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Emerging, Not Emergency


Traders may have changed direction this past month, but the competitive imbalance did not...


Last night I was going through my regular rituals after bedtime stories with my 4-year old. She makes me whistle the theme song to "Hoosiers," then sing "Take Me Out to the Ballgame," and close with "The Eyes of Texas are Upon Us"......I don't have any idea why she picks those songs, or thinks sports are great, or that I am a world-class singer. Just a coincidence I guess. I don't encourage any of those.

So right as I tucked her in (wearing her rally shirt - an oversized HOOFY from the 'Ville), I pointed to the clock since we were way past bedtime. She looked up and ask one of those questions that delete every other one that day - "Daddy, what happens when time moves forward?" I was speechless, this tiny Minyan asked a better question about the markets than any other I have seen over the past month. Most of the 'DISASTERS' have us back to levels 'NOT SEEN' (both of those get screamed)...since earlier this year (that part gets whispered). Some disaster.

As always, she got me thinking....and prompted me to finish a long answer to another question I received from a larger Minyan last week....

I had a question offline about what I meant recently when referring to Ireland's competitive advantage in attracting business. They have one of the most simple and attractive corporate tax environments in the world at 12.5% and not surprisingly they are making new homes for companies around the world, and many of the U.S.'s finest.

How are we competing?

  • According to an AP story which quoted the IRS, the tax return they just received from General Electric (GE) was 24,000 pages long.

  • The Standard Federal Tax Reporter, a reference book for accountants and tax preparers to summarize the code and make it simpler to use is over 60,000 pages.

  • The FY 2006 budget requested that Congress allocate $41.4 billion for regulatory activities, a 4.8% increase. The regulators budget is growing at a faster rate than other nondiscretionary spending (up an amazing 46%, after inflation, since 2000). Staffing is at an all-time high of nearly a quarter million people.

  • The number of registered lobbyists in Washington has more than doubled since 2000 to more than 34,750 while the amount that lobbyists charge their new clients has increased by as much as 100 percent. Only a few other businesses have enjoyed greater prosperity in this choppy economy.

As I've written before, this is but one of the reasons our work shows that Large Caps are facing severe headwinds, especially the Largest Cap of them all – the U.S. In this country we are not debating about how to compete and attract businesses, we are arguing about how to be taken care of and how to tax for it. Ask the next guy on a U.S. street what his dream is, I'll guess it's "to retire early." Pick a guy on the street in an emerging nation it's likely to be "to work."

There are extraordinary risks when investing internationally, to be sure, but I think that different risks may prove even more dangerous domestically - assumptions. The U.S. is consumed by entitlement programs under-financed by these 8-foot tall tax returns (that's 24,000 pages). But investors are entitled to nothing. And, good investors who realize this are looking to work and not be taken care of, hence our P&L's Principle #12: Sell Complacency, Buy Kaizen.

I was reviewing "Triumph of the Optimists" the other night which is a treasure chest of data, and sure to keep you undisturbed for some bedtime reading as hundreds of pages of charts will not get confused with a list of 'turn-on's' by your spouse. In the year 2000, out of 111 countries, only one was home to 48% of all equity investment. I believe that assumed dominance of the U.S. will erode for the rest of our lives, as a percentage.

In 2000, 9 out of every 10 dollars raised by foreign companies through new stock offerings were done in New York rather than London or Luxembourg -- the two other main choices for listings like these - according to data from Citigroup.

But by 2005, the reverse was true: 9 out of every 10 dollars were raised through new company listings in London or Luxembourg.

Emerging markets are not emergencies, they are emerging. Traders may have changed direction this past month, but the competitive imbalance did not, in my opinion. And as for the contrarian call of "everybody is now in emerging markets" and that trade has passed….Color me less than convinced (particularly when a contrarian call becomes popular!). I like to watch the Hewitt 401 (k) Index which tracks the daily activity of nearly 1.5 million 401(k) participants with nearly $90 billion in collective assets. International and emerging market equities total nearly 8% of all 401(k) balances, which should sound small especially considering the fantastic appreciation they would have seen the past several years without any contributions.

But, what makes that an even smaller number is the fact that only one quarter of all those plans in the index even OFFER an emerging market selection. Yet.

I actually told a partner last week when we were talking about the subject that I think my job is going to be easier as a money manager than it will be as a parent. I like the idea of competition and I'm afraid more and more Americans disagree with me. That reminds me to congratulate the graduating class of 2006, especially those from Westview High School in Oregon. It seems there was a tie for valedictorian this year. The honor traditionally reserved for a single student was changed by this school to ANY student with a 4.0, which this year included one in seven seniors. There were 75 valedictorians at this school! Entitlement programs start early around here, no?

I am going to do whatever I can as a dad to eliminate any assumption, except for bedtime stories as long as they want. As a money manager I will continue to sell Complacency and buy Kaizen, which has us significantly over-weighted internationally. The only thing that has changed over the past few weeks is that I had to have my little girl tell me a few good stories instead, I was a little short!

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