Multi Currency Portfolio Update July 2007


Multi currency portfolios have recovered as shown here in the latest review of the five multi currency portfolio’s we have tracked since November 1, 2006 (nine months).

Portfolios 2007 Apr 30 June 1 June 28 July 10 July 20 July 27
Swiss Samba 26.60% 41.46% 44.80% 45.22% 45.84% 44.47%
Emerging Market 32.46% 40.38% 54.31% 62.77% 67.67% 74.67%
Dollar Short 30.79% 31.84% 33.81% 38.85% 40.31% 37.90%
Dollar Neutral 25.58% 32.26% 37.64% 38.59% 38.07% 37.14%
Green 135.11% 170.33% 178.28% 201.14% 214.15% 197.01%

Though most of the portfolios peaked during the month and have receded from mid month highs, all the portfolios remain near the highs of last month.

The drop from mid month shows reflects that yesterday was the worst day in 2007 for emerging markets. Bad news about US housing markets and lender concerns finally worried investors enough to shift their focus to risk aversion. This caused a sharp setback in stock markets all over the world. Emerging-market bonds denominated in local currencies and emerging-market currencies also suffered weakness.

Most media report falling markets.

USA Today’s lead article in the Money section read: “ NEW YORK (AP) — Stocks extended their steep decline Friday as investors already anxious after the second-biggest market drop this year digested a stronger-than-expected read on the economy. The Dow Jones industrials fell more than 100 points. Wall Street shuddered Thursday amid worries over the U.S. mortgage and corporate lending markets, sending the Dow Jones industrials down by as much as 450 points before it closed with a deficit of 311. Investors globally took flight from equities, shifting cash into safer investments.”

The Wall Street Journal’s top story began: “STOCKS DECLINED again after a big sell off in the previous session, as credit worries continued to dog financial markets. The Nikkei 225 slid 2.4% and South Korea ‘s Kospi fell 4.1%.”

The BBC confirmed the weakness in its lead article that said: “ U.S. stocks sink again despite GDP . Volatility sweeps global markets. Stock market volatility is being seen around the world. US stock markets have dropped sharply, extending a global share sell-off amid fears about the effect of higher interest rates on the world economy. There are concerns that higher rates will hit corporate profits and takeover deals, and dent consumer spending. European markets were also jittery, with London ‘s share index closing down for a fourth day and ending at its lowest level since the middle of March. Analysts have warned that markets could remain volatile for a number of weeks.”

In short, economic concerns create worries that interest rates will rise and affect corporate profits, thus pushing earnings down. The same concerns about rising interest rates dampen bond markets as well.

Yawn. Do not let the press get to you!

Over the past two years we have already seen this happen twice, with prompt rebounds. This gives us a clue on what could be coming. We have learned that such set backs can be fast and sharp (so we should not be surprised to see further drops), but those who invested in longer term fundamentals cleaned up when by seeing these drops as buying opportunities.

This adjustment may indeed last longer than the last two. Yet long term, the global economy still has innumerable distortions (areas of opportunity). There is still plenty of long term demographic potential (more opportunity). Potential for increased productivity from globalization creates even more odds for long term profit.

We should be a bit surprised that the one portfolio that has not dropped since mid month is the Emerging Market Portfolio. The next few days may show a differing picture but, there are three lessons to be learned now from this emerging market strength. Let’s look at that portfolio to understand these three lessons.

Portfolio Invested Value
  Nov. 1 2006 July 27, 2007
Jyske Invest Chinese Equities 50,000.00 81,933.90
Jyske Invest Eastern European Equities 50,000.00 62,881.88
Jyske Invest Indian Equities 271.50 50,000.00 63,001.84
Jyske Invest Far Eastern Equities 30,000.00 44,530.27
Jyske Invest Turkish Equities 89.20 20,000.00 32,775.71
Total Portfolio 200,000.00 285,123.60

Borrowed Currency Interest Rate Repayment Accrued Interest
Nov. 1, 2006 Borrowed   July 27, 2007  
$100,000 CZK 3.875% $107,352.13 $3,096.81
         
Total Liabilities     $110,448.94  
Total Portfolio Net Value     $174,674.67  

$100,000 invested November 1, 2006 was worth $174,674.67 on July 27, 2007.

Here are the three lessons.

Lesson #1: Emerging markets have strong fundamental stability. The reasons behind the growth of emerging markets (growing global population, greater productivity and greater demand) have not disappeared. The desire to have more abundance for everyone remains. The need for business to integrate its activities with the environment have never had more pull.

The global economy needs emerging markets to emerge. Business needs the labor available in emerging markets. Society needs to help the poor become more productive and hence wealthier. Consumers need the lower prices available through emerging countries to offset the in growing inefficiency of governments worldwide (especially the US ).

Lesson #2: Problems create good value. Turkey is the great example in this portfolio. This secular nation has been riddled with political concerns. Multi Currency updates have continually pointed out that this tension creates good value in the Turkey stock market. $20,000 invested in the Istanbul exchange last November is now worth $32,775.31. Please give me more problems like this!

We may indeed see more political struggles. The leader of the new party in Turkey ’s parliament, the MHP, said his party will be present in the parliament during the coming presidential election. This means the ruling AK Party will have enough assistance to nominate Foreign Minister Gül as its presidential candidate. The secular CHP will object strongly. Suggested worst-case scenarios include military intervention since the military has seen itself as the guarantor of a secular Turkish state since Mustafa Kemal Ataturk formed the Turkish Republic with major reforms that created a modern, democratic and secular nation-state in the 1920s.

The rub is that the AK Party places a lot of importance on Islam in its party ideology. Opponents assert that it is an Islamist party that will subvert the framework of the secular constitution. This tension has been in place since the AK came to power in 2002. Yet through all this the economy has improved and the stock market risen. In other words all the political nonsense has just been noise.

Gül is not liked by the military but investors have not fled. Jyske Bank says in a recent analysis, “There is no reason to panic – we are bullish for the long term and the AK party is a guarantee of continuing reforms, just as it has been for the past five years.”

Lesson #3. Forex potential loads extra value into portfolios. The emerging market portfolio is 100% leveraged with a Czech koruna loan. This loan has created a 7.35% drag on the other wise excellent appreciation for the last nine months. In other words the portfolio borrowed $100,000 worth of koruna. The loan payoff is now $107,350.

Yet the koruna is under pressure and creates an extra area of added opportunity in this portfolio. The Czech central

bank just raised interest rates by 25 bp to 3.0%. The inflation forecast for the rest of this year and 2008 are up. Currencies tend to drop in line with inflation differentials. This means if Czech inflation rises faster than inflation in the US we are more likely to see the koruna drop versus the US dollar. Such a drop will add more profit onto this already very successful portfolio.

Our lessons from tracking these portfolios over the last two years suggest that we should watch markets carefully but be optimistic. Protect against short term realignment but use them as buying opportunities to find value as well.

Until next update, good global investing!

Gary

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