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Chartwell Expands Access to Global Hedge ETFfolio

By Carl Delfeld of Chartwell ETF

Chartwell will expand access to its Global Hedge ETFfolio which to date has been reserved for private money management clients. The new service will provide current holdings and send trading signals via email. The price is $1,000 per quarter or $3,000 per year. For more information and to reserve your place, contact Chartwell at 719.264.1503.

 

Japan's Sad Story

By Carl Delfeld of Chartwell ETF

The slide in exports was the steepest since 1957 and highlighted the severe impact of the global slowdown on demand for Japanese products ranging from cars to heavy machinery and electronics. Exports to the US fell 52.9 per cent and those to China were down 45%. Imports fell 32% as well reflecting a sharp drop in consumer demand. The Japanese yen also appears to be losing its role as a safe haven in a global storm.

Japan and the Japanese economy were riding high in the 1980s building on the country’s remarkable resurgence since its devastating defeat in World War II. The bestseller “Japan is #1” was the talk of the town, companies around the world were rattled by seemingly invincible Japanese companies like Sony, and U.S. congressman were clamoring for protectionist legislation.

The Tokyo stock market hit its apogee in 1989 and then things fell apart. A banking crisis combined with a real estate meltdown led to a sharp and prolonged recession and the much talked about “lost decade”.  The banking system failed to aggressively confront its bad loans in an attempt to put off the inevitable. Politicians avoided tough choices and launched a series of ten infrastructure stimulus packages leading to a staggering national debt equal to 180% of the country’s GDP.  The cross-share ownership of Japanese companies, a source of strength during the boom, became an albatross.

Japan’s broad Topix market index earlier this year fell to a level reached in 1984 wiping out a quarter of a century of gains. Japan unleashed a plan today to set up a government fund to buy equities. Hong Kong did much the same in 1997 spending $15 billion equal to 8% of market value.

Will the Japan plan work? Will the Japanese market rebound from these historic levels. What about Japanese politics and the direction of the yen?

Join Chartwell ETF today for only $40 per month and read the full story in tomorrow's issue.

 

     

U.S. Drops Below NZ in Index of Economic Freedom

By Carl Delfeld of Chartwell ETF

It is incredibly difficult in turbulent markets to look ahead with the big picture in mind. Let’s give it a try.

I have been following for some time the annual report on the Index of Economic Freedom published by the Heritage Foundation and the Wall Street Journal. It ranks countries based on a grading system that includes ten freedoms such as property rights protection, investment freedom, tax rates, government intervention in the economy, business freedom, freedom from corruption and monetary, fiscal and trade policy.

The idea is not just to rank countries but to track movement both up and down and to highlight the proposition that freedom and prosperity are highly correlated.

Here are the top twelve countries for 2009 and their corresponding ETF.

         1)         Hong Kong (EWH)

         2)         Singapore (EWS)

         3)         Ireland (IRL)

         4)         Australia (EWU)

         5)         New Zealand (up one slot)

         6)         United States (SPY) (slipped from #5)

         7)         Canada (EWC)

         8)         Denmark

         9)         Switzerland (EWL)

         10)         United Kingdom (EWU)

         11)         Chile (ECH) (slipped from #8)

         12)         Netherlands (EWN)

The average score for the 183 countries that were ranked was roughly what it was last year. It is interesting to note that all of the top seven slots are countries formerly associated with the British Empire (sorry, Mr. Jefferson the Francophile, it looks like Alexander Hamilton was right on, France is #48) and that half of the ten top ranked countries hail from Europe. Egypt, Mauritius and Mongolia were the three countries that moved the most up the rankings.

I was a bit surprised that some well respected economies as well as fast-growing emerging markets with high flying stock markets did not move up much at all and actually had rather poor rankings.

Here are just a few examples.

         #19         Japan (down two slots)

         #25         Germany

         #23         Austria (up 7 slots)

         #49         Mexico (down 5 slots)

         #58         Malaysia (down 7 slots)

         #54         Thailand

         #105         Brazil

         #123         India (down 8 slots)

         #131         Indonesia (down 12 slots)

         #132         China (down 6 slots)

         #144         Russia (down 10 slots)

This brings us to the relationship between stock market performance and the degree of economic freedom. Cynics might point to the fact that Ireland (#3) has been perhaps the worst performing market during the last year and that Chile has been sliding and Singapore has also hit a rough patch. Meanwhile, the hottest markets of the last few years were three countries ranked below #100; Brazil, India, China & Russia also so known as the BRICs.

But wait just a darn minute. First, we need a much longer perspective than just a year or even a few years to test whether this divergence is sustainable. For example, both the Ireland and Chile markets outperform any of the BRIC countries if you use a five-year time frame. Plus the MSCI emerging markets index in U.S. dollar terms is down 20% year-to-date.

The other interesting angle is just how good some of these emerging markets could perform with only marginal progress in all or some of these economic freedom categories. My opinion is that it is very unlikely that China and India can maintain double-digit growth rates without addressing these issues as soon as possible.

Then you need to look at per capita income levels. The top 20% of countries ranked have per capita incomes twice that of the next 20% and a stunning five times that of the bottom 20%. It is time for economic freedom to trickle down and the sooner the better.

Instead of just talking about these important issues, why not put some money on the table and put them to the ultimate test. Chartwell Partners Wealth Management has launched the Chartwell Country Freedom Folio for private clients. It is a basket of the top ten ranked countries using country specific exchange-traded funds also known as ETFs. Because that New Zealand and Australian markets have a great degree of overlap, we are putting the Netherlands in the tenth slot and will weight each country equally.

And don’t forget America in the #6 slot. The record of stock markets during a recession is sometimes surprisingly quite good. In the nine U.S recessions (zero to negative growth) since World War II, in four of those recessions the stock market actually soared: 40% in 1954, 22% in 1961, 30% in 1980, and 30% in 1991.

It is a tough and tricky time to put new capital to work but why not start with the freest economies in the world?

Taiwan, Japan ETFs Slump

By Carl Delfeld of Chartwell ETF

Taiwan and Japan released fresh indications of Asia's worsening economies.

Official data on Wednesday showed Taiwan’s GDP shrank 8.4% year-on-year in the last quarter of 2008, a bigger drop than analysts had expected. Exports for the quarter dopped 8% and some expect them to fall 20% for 2009. Meanwhile, Japan's economy slowed at a 12.7% annual rate and suffered a $160 billion net capital outflow in 2008. Political turbulence is Japan is also escalating.

The Taiwanese central bank to made an unexpected in interest rates, bringing its key interest rate to a record low of 1.25%. The economy has contracted for two straight quarters, meeting a common definition of recession.

Taiwan's bad numbers reflect a dismal outlook for other economies in the region, particularly that of China, where Taiwanese manufacturers have shifted much of their output in recent years and where many of the island’s manufactured electronics parts are shipped for final assembly before being sold to consumers in the west.

According to the Financial Times, Asia may see the number of jobless people rise by up to 23.3 million in 2009, three times more than the estimate of 7.2m last month as the region is impacted by sharply lower demand in the world’s richest countries.

Don't Forget ETF Annuity Bucket as Safe Haven

By Carl Delfeld of Chartwell ETF

With our core and explore strategy, one point I stress is that your core portfolio needs to be strong and your explore portfolio needs to be flexible and trading oriented.

And members of Chartwell ETF know of my frequent advice that investing is playing the probabilities. If you think that there is a 50/50 chance that markets will be lower in a year or two, why is your ETF portfolio  80% long in markets? It makes no sense at all and puts your financial future at risk.

Investors need to divide their nest egg into buckets and the bucket that has to weather this market and financial storm may find its best home in an indexed annuity.

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 in your account of 8% out as far as 20 years and over a bit more than nine years, the account 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 a blend of 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 following year. Your worst-case scenario for this indexed side of the annuity account is zero growth. I am sure many investors would jump at that in hindsight.

In short, you get a nice guaranteed rate plus the chance to capture some 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. An indexed annuity is not for everyone and you should not put all of your nest egg in one but I see a strong case for one as part of your investment strategy. Its not perfect but for the right situation, pretty darn close.

Hedge Your Bets with ETF Option Coaching

By Carl Delfeld of Chartwell ETF

Many ETF investors are unaware that there are options on some ETFs going out as far as January 2011.

These can be used to "hedge" your portfolio in this time of great uncertainty and market volatility. A put option can be used as an "insurance policy" if the ETF declines and a call option is a way to bet on a recovery two years off with the advantage of putting less capital on the table. There are significant risks with option investing including the possibility of an option expiring out of the money.

Techniques such as straddling (buying a put and call option at the same time) can be used as a bet on high volatility. For example, will China (FXI) go up sharply or down sharply over the next two years? One strategy would be to go long the China ETF while purchasing a put option in case you are wrong. The MSCI Emerging Markets (EEM), Japan (EWJ), UK (EWU), Brazil (EWZ), and the MSCI EAFE index (EFA) are just some of  ETFs that have options out to 2011.

I strongly advise that you get professional help putting together an options portfolio. I offer personal coaching which includes a powerpoint explaining the basics and possible strategies. This is followed by a personal consultation and a suggested custom options portfolio.

For more information, pricing, and to schedule a consultation, please call me directly at 719.264.1503.       

Stimulus Lessons from London & Tokyo

By Carl Delfeld of Chartwell ETF & the America Unbound Foundation

How would former Prime Minister Margaret Thatcher come down on the stimulus package winding its way through Congress? Her view is probably close to the sentiments expressed in her autobiography entitled Margaret Thatcher: The Downing Street Years.

"As governments tried to stimulate employment by pumping money into the economy they caused inflation. The inflation led to higher costs. The higher costs meant loss of ability to compete. The few jobs that we had gained were soon lost; and so were a lot more with them. And then, from a higher level of employment and inflation, the process was started all over again, and each time around both inflation and unemployment rose."

As usual, some direct, logical, common sense from the "Iron Lady".

And if the goal is to create jobs, Chicago-based Grant Thornton in a study released to the U.S. Department of Commerce Economic Development Administration found that backing business incubators that support entrepreneurs and fledgling, young companies is a more effective strategy in creating jobs. More specifically, incubators create 46.3 to 69.4 local jobs per every $10,000 investment, the report says.

As the U.S. Congress debates an $820 billion stimulus package. It may be useful to look at the trillions of dollars spent to lift the economy from a severe downturn caused by the bursting of a real estate bubble in the late 1980s. During those nearly two decades, Japan accumulated the largest public debt in the developed world — totaling 180% of its $5.5 trillion economy — while failing to generate a convincing recovery.

America’s national debt, not counting new spending under the Obama Administration, now stands at 81% of GDP. The high point for America was in 1946 when it stood at 122% of GDP and then declined to a low of 33% in 1981.   

Martin Fackler of the New York Times notes in an excellent article that one lesson is that it matters what gets built: Japan spent too much on increasingly wasteful roads and bridges, and not enough in areas like education and social services, which studies show deliver more growth and jobs than basic infrastructure.

In total, Japan spent $6.3 trillion on construction-related public investment between 1991 and September of last year, according to the Cabinet Office. But many economists believe that it was not public works but an expensive restructuring of the debt-ridden banking system, combined with growing exports to China and the United States, that finally sparked an economic recovery.

Japan’s experience also seems to argue for spending heavily on social issues. A 1998 report by the Japan Institute for Local Government, a nonprofit policy research group, found that every 1 trillion yen, or about $11.2 billion, spent on social services like care for the elderly and monthly pension payments added 1.64 trillion yen in growth. Financing for schools and education delivered an even bigger bang for the buck of 1.74 trillion yen, the report found.

But every 1 trillion yen spent on infrastructure projects in the 1990s increased Japan’s gross domestic product by only 1.37 trillion yen, mainly by creating construction jobs and other logistical improvements such as reducing congestion.

The debate continues but the U.S. Senate may wish to bring in some Japanese officials to learn their hard-earned lessons.

 

 

Around the World with ETFs

By Carl Delfeld of Chartwell ETF

Spain’s (EWP) labor ministry said Tuesday that the number of people out of work rose to 3.33 million, a 6.4% increase over December and 47 percent increase since January 2008. The ministry does not publish the unemployment rate, but the National Statistics Office said last week that the rate rose to 13.9% at the end of December.

Spain’s job market was hurt badly last year when the global credit crunch exacerbated the unwinding of its property boom. Spain is suffering more than other European countries because it had created millions of low-skilled jobs and unfortunately has a rather rigid labor market.

“What we’re seeing now is very typical behavior for Spain,” said Gayle Allard, a specialist in labor markets at the IE Business School in Madrid. “When the economy is in a recovery, Spain creates jobs really fast, and when the crash hits, it crashes harder.”

Australia (EWA) announced a $26.5 billion stimulus plan and an interest rate cut on Tuesday and the Japanese (EWJ) central bank said it would start buying one trillion yen, or $11.1 billion, of the shares that Japanese banks hold in other corporations. In Japan tens of thousands of job cuts have been announced in the last two weeks. The Bank of Japan is relying on other tools — like buying commercial paper in an effort to ease credit conditions and get banks lending again.

The Australian central bank lowered its benchmark cash rate by a full percentage point on Tuesday, to a record low of 3.25%. Altogether, the bank has lowered the rate by 4 percentage points in five steps since early September 2008.

And in China (FXI), which announced a package of infrastructure spending and other measures last November, is widely expected to announce fresh steps to bolster growth and employment in the weeks ahead.

Russia’s (RSX) credit rating was cut by Fitch over concerns about its slumping currency reserves and the sharp drop in oil prices. The long-term credit rating was lowered a step to triple-B, two rungs above “junk” grade. It would prove very costly for Russia should it lose its investment grade rating. Russia is the only G8 nation to have suffered a downgrade since the start of the financial crisis.