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WARNING: DON’T EVEN THINK OF BUYING REAL ESTATE IN MEXICO UNTIL YOU COMPLETE THIS COURSE!
Updated Monday, May 23, 2016, 10:41 A.M.
Your investing fate overseas need not be in the hands of ultra-nationalist machete wielding drunks, Chavista sex addicts, and French Civil Code imbeciles…
And your problems don’t stop there. Even in “safe Europe” one of the PIGS [Portugal, Italy, Greece, or Spain] can expropriate your home or business in postcard perfect seeming locations such as the scenic South of Umbria. And then there are the bleeding liberals in the Northern “civilized” countries of Germany, Denmark, Sweden, Finland and Norway that have no problems hammering your returns with pork belly VAT taxes.
Let’s face it, international investing is not a cakewalk without a guide.
WHAT YOU GET AND HOW IT WORKS!
This course offers you a concise overseas investing training based on fact from the halls of such erudite places as Harvard.
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I am not just a professor of finance at major state university but I am also a seasoned international investor with decades of experience since childhood. Read my Udemy profile for more detail regarding my credentials.
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-Dr. Scott Brown
Associate Professor of Finance of the AACSB Accredited University of Puerto Rico Graduate School of Business
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|Section 1: Dr. Scott Brown Welcomes You To A Whole New Universe of International Investing!|
Scott explains the different ways to stay engaged with this course material. This is important to help you move forward as a student of international investing.
Dr. Brown sends out educational announcements. These are designed to help you gain further insight into topics covered in this course.
On occasion he will send a promotional announcement. These are not intended to sell you into anything.
Promotional announcements bring other learning points to your attention. And additional resources are suggested.
Some of these may be paid.
If you have a question of a sensitive nature please contact Scott directly. The policy of this Udemy Campus under direction of Dr. Brown is to reply to you within 24 hours on work days, 48 hours on weekends, and up to 72 hours on long weekends.
If he is on travel where internet is expected to be spotty we will post an educational announcement to warn you of possible professor-student messaging delays.
|Quiz 1||2 questions|
What are the two most important points you should have gleaned from this section? Take this quiz to find out!
|Section 2: An Introduction to the Major Themes and Issues in International Investing Today!|
International investing is set apart from everything you have learned from me so far in the following four ways.
The first three present difficulties not faced by a purely domestic investor. The fourth represents greater opportunities to make money delving into markets other investors never consider.
Take Foreign Exchange Risk as an example. This is the danger that bottom line profits in a deal go south from unexpected drops in asset denominated currency values.
The Japanese yen is denoted by the symbol ¥. Imagine that $1 = ¥100. Say you buy 10 shares of Sony at ¥10,000 per share.
If the market moves ten percent in your favor the deal is worth more in hard, cold yen cash: ¥110,000. That’s great and you are smiling ear to ear but what if the yen has depreciated to $1 = ¥120 and you need your cash out in U.S. dollars.
Foreign sovereign governments set the rules on the movement of capital, goods, and people crossing the borders. Some countries are more logical and others are more chaotic. All are governed by politicians with highly diverse perspectives and objectives — some beneficial to all and others despotic.
This means that international laws change in highly erratic ways.
Market imperfections abound in countries around the world in four primary arenas,
The way Nestlé ripped of foreign shareholders is a great example of why only the astute survive in offshore investing. Foreigners could only purchase expensive bearer shares while Swiss nationals were able to load up on cheap registered stock. The rules changed to allow foreigners free participation in registered shares on the 18th of November of 1988,
The graph shows how consistent the spread in price between bearer and registered share is up until free participation. The price of the expensive bearer stocks drops while the Swiss stocks rise.
This resulted in a dramatic transfer of wealth from foreigners to Swiss nationals. No Swiss executives were indicted for the crime since it wasn’t considered as such in the country.
This is example of the pervasiveness of political risk worldwide. Switzerland is widely considered free of political risk. Think again!
When a market is falling in one part of the world another is rising. This creates opportunity for not just firms but also individual investors.
As an investor your only criteria should be maximizing your wealth. And international markets allow you to do this.
But strange lands also provide exciting explorations for strangers. Additional perks of investing abroad create opportunities such as,
As a stock investor always remember that many cultures that are not English Common Law based do not prize your God given right to maximize your wealth as shareholder. Hence you must remain cautious at all times. And don’t be surprised to find that most countries at the end of the day could care less about your property rights. This course teaches you how to avoid — or at least buy real estate with caution in — these countries.
English Common law respects property rights more than any other legal system. This gives shareholders the most power in English speaking societies with Anglo Saxon cultural roots.
Shareholders are at the front of the line behind bondholders in bankruptcy from New York to London.
This is not so everywhere else. All other systems view the American shareholder as a chump on a stump stakeholder like anybody else including,
Japan takes collusion to the extreme with the keiretsu. These are massive vertical and horizontal clans of families who work together for a common goal that rarely considers shareholder rights.
Shareholders and regulators have become much more proactive in firing dishonest and incompetent officers. This has been due to a scourge of scandals of which Enron, WorldCom as well as Global Crossing examples provide.
Watch the T.V. Show “American Greed” for full details of each. And make sure you watch the show with Jim Carrie titled “Fun with Dick and Jane.”
These events wiped out the retirements of tens of thousands of people like you and me. This has underscored the importance and need for sound corporate governance. A financial and legal framework for regulating the relationship between shareholders and management is part of corporate governance.
Another part is company culture.
Russia, Korea, and Indonesia are examples of countries with particularly nasty problems with corporate governance. In these countries shareholder protection is nonexistent.
If shareholders are not protected nor are real estate property owners. Do not buy a residence in these countries.
Rent. No matter what you are trying to achieve investing overseas, ownership of anything will not work without sound local corporate governance.
This is the central theme of this section on international investing trends. Stick to nice countries that respect your hard earned savings.
Avoid everywhere else or visit as a short term tourist.
Pay close attention to the following developments.
The Global Real Estate and Stock Crisis of 2008-2009 of Everything Falling at Once
The deregulation of world markets with rapid innovations in communications technology have flattened global information and trade costs. This has allowed for easier overseas real estate investing. Bonds can now be purchased in multiple currencies. Cross-border stock listings allow you to invest without leaving your country.
Economists did not expect the Euro Currency to flourish until the mid-point of this century. This is measured by the percentage of import-export trades with the EUR on one side of the exchange rate.
More than a third of all currency transactions today involve the Euro.
The zone has increased to over 300 million Europeans in more than 16 countries. Ten joined in two thousand and four alone.
Now economists are anticipating that the Euro currency will overtake the U.S. dollar in global importance soon.
Countries in the Euro zone include,
The chart shows that the value of the Euro has fluctuated greatly against the U.S. dollar. You could have bought a Euro in 2000 for about eighty-five cents. Travel and retirement living for Americans was the best deal ever.
A smart and simple international real estate investing strategy is to buy property in the United Kingdom, Canada, Australia, New Zealand, and the Western European countries above the Northern French and Italian borders when the U.S. Dollar is strong.
Real Estate ownership in the PIGS of Portugal, Italy, Greece, and Spain is for the hardiest of American ex-patriot. You get lots of lifestyle and lots more headaches as a property owner.
The battle between Southern Roman and Northern barbarian rages on. But today the barbarians are civilized and the PIGS of Portugal, Italy, Spain, and Greece (as well as France) much less so.
The bloated government of Greece surprised the world in December of 09’ when Greek politicians announced a jaw dropping budget deficit of 12.7% of GDP rather than the forecasted 3.7%.
Bond investors stampeded. Moody’s, Standard and Poor's and Fitch’s bond rating agencies immediately downgraded Greek sovereign bonds to “junk.”
Market integration showed a vicious downside. Even though Greece controls just 2.5% of GDP in the euro-zone, the crisis quickly hammered debt ratings across Europe as a chain reaction. Fiscal discipline is a serious issue when considering any foreign market for real estate investing.
The chart shows that Greek and German bond yields were near parity until late fall 2009. The spread widened as Greece yields rose uncontrolled until the Greek debt bailout package of May 9.
In the last half decade world trade in the form of imports and exports has grown at a rate double that of world GDP. This has forced more open political economies. Mercantilism politicians can no longer capriciously protect local markets.
Liberalization of trade has been in part sparked by The General Agreement on Tariffs and Trade (GATT). This multilateral agreement includes many member countries. It has reduced trade barriers.
The World Trade Organization (WTO) enforces the rules set by GATT.
An important milestone has been the expiration of quotas on imported textiles. This was on January 1, 2005.
The North American Free Trade Agreement (NAFTA) set forth a schedule for removing impediments to trade. This is between the United States, Canada, and Mexico, over a 15-year period beginning in 1994. Exports to GDP rose from 2.2% in 1973 to 29% in 2006. But NAFTA has been a stark failure beside Europe. There is job migration from South to North in the European Union but not so in the NAFTA system that favors U.S. and Canadian citizens over Mexicans. Problems between Mexico and the United States are similar to those with the PIGS in Europe.
Denationalization involves the liquidation of state businesses. This is necessary for the transition of communist command to market economies.
Privatization brings in enormous foreign direct investment.
China forces foreign investors to buy B shares in privatized Chinese companies. And the Chinese government stands as majority shareholder.
There are now more than fifteen hundred listed on Chinese stock exchanges.
The market collapse of 08’ to 09’ was the worst since the Great Depression. This came from excessive Home and institutional debt. Mortgage risk was hidden through securitization. Systemic American subprime fraud dissolved teacher retirement in Norway.
Nobody has yet done jail time in the U.S.
The chart shows that the Great Recession is accompanied with a spike in the U.S. unemployment rate. The G-20 became a central financial forum in this period. The G-20 includes Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Republic of Korea, Mexico, Russia, Saudi Arabia, South Africa, Turkey, United Kingdom, United States, European Union.Multinational corporations operate in multiple countries. There are at least sixty thousand around the world. These source capital, labor, and deliver goods and services across multiple borders
|Quiz 2||10 questions|
What are the vital chucks of information you should have picked out from each of the video lectures in this crucial introductory section? Take this quiz to find out!
|Section 3: International Real Estate Investments for Serious Ex-Patriots Active or Retired!|
The most important research for real estate investors abroad is a series published in the most prominent journals of economics and finance on the planet. The researchers are professors from Harvard. They are as follows,
Civil code traditions predominate around the world. These are codified bodies of laws. Astute attorneys in these systems can get around the laws in civil code countries like a knife through butter.
If your intention of investing overseas is based purely on securing a solid return avoid investing in any country based on Scandinavian, German, or French Civil Code.
English common law is composed of independent decisions from judicial contemplation of specific cases. Attorneys have the most difficulty manipulating this type of system.
And in fact the studies I cited before have shown the strongest protection of your property rights under English Common Law systems.
The best places in the world for real estate and stock investing is in the United States followed by the United Kingdom, Australia, New Zealand, Canada, The British Virgin Islands also known as Tortola, the United States Virgin Islands and finally Puerto Rico. India, Malaysia, Singapore, and South Africa also enjoy common law based political economies but have too much political volatility.
French civil code spread around the world in the same form as English common law. Countries like Puerto Rico were invaded and colonization occurred. Other countries copied or selectively adapted from one of the two.
Napoleon conquered France and much of Europe. This pulled Belgium, the Netherlands, Italy, Portugal, and Spain into the French civil system. This in turn infected Algeria, Argentina, Brazil, Chile, Indonesia, Mexico, and the Philippines with the worst of the four possible systems of sovereign governance.
German civil code spans the motherland, Austria, Switzerland, Japan, and Korea.
Scandinavian civil code covers Norway, Finland, Sweden, and Denmark. Very few countries in the world today have indigenously developed their own legal system.
The vast majority of countries operate on a transplanted legal code. Local evolution has occurred but the inherent strengths and weakness either shine through or debase.
The best for investors, by far, is that of the English Common Law system. The best for low crime is Scandinavia.
The German system is purgatory the French way is hell.
Central tendencies of investment safety measures of the four major world legal systems are telling. The average value of the shareholder rights index is as follows.
There is a clear denigration of shareholder rights in the French and German civil code system. This reflects low regard for personal property in German and Scandinavian regimes but is particularly bad in the French based political system.
The difference between the United States and Mexico gives a much clearer conflict between the Common Law system to the north and the French system to the south in the Americas. The United States ranks a perfect 5 in shareholder rights. Mexico ranks a fetid 1.
Only a fool would willing invest cash savings or retained earnings in Mexican stocks or real estate. Remember that shareholder rights are a strong proxy for protection of homeowner and commercial property rights.
The Rule of Law Index shows a great deal of variation in mean values.
English common law does not appear to fare well against French code with regard to the rule of law. But a closer inspection of the data shows that the United States enjoys a perfect 10 with the United Kingdom close behind at 8.57.
Mexico has a pathetic score at 5.35 which is actually better than dismal Peru [2.50] or the Philippine’s [2.73]. But as crazy as Brazil [6.32] really is the country has stronger rule of law than Mexico.
Do not consider living in an area with a weak rule of law index. You would be putting your family physically at risk.
The decision of local politicians to protect shareholder rights has enormous economic consequences affecting.
Let’s compare the United Kingdom with Italy across the pond in Europe. The legal origin of Italy is French civil code. That of the United Kingdom is English Common Law.
Italy affords the least protection of shareholder rights  and the United Kingdom the most . Public traded Italian firms are much more concentrated in ownership than those in the United Kingdom.
The three largest shareholders in Italy control 58% of firm shares. In the United Kingdom the figure is much lower at 19%.
And if these facts do not paint a dire picture for investing in French civil code societies. Consider this.
The total market capitalization in Italy is 71% of gross domestic product (GDP). That of the United Kingdom is 248%.
And the bad news for French civil code countries does not stop there.
The number of listed stocks in Italy is just 247. The total quantity of public corporations listed in the United Kingdom is nine times more at 2,292.
But concentrated ownership is a symptom of a deeper problem. When power concentrates in society smaller shareholders and land owners are far more vulnerable to predatory actions of the upper crust.
The statistics above show that investor protection promotes strong real estate, stock and bond markets. Asset values are higher in markets that are perceived by investors as having firmly enforced fair rules for all participants. Flight from weak capital markets induces much sharper declines in global market meltdowns such as that in 08’ through 09’.
Orderly financial markets where investors are fully protected grow best and fall the least wherever they are located on the globe. When investors are protected the economic growth of a country is much more robust than in a country with low investor protection. This is because of three important reasons,
Higher household savings from higher investor trust.
Savings flow to more productive firms.
Investments are more efficiently allocated throughout the country economy that most respects investor rights.
The United States has been the source of the worst and most recent financial scandals. Investors around the globe are calling for even more accountability. Banks, auditors, federal regulators and internal compliance has failed among the Fortune 500.
This destabilizes the capitalist system more than anything else just as it destroyed the Roman empire.
The Sarbanes-Oxley Act is an attempt to improve investor protection in the United States. This includes,
The now much higher cost of compliance has pushed companies to the London Stock Exchange [LSE].
The Certified Financial Analyst designation from the Certified Financial Analyst [CFA] Institute is the most prestigious practitioner traditional in finance. The CFA institute judges the quality of management of a company based on two dimensions.
The Board in terms of,
They look at Management as follows,
The English use social pressure to curb corporate corruption rather than law. They have created the Cadbury Code of Best Practice. Over ninety percent of firms comply.
Those that do not pass compliance must give an explanation.
The Cadbury code requires,
The Dodd-Frank Wall Street Reform and Consumer Protection Act came in the aftermath of the 07’ to 09’ global economic crisis sparked by United States executives and politicians who remain unpunished. It includes two critical components.
The Volker Rule requires that banks accepting deposits cannot trade for the firm’s account nor own significant fractions of hedge funds. The resolution authority allows the government to seize and dismantle large banks facing insolvency.
Dodd-Frank moved over-the-counter [OTC] derivatives to electronic exchanges with order books under a central clearinghouse.
Firms of such size that can affect systemic movements in the financial system are under special monitoring. A new Consumer Financial Protection Bureau exists to monitor mortgages and other loan products.
Foreign Purchases of Property in Mexico
The nationalist Mexican Constitution prohibits non-Mexicans from owning your sweet beach front property anywhere closer than 62 [100 km] miles from the border or 31 miles [50 km] from the coastline. You are forced to work through a bank that holds a trust.
And your problems don’t stop there.
It is true that you can purchase fee-simple in the breathtaking mountains of Mexico. A group of oil rich Texans owned property in a bass fishing lake in central Mexico. One day they woke to the rumble of troop transports. Machine gun toting federalis ran them out.
They ended up relocating in the town of San Pedro de la Cueva to the North at the head of Lake Novillo.
I was young at the time I learned of this. And I never forgot.
And I never trust Latin America when it comes to real estate.
Another family in our Northern California town decided to move to Bahia de Kino in the state of Sonora in Northern Mexico proper. They moved all of their wealth to Mexico.
The Mexican government devalued the peso shortly thereafter. They were trapped doing menial labor in Mexico to make ends meet.
Foreign Purchases of Property in the Dominican Republic
A lot of people are buying in the Dominican Republic. The Dominican Republic is known for opaque transactions and is ranked 77th out of 81 markets globally according to Jones Lang Lasalle.
In fact, Latin America scores low in real estate transparency. Chile is the best at 34th. Yet this compares horribly with the 6th ranked United States.
Right below Chile are Argentina, Brazil, Costa Rica, and Mexico. Then transparency really goes down-hill in the countries of the Dominican Republic, Colombia, Panama, Peru, and Uruguay.
The very worst in Latin America is Chavista Venezuela.
All countries in Latin American have weak contract enforceability as compared to English Common Law origin countries.
All Latin American countries are French civil code origin political economies. This is consistent with the studies I have already shown you regarding Shareholder Protection and Rule of Law Index scores.
Foreign Purchases of Property in the United States Virgin Islands
The U.S. Virgin Islands include St. Croix [my favorite], St. Thomas, and St. John. There is no foreign ownership restriction. You can buy anything fee simple as you would in Florida.
The U.S.V.I is an English Common Law based zone. Taxes are much lower in the United States Virgin Islands than any waterfront area in the 50 United States at a third of a percent on assessed value for a home and slightly higher for land.
If you don’t want to deal with the hassles of speaking Spanish in Puerto Rico the U.S.V.I. is the safest tropical vacation investment paradise for foreign home ownership in the Americas.
Foreign Purchases of Property in Tortola
Tortola is also of English Common Law origin. You have to get a license to own a home and property taxes are three times higher for non-residents at 12% as compared to 4%. Tortola is an English Common Law based society.
Foreign Purchases of Property in Puerto Rico
Puerto Rico is the other amazing tropical vacation home destination. It is a French Civil Code piglet wrapped in an English Common Law blanket.
Hence you enjoy fee simple unrestricted beach front ownership with United States property ownership guarantees. Puerto Rico also has one of the lowest property tax schedules south of the United States continental border.
Hence you enjoy fee simple unrestricted beach front ownership with United States property ownership guarantees. Puerto Rico also has one of the lowest property tax schedules south of the United States continental border.
Anywhere in the world you wish to own a vacation home requires thinking through the legal origins, property taxes and a multitude of specific details. If you will follow your intuition regarding legal origin your overseas purchase will be dramatically more secure than those overseas property investors who wing it!
|Quiz 3||10 questions|
What are the critical factors most important for you to consider when it comes to purchasing residential or commercial real estate overseas? Take this quiz to discover which!
|Section 4: International Stock Markets Offer Unique Foreign Index Diversified Opportunity!|
You can learn a lot from the differences in market capitalization around the world. Total market capitalization is the sum of all of the caps of all of the firms in a market. This is the result of the share price of each stock times the total number of shares outstanding.
This is easy to calculate and is a direct measure of the amount of investment money in a particular market. In this section I will walk you through the following topics:
· Developed country market cap
· Developing countries market cap
· Liquidity measures
· Market concentration measures
Developed Market Capitalization
The total amount of shares outstanding on planet earth times share price summed to forty-eight thousand, seven hundred and 13 billion. Just over four fifths (81%) of market capitalization resides in just twenty-nine of the world’s most highly developed nations.
That was in two thousand and nine.
Developing Market Capitalization
Less than a fifth (nineteen percent) of market capitalization is in developing countries. These so called emerging markets are in:
· South of the American Border
· Non-Japanese Asia
· East Europe
· The Mideast and Africa
I say so-called because emerging markets is a nice way to say inferior legal systems. As you learned before the emerging markets suffer from remnants of Napoleonic Civil Code origin of law.
These inferior legal systems retard market growth. Hence I find the term developing to be very diplomatic.
There are two ways to know if a country is an emerging market. Any country classified as low or middle economies as ranked by income by the World Bank.
Low levels of gross national income (GNI) mark a country as emerging. This a nice way to say poor.
The World Bank maintains free public lists of countries categorized by GNI.
[Resource] Liquidity is King
Have you ever had to wait a long time to sell something? I have.
Try to sell a rental house. Months of waiting can be nerve wracking. You have to keep chipping down your price to get the rental property to move.
Ditto for the stock markets.
It is easy to get in and out of stock in the developed world. It is much harder in emerging markets.
Liquidity is the degree to which it is easy for you to convert your assets to cash.
Developed markets have the highest liquidity because of English, Scandinavian, and Germanic origins of law. This means that you can buy and sell faster and for better prices in these markets.
This automatically relegates single stock investments in developing markets to inferiority over the long haul. However, ETFs on the indexes of emerging (poor) markets offer interesting possibilities as you will see in a bit.
Market Concentration Is an Important Factor
When you look at a country as big as Brazil with about the same population as the United States it should seem odd that just one, two, or three stocks such as Petrobras, Embraer, and Rio Doce command the entire market place.
These three stocks control most of the market capitalization on the two main stock exchanges in São Paulo and Rio de Janeiro.
But the reality is that the Portuguese founded this country with Napoleonic civil code.
Hence stock investors are best off to pile on to just one or two stocks. Another factor is that the average income in Brazil is lower than in the U.S.
Hence there are fewer large stock investors.
The fact that new large companies do not appear over time in these markets is a clear indication that stock market growth in places like Brazil is retarded by inferior law of origin that fails to adequately protect investors.
The primary markets are where stocks are sold directly by the firm to large private investors. The secondary markets allow small atomistic stock investors to gauge value with liquid market entry and exit. A market order is a command to liquidate or initiate a short or long position at the prevailing share price in the stock market. A limit order shifts the intent to a specific price level for entry or exit.
Limit orders are placed by investors who are price sensitive. Market orders are used by traders who are time sensitive.
The Dealer market
The OTC stock market is staffed by dealers. These buy and sell for their own account.
This is a dealer market.
An auction market is very different. The New York Stock Exchange (NYSE) is an example. Here specialists match buy and sell orders. Other investors may also act as counter-party to a trade.
This means that order matching does not mean that the specialist is the buying or selling dealer on the other side of the trade.
Automated exchanges are becoming more powerful and will eventually take over the market. Here software can act as specialist, dealer, and match maker of buy and sell orders.
The electronic order book allows investors to see all contingent buy and sell orders above and below the current standing price.
Any given international stock market is designed around one of the models above. This is because the stock market is a Dutch invention that has performed best in the United States, England, and Japan.
About eighty stock markets exist around the world. Fragmentation has been a problem.
Europe before the zone had tens of exchanges speaking over a dozen languages.
Eventually a major exchange may form in Europe but Euro-zone regulators must find a niche between New York and London.
Inferior legal protection of the Scandinavian, Germanic and Napoleonic origin constitutions have led to insufficient accord and investor trust to germinate a successful European stock market.
Exchanges are now public entities subject to a common agency problem of empire building leading to more consolidation.
Stock Market Trading Volume Overseas
The following trends have increased globalization over the last four decades …
· Free markets
· Multinational Corporations (MNCs) a Diversification Instruments
Stock Market Cross-Listing
A large corporation in one country can list shares in another zone. This is called cross-listing.
It has become popular among executives worldwide.
Cross-listing increases the number of investors in a company. This is useful for companies in developing markets where households hide cash in the mattress and capital is nearly impossible to raise.
Name recognition increases and it becomes harder for competitors to make a hostile takeover.
This has also opened new marketing directions in the foreign market. These so called Yankee Stock Offerings entail selling foreign financial assets to investors in the United States. Another trend is the direct placement to United States public investors under Regulation D. Mexican companies have also been working hard to market shares in the deeper, broader, and wider markets of the United States through NAFTA.
American Depository Receipts (ADRs)
An ADR operates a lot like an exchange traded fund. Foreign executives deposit shares at a bank such as Goldman Sachs. The bank holds the shares much in the same was that a trust holds assets of an ETF.
This allows stocks such as Petrobras to trade as the ADR PBR on the NYSE in U.S. Dollars rather than Brazilian currency.
American Depository Receipts are touted with the following imagined advantages. I say imagined because the highest expected returns are among U.S. stocks.
Hence I can’t imagine any advantage of foreign stock selections as ADRs because of lower expected returns in a bad combination with higher volatility.
· USD Denomination
· United States Exchange Listed
· Dividends in USD
· Underlying Issues are Bearer Certificates
· ADR is Registered
Volvo ADR Case Study
I am sure you have seen Volvo cars. They are from ultra-conservative Sweden.
The company trades on the Stockholm Exchange as VOLVB as a common stock with bearer certificates. It trades across the NASDAQ as an ADR with the symbol VOLVY.
The bank is JP Morgan’s ADR group. S E Banken Custody acts as the Swedish custodian.
Here is how an ADR works.
An ADR investor in the United States places a buy limit or market order that is filled. His or her United States broker fulfills the transaction by purchasing an existing ADR on the NYSE, NASDAQ or OTC. This would be VOLVY in the example above.
Alternatively, the United States brokerage can order new ADR shares from a foreign broker who buys shares directly from the foreign exchange — VOLVB in Stockholm for instance. The foreign broker fulfils the transaction by depositing the shares with the custodian. This is JP Morgan’s ADR group for Volvo.
The custodian receives confirmation of the share deposit, S E Banken Custody of Sweden in this case.
Finally, the new ADR shares are issued to consummate the transaction with the United States ADR investor through his or her broker.
Another twist on this theme started in the fall of 98’. Mercedes and Chrysler merged into DaimlerChrysler AG.
This was a German firm formerly known as Daimler Benz AG. After absorbing Chrysler Corporation, the new firm was birthed trading on the German Bourse. These are Global Registered Shares (GRSs) trading in foreign markets.
Most mergers are bad. This was no different.
Chrysler was spun off like rubbish in 07’ and Mercedes went back to calling itself Daimler AG.
GRS can be bought on the London exchange and sold on the NYSE. This makes them fungible in both U.S. dollars and euros.
More on Global Registered Shares
The main advantage of Global Registered Shares is that shareholders have equal voting rights. But running a global registrar and clearing facility is expensive. I can envision a future conglomerate of public foreign stock exchanges fulfilling this service in the future.
GRSs are a thing of the future or will fizzle. Most executives have opted instead for ADRs.
Deutsche Bank, UBS, & NYSE Euronext trade as GRSs.
Empirical Findings on Cross-Listings and ADRs
It was once thought that ADRs outperform both a U.S. stock market & world stock market benchmarks on a risk-adjusted basis. This was before 2009. Recent studies show that market melt-downs are more severe with regard to ADRs.
The current wisdom is that the highest risk adjusted returns are in the United States. You can find opportunities in ADRs and trade them as easily as I the home country. This is because the ADR price is within twenty to eighty-five points. The law of one price is obtained in the ADR market.
The International Equity Market Benchmarks are as follows…
· North America
· Asia/Pacific Rim
· DJIA — Dow Jones Industrial Average
· CCMP — NASDAQ Combined Composite
· SPX — S&P 500
· T300 — TS300
· MEXBOL — Mexico Bolsa Index
European Equity Market Benchmarks
European Stock Benchmarks
· UKX — FT-SE 100
· CAC 40 — CAC
· DAX — Frankfurt DAX Index
· IBEX — IBEX Index
· MIB30 — Milan MIB30
· BEL20 — BEL20 Index
The iShares MSCI Exchange Traded Funds offer country specific indexes that allow you to capture bullishness or bearishness overseas. These exist for twenty-two different sovereign regions.
Country-specific baskets of stocks designed to replicate the country indexes of 22 countries.
iShares trade across the American Stock Exchange under U.S. SEC and IRS diversification codes.
These offer very low cost, easy ways for investors to diversify retirement plans over different parts of the globe.
iShares MSCI ETFs are Market Driven
They are subject to factors that push foreign stock prices around. These include
Do Macroeconomics Push Stock Prices Around?
You may have wondered if non-farm payroll, unemployment, GDP and GNP shake the stock market. Research concludes “no.”
Fx movements impact the value of an investment for an American buying and selling stock in Great Britain Pounds (GBP). That is because the USD and the GBP must be exchanged to consummate the transaction.
Dramatic fluctuations in another currency can impact the degree to which investors are willing to inject capital into the foreign stock market.
And for this reason Forex can impact stock prices abroad. But not in the United States.
That is because the United States Stock Exchanges are safe harbors during financial storms.
Industrial Structure Does Not Directly Impact Foreign Returns
You would thing that a less industrialized nation would be less likely to produce a corporate manufacturing powerhouse. Think again. Research is inconclusive. Analysts never thought India could create a competitive car industry.
Tata proved them wrong.
|Quiz 4||10 questions|
Take this quiz to test your understanding of international stock investing.
|Section 5: International Bond Investing Offers Greater Flexibility to Lender and Borrower|
International bond markets are least 150% lager than the entire stock markets worldwide. The primary currencies of these markets are the United States Dollar (USD), the Euro Currency (EUR), the Great Britain Pound (GBP) and the Japanese Yen (JPY) are the four horsemen of the interbank foreign currency markets. Because of this the majority of both domestic and foreign bonds are denominated in these four currencies.
The majority of domestic bonds are based on the USD. International bonds are dominated by the EUR.
Thirty-nine percent of domestic bonds versus thirty-six point two percent of international bonds are denominated in the USD. Whereas seventeen point nine versus two point seven percent of domestic versus international bonds are denominated in the JPY.
Forty-seven percent of international bonds are in the EUR versus twenty-two point three percent of domestic issues. Eight point two percent of international bonds are based on the GBP verses two point four percent of domestic debt.
The table shows that thirty-eight point two percent of all bonds (domestic or international) are denominated in the USD. Twenty-nine percent is in the EUR.
The GBP only accounts for four point one percent of the total and the yen for just thirteen point five percent. All other currencies account for fourteen point six percent of the total bonds outstanding in the world.
This bar chart makes it evident that the USD and the EUR dominate the debt landscape on planet Earth. The GBP has the least presence in debt markets. The JPY occupies about as much space as all other currencies combined outside of the USD, GBP, and EUR.
There are a number of factors that are important to pay attention to when investing in international bonds. Foreign Bonds and Eurobonds can be Bearer bonds and registered bonds. These have National security registrations with withholding taxes. So you have to pay close attention to recent regulatory changes with regard to global bonds
Spotlight on Bearer Bonds & Registered Bonds
Bearer bonds have no registered owner. These are very popular among tax evaders, drug traffickers, and other money launderers since they offer anonymity. These also offer the same risk of loss as currency and are a target for those who burgle the one percent. Registered bonds are debt issues with the owner’s name registered with the issuer on a list. Yankee bonds sold to U.S. citizens have to be registered according to SEC rules.
National Security Registrations Are Important Controls
Yankee bonds must meet the requirements of the SEC, just like U.S. domestic bonds. This pushes institutional investors into the less regulated Eurobond USD market overseas.
Before 1984, the American government whacked everybody with a 30 percent withholding tax on interest paid to nonresidents holding U.S. government or U.S. corporate bonds. When this tax was repealed U.S. government bond demand increased while Eurodollar bond demand decreased. This is clear evidence that investors react to government intervention.
Some Security Regulations Make Bond Issuance Easy
Shelf Registration (SEC Rule 415) let’s companies do all the paperwork months or years before they actually issue a bond. This allows them to work it up and set it on the shelf like inventory until they need to raise money through bonds through pre-registration with the SEC.
SEC Rule 144A lets institutional investors and qualified individuals invest in private placements.
Global Bonds are Country Spanning
Very large international bonds from a sole institution in North America, Europe, and Asia are termed global bonds. These were first issued in 1989.
Global bonds based in USD sold by American Fortune 500 Corporations trade as Eurobonds overseas. But they are domestic bonds in the United States, such is the power of America.
The Mac Daddy of corporate global bond issues is the fourteen point six billion USD Deutsche Telekom multicurrency bond. This has
There are a number of types of Instruments in the international bond market.
Since these are the simplest of bonds. They are termed “plain vanilla” bonds at a specific coupon rate. They have maturity and no attached warrants.
Euro-bonds have annual rather than semi-annual coupon rates because they are bearer bonds. Fixed-rate straight bonds are the most common new international bond offerings.
Floating-Rate Notes operate in a fashion much akin to the adjustable rate mortgage (ARM). Three and six month rates are most commonly used for the USD LIBOR rate. Every six to twelve months the rate resets on these bonds. Because of this these bonds trade at a very small premium or discount unless default risk rises.
Equity Bonds Attached to Common Stock
These bonds come in two flavors.
Convertible Bonds Exchange for Stock
Convertible bonds convert to shares of stock. Everything is standardized including the number of shares of stock. The base price of bond that is convertible is the straight fixed-rate value.
This bonds sell for little more [a premium) above the price of common stock or straight value. Investors can cash in for a lower coupon interest below straight fixed bonds that are similar. This is because conversion is useful to investors.
This allows the investor to purchase shares cheaper than market price and retain the bonds. Call option pricing is used to value the warrant that is embedded in the straight fixed-rate bond.
A warrant is very similar to a call option except that it is issued by the firm and not purchased from the secondary market. Warrants allows the investor to buy shares at a set price for a specific period of time. To get shares the investor has to surrender the bond in the case of a convertible bond. But equity warrant bonds pay you cash and as a bonus you get to hang onto the bond.
Zero Coupon Bonds Pay no Interest
Since there are no cash payments over the life of a zero coupon bond these sell cheap at a deep discount from face value. United States investors pay an imputed income tax on the increase in present value from year to year. A capital gain of this sort is tax exempt in Japan.
Pricing is simple for zeros.
Divide that Par value by one plus the discount rate raised to the power of the number of time periods to get the present value of the bond.
Dual-Currency Bonds Offer Flexibility with Regard to Currency
These are straight fixed-rate bonds where interest payments are in two different foreign currencies. Interest is paid in JPY in the diagram. The final principal is paid in USD.
This is an example of financing by Japanese Multi-National Corporations when an overseas market needs financing.
The currency for a currency bond is a special drawing right (SDR) or European Currency Unit (ECU). The nick-name for this composite debt is a currency cocktail bond.
This is issued as straight debt.
The diverse instruments of the international bond markets include straight-fixed rate, floating rate note, convertible bond, straight fixed-rate with equity warrants, zero coupon bond, and dual currency bond. Interest payments are annual, quarterly, or bi-annually. The coupon size is fixed, variable, or zero. The payoff at maturity is the currency of issue, conversion into equity shares, or dual currency.
This table shows that more debt is denominated in the EUR where regulation is easier to deal with. The size of the debt market has grown over time.
You saw before that England doesn’t seem to dominate the debt markets. But when you stack the country up against all others you see that it comes in third. Germany is second and the United States is the largest debt issuer by country. Financial institutions are by far the largest issuers many fold more so than corporate bond issuance. Governments are third. International organizations issue the least amount of debt.
International Bond Market Credit Ratings
Moody’s, Fitch IBCA, and Standard & Poor’s sell their credit rating analysis services. They still do so despite tanking the mortgage market as shown in the Big Short. You have to pay the most attention to default risk rather than foreign currency risk. Estimating the risk of sovereign debt focuses on a country as a political economy.
Eurobond Market is a Lot Like the United States
There is a primary market for institutional investors. The market is subject to United States type of structure in terms of underwriting.
The secondary market operates in London as an over-the-counter (OTC) system.
This has brokers as well as market makers. These ae are subject to the International Capital Market Association (ICMA) by forced membership. This is based in Zurich and operates as a self-governing system like the National Futures Association (NFA).
Clearing procedures for the international market include CEDEL and Euroclear for the majority of Eurobond transactions.
When a large entity wants money by issuing debt they work through investment bank that deals in Euro-bonds. Usually it is the same large bank acting as underwriting syndicate lead manager.
The syndicate of underwriters are pools of investment banks and less frequently merchant banks.
A managing group commits capital to purchase debt from the issuer on the cheap. The discount is about two to two and a half percent (250 basis points). The spread on domestic issues is about one percent. A selling group of banks that include the underwriters then sells the bonds to retail investors. Issues are handled my managing groups of teams of bankers from different banks. These invest their own money to purchase bonds from the issuer at a discount.
The Secondary Market for Euro-bonds
Institutional investors can sell their Euro-bonds they bought in the primary market from the selling group before they mature. The Euro-bond secondary market is based in London and is OTC. Frankfurt, Amsterdam, Luxembourg, and Zurich are also trading centers for Euro-bonds.
An over-the-counter market is network of brokers making a market through the internet. These carry inventory and will buy or sell as necessary to clear the market. They trade with retail investors or with other brokers in a digital mosh pit. Brokers make a market by offering two-way bid and ask quotes. The spread between the bid and ask represent the profit. They don’t charge a commission but Professor Bill Christie of Vanderbilt University showed that NASDAQ brokers colluded to artificially widen the bid ask spread to extract more money from their client accounts then they actually deserved.
Clearstream in Luxembourg acts as a clearing system for Euro-bonds as does Euroclear. This last is from Euroclear Bank in Brussels.
The secondary market for Eurobonds is a system of registering change of ownership and the transaction between counter-parties. Most transactions in Euro-bonds are handled by two systems. The first is Euroclear Bank and the second is Clearstream international. Brussels is the HQ for Euroclear Bank.
Euroclear and Clearstream function as clearing firms in similar system. Each holds bond certificates in deposit banks as cash or bond accounts for members. Book entries are electronically posted based on to change ownership of registry of the bond certificates. Bond certificates despite being bearer in nature for Euro-bonds are rarely transferred in physical form.
Other Aspects …
Euroclear and Clearstream also …
Tracking with an International Bond Market Index
J.P. Morgan and Company maintains indexes of this nature as well as those for domestic bonds.
|Quiz 5||10 questions|
Test you knowledge of the international bond market.
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My Curriculum Vitae:
Investment Writing and Speaking:
I am an internationalspeaker oninvestments. In 2010 I gave a series of lectures onboard Brilliance of the Seas as a guest speaker on their Mediterranean cruise. Financial topics are normally forbidden for cruise speakers. But with me they make an exception because of my financial pedigree.
On day 6 the topic I discussed was “Free and Clear: Secrets of Safely Investing in Real Estate!“ The day 7 topic was “Investment Style and Category: How the Stock Market Really Works!” Then on day 8 I spoke about “The 20% Solution: How to Survive and Thrive Financially in any Market!” The final talk on day 11 was “Value Investing for Dummies: When Dumb Money is Smart!”
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I sponsored and organized an investing conference at Caesars Palace in Las Vegas in 2011 under my Wallet Doctor brand. This intimate conference was attended by 14 paying attendees.
As such many strides were made in financial education that week. For instance I met a woman who is a retired engineer from the Reno, Nevada area.
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This humble and retired engineer inspired me to look more seriously at deep in the money calls with far expiration. She also gave me an important clue regarding trading volume.
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In 2012 I gave a workshop at the FreedomFest Global Financial Summit on stock investing at the Atlantis Bahamas Resort. I was also a panelist on a discussion of capital markets.
My course “How to Build a Million Dollar Portfolio from Scratch" at the Oxford Club is an international bestseller. In 2014 I co-authored “Tax Advantaged Wealth” with leading IRS expert Jack Cohen, CPA. This was the crown jewel of the Oxford Club Wealth Survival Summit.
I have been a regular speaker at the Investment U Conferences.
In 2012 I gave a workshop entitled “How to Increase Oxford Club Newsletter Returns by 10 Fold!” The conference was held at the Grand Del Mar Resort in San Diego, California. This resort destination is rated #1 on TripAdvisor.
In 2013 I spoke at the Oxford Club’s Investment U Conference in San Diego California. The talk was entitled “The Best Buy Signal in 103 Years!” Later in the summer I spoke at the Oxford Club Private Wealth Conference at the Ojai Valley Inn.
This was at the same time that Jimmy Kimmel married Molly McNearney in the posh California celebrity resort. It was fun to watch some of the celebrities who lingered.
I also operate a live weekly investment mentorship subscription service under the Bullet-Proof brand every Monday night by GoToWebinar.
I am an associate professor of finance of the AACSB Accredited Graduate School of Business at the University of Puerto Rico. My research appears in some of the most prestigious academic journals in the field of investments including the Journal of Financial Research and Financial Management. This work is highly regarded on both Main Street and Wall Street. My research on investment newsletter returns was considered so important to investors that it was featured in the CFA Digest.
The Certified Financial Analyst (CFA)is the most prestigious practitioner credential in investments on Wall Street.
Prestigious finance professor Bill Christie of the Owen School of Business of Vanderbilt University and then editor of Financial Management felt that our study was valuable to financial society. We showed that the average investment newsletter is not worth the cost of subscription.
I am the lead researcher on the Puerto Rico Act 20 and 22 job impact study. This was signed between DDEC secretary Alberto Bacó and Chancellor Severino of the University of Puerto Rico.
(See Brown, S., Cao-Alvira, J. & Powers, E. (2013). Do Investment Newsletters Move Markets? Financial Management, Vol. XXXXII, (2), 315-338. And see Brown, S., Powers, E., & Koch, T. (2009). Slippage and the Choice of Market or Limit orders in Futures Trading. Journal of Financial Research, Vol. XXXII (3), 305-309)
I hold a Ph.D. in Finance from the AACSB Accredited Darla Moore School of Business of the University of South Carolina. My dissertation on futures market slippage was sponsored by The Chicago Board of Trade. Eric Powers, Tim Koch, and Glenn Harrison composed my dissertation committee. Professor Powers holds his Ph.D. in finance from the Sloan School of Business at the Massachusetts Institute of Technology [MIT]. Eric is a leading researcher in corporate finance and is a thought leader in spin offs and carve outs.
Dr. Harrison is the C.V. Starr economics professor at the J. Mack Robinson School of Business at Georgia State University.
He holds his doctorate in economics from the University of California at Los Angeles. Glenn is a thought leader in experimental economics and is the director of the Center for the Economic Analysis of Risk.
Tim Koch is a professor of banking. Dr. Koch holds his Ph.D. in finance from Purdue University and is a major influence in the industry.
My dissertation proved that under normal conditions traders and investors are better off entering on market while protectingwith stop limit orders. The subsequent article was published in the prestigious Journal of Financial Research now domiciled at Texas Tech University — a leading research institution.
I earned a masters in international financial management from the Thunderbird American Graduate School of International Business. Thunderbird consistently ranks as the #1 international business school in the U.S. News & World Report, and BloombergBusinessWeek.
I spoke at the 2010 annual conference of the International Association of Business and Economics (IABE) conference in Las Vegas, Nevada. The research presented facts regarding price changes as orders flow increases in the stock market by advisory services.
I spoke at the 2010 Financial Management Association [FMA] annual conference in New York on investment newsletters. The paper was later published in the prestigious journal “Financial Management.”
I presented an important study named “Do Investment Newsletters Move Markets?” at the XLVI Annual Meeting of the Consejo Latinoamericano de Escuelas de Administración (CLADEA) in 2011 in San Juan, Puerto Rico. The year before that I presented my futures slippage research at a major renewable energy conference in Ubatuba, Brazil.
I spoke at the Clute International Conferences in 2011 in Las Vegas, Nevada. The research dealt with the price impact of newsletter recommendations in the stock market.
I presented a working paper entitled “The Life Cycle of Make-whole Call Provisions” at the 2013 Annual Meeting of the Southern Finance Association in Fajardo, Puerto Rico in session B.2 Debt Issues chaired by Professor LeRoy D. Brooks of John Carroll University. Luis Garcia-Feijoo of Florida Atlantic University was the discussant. I chaired the session entitled “Credit And Default Risk: Origins And Resolution.” Then I was the discussant for research entitled "NPL Resolution: Bank-Level Evidence From A Low Income Country" by finance professor Lucy Chernykh of Clemson University and Abu S Amin of Sacred Heart University and Mahmood Osman Imam of the University of Dhaka in Bangladesh.
That same year I presented the same study to the Annual Meeting of the Financial Management Association in Chicago, Illinois. I did so in session 183 – Topics in Mergers and Acquisitions chaired by James Conover of the University of North Texas with Teresa Conover as discussant. I chaired session 075 – Financial Crisis: Bank Debt Issuance and Fund Allocation. Then I was the discussant for TARP Funds Distribution: Evidence from Bank Internal Capital Markets by Elisabeta Pana of Illinois Wesleyan University and Tarun Mukherjee of the University of New Orleans.
I am a member of the MBA Curriculum Review Committee, the MBA Admissions Committee, The Doctoral Finance Admissions Committee, the Graduate School Personnel Committee, and the Doctoral Program Committee of the School of Business of the University of Puerto Rico.
I am the editor of Momentum Investor Magazine. I co-founded the magazine with publisher Daniel Hall, J.D. We have published three issues so far. Momentum Investor Magazine allows me to interview very important people in the finance industry. I interview sub director Suarez of the DDEC responsible for the assignment of Puerto Rico act 20 and 22 licenses for corporate and portfolio tax reduction in the third edition. Then I interview renowned value investor Mohnish Prabia in the upcoming fourth edition — to be made available via Udemy. Valuable stock market information will be taught throughout.
In October of 2010 I arranged for the donation to The Graduate School of Business of the University of Puerto Rico of $67,248 worth of financial software to the department that has been used in different courses. This was graciously awarded by Gecko Software.
I have guided thousands of investors to superior returns. I very much look forward to mentoring you as to managing your investments to your optima! –Scott
Dr. Scott Brown, Associate Professor of Finance of the AACSB Accredited Graduate School of Business of the University of Puerto Rico.