ETFs are securities certificates that state legal right of ownership over part of a basket of individual stock certificates. Several different kinds of financial firms are needed for ETFs to come into being, trade at prices that closely match their underlying assets, and unwind when investors no longer want them. Laying all the groundwork is the fund manager. This is the main backer behind any ETF, and they must submit a detailed plan for how the ETF will operate to be given permission by the SEC to proceed.

In theory all that a fund manager needs to do is establish clear procedures and describe precisely the composition of the ETF (which changes infrequently) to the other firms involved in ETF creation and redemption. In practice, however, only the very biggest institutional money management firms with experience in indexing tend to play this role, such as The Vanguard Group and Barclays Global Investors. They direct pension funds with enormous baskets of stocks in markets all over the world to loan stocks necessary for the creation process. They also create demand by lining up customers, either institutional or retail, to buy a newly introduced ETF.

The creation of an ETF officially begins with an authorized participant, also referred to as a market maker or specialist. Highly scrutinized for their integrity and operational competence, these middlemen assemble the appropriate basket of stocks and send them to a specially designated custodial bank for safekeeping. These baskets are normally quite large, sufficient to purchase 10,000 to 50,000 shares of the ETF in question. The custodial bank doublechecks that the basket represents the requested ETF and forwards the ETF shares on to the authorized participant. This is a so-called in-kind trade of essentially equivalent items that does not trigger capital gains for investors.

The custodial bank holds the basket of stocks in the fund’s account for the fund manager to monitor. There isn’t too much activity in these accounts, but some cash comes into them for dividends and there are a variety of oversight tasks to perform. Some managers have leeway to use derivatives to track an index.

This flow of individual stocks and ETF certificates goes through the Depository Trust Clearing Corp., the same US government agency that records individual stock sales and keeps the official record of these transactions. It records ETF transfer of title just like any stock. It provides an extra layer of assurance against fraud.

Once the authorized participant obtains the ETF from the custodial bank, it is free to sell it into the open market. From then on ETF shares are sold and resold freely among investors on the open market.

Redemption is simply the reverse. An authorized participant buys a large block of ETFs on the open market and sends it to the custodial bank and in return receives back an equivalent basket of individual stocks which are then sold on the open market or typically returned to their loanees.

What motivates each player? The fund manager takes a small portion of the fund’s annual assets as their fee, clearly stated in the prospectus available to all investors. The investors who loan stocks to make up a basket make a small interest fee for the favor. The custodial bank makes a small portion of assets likewise, usually paid for by the fund manager out of management fees. The authorized participant is primarily driven by profits from the difference in price between the basket of stocks and the ETF and on part of the bid-ask spread of the ETF itself. Whenever there is an opportunity to earn a little by buying one and selling the other, the authorized participant will jump in.

The process might seem cumbersome but it does allow for transparency and liquidity at modest cost. Everyone can see what goes into an ETF, investor fees are clearly laid out, investors can be confident that they can exit at any time, and even the authorized participant’s fees are guaranteed to be modest. If one allows ETF prices to deviate from the underlying net asset value of the component stocks, another can step in and take profit on the difference, so their competition tends to keep ETF prices very close to it underlying Net Asset Value (value of component stocks).

But, should you really be trading the forex?

Like many topics related to trading the answer is both
“yes” and “no”.

The forex is the most exciting/lucrative market I have ever
traded but it’s definitely *not* for the beginner!

I understand why the beginner is attracted to this market; but
what they fail to understand is that, due to the massive
leverage, it can wipe out your trading float faster than a
speeding bullet.

In my opinion, which I have always stated, it’s best to start
your trading career with non leveraged instruments like stocks.
You can then prove you can make money there before moving to
something more leveraged like options, CFDs or forex.

And even then, as with all trading, you need a good trading plan
in place before start.

Recently I checked out another great course on the forex that
may be worth checking out.

What I liked about it most was the fact that the author outlines
3 different mechanical systems that can be tailored to suit your
preferred trading style, i.e. medium term or day trading.

Anyway, I just wanted to point it out but only if you’ve proven
yourself as a successful trader. I want to stress, trading the
forex, is not for the beginner.

But it’s worth a look:
==> http://www.meta-formula.com/forextrading

Till next time, I wish you good trading.

David Jenyns

October 26 2006

NEW foreign direct investment (FDI) from Japan to Malaysia may trickle down from now since many major Japanese corporations have already established their operations in the country and the tough competition from low-cost production countries like Vietnam could be another deterrent.

Tsuneo Tanaka, managing director of the Japan External Trade Organisation’s Kuala Lumpur office, said some 1,300 Japanese companies have already invested in Malaysia since the 1980s.

“All major companies have already invested in Malaysia. Looking back at the last five or six years, the (local) market is saturated. It is difficult to have new Japanese FDI increasing as rapidly as before,” Tanaka said in an interview in Kuala Lumpur.

However, he said Japanese companies have continued to expand their existing business operations in Malaysia and there has been significant re-investment in their expansion programmes.

“Last year, there was a healthy increase in Japanese FDI to Malaysia compared with the year before, increasing by 20 to 30 per cent,” he added.

Unless there are new business opportunities, it could be tough to attract Japanese investors to Malaysia, which was their favourite investment destination even before the launch of the Look East Policy in 1981.

While Malaysia has become an expensive production base due to rising labour and land costs, Vietnam is now turning into an attractive port of call for Japanese businessmen.

“Japanese companies are quite interested in the potential of Vietnam and this is quite understandable because up to now they do not have much presence in Vietnam,” Tanaka explained.

Vietnam, he said, was developing quite rapidly and this meant that there was potential in increasing business opportunities there.

“As far as the investment environment is concerned, especially in terms of labour costs, currently Malaysia has become a middle developed country.

Naturally its labour costs are less competitive compared to Vietnam and other Asean countries,” he said.

Tanaka said labour-intensive companies will naturally opt for cheaper production markets like Vietnam. – Bernama

What if the “may slow down” came out to be a reality? Meaning, Malaysia market will need a facelift in order to be more competitive and gain more foreign investors?

It was Fed Chairman Bernanke’s cautious comment last Monday which triggered panic selling activities across the stock markets in the world. At that time, the investment community was informed that the anticipated moderation of economic growth in U.S seems to be under way and core inflation has reached a level that, if sustained, would be at or above his preferred range.

Slightly more than a week later, Bernanke’s commentary is a different one. This time he reassures investors the impact of higher energy prices will probably be “manageable” and that economy remains resilient despite the drag of higher oil. It does not matter that the tone of speech has changed considerably within a short period of time, the whole world still bought the news and equity markets staged a sharp rebound.

As for the immediate technical outlook of KLCI, there are still no real signs of a market capitulation. A single day rally will not change the trend. A clear indication is that the FKLI remains stuck within an obvious downtrend channel. The FKLI will be closely watched by us in the next few sessions to determine if the KLCI has already hit its rock bottom. Even if the 885 pts level has provided a new base for the market, whether the key index could make its way back into above the mid-term uptrend line is another issue. It will be a very tough resistance level to be challenged in the future. We are also sceptical if last Friday’s rebound signifies the end of a breakdown from the more than 2-year old of uptrend line as the market has so far retraced only about 4% from the mid-term uptrend line. Hence, it is not the time for the bulls to relax yet but this bounce definitely lets them breathe again.

For the aggressive pundits, if they are already pounding the table about how undervalued everything is and what a wonderful dip-buying opportunity, long positions could be established at above the 885 pts level but peg a tight cut-loss point at below the 880 pts level. If not, it is better to follow the safer strategy of waiting for further confirmations.

From the current level, look for the 900 pts level as the immediate resistance followed by the 910 pts level and the 920 pts level. To the downside, the 885-880 pts area is still the immediate support for the market. If the support area is taken out, then look for the 860 pts level to offer the next support.

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FeaturedHeadline
KUALA LUMPUR SHARES OUTLOOK – LOWER IN RANGEBOUND TRADE AFTER WEAK WALL ST
KUALA LUMPUR (XFN-ASIA) – Share prices are expected to open slightly
lower in rangebound trade following the 213-point decline on the Dow Jones
Industrial Average on Friday, dealers said.

They added trading volume is likely to ease as most investors square
their positions earlier than expected in view of the four-day break for
Chinese New Year next week.

On Friday, the Kuala Lumpur composite index closed up 2.71 points or 0.30
pct at 905.41.

The all-share Emas Index added 0.51 points to 206.09, while the second
board index edged up 0.40 to 83.90.

Losers outnumbered gainers 340 to 333, with 330 stocks unchanged and 320
untraded. Volume was 573.56 mln shares worth 743.73 mln rgt.

“The market will continue to trade within a narrow tange given the sharp
decline on Wall Street last Friday,” a local brokerage dealer said.

He sees the key index’s resistance at 910 points, with support at 895
points.

Mitrajaya Holdings may gain after its wholly owned subsidiary Pembinaan
Mitrajaya Sdn Bhd won a 66.65 mln rgt contract from Putrajaya Holdings Sdn
Bhd.

Nova MSC may also rise after its wholly-owned subsidiary novaCITYNETS Pte
Ltd won a 18 mln rgt land transport information systems contract.

(1 usd = 3.75 rgt)

Japan’s Nikkei Average, Topix Fall; Canon and Nissan Motor Drop
Japan’s Nikkei 225 Stock Average fell 205.13, or 1.3 percent, to 15,491.56 at 9:03 a.m. in Tokyo. The broader Topix index dropped 20.84, or 1.3 percent, to 1603.35. Canon Inc. and Nissan Motor Co. led the declines.

Growth Slows on Declining Auto Sales: U.S. Economy Preview
A slump in auto sales caused the U.S. economy to slow last quarter, a pause that may be temporary as consumer spending rebounds and business investment gathers momentum, economists said reports this week will show. Gross domestic product, the sum of all goods and services produced, probably rose at a 2.8 percent annual rate from October to December, snapping a string of 10 straight quarters exceeding 3 percent, according to the median estimate of economists in a Bloomberg News survey. The growth rate compares with 4.1 percent in the previous three months and an average quarterly gain of 3.1 percent during the past two decades. Auto sales in October dropped to a seven-year low when manufacturers withdrew employee-pricing discount plans. The slump at the start of the quarter proved too large to overcome, even as car sales rebounded in the last two months. With the job market improving, wages rising and business confidence on an upswing, the economy is likely to regain its footing this quarter. The Commerce Department is scheduled to issue the GDP report on Jan. 27. The report also is projected to show that consumer spending, which accounts for about 70 percent of the economy, grew at a 0.5 percent annual pace in the fourth quarter, the weakest since the last three months of 1991, after growing at a 4.1 percent pace the previous three months.

Overwhelmed by bad news, the bull just could not take it. Intel’s poor earnings, a 3.7% jump in crude oil price, the melt-down of Japan’s stock market and weak stock markets throughout the world, were the main distractions to the local bourse.

The KLCI gapped down by more than 5 pts on the opening bell which is not common. After gapping down, the key index did manage to stage a rebound to close the downside gap, but most of the gains evaporated towards the end of the session.

All of yesterday’s bad news had distorted the short-term uptrend and believe it or not, the key index is now back to the breakout level. It means that those who had bought shares at the breakout level are now back to square one.

We retain our bullish bias view towards the short-term market but with a sense of caution. The 900-902 pts area can be considered as the last line of defence for the bull and the market is now struggling to hold up the previous breakout level.

If not because of the few major negative news items, the market would have had a great chance to at least consolidate at above the 906 pts level following the formation of an “Inverted Hammer” candlestick pattern, which is normally viewed as a rather reliable bullish reversal pattern.

More observation is needed as yesterday’s volatile market action has complicated the immediate outlook. Traders who are holding KLCI-linked shares may stick to their positions until we see a decisive dip from the 900-902 pts area.

Meanwhile, look for an immediate upside resistance at the downside gap, ranging from 902 pts level to the 907 pts level, followed by the 910 pts level. To the downside, the next support after the 900-902 pts area is seen at the 890 pts level.

The “Inverted Hammer” is a fairly reliable bullish reversal pattern. It is likely that the market may be able to trade sideways at above the 906 pts level or even extend the rally we saw a couple of weeks ago. Traders should be glad to see a rebound here as a break below the 906 pts level is bad for the short-term market. The bull would not want to see the market retracing back to the breakout level of 906 pts level.

For today’s session, continue to look for an immediate resistance at the 910 pts level, followed by the recent high of 917 pts level. The immediate support for the market is seen at the 906 pts level, followed by the 900-902 pts area.

FPAM is planning a financial expo this November. The details are as follows :

Event : FinEX 2005
Date : 12 & 13 November, 2005
(Saturday & Sunday)
Time : 10.00am to 8.30pm (Saturday)
10.00am to 7.00pm (Sunday)
Venue : Mid Valley Exhibition Centre (MVEC),
Mid Valley Megamall, Kuala Lumpur.

The exposition theme is Your Money & You with special focus on issues that are of interest to the consumers of financial products and services. Besides the exhibition booths, there will also be a series of interesting financial workshops and talks on the different aspects of financial planning and personal wealth.

FinEX 2005 will help inform and educate consumers about financial planning and to showcase the different products and services that are available to assist the consumers in implementing their financial plans well, so that they are better off, financial wise.

FinEX 2005 will help inform and educate consumers about financial planning and to showcase the different products and services that are available to assist the consumers in implementing their financial plans well, so that they are better off, financial wise.

FinEX 2005 will also showcase the diversity of FPAM’s members and associates and it will be an opportunity for its members and associates to showcase the uniqueness, usefulness and innovativeness of their products and services as well as the strength and credential of their organization to the investing public.

The Expo (both the Exhibition and the talks and workshops) will be open to the Public at no charge as FPAM would like to see as many people benefit from this event as possible.

Bank Negara and the Securities Commission will be participating in this Expo and will provide speakers for some of the talks.

We hope the public (as well as individual members of FPAM and their families) will take this opportunity to attend the Expo which have been organized solely for their benefit.

For further queries on participating in the Expo, please contact:
Kenny Kan at Tel: 03 – 2095 7713 or e-mail kenny@fpam.org.my

Agenda:
12 November 2005 – Saturday

11.45 – 12.15 pm Intelligent Investing by Yusry Yusoff, Securities Commission
2.00 – 2.30 pm Market Outlook 2006 and Beyond by Heddy Huzaimi Hussein, Mayban Securities SB
3.00 – 3.30 pm Building Your Retirement Nest Egg by Jennifer Lim, Public Mutual Bhd
4.00 – 4.30 pm Live Long & Prosper by HSBC Bank Malaysia Bhd
5.00 – 5.30 pm Property as an Investment by P.B.Nehru, City Valuers & Consultants SB
6.00 – 6.30 pm How Tax Planning Impacts Personal Financial Plan by Raymond Liew, Malaysian Institute of Accountants
7.00 – 7.30 pm Everybody Wants Your Money by Ken Lo, Money Concepts Malaysia SB

13 November 2005 – Sunday

12.00 – 12.30 pm Your Money & You by Michael Tan, RHB Unit Trust Management Bhd
2.00 – 2.30 pm Growth Corridors in the Klang Valley by Ho Chin Soon, HCS Research SB
3.00 – 3.30 pm BankingInfo by Bank Negara Malaysia
4.00 – 4.30 pm Stock Analysis & Fund Performance by Cynthia Case and Alexander Chia, Standard & Poor’s
5.00 – 5.30 pm Why You Should Abandon Single Fund Investing in Favour of a Portfolio Approach by Rajen Devadason, MAAKL Mutual Bhd
6.00 – 6.30 pm Don’t Kiss Your Money Goodbye by Ronald Leong, Deakin Wealth Solutions SB

List of Exhibitors:
Bank Malaysia Bhd
(Platinum Sponsor)
Maybank Bhd
(Gold Sponsor)
Public Mutual Bhd
(Gold Sponsor)
RHB Unit Trust Management Bhd
(Gold Sponsor)
Amanah Raya Bhd
Amanah Saham Nasional Bhd
Asia Unit Trusts Bhd
Bank Negara Malaysia
Capital Dynamics Sdn Bhd
CIMB Securities Sdn Bhd
City Valuers & Consultants Sdn Bhd
CTLA Financial Planners Sdn Bhd
Deakin Wealth Solutions Sdn Bhd
HLG Unit Trust Bhd
Hwang DBS Investment Management Bhd
Institut Bank-Bank Malaysia
JF Apex Securities Bhd
KDU Management Development Centre Sdn Bhd
MAA Assurance
MAA KL Mutual Bhd
Malaysian Institute of Accountants
Money Concepts Malaysia Sdn Bhd
Nexnews Group
OCBC Bank (M) Bhd
OSK Holdings Bhd
Phillip Wealth Planners Sdn Bhd
PNB Investment Institute
Prudential Assurance Malaysia Bhd
Prudential Unit Trusts
Rockwills Corp Sdn Bhd
Securities Commission
SBB Mutual Bhd
SJenie Sdn Bhd
Standard Chartered Malaysia Bhd
Standard & Poor’s
Standard Financial Planners
Trans Info Media
Total Financial Planning Advisory Sdn Bhd
United Overseas Bank (M) Bhd
Walton International Property Group
AsiaTravelMart Sdn Bhd
Asia File Corporation Bhd