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Painting from Ellsworth Kelly Exhibit, Museum of Modern Art, NY, to January:
It is almost a foregone conclusion that the Fed will lower rates on October 31. Either 25 or 50 basis points. I think they will go 25, to leave some room for another cut, near term. The European Central Bank (ECB) is poised to go the other direction, however. The ECB recently warned that it expects inflation to grow toward the end of the year, and inflation in the largest economy, Germany, was recently measured at 2.4%, well above the ECB's 2% target. The next ECB Council meeting is November 8.
So what does all this mean for the US dollar near term (pictured above versus the euro)?
The Brazilian Stock Exchange in Sao Paolo, Bovespa, will issue shares 
tomorrow, October 26, in its own IPO. It follows in the footsteps of other exchanges that have listed their shares including New York (NYX), London (LDNXF.PK) and Frankfurt (DBOEF.PK). The ticker is BOVH3.BR. The initial share price is expected to be $11. Shares will be sold in Brazil to individual investors and to foreign institutional investors under Rule 144A. As this is expected to be one of the largest IPOs ever in Brazil, it is possible that the shares may be listed at a later date on NYSE. According to Morningstar, "Bovespa posted a first half net profit of
Despite the hard times that have befallen domestic banks, shares in Indian banks have soared. There are only two listed in New York: HDB and IBN. HDB (HDFC Bank) is up 75% over the past year, while IBN is up 82%. Both have experienced explosive growth since 2002, and with the rupee appreciating 13% against the dollar this year, their returns may accelerate. But which bank is the better buy and the best long term prospect?
HDB offers loans, credit cards, foreign exchange and investment services with 748 branches in India. Half of these are in rural areas. 1 US share = 3 India shares. Current share price = $117; present value estimated at $102 assuming 45% net income growth each of the next three years. Long term debt = 3% of total assets. Dividend yield = 0.5%. $1.9 billion cash on balance sheet. $23 billion total assets.
IBN offers loans, credit cards, foreign exchange, insurance and investment services with 950 branches. IBN has a presence in 17 countries, including Russia, China, and the US. 1 US share = 2 India shares. Current share price = $59; present value estimated at $57 assuming 45% net income growth each of the next three years. Long term debt = 15% of total assets. Dividend yield = 0.9%. $0.5 billion cash on balance sheet. $90 billion total assets.
Bottom Line? Shares in both banks are currently overpriced, HDB by an estimated 15% and IBN by 4%. IBN could more easily be bought on a pullback. Its global presence is a plus, as is the dividend, making IBN the better buy. But one caveat: proposed regulation of participatory notes could drop the number of foreign buyers, and therefore the price: Economic Times. Conversely, on the plus side, with inflation at 5%, most analysts say The Reserve Bank of India is likely to raise rates one more time (even though its prime rate is 12.75%). If this happens, and the Fed lowers rates, the rupee will appreciate further against the dollar.
Where can you get a 253% return in two months? IPOs, where else? The following IPOs have generated impressive returns since they were issued recently:
MELI, +124% - MELI is Mercado Libre, a Latin American version of Ebay.
SHOR, +71% - SHOR provides internet protocol phone service
LULU, +222% - Lululemon the much-hyped athletic wear maker in Canada
PWRD, +74% - Perfect World is an on line game developer in China
VMW, +253% - VM Ware, Inc., a software company in Palo Alto, CA
STV, +137% - STV is a digital TV provider in China
Of these companies, MELI and STV may be the best long term bets, with defensible business models. There are some other IPOs that have risen less dramatically, but are sound businesses that could provide long term growth. These include APKT, Acme Packet, an interactive communications provider; PLTE, Claymont Steel Holdings, a steel plate producer in Delaware; and AIMC, Altra Holdings, an industrial manufacturer in Massachusetts. Some of the top institutional investors already hold large stakes in these firms. Above right, VMW shares since August.
Below: section of Jackson Pollock, Untitled, 1950.
A US based industrial company with global presence in its four segments: electrical equipment, fluid power, truck drivetrains, and automotive (superchargers, valves).
P/E = 14.7x; PEG = 1.2. At the current price of $95.56, the stock is undervalued. Value = $108.60 using estimated 2007 EPS of $6.80 in a discounted cash flow valuation with a 12% increase in earnings each of the next three years, 3% reversion growth and a 10% discount rate. Last year the company's net income growth was 18%. The current dividend is 1.8%, paid quarterly, and the company has sufficient cash on hand today to pay this dividend for the next year; the payout ratio is 26%. Long term debt = 15% of total assets and is declining. Over the last four decades, the company has grown through acquisitions of domestic and foreign manufacturers that fit its segments. Recent acquisitions include Morestana SA (Mexico), Pringle Electric (US), Cobham PLC (UK), and Pigozzi SA (Brazil). Eaton currently has 61,000 employees and manufacturing facilities in 30 countries including Brazil, France, Germany, India, Indonesia, Italy, Japan, Korea, Monaco, the Netherlands, Poland, Taiwan, and Turkey. Above left, chart of the last three years.
Bottom line? Eaton's electrical business is the leader in the markets it serves. The stock has consistently outperformed the S & P, although growth was nearly flat during the 2000 - 2001 slowdown. While sales can be cyclical, the wide global presence and four business segments diversify this risk. At their current price, the shares appear undervalued.This information is not meant as investment advice and readers should conduct their own research before buying any stock.
Chinese stocks are sporting some incredibly high multiples lately. Everywhere there is talk of a bubble. Consider the following: HMIN (Home Inns) trades at 186 x earnings, BIDU at 184 x earnings, and STP (Suntech Power) at 52 x earnings. These companies must continue to grow at breakneck speed for years to come to justify their current prices. BIDU is currently valued at a capitalization rate of 0.5%!
To be sure, there are some more moderate P/E ratios to be found: CHL (China Mobile) at 37 x earnings, SNP (China Petroleum) at 18 x earnings, LFC (China Life Insurance) at 14 X earnings, and CEO (CNOOC) at 20 x earnings. Are these valuations reasonable? To answer this question look at PEG (P/E to earnings growth) ratios. If the ratio is below one, the share price is relatively cheap for the growth you are receiving. Based on next year's earnings estimates, CHL has a ratio of 1.15, LFC at 1.4 and CEO at 0.87. The most expensive is SNP at 3.0. CHL, LFC, and CEO appear to be priced within the realm of reason, and despite all the bubble talk, some shares may actually be cheap (!) if real growth outpaces current earnings estimates. With a population of 1.3 billion, that might be possible.
