Japan scares me

Japan has the highest Debt-to-GDP ratio in the world.   According to IMF its predicted to top 245%.  Rates have been dropping for 25years! Yet, interest payments have risen for the last 25years.  Recently inflation expectations have bumped up rates.  The 10-year is up 28bps relative to last month April.  As yields move higher Japan becomes a ticking time bomb and will not be able to service its debt. 

At their current level, if rates hit 2.8% then 100% of tax revenues to go towards interest payments only!


Japan is the 3rd largest economy in the world. 

This scares me.






Herman Venegas

Weekly Review - 10.15.2012

·      Starting off with Canada this week, it looks like the Bank of Canada will continue to keep interest rates low even though the housing market continues to cool off, the number of employed continues to increase, inflation remains at a historic low and business confidence remains almost non-existent. In a new report, CIBC predicted that Canadians might experience low interest rates into 2014 as economic and global conditions will probably worsen and risks will rise in the short-term.

·      Following up on last week’s update on the Venezuelan elections, now that Chavez has won another 6-year term as president, we can be confident that his country will continue to have the world’s best performing stock market until the end of the year. In the last year of his prior term as president, Chavez increased fiscal spending by 41% in real terms beating all growth expectations and making Venezuelan equities seem safer than they really are, but for how long?

·      Today the German finance minister addressed the second Bank of Thailand Policy Forum in Bangkok with an update on the situation in Europe. Wolfgang Schaeuble ruled out a Greek exit as the E.U. remains divided on how and whether to aid Greece climb its way out of the massive hole it is in right now. Spain finds itself in a similar situation as bonds slumped today. With Greek’s debt having been restructured in March, still not much has improved in the E.U. region.

·      Last quarter, the total money spent on IPO’s fell down to $21.3 billion. This is the second-lowest this number has been at since the market crash of 2008. One of the biggest contributing factors for the above is the poor performance of Facebook’s stock since its IPO in May. The Facebook stock has lost half of its value since then as its major growth instrument, the smartphone, is still the principal risk to its stock. The pessimistic global growth forecasts are of course another reason for the declining numbers of the last quarter. 

·      Ending this update with news from the United States, last week the national debt dropped to a six-year low as borrowing by homeowners and businesses both fell relative to the size of the economy. This leads us to question whether the credit rating agencies were right in downgrading the credit rating of the United States. The red, white and blue now has a GDP which is 30 percent of the nation’s debt.

Ali Kazerani

Investing in Turkey

Turkey

Bond Investing

With interest rates being at all time low and the Federal Reserve undertaking Operation Twist whereby $40 million of fixed income securities (MBSs) are purchased indefinitely, investing in the bond market might not seem too attractive. Bond prices move in opposite direction of interest rates – so if you’re long the fixed income market you are betting that interest rates will decrease, hence increasing the value of the bond you hold.  Given the low interest rates environment, investors should be looking at higher yields in non -US sovereign debt.  Our top- down approach will direct us where in the world we want to invest. Destination -> Turkey

Quick Facts:

• ·      Population : 75 million

• ·      GDP Growth : 8.5% (2010 – 2011)

• ·      Stock Exchange Growth : 310%

• ·      Financial Sector Assets (241$ billion in 2006, 710$ billion in 2012)

• ·      Credit Rating : BB+ (Fitch) Ba1 (Moody’s) BB (Standard and Poors)

As we have previously mentioned in our weekly reviews, we have been closely watching Turkey’s economy.  Istanbul is slowly becoming an international finance center as the country’s GDP growth was 8.5% last year – one of the fastest among major economies. Turkey has a youthful population ( half the population is under the age of 29) and is relatively politically stable when compared to other emerging markets.  In June 2012, Moody’s Investors Service upgraded Turkey’s government bond ratings to Ba1 from Ba2 and has continued to maintain a positive outlook. Turkish banks prove to be overcapitalized with a capital to risk assets ratio of 16.5% (more than double of what's legally required).

Turkey’s local-currency bonds have returned 13 percent this year compared with 9 percent for Russia according to JPMorgan Chase & Co. indexes. Brazil and Turkey offers investors the highest yields on their two-year debt among 18 emerging markets tracked by Bloomberg.   Turkey’s record high current account deficit (imports>exports) shrank to its lowest in 3 years to $1.18 billion from 4$ billion. which reflects lower demand combined with an increase in gold exports. The decrease in imports represents a decrease in consumption which in turn will result in the the government stimulating the economy and lowering rates - the cost of borrowing. Rate cuts of at least 50 bps are expected in the upcoming weeks. The bank already cut the gap between its overnight lending and borrowing rate by 150 bps in September and hinted that it would continue its rate cuts to support growth.

Foreign Direct Investment has also been rising. Turkey’s growth has been noticed particularly by Japan who has substantially raised its investment in Turkish debt.  Japanese investors have invested over $3 billion funds in Turkey in 2012. Mizuho Financial Group Inc. and Mistubishi Corp opened offices this past year.  

Sector --> We recommend investing in Turkey’s energy producers. Turkey is an important energy corridor in Europe connecting East and West. The Turkish Electricity Transmission Company estimates that Turkey’s demand for electricity will increase at an annual rate of six percent between 2009 and 2023.

Company --> Aksa Enerji Uretim (AS) is Turkey’s biggest nongovernment power producer.  Aksa has a target of $1.1 billion of revenue this year. Aksa Enerji has acquired rights to extract an estimated 39 million metric tons of brown coal, or lignite, in the area for 35 years.  Also, Goldman Sachs has a 13% ownership in the company.

 Contact us for a detailed analysis on the company's fundamentals.

Foreign Direct Investment Inflows

Anna Nepravishta

Weekly Update - September 17, 2012

What a week it was, big announcements from the fed, geo-political tensions grow, and Apple announces its long anticipated iPhone 5

Want to take a closer look? Let’s go!

Step right up folks; Get your stimulus, this one’s going to be big!

First and foremost the biggest news this week was Federal Reserve Chairman Ben Bernanke’s announcement of another attempt at stimulating the sluggish American economy, QE3 (the 3rd Quantitative Easing):

Like a toddler on Christmas day, markets have been anxiously anticipating the full details of QE3. Here’s what QE3 entails:

Open market purchases of mortgage backed securities at a rate of $40 Billion per month... Indefinitely! (well, to be clear, until the jobs markets improve substantially as long as inflation stays contained)

Here’s a part of the official Fed. statement:

“If the outlook for the labor market does not improve substantially, the committee will continue its purchase of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability,”

The Fed. also hinted at keep rates (which are already near rock bottom) unchanged until at least mid-2015. Pushing back earlier promises to keep rates unchanged till 2014. Yikes...

Market results for the week:

·        US equities gained on the news of QE3

·        The dollar fell broadly

·        Oil prices rose and gold hit a 6-month high

Although, the key metric from QE3 is yet to be determined... INFLATION! For a more in-depth analysis of QE3-inflation risk and how to keep your investments safe & sound, take a look at the below article:

http://investomax.blogspot.ca/2012/09/inflation-is-always-and-everywhere.html

Dispute over Pacific Islands leads to violence and harms Chinese-Japanese Business relationship:

Oh my, this does not look good. Asia’s two largest economies are amidst a heated territorial battle over Diaoyu/Senkaku islands which is leading to violent attacks on businesses.

What’s this all about? In a nutshell, Japan claims to have purchased these islands for nearly $30 million dollars, China simply does not recognize this purchase and says Japan is stealing these Islands from them. Now there we’re all caught up to speed, let’s talk about what’s happening to business between the nations which last year generated two-way trade of $345 billion.

·        Both Toyota and Honda have claimed that arsonists have badly damaged plants in China. Honda has halted production in China for two days – other car makers have followed as well in halting production in China including Mazda and partner Ford

·        Seven & I Holdings, is said to close 13 Ito Yokado supermarkets and 198 “7-11” convenience stores in China on Tuesday following the violent attacks

·        Tech giants like Panasonic have halted production facilities in China (following an alleged sabotage by Chinese workers), same goes for Cannon and Sony has discouraged all non-essential travel to China

Let’s hope this issue reaches a conclusion soon and business returns to normal. For now though, keep an eye on Japanese depository receipts traded in China and expect sharp loses.

Is it really here?

Yes it is! The moment many geeks and Apple loyalists have been waiting for has finally arrived. The iPhone 5 is here!

And it’s taller than ever! This is big news for the economy as a whole as the iPhone has some quite astonishing affects on GDP; take a look at what some economists are saying about it:

·        The iPhone 5 could inject $3.2 billion to the U.S. economy in the fourth quarter or $12.8 billion at an annual rate

·        0.33-percentage-point boost to GDP

With pre-orders hitting a record high of 2-million units, Apple could be well on it’s to reaching these estimates and further continuing its super-growth phase

That’s all for this week folks, stay tuned for more

                                                                                         

Matthew MacMull

"Inflation is always and everywhere a monetary phenomenon." - Milton Friedman

Last week Ben Bernanke announced another round of quantitative easing (QE3).  This time around the FED's have planned to buy $40Billion of MBS per month.  That's another $480B per year.  Three rounds of massive stimulus have led many people to become concerned about inflation.  

As quoted by Milton Friedman “Inflation is always and everywhere a monetary phenomenon.”  Just ask Zimbabweans who have stopped publishing their inflation rates; last recorded rate was on 2008 Mid-Nov. of 89,700,000,000,000,000,000,000%.

What is inflation?

Simply put, inflation is a decline in ones purchasing power.  As more money is made readily available to consumers (money supply) and is circulated in the system (velocity) the prices of goods and services start to increase making it costlier for you and me. 

Lets take a look at how much money is currently in the system...

It doesn't get any clearer than this!  The massive spike represents billions of dollars freshly printed off the printing press starting sometime around 2008. 

Where is all this money hiding?

Banks have tremendously expanded their balance sheets in the recent years.  Taking a closer look at money in circulation we can see that banks have been hesitant to loan mortgages and consumers unwilling to apply for loans.  Even with ultra low interest rates, people are not taking on debt.

What does this all mean?

The spark!  So much fuel has been pumped into the system in the form of money that a spark to the economy will ignite the fire and then..... an explosion.  Once the economy gets heated and starts to pick up there will be big surprises in inflation rates.  Key numbers to be aware of are employment, consumer lending and housing starts.  These numbers will be a good indicator of the spark.   The Federal Reserve expects the economy to pick up by 2015. 

Portfolio Hedging Strategies

Protecting your investments is important! From a portfolio standpoint if you were holding a 60/40 equity bond portfolio throughout the highest inflation peaks of WWI, WWII and the 1970’s you would have a negative 10 year return real return on your portfolio.  

How can you deliver equity like returns in times of inflation?

Benjamen Graham the father of financial analysis has stated two plays.

     1. Inflation Protected Bonds   

          2. Real Assets (Gold, Commodity Futures, Natural Resource Stocks, REITS)

Taking a closer look at these assets.  I have provided their sensitivity (Beta) to inflation surprises        

Data - (1970-2011)

Assets	Beta
Gold	11.5
Commodity Futures	7.1
Natural Resource Stocks	3.0
Inflation protected bonds	0.8
Real Estate Investment Trusts	(1.5)

*inflation surprise is the difference between actual and real inflation

Bottom Line:  Protect your wealth! and be ahead of the curve.  A RAPID rise in inflation will surprise many investors.  Consider holding Gold, Commodity Futures, Natural Resource Stocks and Inflation Protected Bonds as these assets have preformed very well in inflationary periods.  

Spot Gold on Feds announcement

Herman Venegas

September.17.2012