Don Dion’s Weekly ETF Blog Wrap
Don Dion posts his current insights on the stock, bond, commodity and currency markets in his RealMoney blog, anticipating which ETFs will be in play next. Among his blogs this week were the following, in which he wrote about Korea’s economy, challenges for steelmakers and how China is pressuring the solar industry.
Korean GDP Jump Boosts EWY
Posted 10/27/2009 7:07 a.m. EDT
Korean GDP increased 2.9% quarter on quarter in the three months to September and 0.6% versus the same period last year, the Bank of Korea said Monday. It was the briskest quarterly growth rate in seven years and the first positive year-on-year quarter in 12 months, leading officals to comment that GDP could even swing into positive territory for 2009 if the trend continues. The central bank had previously forecast GDP to contract 1.6% this year.
The news lifted the Kospi index and filtered through to a 0.6% gain for iShares Korea (EWY) yesterday, even in the face of a dollar rally and equity sell-off in the U.S.
Signs of a reinvigorated economy have investors excited about Korea, but the country has relied on inventory rebuilds for some of its economic expansion. Government spending declined in the quarter as the administration pared back its stimulus expenditure.
With a 65% return year-to-date, EWY has joined the ranks of iShares Taiwan (EWT), iShares Sweden (EWD) and iShares Emerging Markets (EEM). Going back two years, EWY has been one of the worst performers among international ETFs, suggesting it may have much more ground to recover if Korea’s economy helps to lead the way out of global recession.
Demand Issues Depress Steel ETF
Posted 10/28/2009 11:24 AM EDT
With the global economy still struggling to heal, issues with supply and demand are throwing some of the world’s largest steel producers for a loop. While China’s steel issues have stemmed from extreme oversupply, recent earnings reports from U.S. Steel(X), Europe’s ArcelorMittal(MT) and India’s Tata Steel show that many other firms are suffering from decreases in demand.
Both ArcelorMittal and U.S. Steel are large holdings in Market Vectors Steel ETF(SLX), making up nearly 20% of the fund’s total assets.
The collapse in Europe’s steel demand caused ArcelorMittal, the world’s largest steelmaker, to miss analysts’ profit estimates for the third quarter. In response, the firm suffered its largest drop in three months on Wednesday. U.S. Steel and Tata Steel also failed to meet analysts’ forecasts because of demand issues. This marked the third consecutive loss for U.S. Steel. The firm followed up the report saying that it expects to see a smaller loss in the fourth quarter as well.
It is likely that the steel industry will continue down this rocky path. Therefore, ETF investors hoping to use SLX as a recovery proxy will need to have a strong stomach to make it through these dips.
While year to date for the period ending Oct. 27 the fund is up 81%, in the most recent one-week period SLX has lost nearly 7.5%, and the fund will continue to exhibit considerable volatility in the near future.
China Looks to Turn Screws on Solar Industry
Posted 10/30/2009 1:37 p.m. EDT
China’s National Development and Reform Commission may increase pressure on the solar industry. Although it has subsidies, they are smaller than those in other nations, and the NDRC prefers to use benchmark prices to spur development. This would force efficiency into the system and possibly knock out competitors who cannot meet the low target.
The solar industry is up in arms, however, and actively seeks to lift the benchmark, currently planned for 1.09 yuan per kilowatt hour, or about 15 cents. That’s below the original benchmark of about 1.20 yuan, and well below recent projects that were allowed a hefty 4 yuan.
The low price isn’t a policy misstep. According to NDRC’s deputy director, “Market forces should determine the proper price and guide development of the industry.” Alternative energy cannot be competitive unless it becomes profitable in a free market, and the Chinese regulators appear determined to force market pricing into this sector.
Solar producers may persuade NDRC to lift the benchmark price, but this is a sign that the Chinese government will not sacrifice its economy on the altar of green energy. Many governments are likely to find they wasted billions on inefficient technology, while the Chinese focus on efficient and profitable technology.
Overall, I view this as bullish for the solar industry. Solar will never become a truly profitable industry until it can become competitive without subsidies and tax breaks. Market Vectors Solar Energy(KWT) has considerable exposure to the Chinese solar sector, with holdings such as Suntech Power(STP), which makes up 8.5% of the fund’s portfolio, Trina Solar(TSL), which makes up 5.3%, and Yingli(YGE), at 4.3%. The top holding is First Solar(FSLR), at 12.2% of KWT’s portfolio. First Solar signed a 2 megawatt deal in China last month and says it will eventually have to build a manufacturing plant in China to meet expected demand.
