How Do You Spell Relief from
the Sub-Prime Crunch? S.W.F
Today's comment is by Mike Burnick, Editor of Market Shock Trader and Global Markets Analyst for The Sovereign Society.
Dear A-Letter Reader,
We're finally seeing some relief from the sub-prime credit crunch on Wall Street. And it's coming from the most unexpected places.
The world's sovereign wealth funds (SWFs) are riding to the rescue! These government investment pools are snapping up what they see as "bargains" hidden in the U.S. financial wreckage.
Who would have thought that credit crunch relief would come from an investment by the Abu Dhabi Investment Authority? Last week, they agreed to "buy a US$7.5 billion stake in Citigroup Inc., helping the biggest U.S. bank buy assets to bolster capital eroded by credit-market losses," according to Bloomberg.
Think that's shocking? Get this: They're not the only ones ready to bailout Wall Street.
China Investment Corporation (CIC), just expressed their own desire to invest in "stocks rocked by sub-prime mortgage defaults." Last week, the chairman of CIC said that the US$200 billion SWF he directs seeks to be a "stabilizing force in the international capital markets."
Citi the First of Many SWF Deals
China, like Brazil, the Persian Gulf states, Russia, and many other global players have trillions of foreign currency reserves - much of it U.S. dollar denominated. And apparently their trillions are burning holes in their pockets.
As the Financial Times put it, there exists today a "fundamental imbalance caused by a shortage of capital in the west and surplus of cash in the east."
So more money than ever before is moving west. This suggests that the Citigroup investment "will not be the last such move."
For example, CIC's role is to help diversify some of Beijing's nearly US$1.5 trillion in reserves into higher yielding investments. That includes perhaps U.S. equities - especially distressed financials.
SWFs are the new big dogs in global capital markets. They exert tremendous influence in swinging deals and driving M&A activity due to the sheer size of their war chests of cash.
According to Merrill Lynch forecasts, global SWFs should grow to nearly US$8 trillion in combined size over the next four years. That's up from about US$2 trillion today. Members of the Gulf Cooperation Council of Arab States have already made a big splash this year with plenty of petro-dollars to reinvest.
GCC Leads the Way in High-Profile Deals
"Gulf investors have spent about US$70 billion on overseas acquisitions this year," according to Bloomberg data. That's nearly twice what they invested last year. The GCC can thank sky-rocketing oil prices for their growing investment portfolios.
Bloomberg data shows that "Gulf producers including Saudi Arabia and the U.A.E. earn more than US$1.3 billion a day from their energy sales." That creates lots of excess cash in search of profitable investments.
Earlier this year, Saudi Basic Industries, a major chemical maker in the Middle East, bought out the plastics division of General Electric in a deal valued at US$11.6 billion.
Dubai World said it would invest up to US$5 billion in MGM Mirage. They want to invest in this major U.S. gaming company to tap into Las Vegas' booming growth. And the government of Abu Dhabi recently purchased an 8% stake in U.S. chipmaker Advanced Micro Devices.
Financial Sector a Favorite Target
The financial sector has been a particular area of interest. According to the Financial Times, Morgan Stanley estimates SWFs "have injected more than US$37 billion into financial stocks since the beginning of the year - four times the amount they invested in 2006."
Before Abu Dhabi made its move on Citigroup, Dubai International Financial Center took a 2.2% stake in Germany's Deutsche Bank. More recently, Abu Dhabi said it's looking for "acquisitions in the U.S., where the falling dollar and a lending crisis are driving down the price of banks and property."
Nothing like a housing recession and credit crunch to create bargains!
Although the Gulf States grabbed the big headlines with the Citigroup purchase, the Chinese are forging their fair-share of deals too.
Far Eastern Sovereign Wealth Moves West
China's Ping An Insurance recently purchased a 4.2% interest in Belgium's Fortis Financial Group for US$2.7 billion.
In October, Wall Street firm Bear Stearns faced big sub-prime related losses and desperately needed fresh capital. So the Wall Street giant sold a stake to China's government-controlled Citic Securities Co. for US$1 billion. And earlier this year, CIC invested US$3 billion in private equity firm Blackstone Group just prior to its initial public stock offering.
Right now, the cost of money isn't nearly as important as the value of collateral. So the Fed may be pushing on a string with lower interest rates. However, the world's sovereign wealth funds are flush with cash, and are already swooping in on the beaten down U.S. financial sector.
So in spite of the recent bounce in the oversold dollar, the Fed's easy-money policy is bound to erode the buck further over the longer term. Once the dollar starts to fall again, it should only make U.S. dollar-denominated assets of all kinds appear even more attractive to foreign purchasers.
I see a giant wave of asset purchases coming from European, Brazilian, Canadian, Arab and Chinese investors. Maybe they'll even breathe new life into the beleaguered Miami condo market!
MIKE BURNICK, Senior Editor & Global Markets Analyst
EDITOR'S NOTE: While the rest of the world are snatching up the "bargains" in the financial sector, Mike Burnick just recommended his subscribers to sell put options on the sector - for gains of 50%, 131% and 142%. Find out how you can get in on these types of gains now.
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