What Is Saudi Aramco?

Oil was first discovered on the Saudi Arabian Peninsula in Bahrain in 1932 and in Saudi Arabia in 1938. A succession of US oil companies explored and found oil, sold parts of their interests and found oil in Dubai as well. In 1949, the Saudi king threatened to nationalize oil facilities and gained a 50-50 share of profits. The company continued to find more oil and grow over the years.

In 1973 the USA supported Israel in the Yom Kippur War and Saudi Arabian government retaliated by “acquiring” a 25% “participation interest” in Aramco followed by 60% in 1974 and all of the rest in 1976. Aramco managed operations until the late 1980s at which time the entire operation became the Saudi Arabian Oil Company. This is the real name of the company today despite the IPO being referred to as Saudi Aramco.

This company became the world’s largest in 2005 when its estimated market value approached $800 billion. This month as the shares have risen in value to about $2 Trillion, the company is again the largest in the world, surpassing Apple by a factor of two.

How Can You Invest in Saudi Aramco?

Saudi Aramco trades on the Saudi Arabian stock exchange, the Tadawul. Unfortunately, to invest directly in Saudi Aramco, you need to buy it on the Tadawul exchange. And, according to U.S. News, individual foreign (non-Saudi) investors will not find Saudi Aramco available outside of that exchange.

Aramco decided in November that it would not list its IPO shares on a major U.S. exchange, making it difficult for the average U.S. investor to gain access to the stock. Tadawul has strict rules about foreign investment. Qualified institutional foreign investors must have at least $5 billion in assets and at least five years of investing experience to be eligible to trade on the Saudi exchange. Prior to 2015, foreign investors were prohibited from trading on the Tadawul exchange entirely.

For the time being, the only alternative for the normal investor is to buy shares of an ETF that tracks a basket of Saudi stocks (which will soon include Saudi Aramco). One example is the iShares MSCI Saudi Arabia ETF but there are others as well. This approach dilutes your exposure to Saudi Aramco but, for now, is the best alternative for most investors.

Is Saudi Aramco a Good Investment?

The Saudi Arabian Oil Company makes lots of money as the country sits on a vast pool of oil and natural gas. However, there is a long history dating back to 1949 of the Saudi government (king) finding reasons to increase the government’s share until foreigners are excluded.

Market Watch looks at investing in Saudi Aramco and mentions the ETF approach. They also note the risk of investing in Saudi Arabia by quoting from the IPO prospectus.

The interests of the Government, the Company’s controlling shareholder, may differ from the interests of the Company or the Company’s minority shareholders. The Government will continue to own a controlling interest in the Company after the Offering and will be able to control matters requiring shareholder approval. The Government will have veto power with respect to any shareholder action or approval requiring a majority vote, except where it is required by relevant rules for the government.

And, because Saudi Arabia is a monarchy, the rules for the government can be changed at any moment by the king.

This having been said, Saudi Aramco makes a lot of money and buying shares of an ETF that tracks the company as part of a basket of Saudi stocks is a reasonable way to diversify your portfolio. Just don’t put everything that you have into this investment and wake up some morning to find out that the Saudi Royal Family needed more money and “acquired” your investment!

For all the concerns about slowing US economic growth, there’s consensus that stocks can continue to rise. But for the best returns, strategists and portfolio managers have indicated they’ll look elsewhere.

Neil Dwane, portfolio manager and global strategist at Allianz Global Investors, thinks that the heated run-up to the 2020 election is likely to weigh on prices.“While the United States has offered investors strong returns for many years now, the country will likely spend much of next year grappling with growing political uncertainty,” he wrote in an op-ed for CNN Business. “The real investment opportunities in 2020 may very well be found abroad.”

Our belief is that the very partisan election campaign will not adversely affect the stock market so long as earnings continue. However, the now-certain-to-be-long-term trade war, the ever-increasing US debt, and a generally slowing global economy are likely to affect the U.S. market. No matter why it will happen, the U.S. market is likely to slow down and well-chosen investments elsewhere will flourish.

Where to Invest outside of the USA

In our recent article about safe investments in an uncertain world, we published a map of the world from OECD, color-coded for expected economic growth. The only nation in the Western Hemisphere predicted to experience better than 3% growth is Colombia. In Europe, only Spain, Poland, and Turkey are likely to grow faster than 3%. And all of the 4%, 5%, and better growth rates are expected to occur in South and East Asia. India stands out with a predicted rate of economic growth greater than 6%.

The ABC (anywhere but China) movement is likely to continue and countries like Indonesia, Vietnam, and India are likely to benefit. A good place to look for cues about where the smart money is going is the World Bank’s yearly report on foreign direct investment. Although the world’s two largest economies, The U.S.A. and China receive the greatest cash inflows, the table that the World Bank publishes each year gives you a good idea of where else investment capital is going and if the trend is up or down.

How to Safely Invest Outside of the USA

Since you probably do not speak many foreign languages and do not have someone “on the ground” in Indonesia, India, or anywhere else in South and East Asia (or Colombia, Spain, Poland, and Turkey), you need a safe way to invest your money. And, you need to be able to do the same sort of fundamental analysis that you do when investing in stocks in the USA. The route that many investors take is to purchase American Depositary Receipts. As Investopedia explains.

An American depositary receipt (ADR) is a negotiable certificate issued by a U.S. depository bank representing a specified number of shares or as little as one share investment in a foreign company’s stock. The ADR trades on markets in the U.S. as any stock would trade.

ADRs represent a feasible, liquid way for U.S. investors to purchase stock in companies abroad. Foreign firms also benefit from ADRs, as they make it easier to attract American investors and capital without the hassle and expense of listing themselves on U.S. stock exchanges. The certificates also provide access to foreign listed companies that would not be open to U.S. investment otherwise.

The best route is to only purchase level three ADRs. They are subject to full SEC reporting requirements so that you can just as easily analyze them as you would a US stock.

As an example, follow this link to see Indonesian ADRs. It is of note that only one ADR of an Indonesian company trades on the NYSE. As a fixed line Telecom Company this is not an internationally famous company but it is one that will grow as the Indonesian economy expands. You can also check out ADRs for any of the other nations with higher projected growth rates in you are wondering where to invest outside of the USA.

U.S. stock indexes slid Tuesday after China’s devaluation of its currency signaled growing worry about slow growth from one of the world’s biggest importers of raw materials.

The onshore yuan on Tuesday posted its biggest one-day loss in two decades. A weaker yuan could hurt the competitiveness of firms outside China by making their goods and services relatively more expensive, while companies that generate sales in China could find revenue generated in yuan is worth less in their home currency.

The bosses of the managed capitalism economy have often seemed infallible as cheap labor attracted foreign investment and produced cheap and profitable exports for decades. However, we have often compared China to Japan of the 1980’s when the Japanese seemed ready to take over the world. A glut of hidden debt took down the Japanese economy and sent it into two decades of deflation. If this is the death of the Chinese economic miracle hidden debt may be the culprit for China as it was for Japan.

Chinese Debt

Many people know that China holds a few trillion in hard currency reserves. However, many businesses in China have debts denominated in U.S. dollars and not yuan. The Financial Times reports that China’s dollar debts come under pressure as the yuan devaluated.

China’s surprise devaluation of the renminbi has stunned markets and stands to escalate a regional currency war. Further, while a weaker currency is seen helping bolster China’s sagging economy, any macro benefits must be weighed against costs. These mainly fall on those domestic companies and banks that have dollar-denominated debt and face the prospect of paying them back via a weakening renminbi.

Among the broader market implications looms further downward pressure on commodity prices and on blue-chip equities in the developed world, as multinational companies face the prospect of slowing demand from China and a firmer US dollar.

A big and more immediate risk, however, is that investors and other emerging market countries will expect further weakness in China’s currency.

It also remains to be seen whether the higher debt servicing costs for Chinese companies and banks that have borrowed dollars sparks a massive unwind of such loans, pushing the dollar sharply higher.

If this downward slide of the yuan accelerates it could we spell the death of the Chinese economic miracle.

What Is the End Result?

When a country is in trouble and takes steps to devalue its currency it can become a self-fulfilling prophecy as the market expect repeated devaluations and drives the currency down. The world is seeing a Forex world of competitive devaluations. The end result of the yuan devaluations could be an accelerated Forex race to the bottom which China will not necessarily win. The problem for China is that it needs to build up local consumption and not rely on exports for continual growth. MarketWatch says that this move ramps up the risks for investors and the Chinese economy.

The fault line in China’s struggling economy has just extended from its equity to its currency markets. With all eyes focused on Beijing’s epic, state-orchestrated stock-support program, the central bank on Tuesday surprised markets with an almost 2% devaluation of the yuan, the largest since 1994.

Investors now need to assess whether China is ready to embark on a new yuan weakening cycle. While this may boost exports and give the economy a lift, it is also a potentially hazardous path as authorities juggle potential capital flight and corporates holding substantial foreign currency debt.

The flight of capital out of China may accelerate and seal the death of the Chinese economic miracle.

Is This the Death of the Chinese Economic Miracle? PPT

Colombian Economy

Bloomberg Business writes about the slowest growth since 2009 in Colombia.

Central bank Governor Jose Dario Uribe said he expects the economy this year to post its slowest expansion since 2009 as prices for Colombia’s biggest export tumble on global markets.

Calling an estimate of 3 percent growth “reasonable,” Uribe said the central bank’s technical staff also may cut its 2015 forecast from 3.1 percent or 3.2 percent, which is down from 3.6 percent earlier in 2015. While 3 percent would be the weakest since 2009, economists expect Colombia’s expansion to beat the regional average for a fifth straight year.

“We’re in a transition period from an economy that was propelled by the rise in prices of oil and other commodities and so Colombia has to adjust,” Uribe told reporters in Cartagena.

With oil accounting for around half of Colombia’s exports and about 17 percent of government revenue, a 50 percent drop in crude prices has pushed the peso to an 11-year low while the current account gap may end 2015 at a three-decade high.

This sounds pretty grim unless you think in terms of attractive stocks in weak markets and look at Colombian banks or oil companies that will appreciate in value when the price of oil goes back up. Like other nations hurt by sluggish economies Colombia is looking to improve its infrastructure and therefore its competitiveness along with helping the economy with stimulus measures.

Weak Economy but Strong Banks

Fitch ratings of Colombia’s largest banks have been upgraded or affirmed across the board following a recent review, according to Business Wire.

Fitch Ratings has completed its review of Colombia’s five largest banks and their related entities. As a result of the review, the ratings for Bancolombia and Banco Davivienda have been upgraded and the ratings for Banco de Bogota, BBVA Colombia and Banco de Occidente have been affirmed. The Rating Outlook for the ratings is Stable.

The five banks considered in this peer review have market shares between 7% and 22% by assets in the Colombian banking system and together comprise about two thirds of the system’s assets. All of them are universal banks and their total assets range from USD14 billion to USD62 billion. The top three banks (Bancolombia, Bogota and Davivienda) have grown inorganically in the past few years and have a significant presence in Central America.

This information supports our contention that there are attractive stocks in weak markets.

How to Invest in Colombian Banks

Bancolombia preferred stock is available as an American Depository Receipt via Bank of New York Mellon.

Bancolombia – Pref CIB     05968L102

A Bancolombia ADR currently trades for $38.64 a share and pays a 3.47% dividend. It is trading near the bottom of its 52 week range ($36.23-$66.78). Until the last year when oil prices fell this stock traded from the low 50’s to 70. As with all investments, do your homework before risking you money. The risk in Colombian bank stocks is that the economy could get worse if oil does not go back up and the promised infrastructure improvements could fail to materialize. However, oil goes back up so will the Colombian peso and the prices of Colombian bank stocks!

Attractive Stocks in Weak Markets PPT

In an effort to get domestic companies booking huge foreign earnings to invest more in the U.S., President Barack Obama will propose a one-time tax on the firms’ overseas profits to help fund the repair of the country’s crumbling transportation infrastructure, the Associated Press reported Sunday.

The White House apparently believes it can drum up bipartisan support for the proposal, part of the president’s $4 trillion budget for the 2016 fiscal year, by using the tax revenue on construction projects in almost every congressional district. The president is scheduled to send the proposal to Congress Monday.

Spread out over six years, the public-works program would dedicate $478 billion to repair and upgrade bridges, highways and transit systems all over the U.S., AP reported. About one-half of that money would come from taxing the estimated $2 trillion in American corporate earnings amassed abroad at 14 percent, a much lower rate than the 35 percent tax imposed on profits in the U.S.

This proposal aims to deal with two issues. One is that many US companies hold profits offshore both to avoid US taxes and to more efficiently fund offshore ventures. This tends to increase offshore investment by US corporations and reduce their investments in the USA. The second issue is that the USA could use more than a little infrastructure repair. And that repair would be done by American workers giving a boost to the middle class who get bypassed when companies produce and invest offshore.

Investing in Public Works

The tax on foreign earnings proposed by the president is supposed to pay for public works programs such as fixing bridges and highways as well as mass transit. The Boston Herald provides details.

Obama’s six-year $478 billion public works program would provide upgrades for the nation’s highways, bridges and transit systems, in an effort to tap into bipartisan support for spending on badly needed repairs.

If this indeed comes to pass investors should look for where to earn a profit from cement poured and construction equipment manufactured.

Open for Negotiation

The president is required by law to submit a proposed budget each year. This budget is for the 2016 fiscal year starting this coming fall. When one party controls the White House and the other controls congress all budget issues are subject to negotiation. This includes the onetime tax on overseas earnings. As the Wall Street Journal notes, linking the tax to infrastructure improvements and repair is an attempt to find common ground.

Mr. Obama wants U.S. companies to pay a 14% tax on the approximately $2 trillion of overseas earnings they have accumulated, a White House official said Sunday. They would face a 19% minimum tax on future foreign profits. Companies could reinvest those funds in the U.S. without paying additional tax.

In making the pitch in his 2016 budget plan due Monday, the president is elevating two issues that previously gained traction with lawmakers of both parties: changing the tax code on overseas profits and raising spending on highways and transit systems.

If the proposal eventually becomes law it will result in a one-time tax on foreign earnings and a huge stimulus to the middle class with jobs related to infrastructure improvements.

Tax on Foreign Earnings DOC

Tax on Foreign Earnings PDF

Tax on Foreign Earnings PPT

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A Long Term Investment Strategy

There are lots of potentially viable stock market investment strategies. But, any strategy that you use when you invest your money should fit your own circumstances and your own plans. In this instance we want to look at the scenario that we described at the start. You have paid off credit card debt, purchased a home and put enough money in the bank to cover short term emergencies. You are busy building your career and your family and do not have time to constantly trade stocks, especially foreign stocks that may require more time for sound fundamental analysis. What we are aiming at is picking several long term investments with strong potential for comfortable returns on investment (intrinsic value) and security against financial loss (margin of safety).

Timing and Due Diligence

Keep the number of investments that you need to track at five or fewer. You should at least check stock prices of your investments once a week and you should read quarterly and annual reports on all of your investments. It is basic and in fact critical that you understand how a company makes money and intends to continue to make money. And it is critical that you pick investments with a margin of safety in the form of cash reserves, strong market sector position and a currently reasonable stock price. There are lots of really promising companies and many of these have already been bid up by the market. Do not jump in and invest your money on a stock that has run way up in price only to see thirty percent of your investment disappear as the stock corrects. You can run endless stock screens on sites like Google Finance to find stocks with attractively low price to earnings ratios and you can look at what these companies do and how their stock prices track over the years. As you want to know and fully understand how a company makes its money it may be best to start out with companies that sell products and services about which you have some expertise. Doctors, nurses and pharmacists certainly know about pharmaceuticals. Anyone working in the oil sector knows about big oil companies or oil exploration companies. Any anyone working in transportation has insights in that sector. Take your time. Start slowly. Audit your results and modify your approach based on your degree of success or failure. And remember that when you invest your money you have a set of long term goals. Always invest with the end result in mind.

Invest Your Money DOC

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Gold, Fiat Money, and the Price of a Quart of Milk

Investing in gold was a great idea for most of the first ten years of the 21st century. It was also a great idea for much of 1970’s when inflation was rampant. Gold bugs firmly believe that paper money will eventually become worthless and as of a year or so ago were predicting $3000 an ounce gold. In 2011 gold surged over $1,800 an ounce and today goes for around $1,200 an ounce. As the US stock market surges the prospect exists of an ounce of gold going for less than $1,000 an ounce. The demise of the US dollar is a recurring prediction. However, the US Federal reserve promises to cut back on the $85 Billion a month quantitative easing stimulus program. When this happens interest rates will rise in the USA and the dollar will trade higher against foreign currencies. And gold will go into a tailspin. Gold bugs continually talk about the purchasing power of an ounce of gold. Well, the purchasing power of gold has fallen by a third in two years breaking the rule of good investing goals and strategies of not losing money.

How about the Stock Market?

The US stock market has been on a spectacular rise for the last year. Sound investment goals and strategies would have put us into the US stock market early. However, it is always a good idea to take a little profit from time to time because you really do not have profit until you take a profit. Successful long term stock investors look for underpriced stocks, not cheap stocks. They consider the anticipated earnings of a company and compare that to the current price. This is intrinsic value analysis. Your investment goals should be centered on making and keeping money. Having stock in a strong and continually growing and profitable company is a sound practice.

Strategy versus Goals

Set reasonable goals and they will be easier to reach. Stick with basic tried and true investment strategies and you will be more likely to obtain your goals. When investment goals and strategies are in sync, investors profit. Staying ahead of inflation is a time honored investment goal. So is seeing the future. Early investors in American Telephone and Telegraph did well for over half a century as the USA extended its communications system across the nation. There are parts of the world that are going to replicate the American experience in growth of the middle class and development of infrastructure. We have written about how to invest in middle class growth in Latin America, investment and the Panama Canal Expansion, and simply investing in foreign stocks. These can all lead to wise investment goals and strategies to achieve them. But, as always do your own fundamental analysis and sit on the sidelines rather than lose your money in a poorly thought out or timed investment. If you have questions about investment in Latin America, especially Panama and Colombia, feel free to contact us.

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Argentina Defaults on $100 Billion in Debt

Argentina defaulted on about $100 Billion in debt, denominated in US dollars, in 2001. Many if not most of the bond holders were offered bonds with a substantially lower value and they agreed to the deal. They retained some value and have been receiving payments ever since. Those who refused the offer had bonds that were worth cents on the dollar if that. Now a number of large hedge funds are suing in US courts to have Argentina pay in full on their defaulted bonds. The hedge funds won in a lower court and now have had the decision upheld by a three judge panel of the US Court of Appeals. It remains to be seen how these hedge funds would collect even if they win. But, it also remains to be seen how any foreign country could offer their bonds to US investors in the future if US courts determine that when US investors buy defaulted bonds that they can be eventually paid in full. Defaulted bonds were not one of our three great foreign investment ideas . But with enough risk tolerance and the potential for huge profits one might buy defaulted international bonds if the price is right and the profit potential high enough.

Investing Offshore

Successful international investment strategies include investing in foreign stocks , foreign real estate investments , setting up the management aspect of a business in a tax friendly locale, setting up shop for one’s entire business offshore, buying bonds and more. With any of these international investment strategies one ought to consider access to markets, manpower needs and costs, access to appropriate technology, and growth potential. And, in the case of bonds one needs to consider the ability as well as the willingness of the government in question to pay its bills.

Slower Emerging Nation Economic Growth

Coming out of the 2008 Great Recession, Asia was the engine of growth while Europe wallowed in recession and the USA slowly improved. Growth seemed to be the province of the BRICS nations, Brazil, Russia, India, China and South Africa. We noted some time back that when value investing for long term profits, going where the growth is, is the beginning of a good strategy. Now, however, India, South Africa and Brazil are all seeing substantial slowing. China is flirting with a real estate bubble. Intrinsic value of overseas investments is the same as in the USA. The value of an investment hinges on its forward looking income steam. As slower growth hits the BRICS nations there could be more opportunity to buy defaulted international bonds. If this interests you make sure that the price is right and that someone with deep pockets is footing the bill to take the issue to court.

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Democracy, Fair Governance, and Investment

Egypt has had a democratically elected president for just over a year. He was elected by a very small margin. However, he has governed as though he had received a huge mandate from the Egyptian people. What Mr. Morsi, the president of Egypt, has missed is the understanding that a true democracy is not just based on who gets the most votes. It is based on democratic and fair governance. The US system of checks and balances has served that nation well in keeping headstrong politicians from going too far either left or right over the course of more than two centuries. It is to be hoped that when the military steps back into Egyptian politics that it insists on a broader concept of democracy than that of Mr. Morsi’s Islamic Brotherhood who seem to believe that a small majority at the polls entitles them to enact laws that they believe are the mandate of the Almighty. If the Egyptian military can govern briefly and with a light touch they may be able to put Egyptian politics and the economy back on a sound footing. If so it will be time for Middle East investment, at least in Egypt. Fundamental analysis tells us the obvious which is that the tourism sector will bloom again if the social situation stabilizes. Egypt has a large manpower pool and many skilled individuals. All that it needs is a stable economy and political scene in order to succeed.

Elsewhere in the Middle East

Much of the rest of the Middle East is in the same straits or worse than Egypt. The economic lesson to be learned is that fighting needs to stop and governance needs to be fair for all concerned including minorities. A good lesson can be learned from Ireland where conflict scarcely abated for nearly a thousand years and finally has come to an end. It is time to invest in the Middle East. Things may be at their worst which could make now the time to look for opportunities. Sound stock investing principles always apply whether it is time to invest in a resurgent US economy, time for Middle East investment, or investment in any sort of foreign or domestic opportunity.

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In posing the question how high can stocks go, we should consider fundamental analysis of individual stocks, the markets in general, the US and world economies, and the prospects of other, non-stock, investments in the near term future. And, one should always consider the lemming effect, the herd following market leaders, even when all of them are heading for the proverbial cliff.

Does Government Policy Set Market Prices?

Wall Street hit a record high and markets across the globe followed. Japan‘s Nikkei 225 index is up to nearly a five year high. In both cases much of the enthusiasm has to do with Federal Reserve/Central Bank policies. Somewhere around $7 Trillion in equity was erased when the markets tanked in 2008. Governments bailed out banks to keep credit markets afloat and engaged in gigantic stimulus programs to get their economies going again. Much of the enthusiasm in the markets comes from an optimistic view of how much longer the Fed and other institutions will continue to promote growth with their policies. How high can stocks go? That depends on the Fed and other central banks and on the perception of the market.

How about Individual Stocks?

Picking new winners in the stock market typically has little to do with the general state of the economy or monetary policy. The success of a new company has to do with its products and its sales. Intrinsic stock value is the expected future earnings of a company discounted to current cash. When a stock is underpriced as compared to its future earnings potential it is a good buy and when it is overpriced in this regard it is time to sell. How high can stocks go in this regard? Microsoft grew about two thousand fold before it corrected and leveled off a few years ago. No matter what the economy is doing there is a bio tech company out there that will come up with a cure for diabetes, Alzheimer’s, or heart disease. How high can stocks go when the company has a unique product? The sky is the limit.

Is the Market on Track or Is the Market Crazy?

If you believe that the world economy will get back on track, that North America and Europe will regain full financial health, that these two giant economies will continue to lead in innovation, you want to own stocks in these economies. If not you will want to look elsewhere. If you believe that the BRICS nations will grow and prosper you will want stocks in Brazil, Russia, India, China, and South Africa. If you think there are problems, such as potential BRICS development bank problems that we mentioned recently, you will want to be careful there as well. As we consider how high can stocks go we should also consider what will happen if there is another major shock to the markets such as an expansion of the war in Syria or even conflict with Iran over its nuclear ambitions.

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