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Five Things You Need to Know: China Diversification, To Have and Have More, A Note On Volatility, Sounds Good In Theory, Department of Impossible-To-Make-Up: Realtor Board Won't Send Numbers to State


The news you need to know, before you know you need it!


Minyanville's daily Five Things You Need to Know to stay ahead of the pack on Wall Street:

1. China Diversification

More chatter about China's pending forex diversification strategies made the news pages over the weekend. This is something we've been talking about for months now, and while the conventional wisdom seems to be that this is ultimately bearish for the dollar, we're not so sure.

  • China's Premier, Wen Jiabao, said after a top-level meeting on finance reform over the weekend that Beijing should improve the management of its foreign reserves and explore ways to diversify their use, the Financial Times reported.
  • The formal policy switch opens the way for China, which has been passive in managing its money, to establish an agency to handle a portion of its reserves.
  • Of course China now has the world's largest foreign reserves, pegged (almost literally) at something like $1 trillion.
  • Although no one quite knows for sure, it is believed that about 70% of China's reserves are held in U.S. dollars, mostly Treasuries.
  • Conventional wisdom is that diversification by China away from U.S. dollars will spell trouble for the world's reserve currency.
  • More importantly, however, is what China's specific diversification strategy, which is still many months away from being formally realized, will mean for other global asset classes, including stocks, bonds and commodities.
  • Among the initial targets for China's reserves are crude oil (China plans to build upon their emergency supply of crude) and metals, including copper and gold.

2. To Have and Have More

Minyan Michael Santoli penned the must-read cover story in this week's Barron's on the widening gap between the Haves and Have Nots. You may remember that as one of our Five Themes You Need to Know for 2007.

  • Even though we've seen similar facts and figures countless times over the past couple of years, the numbers are still staggering.
  • As of 2004, the richest 1% of Americans owned 37% of all domestic stocks held by individuals, and the top 10% owned 79% of all domestic stocks.
  • The article delves into the investment implications of this widening gap, citing a theme conjured up by Citigroup global strategist Ajay Kapur called Plutonomy.
  • According to Citi, the Plutonomy theme should continue to benefit luxury-stocks such as Coach (COH), Sotheby's (BID) and Tiffany (TIF), among others.
  • UBS has a similarly-themed basket of stocks that includes companies with strong ties and brand identity catering to an affluent marketplace, including American Express (AXP), Constellation Brands (STZ) and Simon Property Group (SPG).
  • You have to love the wirehouse approach to the Haves vs. Have Nots divide, which essentially boils down to this: "The Haves are increasingly driving the global marketplace and share prices. Here's how you can get in on the action!"

3. A Note On Volatility

Last week Minyanville Professor Jason Roney noted that the range for the Dow was its tightest in over 50 years. Yes, 50 years. What were you doing 50 years ago? Well, if you were alive, chances are you were compressing the weekly range in the Dow.

  • According to Minyanville Professor Adam Warner though, that's just the tip of the iceberg, which I believe could be construed as a metaphor of Titanic implications.
  • Adam writes that, "Historical volatility, as measured by the DJX (the blue line in the chart below) is now below 6, the lowest level as far back as the data goes (about a decade)."
  • The point? "Time is money in options. Every day you own an option that is overpriced (in volatility terms) vs. the underlying stock action, you lose money. Even if you catch a low in the VIX. Using the DJX for example, options have remained high vs. the index for five months now."
  • Speaking of the VIX, one thing we've noticed that many may be overlooking is that the VIX actually made it's low the week of Thanksgiving and has very quietly been making higher lows ever since.

4. Sounds Good In Theory

Toyota (TM) is working on a new approach to car design, development and manufacturing in an attempt to come up with an ultra-low-cost car, according to the Financial Times.

  • Toyota President Katsuaki Wat-anabe said in an interview with the Financial Times that, "everything from design to production methods will be radically changed and we are thinking of an ultra-low-cost way of designing, using ultra-low-cost materials, even developing new materials if necessary."
  • The move by Toyota increases competitive pressures GM, Ford and DaimlerChrysler which are already struggling to keep pace with Toyota's sales and growth.
  • Toyota, which recently was forced to recall 500,000 cars, will this year likely overtake GM as the world's largest car-maker.
  • Currently, the automaker has no ultra-low-cost vehicles among its models.
  • Watanabi said that the aim was not to simply introduce a cheap vehicle, but to review each step in the production process to lower costs for the new model and then to apply the lessons across its line-up, the FT said.
  • Of course, Toyota isn't the first car-maker to come up with the bright idea of an ultra-low-cost-car made of ultra-low-cost materials.
  • Below, Minyanville takes a look at a past attempt by a U.S. automakers to introduce an ultra-low-cost model.

Introducing an ultra-low-cost car certainly sounds like a good idea, but the reality is that it the idea may be better in theory than in practice. Below is an ultra-low-cost car model from a U.S. automaker that didn't quite turn out as planned.

1957 Ford Frankfurter

The Ford Frankfurter was designed to kill two birds with one stone; provide low cost transportation and a tasty, go-anywhere meal. Made entirely of pork remnants with a synthetic collagen casing, a healthy white-bread bun and pickle wheels, the Ford Frankfurter could easily feed a family of four on a leisurely Sunday drive. Although initially quite popular, the Ford Frankfurter was soon recalled, however, after some consumers complained of giant swarms of flies attacking the car, while others complained of feeling bloated after driving and eating it.

5. Department of Impossible-To-Make-Up: Realtor Board Won't Send Numbers to State

The Naples Area Board of Realtors no longer will provide monthly home sales numbers to the statewide association that calls itself the voice for real estate in Florida, the Naples News reported.

  • The Naples Area Board of Realtors has for years has reported sales transactions for existing single-family homes and condominiums to the state association.
  • Now, however, the local real estate board says it doesn't think the way the Florida Association of Realtors reports the numbers is relevant and that it can do a better job with its own reports.
  • Most recently, the Florida Association of Realtors reported that the median home price for single-family homes was down 13 percent to $415,200, and that condo prices fell 11 percent to $334,500, when compared to a year ago.
  • Joe Ballarino, president and chief executive of Amerivest Realty in Naples, said the Florida Association of Realtors numbers are "accurate numbers," but "not relevant numbers, and that is an important distinction."
  • "Now is a good time to buy," Ballarino said. "But the buyer confidence is not there."
  • Ballarino expects the confidence to return to Naples now that the Florida Association of Realtors will no longer be able to report how bad sales are there.
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