society European Advantage Tour. This weekend we had a little bit of down time in Zermatt, the well known skiing destination. On Sunday I took advantage of some free time, and did the tourist thing, taking the Matterhorn railway (the Gornergrat bahn) all the way up the mountain side to the roof of Europe.

The views was just incredible, but one of our members on the tour mentioned that he had been here before many years ago, and that the glaciers that once lined the high mountain valleys have receded a great deal -- strong evidence of global warming here in the Alps!

There is a “green energy” revolution underway in Europe. Located off the wind swept North Sea coast of Scotland, a big part of Europe’s green energy future is already operational.

Recently, UK-based Talisman Energy and Scottish and Southern Energy, threw the switch on its Beatrice Wind Farm Project, which harnesses some of the world’s highest wind speeds to generate renewable (or green) energy.

This is just one part of a very big movement in Europe to take the lead in green energy investment. The European Union set an ambitious schedule for member countries to generate 20% of the EU’s total energy needs from renewable “green” energy sources by 2020 – just 12 years away.

EU's Green Energy Ambitions are NOT Just Hot Air

Wind power could provide a very large part of the solution in Europe, which boasts thousands of miles of very breezy coastline. According to the European Wind Energy Association, offshore wind could provide up to 150 GW of power for the EU – equal to the power generated by 150 nuclear plants.

Within three years, the EU expects to generate enough electricity from wind power alone to meet the needs of 86 million Europeans. Denmark is the current EU market leader in offshore wind capacity with 400MW(megawatts), the UK is second at 300MW, and the Netherlands is third (140MW).

Wind power is just one of the green energy technologies that are now emerging as a viable alternative to fossil fuels. Sovereign Society members were able to jump in early on this profitable trend. In fact, Thomas Fischer of Jyske Bank in Copenhagen alerted us to an exciting alternative energy play that we recommended to members early this year.

Since then Denmark based Vestas Wind Systems has surged nearly 60% higher in value, but that’s just the tip of the iceberg when it comes to green energy. There are a number of lucrative ways to play this exciting sector right now, with huge upside potential over the next several years.

Follow the Money: Into Huge Potential Profits in Green Energy

In fact, the well-heeled, smart-money investment crowd is pouring billions of dollars into the green energy sector right now. Private equity and venture capital firms are writing blank-checks to back the most promising alternative energy technologies and companies, in hopes of cashing in on the next great technology boom – reminiscent of the internet bonanza of the 1990’s.

The alternative energy sector is enjoying explosive growth – and not just in Europe either. In fact, there are plenty of green energy plays with big potential to be found on a global basis. This sector should be a prime area to earn rich investment gains for years to come.

In fact, just before I left for Europe, I put the finishing touches on a special report: Go Green and Grow Rich, that closely examines the extraordinary profit opportunities in the green energy sector today.

In my view, the alternative energy sector has perhaps more upside potential than the high-tech and internet boom of the 1990’s. If you want to get in ahead of the curve on this emerging investment sector – then you’ll want to reserve your own copy of my report right away.

Notes from Switzerland: Guarding Your Assets in Fortress-like European Banks… Update on the Decade of Commodities… and Global Diversification Made Easy

I’ve been in Switzerland since Thursday, attending the Sovereign Society’s European Advantage Tour, and getting an earful of great information about asset protection and investment strategies from some of the world’s top experts.

Yesterday, Saturday June 23, was a travel day for attendees. We departed Geneva early in the morning via luxury motor coach, for a beautiful ride around Lake Geneva that ended at the Chillon Castle.

This ancient stone fortress built right on the shoreline of the lake guards the strategically important Saint-Bernard pass through the Alps; the road that leads on to Italy. Chillon offers visitors sweeping views of Lake Geneva and the Swiss Alps beyond, from every room in the castle… including the dungeon!
Asset Protection: Austrian-Style

The tour of the castle is a great metaphor for the rock-solid asset protection ideas I have heard in recent days. In fact, on our last day in Geneva I had lunch with Andrew Griebel from Euram Bank in Austria.

Andrew made the short-hop from Vienna to speak about the very strict Austrian bank secrecy laws; so highly regarded in his country that the privacy guarantee is written right into the Austria’s constitution.

Andrew has a unique perspective on global investing that I admire. That’s because he cut his teeth in this business on Wall Street many years ago. In fact, Andrew began his professional career with none other than Merrill Lynch in New York, before moving on to bigger opportunities in Europe.

This Top Austrian Bank is Rich in Liquidity

One of the best features about top European banks like Euram, is the conservative way they are managed. For instance, the Bank of International Settlements sets world-wide standards for bank liquidity; meaning how much reserve cash they need to keep on hand relative to customer deposits.

The average liquidity bank liquidity ratio world-wide is about 8%, while the average at U.S. banks is a paltry 2% (the lowest in the developed world), but Euram’s liquidity ratio is a whopping 25%!

That certainly helps Andrew’s clients sleep better at night, knowing their fortunes are secure. Another great feature about banking in Austria is the fact that there’s no withholding or capital gains tax on your bank holdings; everything you earn is yours to keep.

Investing in Van Gough

On the investment side of the fence, Andrew talked about some of the innovative solutions he can offer his clients courtesy of Euram. One that I found particularly interesting is a private fine art fund the bank structures for clients.

This Euram fund owns a diversified portfolio of fine art: paintings, drawings, sculptures and the like. The fund then lends out its art works to museums and galleries for public showings; and collecting fees that provide current income for the fund in addition to the long-term capital appreciation potential of fine art.

Art as an asset class has one of the lowest correlations with securities like stocks and bonds: meaning that they don’t move in the same direction. So when securities markets get stuck in a slump, as bond markets have in recent weeks for example, fine art provides upside support to your portfolio.

That’s a very interesting and unique investment option that you’re just not going to hear about from your broker at Merrill Lynch.

Avoid Funny-Money at all Costs

Michael Checkan of Asset Strategies International flew in from across the pond to join us in Geneva and bring us up to date on big profit opportunities in precious metals. As most investors know, gold and silver prices (among other commodities) have been conspicuously quiet so far this year. In fact, gold is up only about 2% so far in 2007.

But Michael assured us today that we are still in the midst of a golden-age for precious metals investing, which he refers to as “the decade of commodities!

He even arrived in Geneva bearing gifts for attendees; old bank notes from countries around the world, which have NOT been very diligent about protecting the integrity of their paper currency over time. In fact, Michael refers to paper bank notes as “funny money”; mostly worthless in the long-run except as a novelty item.

As Michael explained, no paper money in the history of the world has ever held it’s value as a true store of wealth – but gold is everlasting – the only “real money.” The U.S. dollar bill for example is still worth the exact same today on a nominal basis as a dollar bill from 1913; it’s still worth $1. However, the real purchasing power of the buck has declined to just six-cents since that time.

A currency is only as good as the government’s willingness to stand behind it, and far too many give in to the temptation of debasing their currencies. And sometimes these governments disappear along with the currency.

Michael also points out that the supply-demand equation for gold is still indicating higher prices ahead. Last year industrial demand hit a record of $44 billion, and investment demand surged 45%, yet gold supply fell 13%.

It’s pretty clear that the price of gold has just one-way to go over time: UP!

Global Diversification Made Easy

In my own presentation last week, I provided the latest information on emerging global investment trends; and the most inexpensive ways to play them using exchange-traded funds (ETFs).

Investors need to be aware that it’s a very big world out there. In fact, the U.S. only makes up about 45% of total stock market value world-wide the other 65% are international markets, which have been far out performing the domestic stock indexes for quite some time.

In fact, the Morgan Stanley EAFE Index, a widely followed benchmark for the rest of the world, has scored better returns every year since 2002. It is also the leading performer so far in 2007, which would mark its sixth-straight year beating the S&P 500.

Foreign Currency Gains Provide a Profit Double-Play

It’s easy to see why when you look around at the spectacular performance of many individual markets around the world. Brazil continues to be red-hot: up 18% so far this year, and many folks are aware of how well China is doing again this year. But it isn’t just the underlying fundamental strength in these markets that is at work here. The falling dollar is also giving international investors a big boost in performance.

Brazil for instance is actually up more like 28% year to date in U.S dollar terms; in other words, for American investors who were smart enough to diversify their holdings overseas as the greenback sank in value. In Australia it’s the same story.

The market down under is up about 10% in local terms – but it’s up 18% when priced in dollars. And Canada has surged 17% so far this year, for American investors, while in Toronto the index is up 7% in Canadian dollars.

This is just another great reason to look overseas. Not only are many international economies expanding faster than the U.S. and with stronger profit growth, but as the dollar slides, you get paid a second time with even bigger gains in foreign ETFs.

Sunday, the European Advantage Tour made a restful stop in beautiful Zermatt, in the shadow of the Matterhorn. On Monday we move on to another Swiss banking hot-spot: Zurich. Be sure to catch up with my blog again Tuesday for more asset protection and investment ideas from the heart of Europe.

How to Earn 500% Returns From Your Favorite Sport

I’m posting this brief note after a full slate of presentations this morning at the Mandarin Hotel du Rhone in Geneva, the lovely setting for the first leg of our European Advantage Tour 2007.

If you weren’t able to join us for this event, you’re missing out on some fascinating presentations, jam-packed with information and timely analysis on investment and private banking trends. But I’ll try and bring you up to speed with some of the most interesting highlights.

This morning, Sovereign Society members and guests were treated to presentations chock-full of investment ideas and strategies from two of our European private banking experts. Plus, we received an update on “the decade of precious metals” from a leading authority.

Innovative Danish Fund Cashes in on Global Warming

Thomas Fischer, the manager of international client relations with Jyske Bank Private Banking in Denmark, joined us in Geneva from his offices in Copenhagen to share his latest ideas on how to take advantage of unique investments.

One private investment fund really caught my attention: a private fund you can invest in, that tracks a “global warming” index.

Of course, the Europeans are ahead of the curve when it comes to finding innovative solutions to reduce their dependence on fossil fuels and go green. In fact, the European Union has set some pretty strict guidelines for reducing greenhouse gas emissions. This private fund, available only through Jyske Bank, includes several companies on the cutting–edge of alternative energy.

One company, the world’s largest maker of commercial windmills, is up 60% so far this year. And another that specializes in solar cells has soared almost 70% year to date. Of course, it’s not all blue-skies and new highs when it comes to investing in this red-hot sector, or any other for that matter, at today’s elevated market levels.

This Investment Gig is Just Too Easy

Thomas was quick to remind our attendees of this fact with a great story about just how easy it’s been making money in stocks recently. In seems that a few years ago, Thomas Fischer’s son Mathew was eager to invest some money he had saved up, but rather than take Dad’s investment advice, Mathew went digging for his own ideas.

This led him to invest the cash in his favorite Danish Football club, which happened to have publicly trade stock on the local exchange. Long story short, Mathew’s enhanced rooting interest in his favorite sports team turned out to be a very profitable investment as well. In fact, the shares have shot up about 500% in just the past few years!

This investment success in his first venture prompted young Mathew to indulge in a bit of bragging, as he told his father: “Dad, your job is easy.” If only that were always the case.

This afternoon, it’s my turn to take the stage and talk about some simple ways to diversify your global investment portfolio using international and alternative investments.

So with time running short, I’ll leave it at that for now. But be sure to check back tomorrow. In Saturday’s blog article, I’ll fill you in on some unique asset protection ideas from Austria. Plus, I will tell you more about the outlook for precious metals from a member of our Sovereign Society Council of Experts.

Arriving in Geneva: Switzerland’s French-Connection

I arrived in Geneva in the wee-hours this morning (U.S. time) to kick off the Sovereign Society’s European Advantage tour which begins here today. But my ride in from the airport to my hotel was quite a wake-up call.

I was struck right away by the unmistakable vibe of money moving around in this cosmopolitan European city. Geneva is very much a global city. In fact, the United Nations has its European headquarters located here.

And the World Trade Organization also calls Geneva home. But make no mistake Geneva is a city built on a very rich foundations of world-class financial services and private banking.

Old World Financial Services – the Leading Industry in this European City

In fact, financial services are the leading economic activity in Geneva, with a specialty in private banking (managing assets of about 1 trillion USD) and in the financing of global trade. Geneva is also an important centre for commodity trading in Europe.

Although my landing this morning was somewhat spoiled by overcast skies, it's still easy to see the beauty of the city that's nestled on the shores of picturesque Lake Geneva.

It’s also the most populous city in the western French-speaking region of Switzerland. A survey last year awarded Geneva with the second best quality of living in the world – second only to its cross-country rival Zurich!

While on the subject of France, here in mostly French speaking Geneva, I thought I’d comment on how recent elections in neighboring France promise to stir things up for the better in old Europe.

Neighboring France may Finally be Poised for Economic Turnaround

Many years ago, Germany used to be known as the “sick man of Europe”, but in recent years that title has unambiguously belonged to France, which has been Europe’s chronic under-achiever for years in terms of growth.

France is still the world’s sixth-largest economy, but you would never know it based on recent data.

Since 2002, when global economies began to recover from recession, the French economy has expanded an average of less than 1.5% annually. Last year, the economy grew just 2% in France compared to worldwide growth of nearly 5.5%, and Euro Zone growth greater than 3%, according to IMF data.

Since winning the French Presidency in May, Nicolas Sarkozy has begun work on a reformist agenda of legislation that promises to shake up French society, and get the economy moving again.

An Overdue Agent of Change

Sarkozy’s agenda includes a number of key business and social reforms that should make the country more competitive in global markets; including reduced taxes, deregulation of France’s strict labor laws, and stimulating more grass-roots growth in the French economy.

There are a number of global investment options for playing the rebound that should follow in French stocks, including mutual funds and ETFs that invest in the country itself, and in the Eurozone region, including specific sectors of the economy.

At about 16 times earnings, French stocks are fairly valued by global standards, especially for such a large economy. And French blue-chips are a bit cheaper than big-cap U.S. shares in many sectors.

Any way you play it, an increase in France’s long-term growth prospects should benefit the entire European Union, if for no other reason than the country will no longer be a drag on Eurozone growth.

Commodities Getting Hot Again

As the thermometer shoots higher to usher in another long-hot summer, it also appears commodity prices are heating up once again.

According to Bloomberg, corn and soybeans have been on the rise again, thanks to forecasts calling for a warm dry summer, and not enough rainfall. Cotton prices are even getting into the act; soaring to fresh three-year highs, thanks to surging demand from… you guessed it, China.

Cotton is still a laggard in this commodity bull market, having appreciated less than 3% in the past year, compared with an 80% jump in corn, and a 40% surge in soybean prices.

Agricultural Commoditites Have Some Catching-Up To Do

In fact, many of the so-called “soft commodities” have largely lagged behind in the commodity bull market, but are now beginning to perk up. In my view, this signals the next phase of the commodity rally is getting underway in earnest.

Investors’ focus has simply shifted (at least for the time being) away from gold and energy, and toward some of the most undervalued sectors of the commodity market.

This phenomenon is quite similar to what happens in the stock market – it’s called “sector rotation.”

In stocks, investors will push up a certain group for awhile, like the tech sector, but after a correction sets in and profits are taken, the professional investors start to look elsewhere.

Maybe now it's health care, or the energy sector that's the new favorite target for institutional investors. The same dynamic happens in commodities too.

So while gold is taking a bit of a breather right now, up just 2% so far in 2007, other “sectors” of the commodity market are picking up the slack. In fact, the agricultural commodities in particular look poised for big gains for several reasons.

Soft Commodities Surging Due to Increased Demand - Lack of Supply

The supply demand imbalance in commodities is probably a familiar story to you by now, several years into this bull market, but it shouldn't be underestimated as a key factor pushing up prices. Global economic expansion is the most obvious reason for continued strong demand for natural resources, especially agricultural commodities. 

Supplies are also running short mainly because arable land available for farming has dwindled, and climate change is leading to acute water shortages in many regions of the world affecting crop yields. Australia for instance is in the midst of a severe drought.

At the same time, standards of living in the developing world are boosting demand for food big time. Food expenditures per person in Chinese cities more than doubled in the 10 years ended in 2004, according to data from the U.S. Department of Agriculture. And with China’s economy expanding at a rate of 11% or more, demand for all kinds of soft commodities should stay robust.

Commodity Bull Markets Good for the Long-Run

I’ve heard some people talk about the end of big gains in commodities, but that talk sounds way off-base to me. In fact, studies have shown that commodity bull markets tend to be long-term affairs.

Rather than three to five years of boom, followed by bust, commodity bull markets have historically lasted an average of about 18 years! So the current bull-run in commodity prices looks like it’s still in its early stage, and may be ready to shift into high-gear, led this time around by agriculture.

There are several ways to invest in the soft commodities sector. In fact, my colleague Eric Roseman the Sovereign Society's "King of Commodities", has come up with several unique investments that zero in on this profit potential, which he discusses in Commodity Trend Alert, his signature research and investment service.

The Best Ways to Invest in Commodities - Think Europe

I recently, alerted readers of my own Global Market Investor service to an ETF that is very well positioned to cash in on the ongoing commodity boom. In fact, there are a number of specialty funds trading on European exchanges that focus on specific commodity markets, without the need to invest in risky futures contracts.

This week I'll be traveling to Europe along with Eric, Erika Nolan, and many other Sovereign Society experts - for our European Advantage Tour. I can't wait to sit down with Eric Roseman over lunch and pick his brain about commodities. There's a lot of money still to be made in this alternative investment sector - if you know how to play it.

Be sure to tune in to my blog later this week - and all of next week - for live, on-sight coverage of the Sovereign Society's European Advantage Tour. I'll be sure to bring you up to speed on the latest investment ideas from all of our private banking and investment contacts on the continent!

Bond Yields Make a Round Trip - Are they Ready to Rebound?

The recent volatility up-tick in financial markets was largely triggered by a bond market rout that saw 10-year U.S. Treasury yields surge (briefly) above 5.25% – the highest level since about this time last year – and a full 50 basis-points (0.5%) higher since early May.

In fact, yields have just completed a round-trip.

The Fed was busy still contemplating further rate increases when 10-year Treasuries last reached 5.25%, in June 2006. At the time the U.S. economy and corporate profits were growing at robust rates, along with the rest of the world.

This time around, the Fed has been in an extended holding pattern, the U.S. economy has slumped to just 0.6% growth in the first quarter, while U.S. corporate profits expanded only 6%, according to the latest government data.

But the rest of the world is still humming right along, and seems to be more than making up for America’s slack.

In fact, official government policy rates have been moving higher around the world, and so are global long-term bond yields. In the UK where the Bank of England has been tightening monetary policy, the yield on 10-year government gilts recently edged up to 5.5% -- the highest rates since 2001.

The recent bond market turbulence in the U.S. seems to be caused more by a realization of this still robust global expansion, rather than any real fears about inflation getting out of hand.

Evidence of this can be seen in the fact that TIPS (Treasury Inflation Protected Securities) bond yields only moved up about as much as the real yields on 10-year Treasuries; without much additional increase as an inflation premium. In effect, the 10-year “breakeven” inflation rate remains pretty much unchanged.

The U.S. economy continues to grapple with mixed economic data at present and may be unable to rebound to much more than a sub-par rate of 2% to 2.5% GDP growth for the full-year.

Meanwhile, the latest IMF forecasts call for global GDP growth to continue surging at an above trend rate of about 5.5% in 2007.

That’s well above long-term trend line growth of about 3.5%. This is another great reason for you to seek out international profit opportunities to diversify your global holdings away from the slowing U.S.

Rather than inflationary fright, global bonds are more likely reacting to stronger than expected economic growth going forward, and the possibility of further interest rate hikes by central bankers around the world.

According to data from Biryini Associates, the 10-year Treasury bond is close to an extremely oversold level, thanks to the recent rout. Since 1990, whenever bonds have sold off this much, they have typically rebounded to post price gains within the next three-months – and so have stocks. Stay tuned!

Taking a Cue from Their Hedge Fund Customers, Wall Street’s Biggest Brokers Leverage Up

Wall Street’s biggest and brightest investment banks have grown rich in recent years funding the insatiable desire for risk taking on the part of hedge funds and private equity firms.

Typically, hedge funds rely on Wall Street firms for trading and to provide the most vital financial commodity of all: leverage. It’s not unusual for a hedge fund or private equity firm to leverage its own capital many times over: 30, 50, or even 100 to 1. That way, these largely unregulated firms are free to make additional emerging market investment and buyout bids – all of it financed at low rates courtesy of Wall Street.

Well, apparently seeing all these hedge funds grow rich on leverage, Wall Street has grown a bit green with envy, and is now moving to ratchet up its own leverage and profits, according to a recent story from Bloomberg news.

Wall Street’s Net Capital Shuffle

Goldman Sachs, Morgan Stanly, Merrill Lynch, Lehman Brothers and Bear Stearns have the potential to earn an extra $4.4 billion in profits as a result of basically playing a shell-game with their own books – shifting capital out of safe investments like cash – and into high-return (and high risk) bets on things like derivatives. And the whole shell game is legally sanctioned by Wall Street’s pals at the S.E.C.

Due in large part to intense lobbying by Wall Street, the S.E.C recently allowed several big firms to up the ante on their own internal leverage; by changing the rules for calculating “net capital”. Under these guidelines, Wall Street firms must reserve a certain percentage of every dollar of capital at risk to help satisfy old-fashioned notions... like solvency in the face of a financial market crisis, or the blow-up of a major client.

Diluted Solvency Insurance

These reserve requirements have been around for decades, and have been strengthened in the past (typically AFTER some disaster like Long Term Capital Management’s bankruptcy) to help provide insurance against massive financial losses on Wall Street.

But since such a scandalous event hasn’t happened in Wall Street’s recent memory (which stretches back at least to last quarter), the S.E.C deems it appropriate to ease the rules.

After all, how else can Wall Street be expected to compete with the likes of London or Hong Kong as a major money-raising center.

The tide on Wall Street has certainly turned toward less regulation making it easier for U.S. firms to compete, but there’s something rather unsettling about loosening the standards by which these firms calculate their own risk levels, and decide how much reserve capital is sufficient.

One particularly disturbing provision of the rule change allows brokerage firms to use non-cash assets – including derivative contracts – as part of their capital reserves to offset risk!

To me, this all sounds a bit too much like allowing the fox to guard the hen-house. But money talks on Wall Street, and it’s all about the bottom line these days.

Less Capital in Reserve Means More Funds for Leveraged Trading

You see, the looser net capital requirements allow brokers to funnel money that might have sat idle in safe Treasury bills, into more profitable trading operations instead.

Wall Street firms earn a significant amount of their profits from “principal trading” operations – essentially leveraging their own capital to invest in global financial markets – just like the big hedge funds do.

One of Wall Street’s biggest and most profitable firms, Goldman Sachs, generated 71% of first quarter revenue from principal trading alone.

Thanks to the new SEC guidelines on net capital, Wall Street firms now have even greater potential to borrow against their unreserved capital to boost leverage and earn higher returns – with higher potential risk or course – but nobody seems too worried about that.

Wall Street’s Big Gamble

Credit-rating agencies including Standard & Poor’s have taken notice however. Too much leverage, and too little capital held in reserve, is a recipe for possible credit rating downgrade. For now S&P still gives Goldman and Merrill AA- credit ratings, but the agency is no doubt uncomfortable with the increased leverage.

According to the Bloomberg story, one analyst is on record with this observation: "David Hendler, an analyst at CreditSights Inc., in New York, is skeptical that securities firms will reserve enough when there’s so much money to be made by adding leverage and taking risks."

Increased leverage, higher risk-taking, more trading profits; hey, Wall Street’s just doing its part to join in on the global liquidity party, perhaps a bit late. The game is easy, at least so long as the mother’s milk of speculation – low interest rates – stay that way.

What was it I heard this week about U.S. and European government bond yields at five-year highs...?

International Stock Market Gains Getting a Big Boost from the Beleaguered Buck

In yesterday’s blog post, I discussed the fact that your U.S.-based brokerage accounts may not be performing as well as the blue-chip averages might lead you to believe.

While both the Dow and the S&P 500 Index hit new all-time highs this year, the falling value of the U.S. dollar has severely sapped these gains, when viewed from a global perspective. In fact, the S&P 500 is still almost 40% below its 2000 peak, when you price this index in euro instead of dollars.

This Same Trend Remains an Ongoing Theme in 2007, at Least So Far…

The Brazilian real is another currency that is surging higher against the dollar.  Investors in Brazil’s Bovespa Index are enjoying spectacular year to date gains of 28% in U.S. dollar terms. 

Meanwhile, an investor based in Rio would still be happy with his stock investment returns this year, but it’s a more restrained gain of about 18%

Or take Australia. In the land down under, investors have enjoyed stock market gains of about 9% in the benchmark ASX 200 Index this year – similar to the return of the Dow. 

But for U.S. based investors, Australia’s market is up nearly 18% in dollar terms.

Taking a look at a leading stock market much closer to home, the Toronto Stock Exchange 300 Composite is up a rather modest 7% this year for local investors living in the great white north.

But for U.S. stock accounts, Canada has been a profit bonanza with gains of 17% this year – mostly courtesy of the strong Canuck-buck – which continues to surge towards par with the U.S. dollar.

Currency Return: Another Key Factor in Global Investing

These are just a few examples that I think illustrate the point that when it comes to investing overseas, there are at least two key dynamics at work influencing your returns. The first is what’s going on in the home-market of the country or region you’re considering for investment.

What’s happening with the local economy, interest rates, deficits, trade balances, corporate profits, etc, etc. – these factors are the driving influence behind how well a market performs on a nominal basis – that is, in its own local currency.

But as a global investor, you must also carefully consider what’s happening with international currencies, in relation to your own home currency. That’s where you can earn a potential double-play on your global market gains.

As the dollar has bounced a bit in recent weeks, it’s now more important than ever to have a look at the strength or weakness of the local currency in any offshore market you consider for investment.

Just How Well Have Your U.S. Blue-Chips Performed?

Stock indexes in the U.S. have (mostly) surged to new highs in recent weeks. The venerable S&P 500 index – everyone’s favorite scorecard of U.S. blue-chip shares – finally made it a few weeks ago.

And the old sentimental favorite, but a much narrower measure of just 30 stocks, the Dow Jones Industrial Average made it new fresh record highs a few months ago.

The tech-heavy Nasdaq Composite Index, it should be mentioned, is still about 50% below its dot.com-bubble peak.

But for the most part, investors that stuck with U.S. blue chip shares – through thick and thin – have finally been rewarded. Painful memories of the post-bubble bear market in America’s blue-chips have at long-last been erased. Well, not exactly.

From the Outside Looking in – U.S. Stock Gains Don’t Look so Hot

If you look instead at the U.S. stock market’s performance from the point of view of an overseas investor, the returns look pretty poor indeed.

And in a world-wide investment marketplace that’s growing more tightly integrated by the day, how else would you view market performance?

As I’m fond of saying, there’s a big world of investment opportunities out there, so you shouldn’t limit yourself to just domestic stocks, ETFs, or mutual funds.

International markets today make up about 55% of the world’s total stock market capitalization, and this percentage is growing fast. The point is, even for the domestic portion of your equity assets; don’t use the S&P 500 or the Dow as your only benchmarks to judge how well you’re doing.

From the point of view of a European investor for instance, U.S. share prices are performing miserably – still languishing far below their previous peaks.

The S&P 500 Index for instance, priced in euros, is still almost 40% off its 2000 high. And the Nasdaq when priced in euro, is some 65% below it’s previous peak – yikes!

Sinking Dollar Saps Stock Returns in Global Terms

Or course the sinking U.S. dollar plays a big role in this dichotomy of performance, depending on which side of the “pond” your stock account is located. The euro has gained about 60% in value vs. the buck since 2000, which means that many U.S. dollar denominated asset classes look as if they’ve been standing still for the past few years!

But this trend isn’t just confined to the euro, and it isn’t just an historical issue; it continues to impact U.S. stock performance today in 2007, and in many other currencies as well.

But here’s the potential upside; as this trend continues, it can give you a double-dose of gains for your U.S. based global investment portfolio.

Tune in tomorrow, when take a closer look at how this trend is playing out in global markets so far this year...

A Rough Week in Global Markets

Last week, Chinese shares fell on the first day of the week, but most markets shrugged that off to post early gains. However, worries about rising global interest rates and inflation sparked a more meaningful sell off on Wall Street later in the week, which may carry over for increased volatility over the next several sessions.

The volatile Shanghai Composite index plunged 8.3% in overnight trading one week ago today, the biggest fall for the Chinese A-share index since a nearly 9% sell off spooked global markets back in February.

Other Asian markets suffered some collateral damage as a result of China’s swoon; most notably Japan and Hong Kong, markets stabalized later in the week, but still finished with modest losses.

Wall Street Shrugs off China, but is Wary of Inflation and Interest Rates

On Wall Street, investors largely ignored the selling in China, as the S&P 500 Index rallied to yet another record high last Monday. But the good times didn’t last. U.S. stocks headed south on Tuesday, after stronger than expected economic data on the service sector, and manufacturing activity.

It didn’t help matters that Federal Reserve chief Ben Bernanke was on the stump talking about the ongoing housing debacle; he also reminded investors that inflation was still the Fed’s #1 concern.

Against this backdrop, global markets slipped again, led lower by U.S. stock markets, which fell three straight days. In Europe, the ECB again hiked benchmark lending rates to 4%, which was widely expected. But the ECB continues to talk tough about inflation, as central banks typically do, which nevertheless spooked investors.

Are Bonds in a Bear Market?

The perception in the market is shifting to higher inflation expectations perhaps extending the upward trend in global interest rates. Previously, many investors thought the U.S. Fed was finished with its monetary tightening, and that other central banks would soon follow suit.

The yield on the benchmark 10-year U.S. Treasury bond surged to a high of 5.14% last week for the first time in almost a year. Treasuries are still one of the most widely held securities on the planet – a favorite investment for all those countries with bulging trade surpluses seeking to recycle their dollars. When bond yields rise, as they have now for five weeks straight, bond prices move in the opposite direction falling in value.

Bill Gross, the celebrity fixed-income manager at Pacific Investment Management in California, one of the world’s biggest bond investment firms, says that bonds are now in a bear market – following the end of a 25 year bull run. 

If that is in fact the case, then investors around the world may have more to fear from higher inflation expectations and higher interest rates going forward. And as I have pointed out before, higher rates have the potential to stop the growth of global liquidity and credit expansion dead in its tracks.

The Rising Cost of Asset Appreciation Part II

In an article yesterday, I pointed out how a relatively benign interest rate environment in the U.S., Japan and many other nations around the world is helping to fuel global asset appreciation.

The red-hot performance in emerging markets, strong global trade, share buy-back activity, the M&A boom, and the staggering growth in derivatives – are all highly dependent on low rates – and abundant liquidity. But rates have been quietly creeping higher.

In fact this week, yields on 10-year U.S. Treasury bonds broke above the 5% barrier, triggering a torrent of selling on Wall Street, and in many international markets too.

In an apparently unrelated bit of news, which is actually more relevant that many investors realize, Morgan Stanley said in a report that the global derivatives trade rose to $415 trillion at the end of last year.

The Derivatives “Time-Bomb” Ticks Away

My colleague Jack Crooks, who keeps track of these seemingly esoteric stats, points out that: “the global pool of structured financial products [derivatives in all forms] ballooned from 8.7% of global GDP in 1987 to 246.1% in 2000 and then to 789.2% last year.”

The staggering growth in derivatives, which is now nearly nine-times the size of the entire world economy, parallels the appreciation of global assets and the expansion of cheap credit worldwide because these events are all closely intertwined – you can’t have one without the other.

In fact, the value of derivatives is like a scoreboard for global liquidity and asset appreciation. As the big Wall Street firms, hedge funds, and private equity players around the world push asset prices higher, they use ever increasing amounts of leverage (borrowing) to do so. And the way they “manage their risk” (or attempt to anyway) is through the derivatives trade.

The thing that alarms people the most about derivatives is the fact that it’s a largely unregulated over the counter market where big banks, brokerage firms, hedge funds, and private equity investors all come together in an attempt to slice and dice their risk exposure, peddling pieces to various “counterparties.”

Wall Street’s “Smartest Guys” Engaged in a Pants-off Dance-off

This dizzying system of derivatives high finance works well, so long as the global liquidity boom plays on, and money (like Wall Street talk) is cheap. All these newly-minted masters of the universe think that THEY are the smartest guys in the room, and are convinced they can always find some “greater fool” to lay off their risk.

It’s like a game of musical chairs, only so far the music has played on too long, and nobody really knows how many derivative players will desperately fight for the few remaining seats – when the sweet strains of music finally fade away.

Of course somebody (quite possibly several of them) will inevitably fall flat on his/her rear-end, as is always the case. But for the time being, everybody thinks their seat is safe, it’s the other guy who’s got to worry, not me!

So What's All This Got to do with Unsettled Financial Markets?

One area of high finance that’s certainly been inflated by cheap liquidity, is the current craze in merger and acquisition (M&A) activity.

Steven Leuthold, who actually IS one of the smart guys in the room when it comes to investments, recently commented in Barron’s: “the price private-equity firms are paying to buy out companies is 33% to 40% higher than a year ago,” indicating that too much cheap money may be chasing too few high-quality companies in today’s equity markets.

Leuthold hastens to add that he doesn’t believe private equity alone will sink the market.  But in the current lull of slower economic growth and higher rates, liquidity may begin to dry up somewhat at the margins.

And when that happens, players in the global asset appreciation party must carefully keep an eye on the nearest chair. And any wrong-move: from the M&A world, in emerging markets, or among derivative soaked hedge funds – could easily trigger a mad-dash for the exits.

So, are the DJs of global liquidity done playing music for the night, or just changing their tune? Well this week at least, Wall Street didn’t seem too pleased with the lack of music.

The Rising Cost of Asset Appreciation

Inflation is everywhere.

It’s certainly in energy and food prices, regardless of what the questionable “official statistics” tell you. And inflation is also threatening to push up the cost of keeping the global liquidity boom alive and well.

As I have commented previously, cheap credit (or debt) represents the rocket-fuel that continues to propel global asset appreciation. But interest rates are also on the rise around the world, which is effectively raising the cost of the fuel required to propel this asset boom ever higher.

This begs the question: are we fast approaching an inflection point in asset markets?

Stocks & Bonds on Divergent Paths

Typically, low or at least stable interest rates help fuel stocks, and other asset prices higher, but since the spring of this year, while the S&P 500 index has marched to new record highs (along with many other asset classes), prices of benchmark 10-year U.S. Treasuries have moved in the opposite direction.

Since yields (or interest rates rise as bond prices fall, this divergent move has led 10-year Treasury yields back above 5%, up from about 4.5% early this year.

Longer-term 30-year Treasury bond yields are nearly 5.2%, perhaps on the way to 5.6% and beyond within the next 6-months, according to some commentators.

It’s an interesting development: seeing higher rates amid a U.S. economy that expanded just 0.6% last quarter, according to the most recent data, the slowest growth since the last recession. Many still belive the odds of recession in the U.S. are still pretty good, in fact we may already be there once all the “official data” gets revised.

As I mentioned, low global rates have produced the abundant liquidity needed to keep the whole game in motion.

Low Rates that Fuel the Boom, are Now on the Rise

The easy money fuels emerging market investment, global trade, the commodity boom, share buy-back activity, the current global M&A boom, and the staggering growth in derivatives – it all depends on low rates – and abundant liquidity.

However, interest rates are stubbornly on the rise at present – perhaps fixed income markets are simply looking past the valley of slower U.S. economic growth, to more asset appreciation ahead – let the good times roll!

But I’m beginning to see some signs of potential excess around the edges of this global liquidity boom.

Corporate M&A activity has reached a frenzied pace, with more buyout offers announced nearly every day. Meanwhile, the secret currency that helps support leveraged asset appreciation, the global derivatives trade, is growing to ridiculous levels.

It seems like sooner of later (probably sooner), something’s got to give... tune in tomorrow for my take on the buyout and derivatives boom – and how it’s likely to impact financial markets.

Argentine Subsidies Lead to Energy Crunch as Mother Nature Turns Ugly

The financial times recently reported that Argentina suffered a severe cold snap last week (yes, its winter in the Sothern Hemisphere). Further, the country’s energy sector was caught of guard by the unexpectedly inclement weather, which “pushed the national energy system to the brink of collapse” as a result.

With sub-zero temperatures in the capital of Buenos Aires - producing the coldest month of May in 45 years - Argentina’s power grid was pushed to the breaking point. This resulted in “schools without heating and residents suffering power cuts” throughout the city as citizens were subjected to curbs on their fuel supplies, which got diverted to power plants instead.

Energy Subsidies lead to Under-Investment in Sector

The root cause of Argentina’s electrical woes however, is due to a heavily subsidized energy sector in the country, which has led to misallocation of resources, and under-investment in Argentina’s energy infrastructure.

In fact, Buenos Aires residents pay “some of the world’s cheapest utilities rates” with monthly bills for natural gas routinely running just $10 for an average sized apartment. Government tariffs have been frozen at these artificially low levels for five years. Oil prices in Argentina are also heavily subsidized.

As a result, Argentine energy companies suffer from a “double whammy: domestic prices for oil and gas that are well below international prices, plus high tariffs on exports.” These socialist energy policies lead to shortages of diesel fuel, due to limited domestic oil refining capacity. Companies must then purchase much more expensive fuel on global markets, only to sell it at a loss again to Argentine customers.

Straightening out Argentina’s Energy Sector May be Too Late

With profit margins crimped by this dilemma, Argentine energy companies have been unable to invest in new refining capacity and pipelines, while utilities have under-invested in new power-plants and transmission networks.

In a nation enjoying robust economic expansion of 8%-plus annually over the last several years – something’s got to give.

Finally, Argentina’s government has conceded the need to modify its restrictive tariff structure, which should finally provide incentives for private firms to invest in modernizing the nation’s energy sector.

But building new power plants, transmission lines, and oil refineries doesn’t happen overnight. So Argentineans may soon face a tough choice: between the reality of high global oil and gas prices – or risking a severe economic slowdown as a result of the country’s inadequate infrastructure. Tough choice!

You Should Hear what Bonds are Saying about Stocks

U.S. stocks aren’t the only assets rising to new highs recently – so are U.S. Treasury bond yields – and that fact may soon have investors running for cover.

The financial press has been busy reporting new record highs in the S&P 500 index of blue-chip U.S. stocks. In fact, many global equity lists are surging higher. But less well noticed is the fact that interest rates have also been moving higher in recent months.

Two-year U.S. government bond yields recently reached 4.97%, and the still inverted yield curve (when short-term interest rates rise above long-term) now prices the benchmark 10-year Treasury to yield 4.95%. In fact, yields on the 10-year have jumped nearly half a percent since mid-March, to the highest level in nine-months.

Also, a Bloomberg news story (Fed Faces Pressure to Raise Rates, Options Show) yesterday reveals that options contracts tied to the expected Fed funds rate (the overnight lending rates targets established by the Federal Open Market Committee) indicate a growing probability that the Fed’s next interest rate move might be to hike rates to 5.5%, rather than cutting interest rates to counteract anemic economic growth.

What the bond market may be telling us is that inflation pressures continue to grow, as a result of abundant liquidity around the world. And if this is a legitimate signal, it may have very negative implications for U.S. stocks – and perhaps equity markets around the world.

That’s because one of the key factors supporting stock market gains has been low global interest rates. Cheap interest and abundant liquidity is fueling the boom in merger and acquisition activity, boosting share buy-back activity, and is funding the yen-carry trade in global markets.

Should interest rates surprise investors by moving higher in the near term – as opposed to the market’s current outlook that calls for steady or falling rates – then it may finally provide the catalyst for a long-overdue correction in stock markets.

And as I noted in my last article Are Global Markets Moving in Lock-Step? (June 3, 2007), when markets fall, they tend to all go down together. Be careful out there!

Are Global Markets Moving in Lock-Step?

As I pointed out in my last article, the S&P 500 index finally made it “over the hump” last week to a new all time closing high. But it’s not much reason to celebrate given the dismal relative performance of this blue-chip U.S. stock index.

While the S&P 500 index gained about 9.5% annually over the past five years (through May 7, according to data from Standard & Poor’s), the MSCI EAFE index of developed foreign stock markets surged 17% a year – nearly twice the annual rate of U.S. stocks.

But you ain’t seen nothing yet...

The MSCI Emerging Market Index – which includes red-hot developing economies like China, India , Russia and Brazil – soared nearly 26% a year over the last five-years. Even in the U.S., several smaller stock indexes have shown clearly superior performance. For instance, the S&P MidCap 400 Index is up about 12.5% per year over this same period.

Investors Piling-On Best Performing Markets

Given these facts, it’s no wonder that investors are piling into overseas markets in record numbers. In fact, mutual fund flow data from the U.S. Investment Company Institute shows that in 2006, $10 billion of fresh cash moved into international equity funds, while funds that track the S&P 500 index suffered a net OUTFLOW of more than $8 billion.

But if you’re considering a headlong rush into foreign markets, keep the word “correlation” in mind.

Correlation, as it’s applied to investment returns is a measure of how much alike two different markets perform. A correlation of 1 means two markets are said to move in perfectly lock-step with each other, falling and raising the same magnitude at the same time. The lower the correlation, the less “alike” two markets are.

Global investors seeking to diversify their investments should seek out markets that ARE NOT too closely correlated – thus when one market zigs the other zags – producing a much smoother ride along the way.

For Diversification, Look for Low Correlation

Looking at global stock market returns over the past 5-years shows the S&P 500 and MSCI EAFE index have a correlation of 85% (pretty close to perfectly in lock-step). And Emerging Markets are 78% correlated with the “500 over the same period. These correlations grow even stronger during global market sell offs – as occurred in February and early March. When markets fall, they all fall together.

But there are several interesting markets around the world, which look undervalued to me on a fundamental basis, and ALSO have a very low correlation to U.S. market returns.

For example, Japan (as measured by the iShares MSCI Japan index ETF (symbol: EWJ) has a correlation of less than 30% with the S&P 500 index, according to S&P data, one of the lowest in the world.

Global investors in search of greater profit opportunity AND diversification for their holdings, should be taking a very close look at these markets right now.