We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are

Life, Liberty and the pursuit of Happiness.

That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed,

Wednesday, February 21, 2007

Capitalization ... Nationalization ... or Confiscation: Take Your Pick

Today's comment is by Mike Burnick, The Sovereign Society's new Senior Editor and Global Markets Analyst.

With the first month of 2007 now in the rearview mirror, it's worth reflecting on some of the blossoming trends emerging in global investment markets. These are trends that could create some interesting buying opportunities for the attentive investor throughout the year.

In particular, there's one emerging market investment strategy that looks to me like a sure thing. Emerging market leaders (dictators) are using an innovative strategy to capitalize on (exploit) profitable business interests, by nationalizing privately owned companies, and entire industries.

Think of this as the mirror image of the booming private equity investment trend.

In Venezuela, President Hugo Chavez is engaging in some creative asset allocation. He just announced plans to nationalize Venezuela's telephone, energy and electric utility sectors.

Venezuelan Investors Follow the "Chavez Plan"

It seems that President Chavez is a deep-value investor at heart. He's determined to fetch these assets for his countrymen at a bargain-basement price -by saying publicly that he intends to "pay" shareholders well-below market prices for the assets.

Just last week in fact, Chavez upped the ante in his "hostile" takeover bid for the nation's energy sector. He indicated that the Venezuelan government was prepared to seize the assets of four major foreign-owned oil units by May 1st. And he would use force if necessary - just in case negotiations should bog down over price.

Private companies including ChevronTexaco, ExxonMobil and ConocoPhillips of the U.S., plus Statoil of Norway, Total of France and BP of the U.K. have collectively invested about US$17 billion in Venezuela's energy sector. No word yet on counter-offers from any of these firms, but (one-sided) negotiations are continuing.

Chavez must certainly be commended for the broad nature of his nationalization scheme. It's a smart idea. He's building a well-diversified portfolio of assets across different industries in one fell swoop. This should help reduce risk in the people's portfolio. Perhaps Chavez is planning to launch his own Exchange Traded Fund (ETF).

Investors React Poorly to the Chavez "Social Revolution" Privatization Plan - But Give Them Time To Come Around

You may ask, "What about the market's reaction to Venezuela's new nationalization plan?" After soaring in 2006, the Caracas Stock Exchange has pulled-back "slightly" on this news, plunging about 30% in January. Apparently global investors just can't appreciate the finer points of the Chavez investment strategy yet. But we all have faith they'll come around.

While certainly ambitious, the Chavez strategy isn't all that original. Venezuela is simply jumping aboard a well-established, but still growing trend.

Bolivia's leftist leader, President Evo Morales, announced a "hostile takeover" of the country's energy industry last year. The President even sent the army to seize control of Bolivia's gas fields in order to obtain "more favorable terms" from French energy giant Total, and Occidental Petroleum Corp. for development of these assets.

Shrewd negotiating tactic - Warren Buffett take note!

But you can hardly blame these Latin American Nations for beginning the trend toward trampling shareholder rights (not to mention, setting capitalist ideals back several decades) by shamelessly confiscating private assets. After all, they're just following the lead of their "former" socialist comrades in Russia.

You may recall just a few years ago, that the Russian government essentially nationalized its energy sector.

Russia dismantled the nation's largest privately held energy company (at the time) Yukos, and jailed the firm's former CEO on (questionable) charges of corruption and tax evasion. The Yukos affair cost private investors an estimated US$45 billion in lost (confiscated) market value. But the Kremlin prefers to think of it more as a socially-justified wealth transfer.

More recently Russia threatened to cut off supplies of natural gas to Europe, unless they agree to "renegotiate" existing contract prices. And in an attempt to repeat its successful Yukos "restructuring," Russian authorities recently made an offer (ultimatum) to Royal Dutch Shell. They asked the Anglo-Dutch energy firm to sell its controlling interest in the huge Sakhalin energy project to Gazprom -- the Russian state-run natural-gas monopoly.

While profitable for the state (at least in the short run), these growing trends toward socialization, nationalization or outright confiscation of privately held and financed assets should serve as a cautionary tale for international investors.

Choose the Happy Resource-Rich Nations!

It would seem that developing markets, rich in natural resources, can be divided into two rather broad categories. The first category includes the many nations which get a taste of newfound resource-based wealth and are eager to embrace free-market based rules of law - and play by those rules. These nations are happy to attract more foreign investment in hopes of gaining the expertise, and the investment dollars, necessary to continue the virtuous cycle of growth and prosperity.

But there is a second group of nations, including those practicing politics that are less well-grounded in democratic principles. These nations get their first taste of resource-based riches -- and are instantly intoxicated. And all too often, the government responds with hostility and belligerence toward the very sources of private capital investment that are needed to fuel the wealth creation dynamic in the first place.

Talk about biting the hand that feeds you. As a global investor, I would much rather put my capital to work in those free-enterprise nurturing nations that are members of the first group, rather than the socialist wealth-confiscators found in the second group.

MIKE BURNICK, Senior Editor

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