ETF XRAY

Global Markets Start Week in Red

By Carl Delfeld of Chartwell ETF

Barchart reports that global stock markets are down sharply today after US Treasury Secretary Geithner warned some financial institutions will need substantial government aid. The European DJ Stoxx 50 this morning is down -2.35% and June S&Ps are down -18.00 points (-2.21%). The Asia-Pacific stock markets today closed lower with Japan (-4.53%), Hong Kong (-4.70%), China (-0.58%), Taiwan (-3.43%), Australia (-1.85%), Singapore (-4.15%), South Korea (-3.36%), India (-4.78%). Concerns deepened that the global financial crisis may not be nearing an end after

Treasury Secretary Geithner said on the ABC News program "This Week" that some banks are going to need "large amounts of assistance." European bank stocks were also pressured today as UBS AG, Switzerland's largest bank, fell 7% after the Sonntag newspaper reported the bank may cut 8,000 jobs and "write down billions," while Barclay's dropped over 8% after Societe Generale downgraded the UK's third-biggest bank to "sell" from "hold," sayi ng the bank still needs 15 billion pounds ($21 billion) to 20 billion pounds of tangible common equity to adequately address "its excess leverage." European economic confidence tumbled to a record low in Mar as consumers and businesses remain pessimistic over the prospects for the economy.

In Asia, Japan's vehicle production tumbled -56.2% y/y, the biggest drop since 1967, on slumping demand from the US and Europe as Japan's domestic auto production has posted record drops every month since Nov, while Japan's industrial production fell -9.4% m/m in Feb, its fifth consecutive monthly decline and the longest streak of declines since 2001.

Strong Dollar Impact Felt Worldwide

By Carl Delfeld of Chartwell ETF

The greenback has been to some a surprise beneficiary of the global financial crisis.

American investors are avoiding foreign opportunities and bringing their dollars home.  China and many other foreign governments continue to buy huge quantities of American treasury debt. In the last year, the dollar has risen 13% against major foreign currencies after adjusting for inflation, according to Fed data. Foreign holdings of Treasury bills rose by $456 billion in 2008.

These actions are increasing the value of the US dollar and helping to keep, at least for now, long-term interest rates low. The downside is that US export growth will be hit by lower demand overseas and higher prices. Te stronger dollar is also hitting vulnerable emerging market countries hard.

A dollar invested by foreign central banks and investors in American government bonds is a dollar that is not available to Eastern European countries desperately seeking to refinance debt. It is a dollar that cannot reach Africa, where many countries are struggling with the loss of aid and foreign investment. Private money invested in so-called emerging countries plunged from $928 billion in 2007 to $466 billion last year and is likely to fall to $165 billion this year, according to the Institute of International Finance.

The most immediate crisis appears to be in Eastern Europe, where individual and corporate investors borrowed excessively in the euro and the Swiss franc and then overbuilt factories, business towers and homes. Their debts are growing as their currencies decline in value, leading to bank losses and requiring government bailouts. “Eastern Europe looks incredibly similar to Asia in the 1990s,” said Brad Setser, an economist at the Council on Foreign Relations in New York.

Actually, it is worse. In the 1990s, the rest of the global economy was growing nicely and was able to step in with financing and Asian countries were able to resume growth by selling goods to the United States, Europe, Japan and China aided by weaker currencies and thus cheaper exports. In a report released recently, the World Bank predicted that the global economy would shrink in 2009 for the first time in more than half a century and forecast that global trade would decline for the first time since the early 1980s.

Ireland ETF Surges

By Carl Delfeld of Chartwell ETF

Since its selection as Chartwell's ETF Pick of the Week on March 6th, the New Ireland Fund (IRL) has surged. Below is how we described the opportunity and risks.

"Ireland has without question lost its magic and no country’s stock market has fallen further during the global financial meltdown. The New Ireland Fund has fallen from over $20 to close yesterday at $3.30.

Ireland’s real estate bubble was and is perhaps the worst in the world and has greatly impacted its banking system.

Ireland's largest bank and the second largest holding in the New Ireland Fund, Allied Irish Banks PLC, reported a 57% fall in its net 2008 profits as its written-off debts soared amid crumbling property markets in Ireland and neighboring Britain. Allied Irish shares have plummeted more than 90 percent over the past year "because nobody can really call how deep or long this cycle is going to be." AIB shares hit a record high of euro23.95 in February 2007. Ireland’s government has unveiled a deal to invest euro3.5 billion in the bank but AIB shareholders still must approve that bailout -- which would give taxpayers a 25% stake and require the bank to pay a euro280 million annual dividend to the government later this month.

Meanwhile the largest holding in the New Ireland Fund, CRH Construction, has successfully launched a rights offering and seems to gaining its footing despite the construction slowdown.  Well over half the cash from the Irish building materials producer’s rights issue announced on Tuesday is reserved for acquisitions, leaving €500m to retire debt. CRH’s balance sheet also looks reasonably solid. At the end of 2008, net debt to earnings before interest, tax, depreciation and amortization was an acceptable 2.3 times, well below debt covenants of 3.5 times. After the cash call, it falls to 1.8.

I have been wrong on Ireland before but its seems to me that relative to its current price, IRL offers investors a reasonable chance at significant upside especially since it is trading at a 27% discount to net asset value. The risk of AIB demise is real and the Ireland economy is reeling but a bet on its eventual recovery from these depressed levels warrants consideration.

Catalyst

The successful rights offering of the fund’s largest holding, low valuations and the expectation of economic aid from the European Union. Allied Irish Bank (AIB) may also be oversold and is up 18% in trading this morning.

Risk Factor

The risk factor is high, strongly suggest an 8% trailing stop loss."

Gold ETF Passes EFA in Assets Under Management

By Carl Delfeld of Chartwell ETF

As of March 1^st there are 739 ETFs listed on US exchanges with assets totaling approximately $451BN managed by 22 ETF managers according to State Street Global Advisors.

ETF industry fell $45BN or 9% for the month. Only four new ETFs were launched in February and Northern Trust exited the ETF management industry and closed all 17 of its funds 
with total assets of approximately $29MM.

The top three managers in the US ETF marketplace were: Barclays Global Investors (BGI), State Street, and Vanguard. Collectively, they accounted for approximately 84.5% of the US-listed ETF market.

Average daily volume increased from an average of $79BN to $85BN. All market cap ranges fell for the month, with small caps declining the most. Large cap and small cap value are down 22% plus so far in 2009. Information Technology was the best performer down 7% while Financials was the worst down almost 40%.

The SPDR Gold ETF (GLD) climbed past MSCI Europe, Australia and Far East (EFA) as the second largest ETF in terms of AUM behind the leader SPDR S&P 500 (SPY).

Don't Forget Closed-Ended ETFs

By Carl Delfeld of Chartwell ETF

For a variety of reasons, closed-ended funds can be a better play on a particular market then ETFs. The most obvious reason is that they often trade at a significant discount to net asset value. However, these discounts or premiums can persist over time so it is important to look at the historical pattern.

Next, most ETFs are baskets of companies that are weighted by their market value. With closed-ended funds, the portfolios are actively managed and while the same companies will likely be in both investment vehicles, the weighting will be different.

The fees are almost always significantly higher for closed-ended funds.

Below are two examples of funds that allow investors to buy into some well-known companies at a discount to their market value.

Boulder Growth & Income (BIF)
Selling at 23% discount to NAV. Blue chip holdings with 25% allocation to
Berkshire Hathaway.

Swiss Helvetia (SWZ)
24% discount to NAV and 40% of assets in Nestle, Roche and Novartis.

Here are some common questions that investors have about closed-ended funds.

What is a Closed-End ETF?

Like a traditional mutual fund, a Closed-End ETF is an investment company that pools the assets of its investors and uses professional managers to invest the money to meet clearly identified objectives, such as current income or capital appreciation. However, unlike a mutual fund, a Closed-End ETF issues a fixed number of shares through an initial public offering, and lists those shares on a national stock exchange such as the New York Stock Exchange (NYSE) or the American Stock Exchange (AMEX). Investors who wish to buy or sell fund shares do not purchase or redeem directly from the fund - rather, they buy or sell fund shares on the stock exchange in a process identical to the purchase or sale of any other listed stock.

Is a Closed-End ETF closed to new investments?

No. Although Closed-End ETFs have a fixed number of shares outstanding, investors can purchase and sell shares in Closed-End ETFs at any time during the trading day, similar to any other listed stock.

How do I buy/sell Closed-End ETFs?

Like mutual funds and stocks, Closed-End ETFs may be purchased in regular brokerage accounts (individual or joint-name), retirement plan accounts, trust accounts or custodial accounts. Closed-End ETFs can be purchased and sold on national exchanges just like any other stock. All the strategies associated with stocks, such as market orders, limit orders, stop orders, short sales, and margin buying can be used in the purchase and sale of Closed-End ETFs.

Is there a sales charge associated with purchasing shares?

No. Because Closed-End ETFs trade on national exchanges similar to stocks, there is no sales charge attributed to the transaction, although your broker will charge a commission for the stock purchase or sale.

China Clings to 8% Economic Growth Projection

By Carl Delfeld of Chartwell ETF

China’s leadership is clinging to an 8% growth this year as Beijing hinted but did not announce new stimulus measures beyond the $585 billion announced last November.

"We face unprecedented difficulties and challenges," Premier Wen Jiabao warned in a speech to China's National People’s Congress (NPC) of 3,000 unelected delegates. However, he said, "We will be able to achieve this target" of 8% growth. Wen promised to "dramatically increase" spending to boost exports, create jobs and counter the impact of the global slowdown that has thrown at least 20 million Chinese migrants out of work.

But he made no mention of possible new stimulus measures on top of the package unveiled in November. That will disappoint Chinese financial markets, which rose Wednesday on hopes he might announce a new round of spending worth up to 10 trillion yuan ($1.5 trillion).

Private sector economists are forecasting 2009 growth as low as 5.6% -- the weakest in nearly two decades. China will raise military spending by 15%  this year, continuing a long streak of double-digit jumps that has alarmed the United States.

What happens in China will have great impact on Southeast Asian countries like Singapore, Taiwan and Hong Kong. Keith Bradsher of the New York Times reports that Singapore, where the population is just 4.6 million compared with Taiwan’s 23 million, is particularly vulnerable to a decline in trade. It normally imports unfinished products, does some processing of the goods and then exports them, so the total dollar value of its exports and imports is much greater than its gross domestic product — almost four times as much. With so much of its output dependent on trade, much of it handled by multinationals, Singapore is scrambling to stay afloat and its ETF (EWS) is reflecting this.

But in the short term, “there’s no hope for us if the global economy goes down,” said Philip Yeo, the special adviser to the prime minister for economic development.

Small economies are hoping that China’s rosy economic projections become a reality. Taiwan is in the earliest stages of negotiating a free trade pact with the mainland, while Singapore signed one on Oct. 23 and Hong Kong has signed a series of six increasingly broad trade agreements with the mainland since 2003.

Eastern Europe's Impact on Markets

By Carl Delfeld of Chartwell ETF

Fears of financial instability in central and eastern Europe and economic nationalism in the west are expected to dominate a summit of European Union on Sunday as the 27-nation bloc plunges deeper into recession.

The lending by European banks to eastern European markets surpasses in relative size the U.S. subprime crisis. About 60% of Poland’s mortgages are denominated in Swiss francs, Austrian banks collectively lent to 70% of the nation’s GDP and Europe’s major banks made 75% of their loans to the region. Collectively, Eastern Europe has borrowed $1.7 trillion, much of it short term and denominated in hard currencies.

All of this is going to have a major impact on the European economy that represents a third of global GDP and whose consumers buy a lot of stuff from America and Asia.

The speed of this global economic decline is without precedent. Japanese exports were down 45% in January. Japanese exports to the US fell 53% and to the European Union and Asia by 47%. This follows an 18% drop in China, 33% in South Korea and 44% in Taiwan.