PSP: Private Equity Investing

Powershares Listed Private Equity Portfolio (PSP) is another innovative ETF (exchange traded fund) on the street from PowerShares Capital Management, a unit of mutual-fund giant Amvescap Plc. PSP began trading on the American Stock Exchange last week. It tracks an index of 34 listed private-equity companies that primarily invest in and lend capital to privately-held firms. So, the fund provides ordinary investors access to the potentially lucrative world of start-ups, business loans and corporate buyouts -- traditionally the exclusive domain of large financial institutions and wealthy individuals.

The fund doesn't participate directly in non-listed private equity, but rather in publicly traded companies that invest in private equity themselves. Its tracking index is tilted more toward late-stage, established companies to reflect the industry and because they're less risky than pre-IPO companies with scant revenue.

Companies in the index must have a market capitalization of at least $50 million and a share price over $1. The index limits individual holdings at 10% and may include U.S.-listed ADRs of foreign corporations, but currently doesn't contain any. Inclusion in the index depends on a company's reputation, valuation of the underlying securities, management, financial qualities and historical performance. The index seeks diversification by stage of investment, sector and capitalization structure. Types of private-equity investments include leveraged buyouts and mezzanine financing. The index is rebalanced on a quarterly basis. the index's largest holding is publicly traded buyout and mezzanine fund American Capital Strategies (ACAS). The full list of companies is here. The fund has expense ratio of 0.60%.

However, for small investors it may not be a right choice of investment. The index is too narrow, which could make the fund extremely volatile and subject to significant gains and losses. Some of the companies in the tracking index are small and illiquid, which could create premiums and discounts to net asset value and drive up trading costs.

China Mutual Funds

Retail mutual funds investing in China are scoring big gains in 2006. Here are 5 Top-performing mutual funds and one exchange traded fund with their year-to-date gain percentage:

Oberweis China Opportunities Fund (OBCHX) 53.1%;
Old Mutual Clay Finlay China (OMNAX) 48.2%;
John Hancock Greater China Opportunities (JCOAX) 42.9%;
Dreyfus Premier Greater China (DPCAX) 42%;
Matthews China Fund (MCHFX) 36%.

The iShares FTSE/Xinhua China 25 Index (FXI) ETF had year-to-date gain of 39.4%. It tracks the 25 largest and most liquid Chinese companies trading on the Hong Kong exchange.

Fidelity China Region Fund (FHKCX) gained relatively smaller percentage of 19.7% but we like it better because of its very balanced and diversified portfolio which can be sustained over a long term. The top performing fund Oberweis is only one year old and it focusses on small-cap and midcap stocks that stand to benefit from China's growing consumer class, but such a portfolio is too risky to carry on over a long time horizon. Oberweis' phenomenal gain may soon be followed by too much of volatility which might offset its recent gain to bring it down to a reasonable level of long term growth.
[Disclosure: We donot own any of these funds in our personal portfolio]

House Price Falls, Mortgage Rises

U.S. Census Bureau reported (see full report) that sales of new homes unexpectedly rose 5.3% in September to a seasonally adjusted annual rate of 1.075 million, the most in three months. Homebuilders slashed prices at the fastest pace in 36 years in September, boosting sales to this high level. Median sales prices dropped 9.7% in the past year to $217,100, the lowest price in two years. It's the largest percentage decline in median prices since December 1970. Median prices for existing single-family homes are down 2.5% in the past year, the largest decline ever recorded.

As median house prices slipped, mortgage rates edged up, according to Freddie Mac's weekly survey. In fact, the slowdown in housing market was a reason behind the Federal Reserve's decision to not raise rates on Wednesday.

According to Freddie Mac's weekly survey, the 30-year fixed-rate mortgage averaged 6.40% in the week that ended today -- up from its 6.36% average last week. At this time last year, the loan averaged 6.15%. The 15-year fixed rate averaged at 6.10% this week, again an increase from last week's 6.06%. At this time last year this rate was 5.69%.

Rate for 5-year Treasury-indexed hybrid adjustable-rate mortgages (ARM) averaged at 6.14% increasing from last week's 6.11%. This rate averaged 5.63% a year ago. The 1-year Treasury-indexed ARMs also moved up this week to 5.60% from last week's rate of 5.57%. At this time in 2005, the 1-year ARM averaged only 4.91%.

Proshares' Special ETFs

In July ProShare Advisors LLC listed four index-linked ETFs (Exchange Traded Funds) on the American Stock Exchange. These innovative ETFs seek to provide twice the daily opposite return of the Nasdaq 100 (NDX) , Standard & Poor's 500 (SPX) , S&P MidCap 400 (XX) and the Dow Jones Industrial Average (DJIA) .

Ticker symbols of these ETFs are UltraShort QQQ ProShares (QID) , UltraShort S&P 500 ProShares (SDS) , UltraShort MidCap 400 ProShares (MZZ) and UltraShort Dow 30 ProShares (DXD) . These attempt to give 200% of the opposite return of the targeted benchmarks. So, if the index falls 1%, the corresponding fund is designed to gain 2%. The new ETFs can thus also be used to hedge stock portfolios against market pullbacks.

Caution: Investors in these ETFs can lose money when markets rise. So, such volatile, leveraged investments should be approached with care. If you are not mature enough in investment market, it's better to avoid these funds.

Also, in June, the company had introduced its first 8 ETFs of the following two kinds: (i) 4 leveraged funds that seek to provide double the index's normal return:
Ultra QQQ ProShares for Double the NASDAQ-100 Index (QLD), Ultra S&P500 ProShares for Double the S&P 500 Index (SSO), Ultra MidCap400 ProShares for Double the S&P MidCap 400 Index (MVV), Ultra Dow30 ProShares Double the Dow Jones Industrial Average (DDM).

(ii) 4 ETFs that provide 100% of the inverse, or opposite, return:
Short QQQ ProShares Inverse of the NASDAQ-100 Index (PSQ), Short S&P500 ProShares Inverse of the S&P 500 Index (SH), Short MidCap400 ProShares Inverse of the S&P MidCap 400 Index (MYY), Short Dow30 ProShares Inverse of the Dow Jones Industrial Average (DOG).

Since its introduction, DOG have been passing through a very bad patch with Dow Jones Industrial Average continuously scaling newer peaks almost every week.

Victims of ARMs

Many home-owners are at risk with their adjustable-rate mortgages (ARM). Rising interest rates and falling home values are creating an atmosphere of panic among some borrowers who had extended their ability of purchase by selecting such ARM or interest-only mortgages and are now finding their monthly payments at unaffordable level.

But not in all cases the borrowers' greed of possessing a larger home was the sole reason for them to end up in such a miserable state. In many cases, due to heavy-handed salesmanship originating from too much of competetion among loan brokers, inconsistent loan representations regarding the benefits or terms of the loan were made by the brokers. In some cases, unnecessary disclosures which were not required by the law were asked from borrowers at the time of loan origination.

If you feel you might have been led to such a situation for such wrongful business practices, you may consider consulting a consumer-protection attorney. Most consumer-protection attorneys offer a free consultation. If you have a case, you may be charged up to one-third of any benefit obtained through the lawsuit. Some state and federal consumer protection laws provide that the lender, if it loses, pay attorney fees. To find a consumer protection attorney in your area, visit the website of National Association of Consumer Advocates (NACA), a nationwide organization of more than 1000 attorneys who represent and have represented hundreds of thousands of consumers victimized by fraudulent, abusive and predatory business practices.

FDIC-Insured

'FDIC insured' -- this is an important phrase that we must always check out before we put our cash into any bank in any form. But, as we know, its coverage is upto $100,000. For many of our senior citizens who are already retired or are approaching that soon, this is a problem, if they wish to keep most of their wealth in safe deposits rather than investing in stock market.

Nevertheless, just 60% of our $4.4 trillion in deposits are FDIC- insured today. That's down from 77% of $2.5 trillion in deposits that were insured in 1992. There are a few ways to get more than $100,000 of FDIC insurance coverage on your bank deposits, despite the agency's insurance limits:

(i) Visit http://www.fdic.gov/ or call 1-877-275-3342 to find out how you might obtain more FDIC-coverage by splitting your money into different ownership categories including single accounts, joint accounts, self-directed retirement accounts and revocable trust accounts.

(ii) Visit http://www.cdars.com/. CDARS stands for Central Deposit Account Registry Service, a CD placement service owned by Promontory Interfinancial Network LLC, Arlington, Va. One can get coverage upto $20 million through this program. Through this service, you select a participating bank which arranges to split your deposits among member institutions. You get the rate paid by the bank at which you open the account. Bridge payments are made between that bank and the other participating banks to compensate for any interest-rate discrepancies.

(iii) Some companies -- including The Calvert Group and Merrill Lynch -- automatically provide extra FDIC insurance through specific accounts. The Calvert Group may split-up bank money-market deposit account funds among four participating banks through its"Insured Market Plus" account. This means as much as $400,000 of FDIC insurance per person. Merrill Lynch's "Insured Savings" Account is available through certain types of accounts. Twenty-five banks currently participate in this program.

Mortgage Rate Little Changed

Mortgage rates hovered very near to last week's averages, pausing ahead of next week's Federal Reserve meeting. Most people believe that the Fed will not raise rates at that meeting. A decision of rate change in either direction would impact short-term rates. To get a feel of where the long term rates are heading to, one needs to watch carefully fine points in Fed's statement.

According to Freddie Mac's weekly survey, the 30-year fixed-rate mortgage averaged 6.36% in the week that ended today -- down slightly from its 6.37% average last week. At this time last year, the loan averaged 6.10%. The 15-year fixed rate remained unchanged at last week's average of 6.06%. At this time last year this rate was 5.65%.

Rate for 5-year Treasury-indexed hybrid adjustable-rate mortgages (ARM) averaged at 6.11% increasing slightly from last week's 6.10%. This rate averaged 5.59% a year ago. The 1-year Treasury-indexed ARMs also moved up a little this week to 5.57% from last week's rate of 5.56%. At this time in 2005, the 1-year ARM averaged only 4.89%.

Resources: Financial Planning

Today we post contact information and pointer to websites of some useful
organizations whom you may approach as individual or as a team to get
advice and guidance for financial planning:

For information on a variety of money-related topics
American Institute of Certified Public Accountants (800) 862-4272
The Financial Planning Association (800) 282-7526
International Association of Registered Financial Planners
(800) 749-7947

Especially for guidance needed to start an investment club, visit
National Association of Investors Corporation (810) 583-6242

For information from and about fee-only financial planners, contact
National Association of Personal Financial Advisors (NAPFA)
(800)366-2732

Mortgage Rates Up After 4 Weeks

Concern for inflation boosted mortgage rates during the past week, hitting adjustable-rate mortgages especially hard and narrowing the gap between ARMs and fixed-rate mortgage rates. The concern has put some upward pressure on bond yields, which translated into higher interest and mortgage rates this week. The rate had gone down in 10 out of 11 weeks before this week.

According to Freddie Mac's weekly survey, the 30-year fixed-rate mortgage averaged 6.37% in the week that ended today -- up from its 6.30% average last week. At this time last year, the loan averaged 6.03%. The 15-year fixed rate averaged at 6.06% this week, again an increase from last week's 5.98%. At this time last year this rate was 5.62%.

Rate for 5-year Treasury-indexed hybrid adjustable-rate mortgages (ARM) averaged at 6.10% increasing from last week's 6.00%. This rate averaged 5.57% a year ago. The 1-year Treasury-indexed ARMs also moved up this week to 5.56% from last week's rate of 5.46%. At this time in 2005, the 1-year ARM averaged only 4.85%.

40-Year Mortgage

The 40-year mortgages, for years a niche product, is finally set to have a strong presence in the mainstream mortgage market. Forty-year mortgages have lower monthy payments than the well-known 30-year version, altough they cost more over the life of the loan because the borrower pays interest for 10 years longer. With the lower monthly payments, they are seen as a tool to allow people to buy homes that are unaffordable with 30-year mortgages. Fannie Mae stuck its toe in the 40-year mortgage pool a year and half ago when it started a pilot program to buy the long loans from 22 credit unions. Now Fannie Mae has really taken the plunge, and will buy conforming 40-year mortgages from any qualified lender.

It's not a sure bet that 40-year loans will catch on. First, the interest rates are slightly higher--usually an eighth to a quarter of a percentage point. Second, tacking 10 years onto the payment schedule doesn't save all that much money every month.

Its chief competition was interest-only loans which occupied a big chunk of the mortgage market in high-price cities as buyers hunted desperately for ways to afford more expensive houses. But with rising interest rate the advantages of having an interest-only loan are also vaporing away.

Still, there are a plenty of home buyers who might barely stray outside of those guidelines when applying for a 30-year mortgage--for example, if the house payment would be 29% of monthly income, a 40-year loan might allow a borrower to qualify by sliding under the 28% threshold. The real difference is quite small, though: On a $200,000 loan, the reduction in monthly mortgage would amount to less than 64$ a month on a 40-year, fixed-rate mortgage at 6.25% compared to a 30-year fixed at 6%. Over the lifetime of the loan you'll end up paying much more in total interest, though.

Another Currency ETF

In September, PowerShares launched a new innovative ETF (Exchange Traded Fund) based on currency trading: Powershares DB G10 Currency Harvest Fund (DBV) that simulates the so-called currency carry trade, tracking a Deutsche Bank AG index comprised of six of the Group of Ten, or G10, currencies: U.S. Dollar; Euro; Japanese Yen; Canadian Dollar; Swiss Franc; British Pound; Australian Dollar; New Zealand Dollar; Norwegian Krone, and Swedish Krona. The index is designed to exploit the trend that currencies associated with relatively high interest rates, on average, tend to rise in value relative to currencies associated with relatively low interest rates.

Accordingly, this sophisticated index reflects long futures positions in the three currencies with the highest interest rates, and short positions in the three with the lowest rates. However, if the U.S. dollar is one of the three highest or lowest-yielding currencies, the ETF will not take a long or short position because investors are already buying shares with their home currency. The leveraged long-short index reviews the currencies of countries with the highest and lowest rates and rebalances quarterly.

The new fund is different from single-currency ETFs, such as those managed by Rydex Investments, another ETF provider (read our past posting). For example, the Euro Currency Trust (FXE) buys Euros, rather than currency futures, in a primary deposit account to provide investors with exposure to the exchange rate between the U.S. Dollar and the Euro.

Although U.S. investors may use this ETF as a long-term diversification tool for U.S. investors, one must note that currencies are generally volatile and the temptation to engage in potentially damaging and costly trading could be high.

A Special ETF from Powershares

PowerShares Capital Management was on a flow throughout 2005. One after another .. they launched new and innovative Exchange Traded Funds (ETF). In December they introduced an ETF that challenged traditional notions on index investing.

Its name is PowerShares FTSE RAFI U.S. 1000 Portfolio (PRF) and is listed on the New York Stock Exchange. This special ETF from Powershares is based on a controversial new "fundamental" indexing strategy pioneered by Robert Arnott, chairman of Research Affiliates and editor of the Financial Analysts Journal. In 2004, Arnott published an academic paper that was critical of most traditional benchmarks prevalent in the indexing market, which weigh companies by their market capitalization. Arnott's opinion was that indexes formed in this way get over-exposed to overvalued companies, especially during periods of 'irrational exuberance' (thanks, Mr. Greenspan for this phrase). The prominent example is the S&P 500 index which, during the bubble days of late 1990s, got dominated by highflying growth and technology companies whose stocks were driven by some sort of madness. When rationale came back to investors, the index (which thus far was considered a safe heaven) suffered quite a lot.

PRF, on the other hand, tracks the performance of the top U.S.-based companies whose fundamental factors (i.e. sales figures, price-to-earning ratio, cash inflow, dividends) -- would determine the weighting in the index.

At the same time PRF has kept a low expense ratio of only 0.6%. Its Top 5 holdings are Exxon Mobil (XOM), General Electric (GE), Citigroup (C), Bank of America (BAC), General Motors (GM). It made its debut in the last week of 2005 at $50. Yesterday it closed at $54.85 -- a return of 9.8% in 9 months.

Mortgage Rates: Low and Steady

Refinancing activity jumped up 18% last week, accounting for almost half of all mortgage applications. The low level of mortgage rates, which went down noticeably last week and remained steady this week, motivated many homeowners to move to refinance adjustable-rate mortgages before they reset to higher rates. Even though rates have fallen recently, housing activity continues to slow while new construction wanes, leading Fed Chairman Bernanke to expect that the national economic rate of growth will lose up to one full percentage point in the last half of 2006.

According to Freddie Mac's weekly survey, the 30-year fixed-rate mortgage averaged 6.30% in the week that ended today -- slightly down from its last week's average of 6.30%. At this time last year, the loan averaged 5.98%. The 15-year fixed rate averaged at 5.98% this week -- unchanged from last week. At this time last year this rate was 5.54%.

Rate for 5-year Treasury-indexed hybrid adjustable-rate mortgages (ARM) averaged at 6.00% -- unchanged from last week. This rate averaged 5.48% a year ago. The 1-year Treasury-indexed ARMs have an average rate of 5.46%, slightly down from last week's rate of 5.47%. At this time in 2005, the 1-year ARM averaged only 4.77%.

Investment in Software

This is not the year 2000 and we usually do not talk much about software companies nowadays. In case you did not notice, you may get surprised by knowing how Software stocks bounced back from the slump the whole stock market had in early summer days. The Dow Jones U.S. software index, which tracks 55 companies has outperformed the technology-laden Nasdaq composite with a widening margin, improving about 18% compared with the Nasdaq's 8% gain.

Trends in both packaged software - that are directed at consumers with price tags somewhere between $100 and $1,000, - and big enterprise applications are driving investor interest in the sector higher than usual. There are a number of forward-looking news in this sector: Adobe Systems Inc. is releasing a new version of Acrobat in November, and of its Creative Suite, which includes Photoshop, early next year. Adding to the fervor is the much-anticipated release of Microsoft's long-awaited operating system upgrade, Vista, plus a new version of OSX from Apple Computer Inc.

The best way to invest in this sector is to buy Exchange Traded Funds (ETF) like iShares Goldman Sachs Software Index (IGV), Powershares Dynamic Software (PSJ) or Merrill Lynch's Software HOLDRS Trust (SWH).

The Top 10 holdings of IGV are: Oracle, Microsoft, Symantex, Adobe, Electronic Arts, Computer Associates, Intuit, Autodesk, Amdocs and Citrix. Today the fund closed at $43.80 -- up by $0.85 or about 2% from yesterday's closing value.

The Top 10 holdings of PSJ are: Intuit, Oracle, Microsoft, Fiserev, Red Hat, Cadence Design, BEA Systems, Citrix, Reynolds and Reynolds, CSG Systems. Today the fund closed at $18.54 -- up by $0.43 or about 2.37% from yesterday's closing value.

The 17 issuers of underlying securities represented by SWH, as of August 1, 2005, were Adobe, BMC Software, Computer Associates, Check Point Software, Intuit, Macromedia, Mercury Interactive, Microsoft, Micromuse, Nuance Communications, Openwave Sys, Oracle, Sap Aktiengesellschaft, Sapient Corporation, Siebel Systems, Symantec, Tibco Software. Today the fund closed at $39.70 -- up by $0.96 or about 2.48% from yesterday's closing value.

[Disclosure: We own IGV in our personal portfolio]

Everbank's Gold CD

Everbank is an internet bank based in Jacksonville, Florida. Since October the bank is offering another innovative way of investing in gold prices. For a minimum investment of $1,500, Everbank is offering a 5-year certificate of deposit with the yield pegged to gold prices. This offers Gold's upside potential as well as its value as a hedge against inflation and other uncertainties. This financial product is a variant of "principal protected" CDs that are linked to the performance of stock indices such as the Standard and Poor's 500.

The CD's effective yield is equal to the percentage difference between the price of gold at the time of purchase and the average value over the time period that the CD is held. Because the average is used, the yield can potentially increase if the price of gold fluctuates rather than rises steadily. If gold prices reverse course, Everbank limits investors' risk by returning their initial investment if they hold the CD to term. The yield hits zero in that case and investors will have to forfeit a guaranteed 5.25% annual return that they could have earned on a safer traditional 5-year Everbank CD. That's the risk-part of this non-traditional CD investment.

On the other hand this is another investment vehicle for an individual to participate in gold without having to pay storage fees for the commodity, or pay a commission.

Currency-based Exchange Traded Funds

In December 2005, Rockville, MD-based Rydex Investments introduced the first currency Exchange Traded Fund (ETF): Euro Currency Trust (FXE) whose current asset value is about $635. The fund is designed to rise in value when the euro strengthens relative to the dollar, and fall when the euro weakens. So, such currency ETFs are similar to money-market funds but denominated in foreign currencies, which are held by the depository for the trusts, the London branch of J.P. Morgan Chase Bank.

Following up on the success of FXE, Rydex Investments listed six more currency-based ETFs in June on the New York Stock Exchange. These funds are:
Currency Shares Mexican Peso Trust (FXM)
Currency Shares Swedish Krona Trust (FXS)
Currency Shares Australian Dollar Trust (FXA):
Currency Shares British Pound Sterling Trust (FXB)
Currency Shares Canadian Dollar Trust (FXC)
Currency Shares Swiss Franc Trust (FXF)
The first 2 funds hold about 1,000 pesos or kronas. The last 4 funds hold about 100 of their respective currency units.

All these funds have low expense ratios of 0.4% of assets. These ETFs also provide a yield based on overnight interest rates in the country of the currency it holds.