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The Giant Global Tax Cut

By Carl Delfeld of Chartwell ETF & ETFfolio 

No doubt there is a lot of bad news out there but many hardly seem to notice one huge tailwind for the American and global economy. Oil prices have simply collapsed. 

In July, crude oil for New York delivery traded at more than $146 a barrel. Three months later, it has almost halved to $74. Some believe it could fall further still. The financial Times reports that analysts at Goldman Sachs, who first predicted the price of crude could rise above $100, now believe it could drop as far as $50. 

This sharp fall in prices is akin to a giant global tax cut. Lower oil prices mean lower inflation, which leaves greater latitude to cut interest rates. It is also a boost for sagging consumer spending. In the second quarter of this year, US consumers spent almost 4 per cent of their personal income on fuel bills, some $440bn. The halving of the oil price since then implies a saving of $200bn. 

Tell Congress that we already have a stimulus package complements of lower oil prices. Of course the fall in prices will hit some countries and help others. Witness the carnage in Gulf markets as predicted in my recent Forbes Asia column. The US economy is a major beneficiary as are some emerging markets like China and India.

ETF Annuity May Provide Safe Haven

By Carl Delfeld of Chartwell ETF and ETFfolio

Since we use a core and explore strategy, one point we stress is that your core portfolio needs to be strong and your explore portfolio needs to be flexible and trading oriented.

A number of Chartwell members and clients have been asking me whether an ETF indexed annuity could serve as core portfolio. So I recently went to a two-day advisor seminar in Denver to find out.

It was an eye opener.

There are much better indexed annuities on the market than even just a few years ago. Nice guaranteed returns, flexibility in index choices, ample liquidity and lower fees. This may be a great way to position your core portfolio and still participate in the upside when markets recover. Just because we are going into a recession, doesn't mean your money has to be in one.

But the most important step is to select a strong insurance company. The insurance company backing the annuity that I think is the best on the market is the oldest insurance (and 5th largest) company in the world (it insured Winston Churchill) and is the #1 provider of indexed annuities in the US.

Briefly, here is an illustration demonstrating how the ETF annuity works.

If an investor puts $800,000 in this annuity, they would receive a 10% bonus right up front or an additional $80,000 for a total initial balance of $880,000.

On this $880,000, you would get a guaranteed annual growth rate of 7.2% for the first ten years, so that in a bit over nine years, the balance would double to $1,760,000 if you did not take any money out.

But there is another perhaps better possibility. Your initial balance will also track an ETF like the S&P 500 or Nasdaq and your account balance will grow by capturing some, but not all, of the index's gains. Another neat option is pick multiple ETFs to track such as the Dow (DIA), the S&P 500 (SPY) and Nasdaq (QQQQ).

Here is a another nice feature. Each year, your indexed gains are locked in so you can’t go backwards if markets decline the follopwing year.

At the end of a bit over nine years, your account balance will have the higher of the indexed account balance and the $1,760,000.

In short, you get a nice guaranteed rate plus the chance to capture most of the upside if markets recover.

I think of this ETF annuity as investing in the markets but with a safety net underneath - just in case.

ETFfolio Investment Consulting

By Carl Delfeld of Chartwell ETF & ETFfolio

In this difficult investing climate, perhaps some investors need some help re-organizing their portfolio and developing a strategy moving forward. I suspect that some are in cash and wondering what to do next.

ETFfolio offers a personal portfolio consulting service called ETF Architect which may help you get on track to meet your financial goals.

I offer you my best independent advice through a process that includes the following six steps:

1) review of current portfolio/documentation
2) personal consultation by phone or in person
3) develop portfolio plan with "core & explore" strategy
4) follow up consultation
5) follow up modifications to plan
6) execution of plan

One perhaps unique part of the consulting process is an assessment of your personal investment habits or investment "personality". I have found that unless a portfolio matches the personality of an investor, the chances of successful execution over time is limited. We call this aspect of successful investing ETF Harmony.

If you are interested in this opportunity, please contact me directly at 719.264.1503.

A Closer Look at a Drop in the Mortgage Ocean

By Carl Delfeld of Chartwell ETF and ETFfolio

It seems that investors just want a bailout plan - any plan and are forgetting that the devil is in the details especially in Capital Hill. For example, it is fiendishly difficult to assess the value of these pools of mortgages which were turned in securities.

Let's take a look at the Bear Stearns Alt-A Trust 2006-7, a $1.3 billion drop in the ocean of risky loans. Here’s how it worked according to Vikas Bajaj of the New York Times.

As the credit bubble grew in 2006, Bear Stearns, then one of the leading mortgage traders on Wall Street, bought 2,871 mortgages from lenders like the Countrywide Financial Corporation.

The mortgages in this basket have an average size of about $450,000, were Alt-A loans — the kind often referred to as liar loans, because lenders made them without the usual documentation to verify borrowers’ incomes or savings. Nearly 60 percent of the loans were made in California, Florida and Arizona, where home prices rose — and later fell — faster than almost anywhere else in the country.

Bear Stearns bundled the loans into 37 different kinds of bonds, ranked by varying levels of risk, for sale to investment banks, hedge funds and insurance companies.

If any of the mortgages went bad — and, it turned out, many did — the bonds at the bottom of the pecking order would suffer losses first, followed by the next lowest, and so on up the chain. By one measure, the Bear Stearns Alt-A Trust 2006-7 has performed well: It has suffered losses of about 1.6 percent. Of those loans, 778 have been paid off or moved through the foreclosure process.

But by many other measures, it’s a toxic portfolio. Of the 2,093 loans that remain, 23 percent are delinquent or in foreclosure, according to Bloomberg News data. Initially rated triple-A, the most senior of the securities were downgraded to near junk bond status last week. Valuing mortgage bonds, even the safest variety, requires a great deal of guesswork: How many homeowners will fall behind on their mortgages? If the bank forecloses, what will the homes sell for? Investments like the Bear Stearns securities are almost certain to lose value as long as home prices keep falling.

Economist's Business Books of the Year

By Carl Delfeld of the Chartwell ETF Advisor

Below are some of the Economist's picks for business and investment books of the year. They may help you in planning any changes in your global exchange-traded fund strategy. Chartwell will also be releasing a white paper on global sector ETF investing later this month.

The Bottom Billion: Why the Poorest Countries are Failing and What Can Be Done About It
By Paul Collier. Oxford University Press; 224 pages; $28 and £16.99
Crammed with statistical nuggets and common sense, this book, by an economics professor at Oxford University, should be compulsory reading for anyone embroiled in the thankless business of trying to pull people out of the pit of poverty.

The Age of Turbulence: Adventures in a New World
By Alan Greenspan. Penguin Press; 531 pages; $35 and £25
A memoir-cum-essay by the famously opaque former chairman of the Federal Reserve that provides few surprises, but is an unexpectedly enjoyable read.

Wikinomics: How Mass Collaboration Changes Everything
By Don Tapscott and Anthony D. Williams. Portfolio; 320 pages; $25.95. Atlantic Books; £16.99
A believers' guide to how the emergence of community on the internet is fundamentally changing business.

The Last Tycoons: The Secret History of Lazard Frères & Co—A Tale of Unrestrained Ambition, Billion-Dollar Fortunes, Byzantine Power Struggles, and Hidden Scandal
By William D. Cohan. Doubleday; 742 pages; $29.95
How an investment bank concentrated on providing corporate advice to the rich and powerful—a business model that relied not on its balance sheet but on the brains and wiles of the men toiling away in its famously ratty offices. William Cohan used to work at Lazard's himself.

The Black Swan: The Impact of the Highly Improbable
By Nassim Nicholas Taleb. Random House; 400 pages; $26.95. Allen Lane; £20
A Wall Street trader turned philosopher on the power of the unexpected.

China's Thanksgiving Snub to America

By Carl Delfeld of the Chartwell ETF Advisor and the Center for American Diplomacy

Despite the fact that hundreds of American military families had flown to Hong Kong for holiday reunions, the Chinese government effectively barred a US carrier group from visiting Hong Kong, forcing 8,000 American sailors and airmen and their families to miss the planned holiday.

The Financial Times reported that China had rejected the fleet’s initial request for a port call. The Ministry of Foreign Affairs gave no reason for the refusal. On Thursday it apparently attempted to reverse its decision but it was too little too late due to logistics and a storm brewing in the area.

“We spent [Wednesday] floating in limbo trying to figure out if [China] was going to let all of the ships into their territorial waters or not. Finally, in the afternoon we were told it was a no-go,” one US sailor, who gave his name only as Jim, wrote on a military bulletin board.

The Kitty Hawk, the Navy’s oldest warship, has been visiting Hong Kong since the Vietnam war, and its Thanksgiving stopover in the territory was intended as a farewell call since the carrier will be retired next year.

The Financial Times reported that Admiral Timothy Keating, head of US Pacific Command, and Admiral Gary Roughead, chief of naval operations, on Tuesday said China also had recently refused a request from two minesweeping ships – the USS Guardian and USS Patriot – to enter Hong Kong harbour to avoid a storm.

"It is not, in our view, ­conduct that is indicative of a country who understands its obligations as a responsible nation.” Admiral Keating said he was more concerned about the decision to deny the minesweepers, which he said had been sailing in international waters, access to the port during a storm.

“For the Chinese to have denied those two ships in particular, small though they may be, that is a different kettle of fish for us, and is in ways more disturbing, more perplexing than the denial for the Kitty Hawk’s port visit request,” he said. Separately, Admiral Roughead said the Chinese had not obeyed the first tenet of the sea, which was that you first provided assistance to vessels in potential trouble before sorting out other issues.

Net Flows to Money Markets Since August Top $100 Billion

By Carl Delfeld of the Chartwell ETF Advisor

While many exchange-traded funds are suffering declines, net investment flows by the world's large equity managers tracked by EPFR Global are leading to the building up of sizable cash positions.

EPFR comments that with sub-prime and global credit fears being fueled by almost daily news of fresh write-downs in the financial sector and evidence mounting that the US economy will slow going into next year, investors retreated from equity funds during the second week of November and shift into the relative safety of Money Market Funds.

All of the major EPFR Global-tracked equity fund and ETF groups posted net outflows for the week ending November 14, with $5.58 billion pulled out of emerging markets equity funds and $5.07 billion out of funds geared primarily to developed markets. Money Market Funds, meanwhile, absorbed $10.1 billion, bringing net inflows since the beginning of August over the $100 billion mark.

Global equity managers did put fresh money into Germany and South Korea Country Funds and injected over $2 billion into Financial Sector Funds and ETFs. During the second week of November they pumped $2.47 billion into Financial Sector Funds – nearly all of that money by way of ETFs – which took year-to-date flows back into positive territory. They also moved aggressively back into US Small Cap equity. Latin American funds and ETFs are year-to-date still sitting on a net gain of 60.76%.

Do you think some of these markets are oversold? Join ChartwellETF.com for a second opinion.

HSBC Credit Report Stops Global ETF Rally

By Carl Delfeld of the Chartwell ETF Advisor

The European DJ Stoxx 50 this morning is trading +0.87%. Asian-Pacific stocks rallied as well today with Japan +2.47%, Hong Kong +4.90%, China +4.18%, Australia +1.28%, Bombay +4.69%.

Country exchange-traded funds also jumped to a strong start this morning but weak credit numbers from HSBC stopped the rally cold.

HSBC recorded a $3.4bn charge for the three months ending September against its US consumer finance business, $1.4bn more than would have been expected if first half trends had continued. Of that $1.4bn, half related to non-mortgage loans.

Stephen Green, Chairman, said in an article by Maggie Urry in the Financial Times that problems with bad debts were spreading from the mortgage business to other loans, such as credit cards and for car purchases, as consumers found it harder to get credit and delinquency rose. He said that while delinquency rates were up, he noted that they were still lower than the level seen in previous downturns.

At the end of the third quarter, $1.6bn or 3.2 per cent of the bank’s US branch based mortgage book were two or more payments in arrears, up from $1.1bn at the end of June. Worse, $3.2bn or 8.2 per cent, of its Mortgage Services portfolio were that far in arrears, up from $2.6bn at the end of the second quarter.

Mr Green said, “I don’t think anybody knows” when the market would begin to recover, but the group now expected “more prolonged weakeness” which would last at least through 2008 and probably into 2009.

Seven Reasons Why a Weaker Dollar is Bad for America

By Carl Delfeld, President of the Chartwell ETF Advisor and Chairman of global think tank Chartwell America

Martin Feldstein, the Chairman of the Council of Economic Advisors under President Reagan, wrote an article for the Financial Times this week which outlines why he believes that a more “competitive” or weaker US dollar is good for America.

Here is my case why a weaker dollar hurts America.

First, a weaker dollar translates into a cut in the real spending power of American consumers - in effect - a reduction in real income.

Second, a weaker dollar weakens the role of the U.S. dollar as the world’s reserve currency. Why should investors and central banks around the world invest in US assets when their value is steadily declining?

Third, the chances of a weaker dollar leading to a sharp reduction in America’s trade deficit is highly unlikely since 40% of the current deficit is due to oil imports that are denominated in US dollars. An additional 20% is due to trade with China which is of course controlling the value of its currency.

Fourth, a weaker dollar is inflationary since it increases the cost of imports.

Fifth, business leaders know that discounting prices may bump near term revenue and profits but at a real cost to long term profitability not to mention inflicting damage to the brand name. This is what we are doing to the brand of America by trying to increase exports by lowering their price in the global marketplace. Better to stand firm on price and sell into global markets on the basis of what is great about American products – superior quality, innovation and service.

Sixth, investors seem to like a weaker dollar since the profits of American multinationals get a boost from foreign earnings being translated into U.S. dollars. Again, this is short-term thinking and vastly overstated since most multinationals have sophisticated treasury departments that hedge currency exposures.

What a weaker dollar really does is to encourage American and international investors to invest in non-American markets. The more the dollar drops, the more global equities rise. Many Asian currencies are hitting record highs against the U.S. dollar. The Australian dollar has climbed to a 25 -year highs, while the Singapore dollar has touched 10-year highs. The Brazilian real, which has jumped 18% in value against the U.S. dollar this year, and the Indian rupee's sharp appreciation against the U.S. dollar during the past year, have supercharged U.S. dollar investors' returns in those markets.

According to EPFR Global, investors are pouring money into global funds - with net inflows of $96.94 billion into world equity funds so far in 2007, while taking out $9.6 billion out of U.S. equity funds. Brazil's local stock exchange, the Bovespa, reported that investors have injected $1.2 billion into the market in September alone.

Foreign investors slashed their holdings of U.S. securities by a record amount as the credit squeeze intensified, according to the latest Treasury figures. The Treasury said net sales of US market assets – including bonds, notes and equities – were $69.3bn in August after a revised inflow of $19.5bn during July. The August outflow exceeded the previous record decline of $21.2bn in March 1990.

Last and perhaps most importantly, I view a policy of weakening the U.S. dollar to improve America’s competitive position as the path of least resistance. Let’s not roll up our sleeves and cut federal spending, greatly simplify our tax code to encourage productivity and achievement or reduce corporate tax rates and excessive regulation. Let’s just wink and weaken and let our nation’s currency drift lower on automatic pilot.

My view is that the value of a nation’s currency reflects the perceived value of country in the global marketplace. Maintaining and strengthening the value of our nation’s currency is in the best interest of American consumers, businesses and investors.

China's Environmental Mess can be Investment Opportunity

By Carl Delfeld, President of ChartwellETF.com and Chairman of the Council on Asian Relations

Nobel Peace Prize co-winner Al Gore needs to rename his famous $40 million powerpoint presentation to “The Inconvenient Truth about China”.

While the media and policy establishment are preoccupied with global warming issues that may have important consequences in 50 years or may be vastly overstated, an environmental disaster exists in China right now. This significant challenge, however, is also a major opportunity for the Chinese leadership and American business.

To get your attention, below is just a just sampling of facts drawn from various sources including an excellent article by Elizabeth Economy in Foreign Affairs.

• China is the world leader in air and water pollution.
• Sixteen of the most polluted cities in the world are in China.
• According to World Wildlife Fund, China is the largest polluter of the Pacific Ocean.
• 2/3 of China’s largest 660 cities face a water shortage right now.
• The EPA estimates that 25% of the particulates hovering over LA originate in China.
• In converting coal into energy, America is six times more efficient than China, Japan is seven times more efficient and India is three times more efficient.
• About 190 million people in China are sick from contaminated water.
• Netherlands’ Environmental Agency states that China is the world’s largest contributor of CO2.
• A World Bank/China Government joint study estimates that about 750,000 infants a year face premature death due to respiratory disease.
• Chinese experts believe that only about 10% of China’s environmental laws are consistently enforced.

Clearly, decisive and immediate action is necessary. It requires three major ingredients.
The first, and by far the most important, is a major change in thinking on the part of the Chinese leadership. Of all people, I am a believer in economic growth but it has to be balanced against damage to the environment. For the most part, Chinese environmental laws and regulations are already on the books, they just need to be strictly enforced.

This means giving local and regional administrators more independent authority, something that the leadership is uncomfortable with given their top down, authoritarian bent. It also requires a change in its “economic growth at all costs” attitude.

Secondly, cleaning up China’s environment will require big bucks. No problem here in light of huge China’s $1.3 trillion in foreign exchange reserves. Setting aside $200 billion over the next three to five years should help enormously.

Thirdly, this environmental initiative will require technology and expertise. This is where American business, the global leader in environmental technology, comes into the picture. Congressional pressure on China concerning growing U.S.-China trade deficits is enormous and growing. Giving American firms the lead in helping China to address environmental issues will help the Chinese leadership to show its citizens that it is taking concrete action while at the same time sharply reducing trade tensions and imbalances.

The environmental challenge in China is daunting but procrastinating will make it ever the more unmanageable. American business is ready to saddle up and help wherever it can.

If all this happens, the following ETF baskets of American businesses could directly benefit if they have the foresight to go after opportunities in China.

PowerShares WilderHill Clean Energy Portfolio (PBW)
PowerShares Cleantech (PZD)
Market Vectors Environmental Services (EVX)
Claymore/LGA Green (GRN)
PowerShares WilderHill Progressive Energy (PUW)
First Trust NASDAQ Clean Edge U.S. Liquid (QCLN)
Market Vectors Nuclear Energy (NLR)