The $10 Trillion Question

Lauren Young

In case you missed the news, mutual fund assets have officially crossed the $10 trillion mark.

Tom McManus, a Banc of America strategist, says riskier funds continue to attract even more of investors’ hard-earned dollars. While U.S. stock funds suffered outflows of $1.4 billion in the most recent week, funds concentrating on foreign stocks saw inflows of $1.4 billion.

It is amazing how much money is pouring into the emerging markets. EMR funds took in $123 million in the past week, and total EMR assets have soared to $105 billion, which is close to all-time highs.

As I've been talking to fund managers for our year-end outlook issue, it's clear that many of them think the emerging markets will continue to shine in 2007. Yet I'm reluctant to back up the truck and dump my hard-earned cash into the emerging markets right now. But since we have a new fund supermarket option available in our 401(k), I might shift 5% of my assets into an emerging markets fund.

One fund I'll definitely check out is American Funds New World (NEWFX), which has a broad, diversified emerging markets mandate. It's not as volatile as other EMR funds, which is a big plus in my book.

What other emerging markets funds should I consider?

No great ETF for plays on exchanges

Aaron Pressman

Commenter Eli Nahass asks, after reading a recent post about the booming market for derivatives exchanges, if there are any ETFs that invest primarily in such shares. The answer is, I'm afraid, not really.

You can see which ETFs hold a big position in a stock by looking on the stock's "components" page on Yahoo Finance. For example, the Chicago Board of Trade (Symbol: BOT) isn't listed in the top 10 holdings of any ETF. It went public just over a year ago so maybe that's not surprising. Cross-town rival Chicago Mercantile Exchange (CME) checks in at 5% of the iShares Dow Jones U.S. Broker-Dealers ETF (IAI) and an unspecified percentage of the streetTRACKS KBW Capital Markets ETF (KCE). ETFconnect.com, another good source of ETF info, says KCE holds almost 6% of its assets in the CME. But both of those ETFs are primarily owners of big brokerage companies like Goldman Sachs (GS) and Merrill Lynch (MER).

The New York Stock Exchange (NYX) is listed as a top 10 holding only in the First Trust IPOX-100 Index ETF (FPX), which essentially buys shares of major IPOs on the seventh day after they go public and holds them for a set period of 1,000 days. The New York Mercantile Exchange (NMX), which had its heady debut just the other day, isn't yet a major holding in any ETF. So no holiday ETF cheer for derivatives exchanges, Eli.

Google's Easy Come-Easy Go $8 Bil

Roben Farzad

Last week, as Google (GOOG) shares hit $513 and the young company found itself worth more than $155 billion, I penned a somewhat sarcastic commentary. The point: Google was stockpiling a ridiculously enviable acquisition currency. Permanent and infinite riches? Or fleeting money? Read on:

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Eat Drink Outlooks

Lauren Young

This is the time of year when every mutual fund company and investment bank holds its 2007 outlook sessions. The events typically take place over a meal at a swanky restaurant or hotel.
I've attended three or four of these events--and I'm scheduled to go a half dozen more after Thanksgiving.

So far, I'd say the general consensus is that 2007 will be a great year for international stocks and larger companies. Over a lunch at the St. Regis Hotel, David Antonelli of MFS waxed poetic on foreign companies. He likes foreign stocks because they are cheaper than their U.S. counterparts, and the earning prospects are good, if not better. He's bullish on Japan because prices are rising, particularly for rentals in the real estate market.

At another dinner hosted by an unnamed asset management company (the event was on background), a value manager told me she's really excited about the deals in large-company stocks, and thinks 2007 could finally be the year for big companies to shine.

I've also been meeting with fund managers individually to see what they've got up their sleeve for 2007. During a lunch last week, Wendell Perkins of the Johnson Family of Funds, said he's also bullish on international stocks. He is a big fan of Quest Diagnostics, and he says the company has been unfairly punished for standing up to UnitedHealthcare amid a recent contract dispute. Pay attention to Perkins: This is a man who eats tuna tartare.

Today Mark Coffelt, manager of the all-cap Texas Value & Growth fund came by, and guess what? In the past four months, he's shifted about half of his go-anywhere fund into international names, including Sanofi-Aventis ADR, Diageo PLC ADR, and ABN-AMRO Holding NV ADR.

Grab your passport.

Forget China, derivatives are the hottest IPOs

Aaron Pressman

It's no secret that shares of derivatives exchanges like the Chicago Board of Trade (Symbol: BOT) and Chicago Mercantile Exchange (CME) have been among the best performers of the year. Hedge funds, pension funds, everybody is using the exchange's listed derivatives more, whether futures on barrels of oil, options on exchange-traded funds or even the new contracts on regional home price indexes.

The CBOT, which announced the other day that it had broken its annual trading volume record for the fifth year in a row, has seen its shares fly up over 60% this year. The CME's shares are up more than 40% with the latest surge pumped up by the exchange's $8 billion offer for its cross-town rival.

Into the fray today comes the debut of the New York Mercantile Exchange known as Nymex (NMX). It went public at $59, just a tad over the recently upped price range of $54 to $57 the company expected in its last SEC filing. At a closing price around $132, it easily beat the previous record holder for opening day gains in 2006, Chipotle Mexican Grill, which exactly doubled in its January debut. That puts the cap on a wild and crazy week in the IPO market which saw nine deals come to market including the lackluster debut of Hertz (HTZ), cash cow to the LBO stars.

Hertz's ugly IPO gets priced tonight

Aaron Pressman

As I've noted time and time again, the upcoming IPO for car rental giant Hertz seems to be trying to set some kind of high water mark for private equity at the trough. It's set to be priced tonight with 88 million shares selling for between $16 and $18. But it's an open question whether the underwriters will find enough demand to stay within that range given that almost all of the proceeds will be paying back debt that paid for dividends to LBO owners Clayton Dubilier & Rice, the Carlyle Group and Merrill Lynch. In a Bloomberg story today, a few analysts and investors warn an appropriate price would be closer to $14. I'll be back with an update after the deal is priced.

Update: Well, no surprise -- Hertz priced below its expected range at $15 a share, raising $1.32 billion. I guess special dividend number 2 will have to be reduced.

WisdomTree has a few more ETF ideas on tap

Aaron Pressman

Thanks to Roger Nusbaum, I see that WisdomTree has filed to introduce another 31 exchange-traded funds. There are some interesting ideas here, including an international real estate fund and dividend-oriented funds for regions and countries - let's dig in and see how they'll be implemented...

One critical point at the outset: the filing doesn't list what the fees will be on the new funds. That could be a make or break factor for many investors. Also of note, the filing includes no historical performance for the underlying indexes and they're not yet listed on WisdomTree's web site.

As with some of the competing non-traditional index fund sponsors, WisdomTree's twist in this filing is to create indexes that don't weight the included stocks by market cap. Instead, stocks are weighted either by earnings or dividend yield.

Thankfully, the international indexes will be truly international. Unlike some competing funds, such as the Powershares India Tiger fund, for example, these new funds will be comprised of stocks actually trading on overseas markets. They won't be limited to U.S.-traded shares or American Depositary Receipts. Buy the new China fund and you'll get "companies that are incorporated and listed on a major stock exchange in " Buy the India fund and you'll get "companies that are incorporated and listed on a major stock exchange in India."

So if the funds get approved by the SEC, this would mark the first true Indian ETF listed in the U.S. (I blogged a little about a foreign listed Indian ETF back in September). That should give U.S. investors simple and inexpensive access to real Indian stocks that will performa as the Indian market performs. Or as Willie Wonka once said: "Lick a pineapple, it tastes like pineapple...The strawberries taste like strawberries. The snozzberries taste like snozzberries!"

I wonder how the head of CVS is feeling this morning?

Aaron Pressman

After watching a ton of election coverage last night all across the TV dial, I went to sleep around 1 a.m. I think I must have seen about 117 interviews with Rahm Emanuel, the Illinois congressman who ran the House Democratic campaign committee. And when I woke up at at the crack of dawn, or should I say when the kids woke me up at the crack of dawn, he was still on (despite what Republicans say, Emanuel is obviously no vampire).

And yet one message of Emanuel's penetrated my sleepy brain with crystal clarity: Democrats plan to rewrite the Medicare prescription drug benefit to allow the government to negotiate prices directly with drug companies. While that idea was certainly in the air before Democrats took over the House (and maybe the senate), I hadn't heard it put at the top of the priority list so clearly until last night. And with the magnitude Republican losses, it's hard to imagine President Bush putting up much of a fight on that one.

Investors were no doubt listening, too. For stocks, what's been a boon, even a boondoggle, for some drug companies and pharmacy benefit managers looks likely to become a big pain.

Check out the stock charts for pharmacy benefit managers since President Bush signed the Medicare Part D program into law at the end of 2003 until this September when Walmart (WMT) announced its own drug discount program. Among the big three, Caremark (CMX) more than doubled, Express Scripts (ESRX) almost tripled and Medco Health Solutions (MHS) lagged with a 75% gain. The S&P 500 gained about 18% over the same period.

It was a great climb for savvy investors but get ready for the other side of the mountain, coming at 9:30 when trading opens. I wonder how Tom Ryan, the CEO of drug store chain CVS (CVS) is feeling this morning?

Little Chelsea is all grown up and working for 2 and 20

Aaron Pressman

Word from the Baltimore Sun that Chelsea Clinton has jumped from the world of management consulting to a hedge fund. The former first daughter will hang her hat at Avenue Capital, a $12 billion distressed debt fund based in New York, the paper says.

A big crowd to get Miller's market-beater crown

Aaron Pressman

The popular stereotype of the wacky, opinionated and brilliant fund manager is about to take a serious hit. After Peter Lynch retired, there was a short-term deficit of WOB's. Thankfully in recent years, we've witnessed the emergence of Bill Miller, former military intelligence officer, former PhD candidate in philosophy and soon-to-be former holder of the longest ongoing market-beating streak in mutual fund land. The bad news is there's no top wacky, opinionated and brilliant manager in the wings to fill this much needed role.

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Time Warner Reliving Its 20s

Roben Farzad

Today, shares of Time Warner (TWX) finally closed above $20, a resistance level that has frustrated the media conglomerate for more than four years. Can this bubble-cursed stock (which once traded at $83) finally get some traction? Two things to watch:

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Chinese IPOs catching fire

Aaron Pressman

Looking down a list of recent IPOs, one number jumped off the screen: 84%. That's the market return of Home Inns & Hotel Management (Symbol: HMIN) since it went public four days ago. A more amazing (or perhaps alarming, depending on your point of view) fact is that the Chinese hotel chain only filed its registration statement at the Securities and Exchange Commission on October 4. Three weeks later, it's one of the hottest IPOs of the year. The chain, operating 82 hotels across China, had revenues of $109 million and net income of $8 million last year.

There's plenty of investor excitement about China, thanks in part to hype around last week's mega $19 billion IPO of Industrial & Commercial Bank of China (which didn't include a U.S. listing, by the way). Other recent movers include New Oriental Education & Technology Group (EDU), up 60 plus percent since going public September 7, and Mindray Medical International (MR), up about 40% since September 26.

Fundamentally, though, there's a simpler explanation. Even with the recent U.S. market surge, Chinese stocks as measured by Morgan Stanley Capital International's "China A" index have far outperformed, gaining 62% so far in 2006. In a world of lackluster returns, that's pretty enticing. It also suggests ordinary investors would be smarter avoiding single issues and buying an index fund like the iShares FTSE/Xinhua 25 Index (FXI).

Hertz owners want more, more, more

Aaron Pressman

It looks like the three leveraged buy-out firms that own Hertz are trying to make some kind of statement about just how much can be sucked out of a recent acquisition before it's flipped. The kind of statement that's in the neighborhood of about $1.4 billion. As bounty hunter Jack Walsh aka Robert DeNiro said in Midnight Run: that's a very respectable neighborhood.

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Legg Mason: Patience, Grasshopper.

Lauren Young

Fund junkies know that Legg Mason’s star Bill Miller is underperforming the S&P 500, which may put an end to his amazing 14-year streak. At the same time, Legg Mason is grappling with a major acquisition of Citigroup’s asset management arm. Since the company preannounced that it would not meet earnings estimates, the stock has fallen dramatically.

But Tom Perkins, manager of the $6 billion Janus Mid Cap Value Fund, isn’t concerned. Perkins has owned Legg Mason stock several times, but most recently sold when it hit $115. (He also bought Miller’s fund for his son 20 years ago.) Now Perkins is buying Legg Mason again. "We are always suspect of acquisitions," he says. And while there may be a few hiccups, Legg Mason is well-positioned for the long term, he says. Plus, at 17 times 2007 earnings, Perkins thinks it is a reasonable bargain. “The stock has come down harder than the earnings estimates, so it represents a pretty good value…with patience,” Perkins says.

Patience, grasshopper.

GateHouse success no path for big city papers

Aaron Pressman

I felt a little frisson of anger this morning when I noticed the latest hot IPO from leveraged buyout world: GateHouse Media (Symbol: GHS). The company priced 13.8 million shares (a couple million more than expected) at $18 (the high end of its range) for an almost $250 million take and an implied market cap of over $600 million. Trading started at $21.60 this morning -- a pretty nice pop for a company with operating income of less than $14 million for the first half of this year and an operating loss of almost $9 million, thanks mainly to interest payments. A money-losing newspaper company investors want to own? Shouldn’t this be a beacon, a rallying point, a moment of joy for all of us in the media biz? Not exactly. GateHouse runs the kind of weeklies that give local journalism a bad name.

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