Tags: Report: | U.S. | Economy | Nosedive

Report: U.S. Economy To Nosedive

Monday, 21 March 2005 12:00 AM

1. Report: U.S. Standard Of Living Set To Nosedive
2. ETFs Allow Focus On Long-Term Goals
3. Caution On U.S. Investment Abroad
4. Fed: Foreign Savings Fueling Our Debt
5. Canadian Oil And Gas Trusts Look To U.S.

1. Report: U.S. Standard Of Living Set To Nosedive
2. ETFs Allow Focus On Long-Term Goals
3. Caution On U.S. Investment Abroad
4. Fed: Foreign Savings Fueling Our Debt
5. Canadian Oil And Gas Trusts Look To U.S.

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1. Report: U.S. Standard Of Living Set To Nosedive



2. ETFs Allow Focus On Long-Term Goals
 
While many financial advisers consider Exchange-Traded Funds (ETFs) a mediocre investment, others insist these indexed funds can free up time, enabling investors to focus on major portfolio decisions and long-term goals.

A CBS MarketWatch report cites many financial experts who favor the low costs, tax efficiency, diversification and predictability they get with ETFs. They are especially drawn by the funds' low expense ratios. ETFs' lower fees benefit both investors and advisers.

"It's easy to explain the cost advantages because it's simply a matter of comparing expense ratios," says Herb Morgan, head of Efficient Market Advisors in San Diego, Calif.

While domestic stock mutual funds average fees of 1.5%, ETFs generally charge 0.43%, according to Morningstar.

Also, the "in kind" creation and redemption processes behind ETFs cuts costs relative to traditional funds, Morgan says. And rather than pay a fund company directly, ETF shares are traded on an exchange. In turn, the ETF isn't required to buy and sell stocks to meet investor purchases and redemptions.

It follows that ETFs don't need to keep cash surplus for redemptions since they are usually fully invested. In contrast, cash-laden funds often underperform in rising markets as their "cash drag" weighs on returns.

And Morgan says there's "potential to add incremental value to client portfolios vs. taking one end-of-day price" since ETFs trade throughout the day and share value can fluctuate during market hours – as opposed to mutual fund shares, which are priced just once at day's end.

3. Caution On U.S. Investment Abroad

A bearish forecast on U.S. dollar is making international equities markets more attractive to American investors.
 
But Clive McDonnell, a Standard & Poor's European equity strategist, says that while bargains do exist abroad, the weak dollar makes it dangerous to invest in foreign companies with high exposure to the American market.

McDonnell says Europe is seeing a major influx of U.S. dollars because there is similar earnings growth on either side of the Atlantic, a weak dollar means returns for U.S. investors putting money into international equities. Since 2001, Americans have been investing more overseas than foreigners have been spending here, but the past 12 months have seen dollar weakness greatly accelerate outflow.

"There's the potential positive gain from a weak dollar," says McDonnell. "Basically, if you invest one U.S. dollar overseas and the exchange rate is 1 euro to $1.20, and then the dollar depreciates so that it moves to $1.30, although the value of the company is unchanged, U.S. investors who sold their shares would get back more in dollar terms."

However, he adds that it would be foolish to invest solely on the basis of exchange-rate weakness. Standard & Poor's recommends placing 20% in overseas equities.



4. Fed: Foreign Savings Fueling Our Debt

The Commerce Department recently announced that the current-account deficit shot to a record $665.9 billion last year – and that sent the dollar tumbling even further. The obvious fear was that America dependence on foreign money to fund its current-account and budget deficits would inevitably lead to a dollar crash.

But top Federal Reserve officials have another theory.

According to Business Week Online: "[Fed officials] argue that the swelling current account deficit is not the result of U.S. profligacy on the part of a tax-cutting President Bush and import-happy U.S. consumers.

"Rather, the gap – which consists mainly of the trade deficit but also includes interest, dividends, and other financial payments – stems largely from what Fed Governor Ben S. Bernanke calls a ‘global saving glut.' The excess savings have their origins in both slow-growing industrial economies such as Japan and Germany and fast-growing emerging markets like China and India."

They assert that accumulated global savings are "holding down interest rates in the U.S., freeing the federal government to run big budget deficits and allowing debt-laden consumers to spend more." If that's true, worries of a foreign investment pullback and impending dollar collapse are greatly exaggerated.

This carefree attitude to the trade deficit got a boost on Mar. 15, when the Treasury Department reported that foreign financiers bought a net $91.5 billion worth of U.S. bonds, stocks and other financial assets in January.

According to Business Week, that was up sharply from $60.7 billion in December and was the second-highest level ever. More important, net foreign capital inflows dwarfed the $58.3 billion trade deficit that the U.S. accrued in January. And the bulk of the buying came from private investors – not foreign central banks.

The global savings surplus is evidenced by the rapidly aging societies of Japan and Europe, whose workers build up savings for retirement but face a dearth of investment opportunities in their own slow-growing economies. They choose to invest abroad, especially in the United States, where the breadth and dynamism of financial markets is appealing.

5. Canadian Oil And Gas Trusts Look To U.S.
 
Intense competition for U.S. oil and gas holdings has Canadian companies heading south in search of cheaper assets in the form of American properties and corporations.
 
Reuters reports that Canadian Royalty Trusts, the tax-advantaged, dividend-paying energy companies discussed at length in NewsMax's Financial Intelligence Report "Royalty Trusts Pay High Yields," are becoming formidable bidders against their American counterpart publicly traded exploration and production companies with a mandate to acquire and exploit assets.

Canadian royalty trusts now number more than 30, up from just a handful a few years ago. Buoyed by tax breaks that provide a competitive advantage over typical corporations, they mirror the trend in the United States, where energy companies have created master limited partnerships due to their tax advantages.

The Canadian trusts are defined by their perpetual need to increase cash flow so they can continue to pay dividends to their large retail investor base. That becomes difficult as production from existing assets declines, driving them to acquire new ones, according to experts.

Many believe it that once a Canadian royalty acquires a U.S. holding, the sky's the limit.

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Monday, 21 March 2005 12:00 AM
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