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THE SOVEREIGN SOCIETY OFFSHORE A-LETTER
Your Link to Freedom, Privacy & Prosperity in the Offshore World
Wednesday, November 9, 2005 - Vol. 7 No. 226
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In This Issue:
* COMMENT: Hidden Danger: East European Russian Investments
* OFFSHORE: Another Great Wall. Bush in Panama, Backs Wider Canal, New Free Trade Agreement.
* WEALTH: EU Destroys Financial Privacy. EU Tax Mutiny.
* PRIVACY & RIGHTS: U.N. Hands Off the Web. Americans Watched.
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COMMENT: Hidden Danger: East European Russian Investments
Dear A-Letter Reader:
The world's best performing region over the last decade is Eastern Europe. No other region comes close since 1995. Over the last three years, marked by the bear market low in the US, the MSCI East Europe Index has surged 46.1% per annum, trouncing the return generated by the MSCI World Index ( 14.9%) and the S&P 500 Index ( 12%). But the real story is their wicked performance since 2000 as most global markets hit a plateau.
The MSCI East Europe Index has gained a stunning 27.2% per year since 2000 and even throughout the bear market from 2000 to 2002, the benchmark sailed higher. From Jan. 2001 to Dec. 2002, the MSCI East Europe Index rallied a cumulative 26% versus a crushing 39% plunge for the MSCI World Index and -34% for the S&P 500 Index. What's truly amazing about this statistic is that it occurred during the worst bear market since the 1930s.
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No Place Like Eastern Europe: 1995 to 2005 (as of Nov. 4, 2005)
2005 1 Year 3-Yr. 5-Yr. 10-Yr.
MSCI East Europe Index 39.3% 50.4% 46.1% 27.2% 11.2%
MSCI World Index 3.7% 11.3% 14.9% -1.3% 5.7%
Source: Morgan Stanley Capital International.
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Eastern Europe has two major macroeconomic advantages versus the industrialized markets. And global investors have clearly exploited this advantage. The first benefit is cheap labor. Compared to Western Europe and other advanced economies, wages in countries like Poland, Hungary or Slovenia, are a fraction to those in Germany and France.
The second advantage lies in tax rates. Many countries in East and Central Europe offer some of the lowest effective tax regimes in the world, catapulting corporate profits over the last several years. This two pronged attack on the mature economies, low wages and low tax rates, helps explain in great part why Eastern European stocks have literally gone through the roof since 1999. But when you look closely at mutual funds dedicated to this sector, you get a very different picture at where performance attribution is derived.
Some of the best performing offshore Eastern European stock funds, for example, have earned the bulk of their profits since 1999 in Russia. Yes, other regional bourses in Poland, the Czech Republic and Hungary have boomed since 1999, including smaller peripheral markets in Croatia, Slovenia, the Baltics and Ukraine, but no one has performed like Russia. Since the bear market low of October 1998 when the ruble crashed and Russia defaulted on its foreign debt, the Moscow RTS Index has skyrocketed 2,327%. Either way you slice it, that's one strong bull market!
The problem with investing in Eastern Europe is that most mutual funds dedicated to this region hold anywhere between 35%-to-50% of their assets in Russia. Some funds hold more than 50% of their portfolios in Russian equities. It's hard to imagine Moscow posting another five years of tremendous returns. After all, Russia has been a prime beneficiary of the commodity boom and is flushed with cash. Russia's economy is clearly in fifth gear as exports continue to hit all time highs. Her oil companies, Lukoil and Gazprom, have earned a fortune. But is it wise to invest 50% of a regional mutual fund in one market after such an incredible rally? I highly doubt it.
Another highly popular destination for East European fund managers is Turkey. The U.S. Global East European Fund, domiciled in the US, has earned 38% per annum since 2000. Its two largest positions, comprising 62.5% of the portfolio are Russia and Turkey. Though you can't argue with the great performance, is that a geographically acceptable allocation for a product dedicated to East Europe? At this stage of the big emerging markets bull run since 2001, I'd avoid a fund with that country allocation. Russia has been a great stock market since 1999. But it's no place for new money.
Eric N. Roseman, Editor
Commodity Trend Alert
Global Mutual Fund Investor
Editor's Note: In January 2006, we will start publishing Eric's Global Mutual Fund Investor (GMFI). Since 1992, Eric's GMFI has focused on the most profitable global funds....many off limits to you, until now. He will reveal the best offshore and US-based funds specializing in Eastern and Central Europe with minimal Russian exposure. Also, he'll look at real estate funds in the region, with tempting yields as property values appreciate in the wake of expensive trends in Spain, France, Italy and Greece compared to cheaper values in the Balkans and Germany. Watch for GMFI details in The A-Letter.
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BOB BAUMAN FROM BEIJING:
When I was last in Beijing in 1980, it was as a Member of the US House of Representatives. That meant our travel and what we were allowed to see was highly controlled by the Chinese Communist government.We often managed to slip away and see much more than our hosts intended, but always we were followed.
But this same paranoid Red control lives on today. Example: I had the BBC news channel on my hotel room TV as background noise when I noticed that the screen went black several times. I checked other channels and they were OK. Then it dawned on me that the BBC had been broadcasting live the arrival of China's president, Hu Jintao, in the UK. Whenever China's human rights record was mentioned, the BBC disappeared from the TV screen.
Later when I tried to access an article on the Voice of America web site, not only could I not get to the web site, all my web access was suddenly cut off. I was able to regain it only by restarting my laptop.
It appears the Chinese rulers don't need the PATRIOT Act for powers of surveillance -- the rule of law is what they say it is, for citizens and for visitors. It's a strange feeling for an American, I must say.
As our Sovereign Society tour progresses I'll give you my impressions of the New China, -- if I can get through the the Great Censorship Wall of the Old China.
That's the way that it looks from the so-called Peoples Republic of China.
BOB BAUMAN, Editor
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* FROM THE EDITOR'S DESK:
OFFSHORE:
* PRESIDENT BUSH IN PANAMA
PANAMA CITY: The President has a quick 19 hour visit in Panama and voices US support for a wider Panama Canal, and for a free trade agreement with Panama. Anti-Bush demonstrations minimal.
* Bush Backs Enlarging Panama Canal. LINK: http://www.guardian.co.uk/uslatest/story/0,1282,-5399084,00.html
* US-Panama trade deal will be tough, Bush says. LINK:
http://www.chron.com/cs/CDA/ssistory.mpl/headline/world/3443974
* For opportunities on how you can take advantage of Panama's closely
guarded money secrets, click here: http://www.web-purchases.com/1
90SPMON/W190H750/
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WEALTH:
* EU WANTS TO DESTROY FINANCIAL PRIVACY
BRUSSELS: The EU has implemented yet another "savings tax directive" trying to stop the flow of capital from welfare states, such as France and Germany, to lower tax havens such as Switzerland, the US, and Singapore. The bureaucrats in Brussels - led by a former Hungarian Communist - want to destroy financial privacy around the world. LINK: http://www.techcentralstation.com/110205A.html
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* MUTINY IN THE EU RANKS
DUBLIN: EU Commissioner Charlie McCreevy publicly broke rank with the EU, opposing European corporate tax harmonization, citing low Irish corporate taxes as a good example of what works. LINK: http://www.tax-news.com/asp/story/story_open.asp?storyna
me=21683
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PRIVACY & RIGHTS:
* U.N. HANDS OFF THE INTERNET
Three good LINKS that explain why it would be absurd to cede control of the Internet to a corrupt bureaucracy like the UN. LINKS: http://www.techcentralstation.com/102805E.html
http://www.freedomandprosperity.org/blog/2005-11/2005-1
1.shtml#073
http://www.heritage.org/Research/InternationalOrganizations
/wm904.cfm
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* 9-11's ENDURING WOUND: LOST LIBERTY
China may be bad, but the US suffers from the self-inflicted wound from the conversion of America from the 'land of the free' to the 'land of the watched.'"
* American Surveillance society. LINK http://www.independent.org/newsroom/article.asp?id=1614
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THE SOVEREIGN SOCIETY OFFSHORE A-LETTER.
* Bob Bauman, Editor * Daniel Aponte, Jr., Managing Editor.
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