Week in Review

Japan Looks to Overhaul Financial Regulations

Japan is hoping to strengthen its financial services industry by fundamentally changing industry regulations that have stymied growth, reports The Wall Street Journal.

A proposal for a large-scale deregulation of financial institutions, stock exchanges and funds by the Financial Services Agency suggests the country wants to lose its reputation as an expensive, bureaucratic place for financial services.

The plan, for example, would abolish a rule that requires exchange-traded funds to be based on 13 designated stock indexes by allowing ETFs to be tied to any stock index or security, including bonds or futures. Currently, Japan prohibits the staff of banks and brokerages from sharing the same offices and customer information, but relaxing those rules could help banks generate more business.

The proposal would also allow foreign issuers to submit disclosure documents in English, removing the expense of translating documents into Japanese. Officials hope these changes will bring more foreign investors to Japan, where household assets far exceed those of the U.S.

Japan strengthened regulations after the 1980s asset bubble popped, but has recently seen its appeal diminish as money managers take their business to less-regulated centers such as Hong Kong and Singapore.

"It is absolutely in the right direction and further in that direction than the skeptics would have believed possible," said Mark Branson, head of the Tokyo unit of Swiss banking group UBS. "When I came here 2-1/2 years ago, people said that kind of change was impossible in Japan."

African Investments Top List of 2008's Hot Issues

Of the 80 things that will dominate the nation's consciousness in 2008, foreign investments and development in Africa top the list, according to predictions by JWT advertising. And if that's the case, then interest in frontier emerging markets funds could continue to build, in spite of recent analysis that emerging markets funds are about to run their course.

Other financially oriented themes for the coming year include continued foreign government investment in U.S. companies (#25), humbling of hedge fund managers overexposed to subprime loans (#34), outsourcing to the Ukraine and other Eastern European countries (#50), social network service brand communities (#65) and the weak dollar and strong Euro (#79).

The list certainly is varied, with Keira Knightley coming in at number seven, followed further down the list by climate sightseeing, e-clutter consultants, eco-fatigue, Facebook suicides, mobile technology explosion, "radical transparency," smart cars and virtual gifting.

"These people, products, places, services and shifts will help to define 2008," said Ann Mack, director of trendspotting at JWT.

"Love it or hate it, technology continues to be a common thread on our list," she added. "It drives the serendipitous randomness that throws up chance connections, groundbreaking discoveries and great business ideas."

U.S. Economy Already In a Recession: Bill Gross

Although Bill Gross, managing director at PIMCO and one of the most famous and successful fund managers in the industry, recently said that the U.S. will experience a mild recession sometime later this year, he now believes the downturn began in December. The good news is that he believes that with the right fiscal controls, it could last only four to five months, the Financial Times reports.

Because Gross expects GDP growth of a mere 1% in 2008, he is calling on the Federal Reserve to bring interest rates down to 3% and for the Bush administration and Congress to "take some rather unperceived and un-forecasted measures in terms of fiscal stimulation.

"If I had to be bold, I'd say we began a recession in December," Gross said. But if the government doesn't step in to effectively jumpstart the economy, the recession could last longer.

So far, Gross said, he has not been satisfied with the government's attempts to stabilize credit markets. "What needs to be done is something fairly radical compared to Republican orthodoxy, which means spend and absorb the deficit, as opposed to pretending that you're fiscally conservative."

Gross also lambasted hedge funds, calling them nothing more than a "con, an unregulated bank. It's been a con on the government in terms of their unwillingness to regulate the industry."

SEC Investigation Into Subprime Pricing Expands

Federal regulators aren't just looking into whether Bear Stearns hedge fund managers hedged their holdings in subprime paper by pricing their own holdings at a more attractive rate than those of their customers, The Wall Street Journal reports. The Securities and Exchange Commission is investigating more than three dozen firms over whether they should have warned the public earlier over their subprime investments, whether they disclosed their risks and how they priced the paper, as well as whether they gave themselves higher values for these securities than their customers.

"As in most investigations, the issue comes down to what did people know and when did they know it," said Mark Schonfeld, director of the SEC's New York office. In the past few months, investment firms have written down more than $80 billion in mortgage-related assets.

Among the firms being investigated are UBS, Morgan Stanley, Merrill Lynch, Royal Bank of Canada and Bear Stearns.

However, Walter Ricciardi, deputy director of the SEC's enforcement division, added, "The fact that we're investigating does not mean that we have uncovered wrongdoing. We don't know now that we will be recommending any enforcement actions in the subprime area."

Early Boomers Won't Wait To Draw on Social Security

Most Baby Boomers turning 62 this year have established very traditional lifestyle characteristics, but don't consider retirement planning to be a pressing issue, according to a survey by MetLife.

"On average, as far as they're concerned, they're not really going to be old' for another 17 years," said Sandra Timmermann, director of the MetLife Mature Market Institute, which conducted "Boomers Ready to Launch," a profile of the first Baby Boomers as they turn 62.

Thirty-one percent said they plan to apply for Social Security when they turn 62 because they feel entitled and would rather have the money than let the government take it. Many Boomers said they need the money now and worry that there will be nothing left in the system if they wait.

The survey also found that 68% have employee or retiree health insurance, 47% are covered by a defined benefit plan, 50% have a 401(k), 50% have an IRA, 38% have stocks, 38% have mutual funds, 85% own their own home and the average value of their home is $297,900.

Fifty-four percent said they are doing only a poor to fair job of ensuring that they have adequate coverage for their own long-term care needs.

Of those Boomers who are aware that they can apply for a federally backed reverse mortgage at age 62, only 16% said they would consider it.

"All in all, this is a fairly affluent group who remain in good health with a lot more left to give," Timmermann said.

Auto Enroll Could Reverse Stagnant Fund Ownership

Ownership of mutual funds in U.S. households made eye-popping gains every year between 1980, when it was a mere 6%, to 2001, when it reached 48%, but it has hovered around that range for the past six years.

But automatic enrollment could significantly change that by drawing households with less income into the mutual fund ownership arena, Investment Company Institute Chief Economist Brian Ried tells the Associated Press.

"We have kind of maxed out-temporarily-the households that could potentially invest" in mutual funds, Ried said. Households that have income of between $25,000 and $35,000 account for only 6% of fund ownership but are 12% of the population, he noted.

Although only a small percentage of employers have turned to automatic 401(k) enrollment, more will continue to do so, and that will boost the numbers meaningfully, he said.

Hedge Funds Reap $41.1B In 3Q07, Reaching $1.73T

The hedge fund industry had net inflows of $41.1 billion in the third quarter of 2007, approaching $1.73 trillion in assets under management, according to research from Lipper Tass. The net inflows were the third highest of any quarter.

"Growth came from ongoing institutional allocation in a period of heightened volatility across many asset classes," the report said.

Hedge funds saw net inflows of $101.1 billion through September 2007.

The industry's assets under management exceed the combined gross domestic product of all the world's low-income countries and has approximately one-tenth of the market value of all domestic shares listed on the New York Stock Exchange, Lipper said.

Russian Investors Double To 400,000, MICEX Finds

For the second year in a row, the number of individual Russian investors doubled, topping 400,000.

A recent poll by the MICEX Stock Exchange found that 50% of financially active Russians would buy stocks if they could afford to, while 90% said they need a lot more financial education.

Alexei Rybnikov, CEO of the MICEX Stock Exchange, recently called for a joint effort by the Russian government, regulators and professionals to help bridge the finance education gap - further reaching an estimated investor pool of six million Russians.

"The Russian stock market has made a breakthrough," Rybnikov said. "In a few years, the number of individual investors will be in the millions. But this potential makes the problem of investor [education] and the general financial culture of Russia's population even more important. Investors entering the stock market should be well informed and realize the importance of their investment decisions and the risks existing in the stock market."

Defense Sector Continues To See Great Performance

The U.S. defense and homeland security sector continues to see strong gains despite the slowing economy.

Through the end of November, the benchmark SPADE Defense Index had a year-to-date gain of 21.5%, nearly 20% better than the Standard & Poor's 500 Index.

Since 2000, the SPADE index has produced a total cumulative gain of 159.8% compared to the S&P's 10.2% and the Russell 3000's 5.9% and has outperformed the S&P by more than 19% in four of the last five years.

"Although much of the gains can be attributed to government spending in the aftermath of 9/11 and the war in Iraq, the defense sector's positive performance predates the 9/11 attack on the U.S., and trends suggest that growth may continue even after a pullback from Iraq occurs," said Scott Sacknoff, president of SPADE Indexes. "Current economic issues related to the subprime loan crisis, inflation and the possibility of recession tend to have less of a direct impact on the defense sector, which derives much of its revenues from government budgets," he said. "While the sector may move in sympathy with the overall market at times, the underlying factors driving the defense industry remain quite different." The defense sector is in the midst of a long investment cycle, and its companies generate nearly 5% of the U.S. GDP, he said.

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