Bini's Blog

Short Break

2008-01-09T23:16:00.000-05:00

I am on a break for about 3 weeks and probably wont blog for this time. Will post an update once I get back.

Shorting Time - High-Time??

2008-01-06T14:39:00.001-05:00

I have traditionally been a buy and hold investor for the last few years. However, with the experts predicting slow economic growth and/or recession for 2008 combined with the housing drop, I have been selling off my profitable positions for the last 2-3 months. I still hold some international positions that I think dont have too much downside and a good long-term outlook, and of course some laggards. I have been sitting mostly on cash and watching the markets. I added money to couple of CDs before the two rate drops we had recently - which have given me better returns than the S&P 500 in the same timeframe.

As true as it might be that timing the markets is futile, I think time has now come when I think I should try my hand at shorting/trading in the direction of general market fundamentals. I have been observing the stocks/ETFs that I'd like to short, and my general thoughts and ramblings are below.

How shorting works:
For all practical purposes, shorting is exactly the opposite of buying a stock now, and selling it in the future for a profit. Shorting is a strategy that can make you money when you think that a stock is destined to fall further. You first borrow shares from the brokerage, and sell them off. You then buy these shares back at a lower price(theoretically and hopefully) and return them to the brokerage, pocketing the difference. Keep in mind that shorting is risky, but can work great in a bear market.

I have been thinking about the following strategies:

Shorting ETFs: If I want to start with low-risk, shorting ETFs might not be a bad idea. Two housing ETFs that come to mind are iShares Dow Jones U.S. Home Construction ETF (ITB) and S&P Homebuilders SPDR (XHB). If you think the economy is headed for a tank, you can also short ETFs like the Financial Sector Select SPDR (XLF).

Buying Short ETFs: ProShares has a number of ETFs whose performance is inversely proportional to the underlying index performance. If you buy the ProShares Ultrashort Real Estate (SRS), and housing keeps going down, SRS goes up in value. Same is true in the Financial Sector for ProShares UltraShort Financials (SKF).

Shorting stocks: Shorting housing stocks seems like a good strategy at this point, considering the housing has still not bottomed, and they all have room for further downside. Shorting stocks like Lennar (LEN), Centex (CTX), DR Horton (DHI) seems like a good strategy. Graph below shows the continuous drop in these three, and from all the negativity around housing, this graph should maintain its downtrend atleast for the next 5-6 months:

Few notes:

Do not, again, do not let a trade become an investment. This is not buy and hold. Decide on a percentage and sell it off after that. I think my initial limit would be 5%.
Average over 2-3 buys and buy on up-days (for shorts) and down-days (for longs).

Voluntary disclosure: I do not hold a position in any of the securities mentioned above, but might start one soon.

Sterlite Industries India - a Strong Buy

2007-12-23T17:18:00.000-05:00

This post is dedicated to Sterlite Industries India (SLT), a leading producer of copper, aluminium and zinc with mines across India, Australia and Zambia, and more recently its forays into the highly attractive electric power generation business. I first heard about this company from a friend who runs his own blog - Rant About It, so I will give him due credit for recommending this to me, and I followed it up with my own research below.

Business:
Sterlite India is a subsidiary of the London based Vedanta group of companies. It engages in production of copper, zinc, aluminium and electric power. It ranks #3 globally for zinc production, #5 for refined copper and on the way to becoming #10 for aluminium production. Graph below shows Sterlite's metal production plan, phase 1 of which has been delivered on time and within cost.

(Source: company website)

This increase in production is facilitated by Sterlite's commitment to increase smelting capacities in planned phases. Sterlite holds excellent reserve positions with #3 in iron ore, #4 in coal and #5 in bauxite reserves. Sterlite also recently acquired Sesa, a debt-free, cash-rich company to get an entry into the highly attractive iron ore business.

The company recently announced its intentions to enter the coal-based power generation on Nov 7, through its subsidiary Sterlite Energy, with plans to aggregate a total capacity of 10000 MW. The current capacity of India's largest power generator Tata, is about 2400 MW. Plans are to complete the 1215 MW Jharsuguda commercial power project in two phases, with Phase1 to be completed by mid 2009, and Phase2 by mid 2010. This foray into the power sector positions Sterlite to capitalize on the power shortage in India, with supply outweighing demands over the last few years. Rumours have it that the company plans to offer another IPO for Sterlite Energy sometime in the future.

Financials:
Sterlite (SLT) started trading on the NYSE back in June '07, and plans to use its proceeds to fund its recent entry into the electric power market. It has appreciated 60%, since being listed. Sterlite's parent company Vedanta is listed on the London stock exchange - it started trading back in December '03, and has appreciated 460% since. Sterlite is also listed in India on the Sensex, where it has delivered returns of 4000% over the last 5 years.

- 2007 revenue and EBITDA are up 84% and 152% respectively, over 2006.
- Strong balance sheet with net cash position
- Trailing and forward P/E at 12 and 16 respectively
- Debt of $2.2 bn as of March 2007, with 65% being long-term debt
- Revenue/EBITDA graph shown below:

(Source: company website)

Positives:
- Sterlite India is positioned excellently to take advantage of Indian as well as global growth in infrastructure, with rising demand for copper, its primary production.
- With the Indian ecomony growing at 9% in 2007, and predicted to be 10% in 2008, Sterlite revenues and income should grow accordingly.
- Management only invests in debt instruments, where asset protection is guaranteed.

Negatives:
- Vedanta's revenue base is largely in US dollars. With the Indian rupee rising against the dollar, export margins could be hurt.
- Short trading history on NYSE, and no analyst estimates.
- If the global economy goes into a recession, Sterlite's returns might turn out to be lackluster.

Overall:
- 3 analysts follow SLT on yahoo finance, with a rating of "Strong buy"
- Overall factors look good for Sterlite India, and I highly recommend it - buy on dips and average over 2-3 buys

Voluntary Disclosure: I currently do not own a position in SLT, but plan to start long one soon.
Sources: Sterlite corporate website

Mutual Funds in India - Part 1

2007-12-09T17:19:00.000-05:00

NRIs who live in US and are considering returning to India at some point, should give a serious thought to investing in India through Indian mutual funds:

-Why mutual funds in India vs. Indian mutual funds in US?
# Long term capital gains taxes in India on equity schemes are 0, thats right, nil. So, considering India's GDP growth, and the fact that this growth shows a promising future, it makes sense to invest in India and take advantage of this 0% long-term capital gains taxes. Long term capital gains tax in US is 15%. Long term refers to any investment over 12 months in both countries.

# Taking a bearish view on the dollar long-term vs. a bullish view on the rupee, you are probably better off investing in funds in India where your rupee will only grow, vs. investing in dollars which probably will fall. This will leave you with a bigger portfolio when you return to India vs. trying to convert all your assets into rupees when returning to India. Five year chart of US dollar converted to Indian rupees is shown below:

-How to buy mutual funds in India?
#The very first thing you will need is a savings account - you can easily open one through either ICICI or HDFC or any other bank offering this service. If you are considering buying mutual funds through your income here, then you need an NRE savings account. If you already have income in India through any source, you can open an NRO account.

#PAN cards are becoming increasingly mandatory for any kind of investment/tax payment in India. To apply for a PAN card, you can fill out an online application here.

# Once you have this savings account, you can buy mutual funds by issuing a check or demand draft from this account, some mutual funds also allow online payments

# You can buy mutual funds through a lot of places like ICICI Prudential, Tata, Birla, Reliance etc.

-NRI Resources
# Reliance has a good guide to NRI investing here

ETF Investing - Part 3 (Addendum to your existing portfolio)

2007-11-24T14:59:00.001-05:00

This is Part3 in a multipart series exploring ETF investing. Click to read Part1 and Part2.

If you have already established a core portfolio and are looking for something that would let you get a quick exposure to say, another country, or another asset class, without taking on a significant risk, you can use ETFs. Certain scenarios include:

International Exposure:

If you own only domestic US stocks, and are looking to diversify into international markets, an ETF like Vanguard All World Except US (VEU) can be a good bet. For that matter, using only 2 ETFs like Vanguard Total Stock Market ETF (VTI) and Vanguard All World Except US ETF(VEU), you can gain a diversified exposure to the entire world's capital markets.

If you are looking for a specific region exposure like Europe or Asia, you can take a look at the Vanguard European ETF (VGK) and SPDR S&P Emerging Asia Pacific(GMF) respectively. If you are bullish on Pacific countries like Australia, New Zealand etc, you can invest in Pacific-ex Japan ETF like iShares MSCI Pacific ex-Japan (EPP).

If you are looking for country-specific exposure like India or China, you have the iPath India ETN (INP) (currently there is no ETF for India, but for all practical purposes, you can consider this ETN as a viable alternative) and iShares FTSE/Xinhua China 25 Index (FXI) respectively. However, if you think that India and China are bubbles, and would like to invest in Malaysia, South Korea or Middle East, you have the iShares MSCI Malaysia Index (EWM), iShares MSCI South Korea Index (EWY) and SPDR S&P Emerging Middle East & Africa (GAF)respectively.

Market Cap Exposure:

Market caps can be divided into three categories - Large-cap, Mid-cap and Small-cap. Lets say that you have been a cautious and conservative investor so far and have a lot of large-caps like GE, Exxon Mobil (XOM), Verizon (VZ) etc., and now you decide to move into a slightly more aggressive field like mid-caps. However, you might want to be aggressive with minimum risk exposure by diversifying into a broad range of mid-cap companies - and guess what, Vanguard mid-cap growth ETF(VOT) comes to your help. Or you might want to have 50-50 exposure to mid caps and small caps, in which case you can invest in Vanguard mid-cap ETF (VOT) as well as Vanguard small-cap ETF (VBK).

Sector Exposure:

If you are bullish on a specific sector, but dont want to risk your investment in just couple of stocks within that sector, you can choose to diversify using ETFs. If you are like me, you are probably bullish on oil and energy, and you can gain a good exposure to this sector using Energy Select Sector SPDR (XLE). If you are bullish on world technology, you can take a look at Technology Select Sector SPDR (XLK). If you are bullish on steel considering the rising demand from emerging economies, especially China, you can invest in the Market Vectors Steel ETF (SLX). If you like the prospects of healthcare companies in general, you can research more about Vanguard Health Care ETF (VHT).

Shorting Exposure:

If you are bearish on the US Economy, just like Asif Suria is, you can still make money by shorting the entire S&P using UltraShort S&P500 ProShares (SDS). This ETF works inversely proportional to the S&P 500 index on a daily basis. If you think that small-caps have had their run and its once again time for the large-caps to run, you can invest in the UltraShort Russell2000 Growth ProShares (SKK). Instead of investing in short ETFs, you can instead also short any regular ETF - however, there are restrictions on doing this within retirement accounts, and thats where the short ETFs come in handy.

Part1
Part2
Part3

Interview with SINLetter's Asif Suria - Part 2

2007-11-15T23:50:00.000-05:00

For Part 1 of this interview, click here.

Q. What is your general outlook on economy at this point in time - for the world in general and US in particular?

A. My general outlook for the US is negative. The GDP number that came out recently probably benefited more from inflation than it did from actual growth. Some market participants are speculating that the growth component was probably less than 1%. We have a huge budget deficit, a couple of wars with almost no allies, high personal debt through credit cards and HELOCs, low wage growth and still have to work off the excesses of the housing bubble (I am still seeing "cost per click" bids in the range of $13.83 to $19.53 for the keywords "no equity home loans" on Google). The only bright spot was the unusually high job growth number that came out last week. In case you are interested, the sponsored links for the search term "no equity home loans" on Google are from LendingTree.com (a division of IAC/InteractiveCorp that is hurting right now) and Countrywide Financial (CFC). I sometimes regret not rolling my Countrywide puts into new puts as I mentioned in this blog entry.

As far as the world is concerned, I believe that India and China are currently overvalued but I like Malaysia (EWM), Turkey, U.A.E, Israel and South Korea (EWY).

Q.If you were to recommend one stock for the next 5 years, which one would it be?

A. This late in a bull market I think it may be prudent to actually scale back on positions. Instead of individual stocks, I would prefer buying the water ETF PowerShares Water Resources (PHO) that consists of a group of 25 stocks that cover various water related investments ranging from desalination to bottled water. I picked this ETF for my November investment newsletter and as I usually tend to do, will add it to my personal portfolio as well. If I had to pick a stock, I would pick children's clothing retailer Gymboree (GYMB). I realized that retail stocks are extremely out of favor at this time but I think Gymboree is attractive at these levels.

Q. Do you think individual investors can beat the market over a long period of time like 20-30 years? Or should they just stick to index funds?

A. I believe if investors are ready to work hard and do their due diligence, they can indeed beat the market over a long period of time. I do not subscribe to the efficient market hypothesis and believe that you end up getting the good with the bad in a broad index fund. Index funds are useful tools for investors who have a moderate to low appetite for risk and cannot spend considerable amounts of time researching new opportunities or keeping track of their existing portfolio. They can also be useful tools for downside protection by using one of the UltraShort index funds like the UltraShort Russell 2000 (TWM) as mentioned in the September 2007 investment newsletter. As the Oracle of Omaha Warren Buffett once said "I'd be a bum on the street with a tin cup if the markets were always efficient".

Interview with SINLetter's Asif Suria - Part 1

2007-11-15T22:23:00.000-05:00

Asif Suria is the founder of SINLetter (Suria Investment Newsletter), which is a free investment newsletter with a focus on international investing. I have been a loyal reader of this newsletter for the past several months, in which he highlights two stocks every month and provides excellent research for the same. His SINLetter picks have handsomely beat S&P, Nasdaq and Dow with total returns of 114.81% since inception in August 2005. You can subscribe to SINLetter here. He has been kind enough to agree to an interview for my blog, so folks, read on ....

Q.Can you tell us a little bit about your investing background - what got you interested, how did you start?

A.I can credit my dad for my interest in investing as some of my earliest memories were of him pouring over annual reports and financial newspapers. I used to deposit dividend checks for him in my teens and more than a decade before he retired, his income investing strategy was so well executed that he could pay for almost all our household expenses with his dividend income. I had been following the market for years and started investing in mid 2001 assuming that the dot com bear market was probably getting ready to go into hibernation. After a great start where I managed to get returns of almost 30% in a six month period (call it beginner's luck), things headed south and I lost a nice chunk of change. Thankfully this experience made me read almost every scrap of material I could find about investing and the markets. I learnt from my mistakes as well as by reading the works of gurus like Benjamin Graham and Peter Lynch.

Q. What was your first stock pick, and why?

A. My first stock pick was Oracle (ORCL). I picked Oracle because I was working as a data warehouse analyst at the time and understood the tech industry and specifically the database sector best. This has been something I have relied on ever since by picking stocks of companies that I have had some personal experience with or understand well. When I bought a Seagate external hard drive, I also bought the stock of Seagate Technologies (STX) since I realized that flash was not going to replace hard drives anytime soon as many on Wall Street feared. Since I used Ameritrade as my discount broker, I also picked up the stock after noticing their fat profit margins and high insider ownership. I often found great travel deals through Priceline.com (PCLN) and in late 2002 at a $1.51 (before the reverse split), I thought the stock was a great deal too. I have since sold all three stocks but they proved to be very profitable trades.

For part 2 click here.

Africa and Middle East - the next big thing?

2007-10-31T23:24:00.001-04:00

I first heard about Africa and its economy from Nicholas Vardy when I attended the Money Show in Washington DC sometime back. Although impressed by the talk and the numbers, I somehow kept postponing blogging about it. Turns out, the African investment has yet again been endorsed by another major source - T. Rowe Price's newly launched Africa and Middle East Fund (TRAMX). Both these sources remain bullish on Africa (T.Rowe on Middle East as well), and the numbers justify their bullishness.

African economy highlights:

African economy is currently benefiting from its natural resources like oil and gas, an increase in commodity prices, debt forgiveness and increasing political stability
Excluding South Africa, the sub-Saharan African has averaged a growth of 7% over the last 5 years
Excluding India and China, Africa is growing faster than Asia
Between 1995 and 2005, African stocks showed compound annual growth of 22%, with equity growth for 2006 in Kenya, Morocco, Uganda and Botswana being 46%, 75%, 69% and 55% respectively
China has been trying to improve its relationship with Africa (from a selfish angle of-course, to get their natural resources). Trade between China and Africa soared to $55 billion last year

Middle-Eastern economy highlights:

The rising oil prices in recent years has produced strong economies in the Middle East which include countries like Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and United Arab Emirates
Real GDP growth for the GCC countries has been 6% in 2006
Governments of these countries are opening up their economies to reduce their dependence on oil prices, led by Dubai with several high-profile projects in infrastructure, financial services and tourism

T.Rowe Price Africa & Middle East Fund highlights:

The primary markets the fund invests in include Bahrain, Egypt, Jordan, Kenya, Lebanon, Morocco, Nigeria, Oman, Qatar, South Africa and UAE
Other potential markets include Algeria, Botswana, Ghana, Kuwait, Mauritius, Namibia, Tunisia and Zimbabwe
The fund has a high risk/return profile since it can invest in small and mid-cap stocks has has a relatively concentrated portfolio consisting of 30-40 companies
Financial companies represent the largest sector exposure, as commercial banks are benefiting from rapidly growing economies.
The fund also plans to focus on companies related to infrastructure spending, and also from wireless telecommunications
No-load fund with an expense ratio of 1.75%
Current NAV: $12.07, P/E: 14.9, Earnings growth rate: 12.1
Country details:

Sector exposure:

This is a high-risk/high-return investment and serves those investors whose goals are so aligned. If the African and Middle Eastern market continues to grow significantly, this investment will provide great long-term returns.

Voluntary Disclosure: I currently do not own the T.Rowe Price Africa and Middle East Fund. Various sources referred for this article include the T.Rowe Price Investor Report, Seeking Alpha etc.

WisdomTree launches small-cap Emerging Markets dividend-paying ETF

2007-10-30T20:17:00.000-04:00

WisdomTree announced the launch of a new small-cap emerging markets dividend-paying ETF yesterday, which started trading on NYSE Arca today with ticker DGS (NYSEArca: DGS). This ETF is based on WisdomTree's Emerging Markets SmallCap Dividend Index, which, according to their calculation has beaten the MSCI Emerging Markets Index by by about 9%, when backdated for the last 10 years.

Key index facts:

Top 10 countries based on weightage include (guess what, no BRICs in the top 10):

Taiwan
South Africa
Korea
Thailand
Malaysia
Israel
Turkey
Mexico
Indonesia
Chile

The maximum weight assigned to the topmost holding is just 2.68% - which means that the fund is highly diversified, which is good, since this is a risky play.
Dividend yield: 4.39%
Companies included in the Index fall within the bottom 10% of total market capitalization of the WisdomTree Emerging Markets Dividend Index as of the annual index measurement date
IBD reports that the index includes some 369 odd dividend paying stocks across 17 different countries

Key fund facts:

The fund, being an ETF, obviously tries to track the above-mentioned index
NAV as of 10/30/07: $51.50
Price: $51.40
Expense Ratio: 0.63%

This fund is probably what some high-risk investors were looking for anyway. Since the index includes only dividend-paying companies, it offers a cushion against the volatility of the emerging markets small-caps. Also the fact that an ETF by very nature is highly diversified, the risk is further reduced.

To know more about ETFs, click here and here.

Voluntary Disclosure: I currently own WisdomTree shares.

ETF Investing - Part 2 (Sample ETF Portfolio)

2007-10-28T19:24:00.000-04:00

This is Part 2 in the series of posts about ETF Investing. Click here to read part 1 about ETFs and their advantages/disadvantages. This post is dedicated to building a sample ETF portfolio.

Some things to keep in mind:
-First things first, you got to decide if you want to dedicate a part of your portfolio to ETFs or your entire portfolio.
-Think about your risk appetite
-Think about your rewards expectation

Higher risk = Higher volatility = Higher profits OR Higher losses

Sample Portfolio 1 -Aggressive (Stock ETFs constitute your entire portfolio):
If you are like me, you would want to dedicate about 30-40% of your portfolio to US, and the rest 60-70% international. Out of the 60-70% international, I would set aside maybe 20% for developed economies like Western Europe and the rest 40-50% for emerging economies, and maybe 10-20% for sector-specific ETFs. Here are the specific ETFs I would allocate money to:
1. Domestic US ETFs:

SPDR S&P 500 (AMEX: SPY) [10%]: Invests in US S&P 500 companies, usually large caps. I would put this at low risk, low rewards. Seeks to correspond to the growth and yield of the US S&P 500 index. Expense ratio 0.08%.

Vanguard Mid-cap growth (AMEX: VTI) [20%]: Invests in US mid-cap companies, I would put this as medium risk, medium reward. Seeks to track the MSCI US Mid Cap Growth Index. Expense ratio 0.13%.

Vanguard Small-cap growth (AMEX: VOT) [10%]: Invests in US small-cap companies, I would put this as high risk, high reward. Seeks to follow the MSCI US Small Cap Growth index. Expense ratio 0.12%.

2. International ETFs:

Vanguard Emerging Markets Stocks (AMEX: VWO) [30%]: Invests in stocks of emerging market economies. I would put as very high risk, very high reward. Seeks to track the MSCI Emerging Markets index. Expense ratio 0.3%.

iShares Pacific ex Japan (AMEX: EPP) [15%]: Invests in stocks of Pacific markets except Japan. Seeks to track the MSCI Pacific ex-Japan index which constitutes economies like Australia, Hong Kong, New Zealand, and Singapore markets. Expense ratio 0.5%.

3. Sector specific ETFs:

Oil and Energy - Energy Select SPDR (AMEX: XLE) [5%]: Like most investors, I am bullish on oil and energy, since these are limited natural resources with increasing demand. I would devote 5% of my portfolio to this ETF, which invests in oil, gas, energy equipment & services companies. Expense ratio 0.24%.

Technology Select SPDR (AMEX: XLK) [5%]: Technology has become or is becoming a part of every field, and considering that tech demand will continue to increase, I would also devote 5% of my portfolio to this ETF, which invests in technology economic sector - which includes hardware, software and telecom companies. Expense ratio 0.24%.

Market Vectors Steel ETF (AMEX: SLX) [5%]: Considering a bullish demand for steel especially from emerging economies, I will also devote 5% to this steel ETF. Expense ratio 0.54%.

More sample portfolios to follow.

Part1
Part2
Part3

WisdomTree: ETFs in 401K?

2007-10-09T22:51:00.000-04:00

Yesterday WisdomTree (Pink Sheets: WSDT) announced the launch of their innovative 401k platform featuring ETFs. Although ETFs have been around since the early 1990s, this is the first time they will be offered as part of any 401K plan. Under this offering, they will also make ETFs of other companies like Vanguard and iShares available along with their own. It will also feature some low-cost, no-load, no 12b-1 fees actively managed mutual funds. WisdomTree will offer two options for the 401k plan:

The "model plan" features six professionally built ETF portfolios depending on the participant's risk tolerance appetite and target retirement date. It includes ETFs from WisdomTree, Vanguard and iShares as well as some actively traded mutual funds.
The "Custom plan" lets an investor make his own choice with available ETFs/funds and create his own customized portfolio.

About WisdomTree: WisdomTree offers ETFs that are fundamentally weighted as opposed to others that are market-cap weighted. The investing principle behind the former being that ETFs should constitute weights of companies in an index depending on their core fundamentals like earnings and dividends vs. the investing principle in the latter which constitutes stocks based on their market cap.

It seems to me like WisdomTree has the first mover advantage in bringing ETFs to 401K, when the popularity of ETFs has soared in recent years. Also smart is the move to offer Vanguard and iShares ETFs as well as some actively traded funds along with its own ETFs to appeal to a broader audience. What remains to be seen is how and when corporates start offering this plan to their employees.

For the entire press release, click here.

Voluntary Disclosure: I currently own WisdomTree (Pink sheets: WSDT) shares.

Loan $25 to fulfill dreams and build livelihoods through Kiva.org

2007-10-06T23:45:00.000-04:00

Recently, I came across Kiva, a non-profit organization, which facilitates connections between borrowers (who are owners of unique small businesses in developing countries) with lenders . Borrowers come from impoverished countries around the world, who are working class entrepreneurs in need of money. Kiva partners with microfinance institutions around the world, which in turn choose these qualified borrowers. You can only lend $25 to a borrower, and they have enforced this limit to curb the huge inflow of lenders that they are currently experiencing. Kiva includes some interesting borrower profiles, excerpts below:

Cambodia: Mrs. Yab Valin is a widow with 4 children, 2 sons and 2 daughters. She learned to sew clothes from the trainer in the village, and then she started to sew for the villagers, going from one village to another. Her sewing improved every day.
Then in 1992, she began her business in sewing clothes at home. She has expanded her sewing business by buying more sewing machines and employing the young ladies in her village. Her youngest daughter also sews clothes at home.
This is Mrs. Yab's first application for a loan from MAXIMA. She requests a loan of $1,000 to buy one more sewing machine for her employee.
Azerbaijan: Xidirov Rovshan was born in the city of Sumqayit. He is 37 years old and the father of two children. He currently lives with his family in Sumgayit, situated in the eastern part of Azerbaijan. He started his business in 2002 selling perfume and nail varnish. With this business, he earned little money. The money was enough for only some of his family's basic needs. He had difficulty covering his family's other needs including medication, clothes, schooling etc. At this moment, his best clients are young ladies who work at offices. He needs $600 to buy silver goods and merchandise in order to have a bigger inventory and be able to offer clients greater variety and quality. With the income from his business, he will be able to support his children’s studies and help with the family’s expenses. He will repay the loan within 12 months.

Again, remember this is only a loan, and will be repaid back - I have seen repayment terms of 12-14 months. You can loan money through your credit card using Paypal, and can choose to receive periodic updates about the business through Kiva. Once the loan is repaid, you can choose to either take your money out or loan it to a new business. The site currently lists 14 defaulted borrowers vs. 3105 who have paid back in time.

Would you consider this as a good way to give back and encourage true entrepreneurial spirit at the same time? Would you consider this as a good investment in society at the same time helping someone stride towards economic independence?

ETF Investing (Part 1)

2007-09-22T19:41:00.000-04:00

This is the first in a series of posts that explores investing in ETFs. I am sure most of you have heard about ETFs (Exchange Traded Funds) - which are the hottest and fastest growing financial instruments of recent times. Almost every few days I hear about the launch of a new ETF, the most recent one that caught my eye was the Nuclear Energy ETF by Market Vectors. Some of the early (and most popular) ETFs include the PowerShares QQQQ (based on Nasdaq 100 index), AMEX SPY (based on the S&P 500 index) and the AMEX DIA (based on the DJIA). Yahoo Finance today reveals a total of 565 ETFs trading in US markets.

What are ETFs?
ETFs are like mutual funds, or more specifically index funds, that trade like stocks, on the open markets. However, unlike mutual funds, the price of an ETF fluctuates throughout the day based on supply and demand. ETFs combine the diversification of mutual funds with flexibility of stocks. Interested in owning the entire US stock market? - you have the Vanguard Total Stock Market ETF (AMEX: VTI) at your disposal. Bullish on technology? - you have sector specific ETFs like the Morgan Stanley Technology ETF (AMEX: MTK). Want to allocate a bigger slice of your portfolio to emerging markets ? - go for the iShares MSCI Emerging Markets ETF (AMEX: EEM).

How do ETFs work?
In order to understand the tax-advantage of ETFs, it is very important to understand how they are created. The big mutual fund companies own a lot of individual shares of different companies as underlying part of mutual funds. So, if they decide to establish say, one unit of the S&P500 ETF, they go an authorized entity with a basket comprising of individual shares of the S&P 500 index and the authority redeems these shares for one unit of the ETF. Of course, these baskets are typically quite huge, and get redeemed typically for 50,000 or more units of the ETF. These ETF units are then floated on the open market for others to buy and sell.
Redemption is exactly the reverse - an S&P 500 ETF can be redeemed by the ETF company for an equal number/proportion of stocks.

Advantages of ETFs

Cost: Probably the biggest advantage of ETFs is the cost factor. Since ETFs are passively managed, their expense ratios are very low compared to traditional mutual funds. Of course, you do have to take the trading commissions into account since you buy ETFs through a brokerage account. However, trading commissions can be zero these days if you have a Zecco brokerage account.
Tax advantage: Mutual funds typically are actively managed, and result in large turnovers of the underlying stocks, which result in unnecessary capital gains taxes for all individuals, irrespective of whether the individual chooses to sell his own fund. Due to the very nature of ETFs (read above for how they are created and redeemed), the capital gains taxes need to be paid only at the final sale of the fund.
Diversification: ETFs are a handy way to create a diversified portfolio consisting of different indices and hence mitigate the risk of owning an individual stock.

Where can I buy ETFs?
Since ETFs trade like stocks on the open market, all you need is a brokerage account. You can discount brokerage accounts with very low or zero trading commissions at brokerages like ScottTrade, Izone, ShareBuilder, FirstTrade and Zecco (free).

ETF Resources:

ETF Center at Yahoo Finance
ETFConnect.com
Morningstar ETF section

Stay tuned for more posts on ETFs about portfolio allocation, comparison of the different fund families and more.

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Part2
Part3

Asian economies - growth, inflation, interest rates

2007-09-09T19:34:00.000-04:00

Now with 6.5 sessions remaining until Fed's announcement about key interest rates, I came across an interesting table of stats from Matthew's Funds Weekly Update showing the growth rate, inflation and key central bank interest rate in some key Asian economies compared with that of the US.

As expected China and India continue to lead the growth rates at 11.9% and 9.3% respectively, with inflation at 5.6% and 3.9% respectively. In order to curb inflation, the central bank in these two countries have hiked their interest rates by 0.9% and 0.75% respectively since 08/06. This contrasts starkly with the growth rate of 1.9% in US and no change in key interest rate since 08/06 - it has held steady at 5.25%. Thailand and Indonesia are exceptions to interest rate/inflation relationship - with these two countries showing a positive inflation growth of 1.1% and 6.5% respectively, but a fall in interest rates by -1.75% and -3.5% respectively.
The interest rates in Indonesia have been lowered to account for slower price increases and fall in inflation from 18% to 6.5% since fuel subsidies were scaled back in 2005. The military coup in Thailand has weighed in on the economy and inflation and money supply have been going downwards since mid-2006.