November 14, 2004
It's Not Kansas Out There: Stay Away from China IPO's
There is one question that is sure to come up every time I speak to a group of investors. "How can I invest in China?" I always tell them the same thing.
"You already are invested in China."
Everyone knows that China is knocking the lights out, growing two or three times as fast as the US. And everyone knows that it was China's incredible growth that drove up oil, steel, aluminum, copper, and coal prices last year. Can't blame them for wanting a piece of the action.
Problem is, the headline investments are sucker bait. As you can read in this CBS MarketWatch article, China is the force behind a huge wave of IPO's that are hitting western stock markets. China's leaders have figured out that the best way to deliver rising living standards to their people is to tap our capital markets for the money to buy the tools and technology to make their workers productive.
Japan leads global IPO's this year with 141 new issues that have raised a total of $9.3 billion. Japan's Electric Power Development company (J-Power) (JP:9513: news, chart, profile), for example, distinguished itself with a $3.4 billion offering - second only to Belgacom (BE:000381027: news, chart, profile), the Belgian telecom giant, which raised $4.1 billion in the largest issue so far this year.
China is runner-up to Japan in the IPO market, raising $4.4 billion via 95 new issues, according to PricewaterhouseCoopers. For instance, leading fixed-line telecom operator China Netcom (CN: news, chart, profile) (HK:906: news, chart, profile) took in $1.1 billion ahead of its scheduled Nov. 16 U.S. listing and a Hong Kong listing the following day.
Next month, Air China is expected to debut in both Hong Kong and London after moving its IPO plans forward from 2005, according to The Syndicate Source, ECM Monitor, which tracks global IPO's.
That's great for them, and a good opportunity for knowledgeable, on-the-ground, China insiders. But it's no place for part-time investors.
Most investors already have more exposure to China growth than they realize. Big US companies like Intel, Ford, GM, Johnson & Johnson, and Procter & Gamble exposed you to China because they have investments there. Commodity price sensitive companies like Exxon, Alcoa, USX, or Phelps & Dodge expose you to China because their revenues respond to commodity prices. And companies in Japan, Korea, Taiwan, and Hong Kong expose you to China because they do so much business there.
You don't need to buy a Chinese IPO to make a bet on China.
I have had a modest direct bet in place on China's growth for some time by owning a strip of Exchange Traded Funds for the Asian countries most exposed to China business. So far, so good. But I am keeping the bet small. I suggest you do the same.
Posted by John Rutledge at 7:02 PM
November 12, 2004
Two Cheers For Telecom Regulators Making Way For VoIP, Cap Spending
I wrote the following op-ed, which ran in yesterday's Investor's Business Daily. The piece talks about the importance of changing telecom regulations to encourage investing in new high-speed networks.
Two Cheers For Telecom Regulators Making Way For VoIP, Cap Spending
Investor's Business Daily
American workers finally caught a break when the Federal Communications Commission reversed an archaic rule that had frozen the U.S. telecom network in obsolete technology.
Based on a recent study that Deborah Hewitt and I helped write for the U.S. Chamber of Commerce, these changes could be worth $634 billion in GDP and more than 200,000 jobs. You can download an executive summary of the study, and see related articles at our website, www.rutledgecapital.com.
This change is going to result in massive investments that will give American companies the high-speed communications they need to compete with Korea, China, and India.
Within hours of the announcement, SBC, Bell South, and Verizon announced they will immediately begin laying billions of dollars in fiber-optic cable to bring high-speed networks to millions of homes and businesses across the country.
It's about time. For too long, regional Bell operating companies were forced to share their networks with other companies at below-cost pricing set by local utility commissions.
The telecom network is the central nervous system of the American economy. It allows manufacturers, schools, and hospitals all around the U.S. to do business with each other. The speed of the telecom network controls the speed of economic activity, what we call Gross Domestic Product (GDP). Telecom policy should be the core of national economic policy.
Under the old rules America has fallen from first place to 13th place in global telecom speed. South Korea, China, and India have all made high-speed telecom networks a national priority. We haven't. Outsourcing and lost jobs are the result.
In America, we have high-speed fiber-optic lines running only between major cities like a string of Christmas lights. From New York, you can communicate at the speed of light with a customer in Los Angeles, Shanghai, or Bangalore. But in the U.S., if your business is located off that string of Christmas lights in a small town, you?re out of luck.
This is especially important in our global economy. Americans are rightly worried about outsourcing, sending service and professional jobs overseas. It's not only about low wages. We're losing jobs because companies in China, India, and Korea have the high-speed telecom that our small-town companies don't. We need the fastest telecom network in the world so American companies can compete and American jobs can stay at home.
The U.S. telecom industry is depressed. Since March 2000, telecom companies have lost 67% of their market value -- or $760 billion.
Over the same period, the telecom industry lost 380,000 jobs. One out of every three lost jobs (or 29%) since March 2001 was in telecom.
Instead of growing and investing, our telecom industry has been sidelined by misguided policy. Under the guise of increasing competition, the Telecommunications Act of 1996 has undermined investment in the U.S. telecom sector. Telecom capital spending is down by two-thirds, from $132 billion in 2000 to $56 billion in 2003.
The government effectively nationalized telecom networks by taking away the property rights of the people who build networks. Until a 4-1 FCC vote last month, the rules forced the companies--who risk their money to build networks--to allow others to rent their facilities at a fraction of cost. That destroys the incentives for both the network builder and the user to make further investments.
Businesses and unions are demanding action. Based upon estimates from a recent study from the U.S. Chamber of Commerce, written by Deborah Hewitt, Tom Hazlett, Coleman Bazelon and myself, a thorough reform of telecom regulations could unleash $58 billion in new capital spending over the next five years.
Capital spending stimulates growth in two ways. The first is what the textbooks call the multiplier. A telecom company's purchase of a new router from Cisco means bigger paychecks for Cisco workers, who increase spending themselves, and so on. That component by itself is worth $167 billion in increased GDP and 212,000 additional jobs per year over five years.
The second channel is even more interesting. Increased telecom investment will make American workers more productive and our businesses more competitive, allowing us to outsource to small towns in America instead of China or India.
This productivity increase is worth $467 billion in increased GDP over five years.
Adding both channels together, you get $634 billion of extra GDP. Rising productivity will keep costs and prices down so inflation stays low. And it helps the deficit. At today's tax rates, the $634 billion of extra paychecks people receive will generate $113 billion in new tax revenues over five years.
The FCC ruling is a good start. I expect Congress to pass a new telecom law next year to complete the job. When they do, American businesses and American workers will finally get the tools they need to compete and grow.
John Rutledge is Chairman of Rutledge Capital and a Senior Fellow of the Pacific Research Institute. He was one of the principal architects of the Reagan Economic Plan.
Posted by John Rutledge at 7:14 PM
November 11, 2004
The Russian Bear is Waking Up
There is a cloud on the horizon that we should keep our eyes on. It is the end of the Russian experiment in democracy at the hands of Vladimir Putin.
I track the major economic and financial storm systems in the Storm Watch section of our website. They identify situations where policy change has opened a gap between returns on different assets, which attract the attention of global investors. My weather map today is tracking storm systems dealing with Iraq, telecom, China, tax policy, and business lending. Each one poses a risk. Each creates an investment opportunity.
I recommend that you read Gasparov's op-ed piece, Putin's Appeasers, in the European edition of Thursday's WSJ, which takes western governments to task for not objecting to recent Russian events:
Under the direction of Mr. Putin, Russia is well into its transition into an authoritarian state. The costs of this change for the Russian people and the world are high and getting higher.
We have grown used to seeing Russia as poor and powerless. That is going to change. Just as commodity deflation in the 1980's dried up Russian revenues, last year's commodity inflation has turned Russia into a money machine. Russian oil and gas reserves are the only real alternative to the Arabian Gulf in the next decade. And they still own all those nuclear warheads.
Ten years ago I asked a friend and former cabinet member in the first Bush administration why they did not simply purchase Russia's stock of nuclear weapons in 1989-1992 in exchange for food during the first long winters after the fall of the USSR. He said they couldn't afford it; the budget deficit would have been too big. I think it would have been our best bargain of all time.
Posted by John Rutledge at 7:17 PM
November 7, 2004
Japan Times--Get Ready for Rising Prices
Doubters in the sustainability of Japan's recovery should read this article. The change of monetary policy to quantitative easing, that is, deciding the amount of reserves to inject into the banking system each month, rather than target an interest rate, is what broke the back of Japan's 13 year deflation. The recovery is real.
For the first time in eight years, Japan's consumer prices (excluding those of perishable food) are forecast to rise on an annual basis, albeit only slightly. A 0.1 percent increase in consumer prices is expected for the fiscal year starting April 1, 2005, according to an economic and price outlook released in late October by the Bank of Japan.
Don't worry about inflation in Japan; that's not in the cards. This year's numbers are showing the impact of the commodity price jump. The best bet for next year is 0-1%.
The only risk now is that the Bank of Japan--usually the Fed's Mini-Me--would decide to return to the disastrous policies that got them into trouble in the first place. I think we have another year before they start loading the gun they will use to shoot their feet off.
Until then, I am long Japanese stocks. There is an exchange-traded fund with ticker EWJ listed on the American Stock Exchange that makes it easy to do.
Posted by John Rutledge at 7:22 PM
Qatar: Distance education from India gets popular among Arabs
I picked up this story in today's issue of The Peninsula, Qatar's leading English Daily. It should be a wake-up call in America.
Ahamed Ottayil--Doha: Distance education courses of some Indian universities conducted by National Education Centre (NEC) in Doha are becoming increasingly popular with Indian and Arab students in Qatar.
According to NEC's director, Ahamed Ottayil, some 20 per cent of the students enrolled for various courses are Arabs, mainly Sudanese and Palestinians. NEC offers graduate and post-graduate courses in various disciplines from Calicut University in Kerala and Alagappa University in neighbouring Tamil Nadu state.
India has built an education system that is churning out large numbers of smart, motivated, highly-trained engineers. They have plans to launch an educational satellite to bring education to rural areas. Now they are exporting high-quality, low-cost education to the Arabian Gulf.
This is great news for the people who will be able to take advantage of the education opportunities. It is the only long-term answer to global poverty. But it should also serve as a prod to US leaders that we need to use technology to drive down the cost of education in America.
We need to drive the cost of college education from $40,000 per year to $400 per year and educate every child in the country who will sit still long enough to learn.
With high-speed communications, there is no excuse for a child anywhere in America not having access to the best teachers in the world via on-line distance learning programs like the ones described in this article.
Today, there are impediments to doing this. One, the lack of high-speed networkd in small towns across the country, will be dealt with inthe new telecom law next year. The other, obstructionist procedures for new distance-learning programs to receive accreditation--and therefore enroll members of the military--has got to go.
If President Bush wants an unerasable place inthe history books, forcing the changes that would make education affordable would be a good place to start.
Posted by John Rutledge at 4:26 PM
November 6, 2004
Post-Election Economic Storm Watch
Jobs - Banks are lending again, big job gains coming, Fed tightening worry.
A Second Dividend Tax Cut- Potential for +10% stock gains, $1 trillion.
The Deficit- Improving growth will increase tax revenues, reduce deficit.
Telecom- Telecom Act of 2005 will trigger massive network investments.
China- China is driving world growth but near-term slowdown is a risk.
Iraq- Elections will take place in January but violence will continue.
SHIFT HAPPENS
Major economic change is almost always the result of a change in government policy that drives a wedge between the after-tax return on one type of asset relative to others. This leads to a SHIFT in asset demands as investors attempt to rebalance their portfolios to take advantage of the return differential. The rebalancing drives asset price changes, and ultimately shows up in the creation or destruction of assets.
Formally, these asset market disturbances are identical to the temperature and pressure differentials that drive the storm systems on a weather map. It is worth remembering that economic shifts, and the risks and opportunities they represent, are always transitory.
Posted by John Rutledge at 4:31 PM
Net Worth Up 30.1% ($2.6 trillion) Since Dividend Tax Cut
Since the tax cut agreement was reached (May 20, 2003), shareholder wealth has increased more than $2.6 trillion (30.1%).
My friend Dan Clifton at the Americans for Tax Reform just sent me the following facts:
Since the closing of the market on Election Day, shareholder wealth has increased $334 billion (3%) in just three days of trading. Total shareholder wealth is now at its highest level since July 3, 2001.
Since October 25th, shareholder wealth is up $661 billion (6.2%). The rapid run up in the market has erased the market declines for the year which is up by $610 billion (5.6%) year to date.
Shareholder wealth is now $974 billion below January 20, 2001 levels.
We may get a second bite at this apple in 2005. Stay invested.
Posted by John Rutledge at 2:32 PM