Another View on the recent Stock Market Panic
Stock-Markets / US Utilities Mar 19, 2007 - 12:59 PM GMTBy: Roger_Conrad
Speaking engagements are one of the more useful aspects of my job.
This weekend, I'm at the Renaissance Waverly Hotel in Cobb County, Georgia, for the WealthExpo.
I look forward to meeting many readers and hearing of their concerns and queries, and I'll be summing them up in next week's Utility & Income. Utility Forecaster subscribers please note: This issue's Roundup has a brief, between-issues roundup of every Portfolio recommendation.
As the past week's extremely turbulent market events showed yet again, the world's investment markets are increasingly connected.
Events that may seem wholly unconnected on the other side of the globe are increasingly affecting investors everywhere.
Moreover, when panic starts in one market, it spreads like wildfire and becomes very difficult to control. This week's guest columnist, Yiannis Mostrous, and I spent several late nights during the past couple weeks monitoring the opening of the Asian and then European markets, as the selling contagion spread across international boundaries.
The spark to the fire was, of course, growing concern about the subprime mortgage market. That's essentially the segment that lends to riskier borrowers, such as first-time home buyers. As a result, lenders take on more risk and are rewarded for making good decisions.
As is always the case in any lending spree, however, good sense often goes out the window in the name of generating profits.
Salesmen are under the gun to produce, and some are no doubt tempted to cut corners or otherwise approve a loan that wouldn't pass muster in more sober times.
With the housing market slowing down and the economy apparently cooling off a bit, it's no wonder the riskier segments of the lending industry are suffering. Nor should it be to anyone's surprise if a major money center bank winds up neck-deep in this.
Wall Street's handwringing, however, is a day late and several dollars short. Bank stocks have taken a pounding already and any company specializing in any kind of mortgages has been literally taken out and shot. For example, THORNBURG MORTGAGE (NYSE: TMA), a favorite of my colleague Neil George, has taken it on the chin, though it has basically nothing to do with subprime.
The point is the subprime “crisis” is pretty much priced into the market now. Aside from giving your portfolio a good pruning--weeding out investments with high yields but uncertain business prospects--there's not a lot to be done about it now.
There may be a few more rotten trees out there, and I certainly wouldn't touch more money center banks with a 10-foot pole. Their will to dominate means they're always at the epicenter of financial crises. And no doubt one of them is going to crack this time around as well. That's why the best banks to own are always the regionals, which rely on building deposits and knowledge of local loan markets.
For the most part, however, this horse is well out of the barn. The same thing, incidentally, applies to the battered Canadian trust market--also a source of handwringing in recent days.
The worst-case scenario on the taxation issue--full corporate taxation beginning in 2011--is now well in the market, despite a real possibility it could be changed for the better in coming months by an opposition electoral victory or a ruling party change of heart. Oil and gas producer trusts are still adapting to lower energy prices, as hedges come off and they lock prices for their output in at lower prices.
But for the best trusts, there's little to fear. As solid fourth quarter earnings attest, their lofty yields are in no danger. In fact, a growing number, like ARCTIC GLACIER (TSX: AG.UN, OTC:
AGUNF), have announced they won't be cutting distributions at all in
2011 despite taxation. And takeover interest is heating up as well, with a bidding war emerging for GREAT LAKES CARBON (TSX: GLC.UN,
OTC: GLCIF). (For more on Canadian trust trends, sign up for my complimentary weekly Maple Leaf Memo at http://www.kcifinance.com .
The larger point of this discussion, however, is that global events are increasingly central to how markets move. And while I strive to make such actions irrelevant to my readers--by focusing on high quality situations in a diversified array of markets--I'm always paying attention to the risks and potential rewards from the global markets.
As I spent a great deal of time discussing these larger issues with Yiannis this week, I'm featuring some of his comments below, excerpted from The Silk Road to Riches: How You Can Profit By Investing In Asia's Newfound Prosperity, published by Financial Times/ Prentice Hall. The Silk Road to Riches
The focus is on geopolitics, emerging as a critical factor in early 2007. The discussion doesn't dwell on current events, such as the war in Iraq. But it provides a useful framework for understanding some of the larger issues facing US investors from the global front.
Note that I do cover foreign utilities in detail in Utility Forecaster and will have a feature story in an upcoming issue.
Current portfolio holdings include several Asian plays.
This process will take time and won't dramatically affect our economic and investment projections for the next 10 years. During the next decade, the US must gradually disengage itself from certain security obligations (for example, Korea, Japan and Taiwan) in a smooth manner. But there's no guarantee that a mindless move by any of the major players won't derail a peaceful transition. This is a variable that could threaten stability in Asia and the world.
The Russia-Iran-India-China axis is a potential force with which the US will either compete or cooperate. A competition would involve a division of economic spheres along multipolar lines as opposed to the current unipolar arrangement. Japan's response to the rise of such an axis is also critical; it could be economically beneficial but strategically unacceptable. Based on its history, Japan will most likely develop strong ties with the axis, given the profound economic impact such cooperation will have in Asia.
The West will soon have to alter its foreign policy model to produce results that bring about further stability. The current approach seems to emphasize the adoption by the emerging world of particularly Western ideological values. “It is sheer hubris,”
Samuel Huntington has written, “to think that because Soviet Communism has collapsed, the West has won the World for all time and that Muslims, Chinese, Indians, and others are going to rush to embrace Western liberalism as the only alternative.”
Mark Mazower, writing in the Financial Times, expressed similar concerns. “States that believe promotion of their interests depends on export of their culture and values are doomed to fail...of course China's rise does not portend the downfall of the US or Europe but it does challenge the West's self-perception as the civilizational hegemon in global affairs...[T]he world before 1800 was one of multiple power-centers and value systems: Let us adjust to the fact that it is starting to look like that again.”
It may be difficult for many to accept Mazower's conclusion, let alone imagine a situation where the US is confronted directly. A rising state must first catch up with and then challenge the world's sole superpower. Rather than resting on the ambitions of a single country, the threat to US hegemony lies in the possibility that it exercises its power-projection capability through military action in a number of asymmetric conflicts.
This could push the US into selecting the parts of the world where it concentrates its influence and power.
The question is this: How far can the US stretch itself militarily, diplomatically and economically? The prolonged occupation of Iraq demonstrates that once a large-scale conflict arises, the majority of resources and intellectual capacity are concentrated on that particular conflict. Other issues in different regions are ignored.
East Asia is a clear example of this dynamic, and exposes the previously unthinkable possibility that the U.S. may still dominate the balance of power, but not the balance of influence.
Investors who fail to consider or, worse, treat lightly the geopolitical changes taking place substantially increase the risk to their domestic and international investments.
SPEAKING ENGAGEMENTS
Please allow me to put in another pitch for this year's Atlanta Investment Conference, to be held at the Chota Falls resort in the North Georgia foothills April 19-21.
This is one of my favorites for several reasons. One, attendance is limited so there's a unique opportunity to meet individually and informally with readers. My colleagues Neil George, Elliott Gue and I will be available throughout. Two, the conference coordinators Martin and Marjie Truax are old friends of ours and attract a wealth of extremely interesting and accomplished speakers. Three, there's nothing like the southland in the springtime and Chota Falls is simply stunning for its natural beauty and bucolic atmosphere.
Finally, the Truaxes are well known in the Atlanta area for their tireless advocacy of autism research and treatment, which your attendance fee will help to fund.
To join us, visit the conference Web site at http://www.aicatchota.com , or call Martin at 1-866-813-9911. I look forward to seeing you there.
By Roger Conrad
KCI Communications
Copyright © 2007 Roger Conrad
Roger Conrad is regularly featured on television, radio and at investment seminars. He has been the editor of Utiliy Forecaster for 15 years and is also the editor of Canadian Edge and Utility & Income . In addition, he's associate editor of Personal Finance , where his regular beat is the Income Report. Uniquely qualified to provide advice on income-producing equity securities, he founded the newsletter, Utility Forecaster in 1989. Since then, it's become the nation's leading advisory on electric, natural gas, telecommunications, water and foreign utility stocks, bonds and preferred stocks.
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