Trading is not a game of exacts. Perfectionists need not apply. Markets are made up of many irration...
A Global "Fed Fear" Portfolio
06/18/2004 12:00 am EST
"I expect the next Fed tightening to take place sooner rather than later, probably in August," says Vivian Lewis. "To protect ourselves, I've developed a "Fed fear" portfolio, made up of global investments that are likely to resist the impact of higher interest rates."
"To develop this portfolio, we looked to several global experts to help contribute their ideas, including Paul Renaud, of ThaiStocks.com; China region expert, Emanuel Balerie, of Euro Pacific Capital; and retired ambassador Harry Geisel. Among the ideas for Fed Fear portfolio, Thai Capital (TF ASE) is already in our model portfolio. Many foreign investors are still unaware of Thailand’s superior performance. A combination of low interest rates and low inflation, stable politics, and an increasingly strong economic recovery have resulted in an upward surge in corporate earnings and in stock prices. This overall positive trend in earnings and share prices is expected to resume this year as the short but negative effects of Bird Flu are shaken off. Now is another opportunity to invest in select Thai shares as the bull market still appears to be in the beginning stages.
"We used to advocate purchase of non-cumulative foreign bank preferred stock. Alas, the changed British tax law makes it less advantageous for UK banks to issue these securities denominated in dollars. However, for various reasons, some of these issues still remain outstanding. A price drop in the Royal Bank of Scotland preferred F shares makes them of interest. They run until the end of March 2007 and will be redeemed at $25. They hit a new low of $26.50 in the wake of a sell-off in preferred shares after better job numbers came out. This led to fears that interest rates would rise in the US. The yield to maturity is 6.4%. Another way to play this theme is to buy non-cumulative preferred C shares of National Westminster Bank non-cumulative preferred C. Nat West is now a subsidiary of Royal Bank of Scotland. The preferreds can be redeemed at the bank’s discretion until April 2008 at a declining premium per share of 90¢ this year, falling by 30¢ a year. So there will be no premium at all after April 8, 2007, and you will get exactly $25 from then on at redemption. The Nat West C’s are currently yielding 7.5%, trading at $26.
"The dollar’s decline is not only likely to continue, but to accelerate. You should consider protecting the purchasing power of your savings by reducing your exposure to the US dollar. One currency against which the dollar has not yet lost any of its value is the Chinese Yuan, as the Chinese government has pegged the Yuan to the US dollar. This peg is a massive subsidy for American consumers and a tax on average Chinese citizens. It is contrary to the economic interests of China. For these and many other reasons, I believe that China will soon abandon its peg and allow the Yuan to float. When this happens I believe the Yuan will rise substantially against the US dollar. Investors should take advantage of this significant, but temporary, opportunity by converting US dollars to Yuan now, before the peg is removed. The best way to convert dollars to Yuan is to buy conservative, dividend-paying stocks, which derive the majority of their income from within China. Two such stocks, suggested by Emanuel Balerie, are China Light and Power Holdings (CLPHY NASDAQ) and Hong Kong Electric (HGKGY NASDAQ)) Both trade at approximately 12 times earnings and yield about 5%. We’d caution readers, however that while the dividends on these stocks are subject to higher withholding tax, and these issues should be bought for their capital gains potential, not for the yield.
"Strategic Energy Fund Units invests in a combination of Alberta junior oil companies, private unlisted start-up oil companies, and energy royalty trusts, providing a good mélange of yield and growth plays in our neighbor to the north. With oil prices going up, the Canadian dollar likely to strengthen, and a probable fall in the value of US dollar-based fixed income plays, there is a strong case for Canadian royalty trusts. The SEF.UN fund, which only began in 2002, plans to list in the US, probably on the ASE, sometime this year. The fund is currently trading at a 14.5% discount to NAV. It is hard to judge the fund’s strategy because the companies are pretty obscure. But certainly the performance to date has been excellent.
"Finally, retired ambassador Harry Geisel, has found a bargain Colombian bank, Bancolombia (CIB NYSE). The current valuation figures are excellent. The firm earned $1.52 in 2003 and the current indicated dividend is 36¢ per ADR. Shouldn’t one be cautious with a ‘risky’ place like Colombia? I certainly wouldn’t put all my coffee beans in one Colombian basket. But note that on Mar. 31 Bloomberg reported that the Colombian Stock Exchange rose 48% in US dollars for the first quarter and was the world’s best performer. This Colombian bank has an indicated yield of 4.6% and a trailing p/e of 6.2 for earnings that are growing like a weed. CIB is near its high. However, if Colombia is really becoming a Latin American success story, its biggest bank still looks mighty cheap."
The key risk-on and off drivers today are the same – U.S. politics, global growth, other centr...
Matthew Kerkhoff, options expert and editor of Dow Theory Letters, continues his 14-part educational...