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By William Patalon III
Money Morning/The Money Map Report
Sovereign wealth funds are here to stay. If you have any doubts at all, just watch as the deals keep coming.
Qatar is the latest of the Middle East "Cash Barons" to jump into financial services fray. The state-run Qatar Investment Authority sovereign fund last week announced that it was accumulating shares of Swiss banking giant Credit Suisse Group (CS). And the QIA said it intends to invest as much as $15 billion in U.S. and European bank stocks over the next year.
Over the past year alone, these highly controversial state-run "sovereign wealth funds" have invested an estimated $70 billion in the world's ailing banking system – with most of the deals taking place in the West.
In the United States alone, the funds have provided bailout capital to the likes of Citigroup Inc. (C), Merrill Lynch & Co. Inc. (MER) and Morgan Stanley (MS) – financial-sector heavyweights whose balance sheets have been eviscerated by the subprime-spawned credit crisis. UBS AG (UBS) – also Swiss-based – has received Cash Baron bailout money, too.
The shrewdest fund managers view these deals as more than just investments that will generate returns – they're also hoping to gain valuable "know-how" about how deals get done. They feel that it's worth investing billions and waiting years for the investment returns to come if they also get an inside look at how buyout deals are searched out, negotiated and brought to a conclusion.
Most of the countries doing these sovereign deals are rich with at least one type of commodity – oil is the most prominent – and with world commodity prices at record highs, they've been able to amass huge capital surpluses that their sovereign funds are now anxious to invest.
China and Middle East countries such as Abu Dhabi, Dubai and others have been the most active. And now Russia wants into the game.
Russia wants this "know-how," too. But we're betting that it will be much more aggressive, demanding board seats and management say-so – something the more-passive China and Middle East funds have been willing to eschew in favor of easier access to the know-how.
Russia could well change the playing field.
We'll watch the situation, closely. You should, too, as the sovereign funds will continue to point the way to some of the best investment opportunities you'll find in the months and years to come.
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10 yr Treasury (Yield)
This week Americans celebrated our past presidents and also received some (positive) news about another world leader that brought about a new round of fireworks. That not-so-nice neighbor on the block is finally moving on. Since 1959, Fidel Castro (81) has ruled the Communist island of Cuba and made more than his fair share of enemies along the way. The U.S. initiated a trade embargo over four decades ago, and finally, some analysts see (the slightest glimmer of) hope that economic reform may be on the way.
Castro's "baby" brother, Raul (76) remains the frontrunner to assume the soon-to-be-vacant presidency, though Carlos Lage (56) has been the country's long-time economic czar and many see him as a potential successor. He is viewed as more of a reformer and the best chance for positive change to the previously closed economy. In any case, the American presidential prospects are sure to be brushing up on their diplomatic skills in light of this news. Any compelling thoughts, Senators McCain, Obama, or Clinton?
Unfortunately, Castro's good buddy and partner-in-crime, Hugo Chavez, is not likely to go away anytime soon. This week, he backed off his idle threats to cease oil shipments to the U.S. after Exxon-Mobil Corp. (XOM) persuaded domestic courts to freeze Venezuelan assets. Despite this news, oil prices still surged above $100/barrel for the first time since early January as traders reacted to an explosion at a Texas refinery and grew more fearful that OPEC may be cutting production at their upcoming March 5th meeting. (Can you say "renewed fears of inflation"…see below?)
As earnings season plugs along, analysts continue to revise their estimates for the first half of 2008. According to a Reuters survey, S&P 500 companies are now expected to grow by a mere 0.7% in the first quarter (from a prior 1.9% projected) and rise by 1.4% in the second quarter. While these numbers are down from previous forecasts, they still reveal that the country can avoid a recession (for now). By true definition, a recession translates into two consecutive quarters of negative economic growth. This week, Wal-Mart Stores Inc. (WMT), the world's largest retailer, reported 4% growth in quarterly earnings on strong international business. OfficeMax Inc. (OMX) (+23%) and Hewlett-Packard Co. (HPQ) (+38%) also reported favorable quarters. On the transactional front, Microsoft Corp. (MSFT) claims that it will not squabble over pricing with Yahoo Inc. (YHOO) now that its offer has been rejected, and the proposed Delta Airlines Inc. (DAL)/Northwest Airlines Corp (NWA) merger stalled over pilot compensation. Societe Generale SA (SCGLY), Credit Suisse, and Barclays Group PLC (BCS) became the global subprime victims of the week and Kohlberg Kravis Roberts is struggling to pay off short-term debt (again).
Stocks were mixed this week as investors returned from a well-deserved (and patriotic) day off only to find oil prices surging to record levels, analysts downwardly revising corporate earnings, and the Fed offering some pessimistic insight into the economy (not a great triple play). Still some early week optimism remained as prospects for additional rate cuts loomed large and a new trading partner may one day embrace globalization (don't count your chickens before they hatch). With little news to (over)analyze, investors pared back equity positions late in the week (until the last hour). Good riddance, Fidel. Any chance, Hugo may join you in a retirement timeshare?
Weekly Economic Calendar
A much need break for investors
Housing Starts (01/08)
Rose for 1st time since October
Large increase due to higher food and health care costs
Fed Policy Meeting Minutes
Depicted a lack of concern by Fed about inflation
Initial Jobless Claims (02/16/08)
Large decline in claims seen as aberration
Leading Eco. Indicators (01/08)
Fell for 4th consecutive month
The Week Ahead
Existing Home Sales (01/08)
Consumer Confidence (02/08)
Durable Goods Orders (01/08)
New Home Sales (01/08)
Initial Jobless Claims (02/23/08)
GDP (4th quarter 2007)
Personal Income/Spending (01/08)
Just when it seemed that the Fed (rightfully?) should be more concerned about the dreaded "R" word than the dreaded "I" word, price pressures may be on the horizon (again). CPI, the retail inflation gauge, rose by a larger than expected 0.4% in January and even the core number (excludes the volatile food and energy components) climbed by its largest percentage (+0.3%) in seven months. Bear in mind, the recent surge in energy prices will not be reflected for another month or two. While economists still expect Bernanke and friends to aggressively fight the downturn (as promised), many feel the magnitude of future moves may be impacted by new inflationary fears. A few hours after the CPI release, the Fed updated its forecast for future economic activity and predicted further weakness due to sluggish housing and credit concerns as well as prospects for higher unemployment and inflation (the worst of both worlds).
Though new home construction climbed in January for the first time since October, the euphoria (OK, maybe a tad strong) was very short-lived. Building permits, seen as a predictor of future housing activity, actually fell to its lowest level since late 1991. Meanwhile, the index of leading economic indicators dropped for the fourth straight month as widespread weakness across various sectors indicated that the downturn should continue for at least another three to six months.
News and Related Story Links:
- Money Morning News Analysis:
Qatar Sovereign Wealth Fund Buying Credit Suisse Shares, Qatar Prime Minister Says.
- Money Morning Economic Analysis:
As Sovereign Wealth Funds Flourish, Russia Looks to Change the Playing Field.
- Money Morning Economic Forecast Report:
Outlook 2008: Three Ways to Profit From Sovereign Wealth Funds – the "Next Wall Street."
About the Author
Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning at Money Map Press. With his latest project, Private Briefing, Bill takes you "behind the scenes" of his established investment news website for a closer look at the action. Members get all the expert analysis and exclusive scoops he can't publish... and some of the most valuable picks that turn up in Bill's closed-door sessions with editors and experts.