Search results matching tag 'Emerging Markets'

A Dividend Growth Stock for the Outdoor Enthusiast

IanWyatt — Wed, 04 Jan 2012 16:56:00 GMT

About a year ago I wrote an article featuring a smallish company that has a long history of paying dividends to subscribers. That alone wasn't the most compelling thing about V.F. Corporation (NYSE:VFC), however.

Really, what I love about this company is the tremendous value that its numerous brands represent to loyal customers.

Now is the time of year when most of us in the northeast (where I live) have packed up our spring and summer clothes and are instead tuning our downhill and x-country skis, or at least moving our warm jackets to the front-hall closet.

I can almost guarantee that most houses across America have products made by V.F. Corporation and that the owners love these items - whether they know that the manufacturer is a publicly traded company or not.

Most people are familiar with many of the brands we associate with outdoor apparel and gear, including K2, Patagonia and REI. But none of those companies are publicly traded. Some remain privately held companies, while others have been bought up by holding companies that own multiple brands focused on selling to outdoor markets.

For investors, this makes it a little more difficult to find potential opportunities for investment since there are limited stand-alone sporting companies that are publicly listed on a stock exchange.

Until a few years ago I had never heard of V.F. Corporation. The North Carolina apparel company is largely unknown among consumers and investors alike. It's no longer a small cap, but its 2.2 percent annual dividend, still relatively small size (around $14 billion market cap), and growth prospects make it very attractive.

And if you're someone who enjoys the outdoors I would be willing to bet that you own something made by this company.

V.F. makes active apparel, denim, and daypack products for 30 well-recognized brands including Lee, JanSport, Nautica, The North Face, Vans, and Wrangler. The company designs and manufactures products under these and other lifestyle brands both in the U.S. and overseas.

Since being founded in 1899, V.F. has expanded and matured over the years. A primary driver of the company's historic growth has been acquisitions of leading brands, including Lee Jeans and many other brands the company owns today.

Over the next five years, the company expects to grow its sales by 13% annually. In just the last quarter, revenues rose by 23% and earnings by 29 percent.

It's difficult to find that kind of performance anywhere in the retail sector these days. But V.F. Corp's success is anything but an anomaly - it has even raised its quarterly dividend (by 14%) for the 39th consecutive year.

The company is increasingly generating international sales in emerging markets such as Brazil, China, India, and Mexico. For investors, expansion of middle and upper classes in the developing world is likely to help fuel growth. In addition to growth overseas, V.F. Corp. plans to sell more products directly to consumers, largely through its 780-plus existing and new storefronts, and online.

The future appears bright for V.F. Corp., and past performance indicates that management is likely to deliver on its promises to shareholders. I wouldn't hesitate to recommend this company on any significant weakness, and to dollar cost average into a position.

With shares currently trading around $128, the stock is valued at 13-times forward earnings estimates. It appears that shares are undervalued relative to the stock market as a whole. There is likely around 20% upside to the stock as the management team continues to execute on its growth plans - not to mention that healthy dividend.

Oh, and V.F. Corp. has been one of the best performers in the S&P 500 this year. That kind of performance, especially from a dividend growing retail stock, puts V.F. Corp. in a league of its own.

Stock ownership disclosure: none

The Case for Going Global Is Stronger Than Ever

JohnMauldin — Sat, 06 Aug 2011 08:46:00 GMT

In This Issue:

The Case for Going Global Is Stronger Than Ever
The US Markets Are Still In Trouble
Undercapitalization
Emerging Markets Still Undervalued
Global Capital Shift Is Accelerating
The Biggest Growth Will Be in the Most Obvious Places (and Sectors)
Conventional Diversification Won’t Cut It Any Longer
Risks (and there are plenty)
Maine and QE3, Operation Twist, etc.?

As will be clear below, I had finished an earlier version of this week’s e-letter, but the events of the last few minutes require a few paragraphs. As I write at the end of the letter, Bloomberg kept their satellite truck here in Maine, as they had got advance warning of the downgrade by S&P of US debt and wanted to interview a number of the economists here, including your humble analyst. I can’t rewrite the letter at this late hour, but will send you additional comments on Monday. And you can go to www.bloomberg.com and see everyone’s remarks, including mine. It will be there somewhere, they promise me.

And now, a few questions and observations are in order.

First, as I walked to the area where the Bloomberg was shooting to go on, Jim Bianco and John Silvia told me that S&P had downgraded the Fed. I laughed and said, “If you guys want to make me look like a fool on TV, you have to at least make up a credible lie.” They kept insisting it was true. I finally asked Mike McKee of Bloomberg and Barry Ritholtz, who was on-air, if it was true. They claimed it was, too. I was still wondering if they were setting me up, but even Roubini (who wouldn’t do that to me) said it was true.

So, if the Fed, which doesn’t issue credit and can print money, can be downgraded because it holds AA+ debt, then why and how in hell can the ECB, which holds hundreds of billions of euros of the junk debt of Greece and Ireland and insolvent banks not be downgraded on Monday? And the Bank of Japan? REALLY? What are these guys smoking? Do we now downgrade GNMA? Of course. And the FDIC? What the hell will repos do on market open? The NY Fed says it won’t affect anything. Don’t ask me, I just work here. And how can you rate France AAA? And still give AA or more to Italy when the market is saying they are getting close to junk?

Side bet for Monday. This could make me look like an idiot, but I think treasury yields fall as the risk-off trade increases. Can this come at a worse time for a nervous market? By the way, maybe you want to go long Kimberly Clark, as they make Depends (the adult diapers here in the US, for my non-US readers), because sales are going to skyrocket all across the financial markets.

Can we say Endgame, gentle reader? Madness. And now on to the regular letter. More to follow Monday.

__________

This week I write from Maine, where, when we landed in the float plane at Leen’s Lodge in Grand Lake Stream on Thursday, we learned that the market had closed down 512 points. I was in the plane with Nouriel Roubini and Jim Bianco (plus a Fed official to be named later), where for whatever reason we could get reception on and off (no phone works at the lodge). We were just watching the market fall. It is fun to sit next to Roubini as a market crashes. He knows ALL the market crash jokes.

So, as is my normal routine for this fishing trip to Maine, I take the week off and invite a guest columnist in. This year it is Keith Fitz-Gerald, whom I have heard speak twice and have started reading. He has lived all over the world and spends a lot of the year in Japan, and is a true expert on emerging markets. I am a fan of investing in emerging markets (as I agree they are the future) but do not consider myself anywhere close to Keith’s level of expertise. So this week we take a look at the case for emerging markets.

If you are interested in subscribing to Keith’s letter and learning more about emerging markets, you can go to https://purchases.moneymappress.com/MMRKFGSHORT4950to79/LMMRM800/. It’s fairly inexpensive and my readers get half off. Now, let’s jump in, and I will end with some closing comments.

The Case for Going Global Is Stronger Than Ever

By Keith Fitz-Gerald
Chief Investment Strategist, Money Map Press

If we have learned anything from the current financial mess, it’s that building wealth is dependent on rational analysis, careful decision making, and risk management. That’s why sticking close to home at a time when our markets are more uncertain than ever is a recipe for disaster and absolutely the wrong thing to do. Not only will you miss out on the world’s fastest-growing markets, but the odds are exceptionally high that you will miss as much as 50% or more in potential returns over the next decade.

Don’t get me wrong.

If you choose to “stay home” or go with what you know, which is what a lot of investors are doing right now, chances are you will probably do okay. After all, there will eventually be a U.S. economic recovery and a market rebound.

But know this.

You will have to watch others outperform you by 50%, 75%, even 100% or more – for years to come. Adding insult to injury, you’ll have to deal with the ever-present knowledge that you could have been one of them.

If you can live with this, fine … but most investors I know won’t be able to.

The U.S. Markets Are Still In Trouble

Despite widespread belief inside the Beltway that the U.S. economy is on the mend, reality is that it’s going to be a long time before U.S. markets return to normal – if there is such a thing anymore.

Our real estate markets are likely to be hobbled for a decade or longer, our consumers are badly scarred, chronic unemployment is likely to be a permanent fixture in the economic landscape for at least the next few years, and the personal deleveraging we’re seeing as most Americans pull in their horns is really still in its infancy.

Factor in the evisceration of our national wealth, the debt debacle on both sides of the Atlantic, feckless leadership, and regulators who are trying to make up lost ground for having missed the crisis in formation, and we have a real witch’s brew, the results of which cannot be understated, especially when it comes to capital markets.

Government bond markets, as I have noted many times in presentations around the world, are pricing in slow-growth to no-growth expectations, as evidenced by the 10-year notes, which have historically reflected growth-rate expectations for the so-called developed world. This is especially problematic given the debt carried by the United States and most of its colleagues.

Figure 1: Source: Bloomberg, Federal Reserve Bank of St. Louis, Calamos.com

The numbers are even starker when viewed through the lense of forward-looking annual real yield on ten-year treasuries, which pencils out to a paltry 0.6%, assuming annualized inflation of 2.4% a year.

Obviously the inflation numbers are highly suspect, as is anything coming out of Washington these days, but this is what we’ve got to work with.

I find myself struck by a terrible sense of déjà vu, because the U.S. – debt deal or not –appears to be charting a course down the same troubled path Japan has trod since 1990, which is something I first noted in early 2000, based upon my first-hand experience in that nation.

Unfortunately, this path is likely to be characterized by the same problems: sovereign debt overburden that makes the Greeks look positively miserly, stagnant national wealth, and slow GDP growth despite trillions in “stimulus” that is unlikely to create any real returns whatsoever.

As bleak as this sounds, however, I also find myself salivating, because history shows that periods of great crisis are really just opportunities in disguise.

Case in point, many emerging markets are now emerging in name only. They’ve become “BEEs” or Big Emerging Economies, with superior risk-reward characteristics, newly unbridled consumer power, and – gasp – some element of adult supervision when it comes to fiscal fitness.

Not surprisingly, their bond markets are pricing in an entirely new set of expectations, 6%-9% growth, and capital markets that may exceed $300 trillion by 2025, according to proprietary research … more than 60% of which will come from outside the established players of the United States, the EU, and Japan.

At a time when we are hamstrung by our own problems, this is hard to imagine. But it’s not difficult to understand: since WWII, developed countries have contributed ever less to global growth.

It’s not that we’re falling off the map. In fact, quite the opposite is happening, and other nations are simply coming up to speed.

Figure 2: Source: PIMCO, Haver Analytics, IMF, FGRP

What’s more, many of the same emerging markets we used to regard as little more than entertaining backwater trading partners are now some of the world’s biggest foreign creditors. Virtually all have large reserves, and the importance of this development cannot be understated.

Here’s why.

In contrast to years past, when a financial crisis would have erupted into a fiscal crisis, countries like China, Brazil, and others have seen their currencies strengthen. This makes their dollar-denominated debt easier to repay, especially as a creditor, because any weakness in the currency actually improves fiscal accounts.

At the same time, being a net external creditor gives emerging-market policy makers economic flexibility that simply wasn’t possible a decade ago. As a result, many emerging economies, particularly the BEEs, can now provide a sort of countercyclical stimulus that is capable of stimulating domestic demand, even as they become less reliant on their exports. This is why China, for example, has not crashed and Brazil refuses to buckle.

According to the International Monetary Fund, worldwide official foreign exchange holdings reached $9.69 trillion in the first quarter of 2011. That’s a 17% increase year-over-year in aggregate.

As of the end of Q1 2011, total foreign exchange holdings by advanced economies were $3.16 trillion, and total foreign exchange holdings by emerging and developing economies were approximately double that, or $6.53 trillion.

If your jaw is not on the floor already, consider China. As of March 2011, China had $3.1 trillion in reserves all by itself, while the U.S. showed merely $128 billion in the proverbial piggy bank.

This means in no uncertain terms that some nations, like our own, have little or no wealth to draw upon while others could recapitalize their financial systems several times over and still have change left.

Undercapitalization Makes Emerging Economies More Efficient & Developed Economies Less Efficient

History shows that one of the single biggest drags on any economy is something I call overcapitalized infrastructure. What this means is that, dollar for dollar, there is so much money available that investments become a process of overallocation or overcapitalization. Or both.

In simple language, this means there’s simply too much money chasing too few quality opportunities, so things tend to get bid up or overcapitalized in the process – like houses, cars, credit card debt, and mortgages. All of which are, in reality, generally depreciating assets that create nothing more than the illusion of profits for very short periods of time.

Under this scenario, labor productivity generally rises but capital productivity generally falls, which is why government analysts are flying blind … they cannot tell the difference.

On the other hand, the BEEs and many emerging markets do not have such troubles. At least not yet.

If anything, they’ve got the reverse to contend with: extremely competitive labor that’s fueled by a powerful combination of ambition and generally growing capital efficiency.

What’s more, because they are starting from an incredibly low base, it doesn’t take a lot to get them moving in the right direction. Many, in fact, are able to engineer a level of capital efficiency that far outstrips our own, led most notably by China, Brazil, and India. And, thanks to millions of underemployed people in low-productivity jobs, they have a huge human reservoir from which to draw for decades to come. We don’t.

According to the McKinsey Global Institute, the average capital output worldwide by country is 253, meaning that it takes 253 dollars in capital stock to generate $100 of global GDP. A nation like China can achieve this with a GDP “investment” per capita of between $1,500-$2,500 per person, whereas the United States requires more than $40,000 and has a capital stock ratio of approximately 205%.

What this suggests is that high-GDP-per-capita nations require more money to maintain the same relative efficiency as nations with low GDP-per-capita ratios.

It’s no wonder, then, that while the West is forced to contend with a proverbial albatross around our necks that’s defined by sovereign debt and badly broken social contracts that nobody wants to relinquish, other nations are embarking on a grand runway of growth that will result in the greatest game of capital “catch-up” the world has ever seen.

Figure 3: Source: IMF, McKinsey & Co., FGRP

Emerging Markets Still Undervalued

Obviously this raises some interesting questions, especially when it comes to which markets may represent the best investment opportunities.

Here, too, the data is quite clear.

According to a July 2011 report from Investment Market Risk Metrics, US markets still appear overvalued, even though they are down substantially from other peaks over the last 131 years.

Figure 4: Source: Pension Consulting Alliance –Investment Market Risk Metrics

On the other hand, emerging markets still appear cheap. Granted they’re not at the levels we witnessed in 2008-2009 or in the early 2000s, but one can make the argument they’re undervalued even now. And therefore more worthy of investment than their Western counterparts.

Figure 5: Pension Consulting Alliance – Investment Market Risk Metrics

Global Capital Shift Is Accelerating

Against this backdrop, it’s no wonder that money is leaving the nanny states of the West and headed to the Far East, as well as to nations that are backed at least partially by natural resources. This includes portions of the Middle East and South America, too.

In perhaps the ultimate irony, our own weak dollar policies, TARP, and QE2 have actually made this capital flight worse, because they have diminished the value of the dollar. So until Washington stops jawboning and actually does something productive that makes money feel welcome here, this will continue.

Many investors think this is new, but in reality it’s just the continuation of a trend that began shortly after WWII, when approximately 75% of the world’s economic activity took place within our borders. We just don’t remember.

Today, that figure is reversed, and various sources estimate that as much as 75% of the world’s daily economic activity now takes place outside our borders.

Some chalk this up to the myth of American industrial might and superiority. In reality we won by default, because the rest of the world was quite literally in ashes and hadn’t yet taken the field.

Now, however, they’re ready to play, which is why the trend in global consumer spending looks like a ski jump, even as the United States’ share of that is in decline or at best flatlining.

Figure 6: Source: PIMCO, Credit Suisse, FGRP, IMF

As to how things will look in a few innings, what we’re dealing with is simply a numbers game, especially when it comes to consumption.

People forget, for example, that China’s middle class alone is estimated to be more than 300 million people strong. Factor in India and much of South America and you are talking about an unprecedented increase in consumerism that may ultimately involve as many as 3 out of every 5 people alive on the planet today –that’s entirely outside our borders.

The Biggest Growth Will Be in the Most Obvious Places (and Sectors)

When I look at the world of the past and the world of our future, some things jump out. Chief among them is the immediate effect that newly emerging nations will have on things the rest of us take for granted – like infrastructure and infrastructure-related holdings – which are among my top choices at the moment and have been since this crisis began.

As recently as 1970, approximately 25% of global GDP was invested in infrastructure, which is defined as fixed assets and equipment by the McKinsey Global Institute. Not surprisingly, this declined to 20% in 2010, leading many analysts to mistakenly believe that global growth was slowing.

Figure 7: Global Investment Rate as a % of GDP, Calamos.com

Nothing could be farther from the truth.

What is actually happening is that the world is being split into a two-speed economy: those countries capable of creating high-productivity capital investments and those that cannot create such things absent huge, misguided stimulus programs and bailouts.

The former are much more attractive investments, because they are characterized by growth, while the latter should generally be avoided because they will be a drag on capital for decades to come, absent a complete simultaneous fiscal reset.

Generally speaking, this suggests moving away from American-, European-, and Japanese-centric choices and into companies that favor the faster growth of emerging markets and BEEs, regardless of where they are domiciled, i.e., on the NYSE, London, or Tokyo exchanges.

Doing so will help investors capitalize on burgeoning domestic growth while at least partially isolating their portfolios from the inevitable slowdowns and stagnant capital “stock”discussed above. It’s worth noting that an increasingly large percentage of exports that were once bound for our shores are being refocused to other emerging markets, suggesting that future growth will be even less dependent on developed market stability than it is now, which is a pretty scary thought if you’re not prepared for it.

By the numbers, this too is pretty straightforward.

Unfortunately, this is where it gets tricky and where we must depart from the past when it comes to our investments.

Conventional Diversification Won’t Cut It Any Longer

For millions of investors, the very notion of diversification is appealing: to split your assets up so that no one decline will take everything down at once. Unfortunately, with everything going on now, this is like rearranging the deck chairs on the Titanic, and about as effective.

Today’s financial markets need a concentration of assets that’s characterized by significant emphasis on creditor nations versus debtor nations. At the same time, investors who don’t want to get left far behind would be wise to fill their portfolios with companies I call the “glocals,” or big multinational firms with strong “fortress” balance sheets, experienced managers, and globally recognized brands. Technology, connectivity, and indirect resource plays all come to mind here, as do dividends, which help offset the risks we take as a part of the investing process.

I also believe that investors want to generally be long resources and commodities for the foreseeable future. Both will be great places to hang out as the West comes apart, while also providing a meaningful inflation hedge. If things don’t come apart, that’s great, because they’ll zoom higher on demand as it resumes.

And finally, I think investors who buy into the international growth that is our future will take advantage of a definite currency bias that will keep your money involved with the efficient capital countries while generally avoiding the slackers, except in very specific instances and only then with risk capital.

You can figure out pretty quickly which is which by looking at the cost of living versus value of investments. Anytime you see the former overwhelming the latter, it’s time to go, as is the case for the United States and Europe now.

Figure 8: Source: PIMCO

Risks (and there are plenty)

No discussion on emerging markets would be complete without addressing the 800-pound gorilla in the room –China. Love it or hate it, that nation is on the move.

More bluntly, China will affect every investment class on the planet for the next 100 years, which is why investors would be wise to come to terms with it. I think the decision is pretty easy, even as it is pretty graphic: the Dragon is coming to lunch on Tuesday. The only decision you have to make is whether you and your money are going to be at the table or on the menu.

The same could be said about volatility. I think it’s here to stay, particularly as our own demographic shift results in further currency debasement and inflationary pressure. You can’t just wish away $202 trillion in unfunded liabilities, despite what those in our capital might think.

No matter which way you cut it, it’s very simple, as I see it: the West (including Japan) faces severe structural imbalances that, when combined with limited willingness to deal with meaningful austerity, will hold it back for many years – which is why I’d rather go with growth any day.

In closing, I want to leave you with one more thought.

Even though we have talked extensively about why the case for emerging markets is stronger than ever, I am not a big fan of abandoning the U.S., which is what some of my colleagues advocate.

The United States is a nation filled with resilient, clever people; and despite the fact that the chips are down, I wouldn’t bet against it.

We will find our way through this mess, even though the path we must take isn’t clearly defined nor brightly lit … yet.

Best regards for great investing,

Keith Fitz-Gerald

Maine and QE3, Operation Twist, etc.?

I close from Maine, where the Bloomberg truck was just told to stay, because evidently there is about to be something announced that is going to be huge (it is characterized as an embargoed story, whatever that is). And they have all these economist types in one place for comment. It really is an all-star line-up in one place. Go figure. It is 6 pm, and I have no idea. Maybe I’ll write a last-minute note. Wait: Latest rumor: a government official tells ABC News that the federal government is expecting and preparing for the bond rating agency Standard & Poor’s to downgrade the rating of US debt from its current AAA value. That should make for interesting dinner discussion!

This has been a very interesting time to talk economics late at night. Some VERY serious economists are talking QE3 and another version of Operation Twist (circa 1948, where the Fed fixed long bond rates) next year as we roll into recession. Others think the Fed has to do nothing. I am sitting and learning and maybe throwing in an opinion or two. I will report back next week.

Today my youngest son Trey and I went fishing. That is, fishing as opposed to catching anything. One bass apiece. But the talk at lunch was good and the banter friendly. We fly back on Monday. This is my 6^th year to come with Trey, and it is our favorite week of the year.

Your hoping to be catching tomorrow analyst,

John Mauldin

John@FrontlineThoughts.com

Unintended Consequences

JohnMauldin — Sat, 26 Mar 2011 18:12:00 GMT

In This Issue:

Loose Monetary Policies and Emerging Markets
Bubbles in Emerging Markets
Difficult Choices
Snowbird, New York, Portland, and La Jolla

The central banks of the developed world are printing money and are engaged in a very-low-interest-rate regime. What does that mean for emerging markets? It is more than just a dilemma, it is a tri-lemma – they have problems not just coming and going but also sitting still! I am in Zurich tonight after a long day, with a 4:30 AM wake-up call to get back home, but deadlines are deadlines. So, to make this one easier on me as well as hopefully instructive for you, you will get chapter 15 of my new book, Endgame, in which coauthor Jonathan Tepper and I speculate about the future of emerging markets in general and investments in them in particular. We once again are on the New York Times best-seller list this week, by the way (thanks to many of you).

The reviews keep coming in. I have never met Anthony Harrington, but he is clearly a keen and astute analyst, since he has called this book a must-read. Seriously, he homes in on one aspect that I think is critical; and that is the issue of trade deficits and fiscal deficits and how they affect each other. You can read his work at http://www.qfinance.com/blogs/anthony-harrington/2011/03/23/mauldins-end-game-teaches-politicians-the-basics-but-are-they-listening-austerity-measures.

And this week, if you have not yet bought your copy, let me commend you to my friends at Laissez Faire Books. I have been buying books from them for nearly 30 years. They are the best source for Austrian economics and libertarian books, along with the usual offering of investment books current in the market. They have matched the Amazon price for Endgame; but if you are interested, move around their website and pick up a few other things along with my book. http://www.lfb.org/product_info.php?products_id=1014&PromoCode=L401M301

And now, let’s look at emerging markets.

Loose Monetary Policies and Emerging Markets

So far we have focused on the United States and other mature, developed economies that have far too much debt. With Japan, the United States, the United Kingdom, and Switzerland at close to zero percent interest rates, it seemed like a good idea to stimulate the economy. However, emerging markets that maintain pegged currencies or that shadow the dollar are essentially reduced to importing excessively loose monetary policies. Reserve growth across many emerging countries has been very strong over the last year. Emerging Asian countries account for almost 50 percent of global foreign exchange reserves. Huge Asian reserve growth since early last year is a result of mimicking loose monetary policies in the developed world to keep their currencies competitive. China has accumulated the most reserves of any emerging market country. This is directly related to its currency peg and its need to recycle the dollars it gets from its exports.

A result of Asian emerging markets’ importing loose monetary policy from developed markets is that domestic inflation rates are rising quickly, as policy rates remain too accommodative. Asian emerging market countries are facing a trilemma: They can fix any two of a pegged exchange rate, free flows of capital, or independence in monetary policy, but not all three. The end result is likely to be higher policy rates and currency appreciation. (See Figure 15.1.)

Bubbles in Emerging Markets

Many emerging markets will double or triple over the next few years. Emerging markets are extremely small as a percentage of total global market capitalization. When investors diversify away from developed markets, it will be like putting a fire hose through a straw. Liquidity from developed markets will overwhelm emerging markets. Part of this is from investors in the developed world wanting to go where the growth is, but part of it is a result of quantitative easing all over the world, especially in the United States. That is why you see emerging markets like Brazil taxing inbound capital flows in an effort to keep their own economies from developing a bubble. (See Figure 15.2.)

There are good reasons why the United States and the United Kingdom are among the highest capitalizations. In part, this is because a higher percentage of companies are publicly traded in the United States and the United Kingdom, whereas in other countries, many more are privately held, family-owned, or indeed government-run. Individually, almost all emerging markets are less than 0.5 percent of total world capitalization, as Figure 15.3 shows.

To further emphasize the small size of some emerging equity markets and their potential to grow, in Figure 15.4 we have compared the total market caps of some of these markets alongside the market caps of some well-known blue chip stocks (in millions of $).

Consider the following examples: Microsoft has a bigger market cap than all of Indonesia, General Electric and Wells Fargo have market caps almost double that of all of the Philippines, Monsanto and Time Warner have bigger market caps than all of Vietnam and Pakistan, and GAP Inc’s market cap is almost double that of Sri Lanka’s.

In the reflation trade, a few characteristics drive outperformance in emerging markets:

• Generous liquidity, that is, rapid monetary expansion

• Positive demographics

• Declining real interest rates

• Underleveraged consumer

• Banking sector with low loans-to-GDP ratio

The main countries that satisfy these requirements are Turkey, Malaysia, India, Indonesia, and Brazil.

Local conditions in some emerging market countries will act as a fire starter to excessive liquidity from abroad. In countries like Indonesia, Brazil, and Turkey, due to solid economies, increasing productivity, and thus falling inflation, they are transitioning to lower interest-rate regimes. This often has the consequence of detracting investors from the falling returns on cash and debt products and pulling them toward higher-yielding equities.

Further, large populations and still relatively low levels of GDP per capita give some idea of the scope for expansion in countries like China, India, Indonesia, and Sri Lanka if the prosperity of more developed economies, such as Taiwan and the Czech Republic, is anything to go by.

In this scenario, liquidity is likely to remain well above the norm for some time, and China will be little different from the other emerging markets:

Small markets + Ample liquidity + Investor risk appetite
+ Historically low interest rates = Bubblelike conditions

Chinese equity, property, and other asset markets will benefit hugely. China differs from many other emerging markets because it has tight capital controls that keep a lid on overseas speculation. If these controls were relaxed, however, and the currency allowed to freely fluctuate, then all bets are off as to the effect on Chinese markets. This would be no different from Japan in the 1980s, when the capital accounts were opened up and the yen was allowed to float. Indeed, many if not all of the bubbles that have occurred since the Dutch Tulip Mania in the seventeenth century have been precipitated by a combination of financial liberalization and innovation.

There is always a bull market somewhere. If you go back to the 1970s in terms of loose monetary policies and excessive government debt, does that mean that we’ll see a repeat of a decade in the doldrums for U.S. and European stock markets? Possibly, but it should not matter to a global macro investor. Again, there are always bull markets somewhere.

Figure 15.5 shows that from 1970 to 1985, if you had invested $1 in the United States, you would have $2 by 1985. If you had invested in Japan, you would have made $6 over the same period, and if you had invested in Hong Kong, you would have made more than $8. Emerging markets will be the big winners of the loose monetary policies around the world. Just as the Fed’s loose monetary policy after the Internet bubble burst created the housing bubble, the Fed’s money printing will inflate emerging markets.

The surplus liquidity isn’t likely to ignite an inflationary boom in the U.S. economy if consumers refuse to borrow and spend. But that liquidity has to go somewhere, and emerging markets look like the most likely destination. Emerging markets and commodities took the first hits in the credit implosion because they were viewed as warrants (longterm call options) on global growth.

As history shows, the leading sector of the previous bull market typically is not the leader of a new bull market. The emerging markets look like they are the new global leaders. Emerging economies account for 43.7 percent of global output and, according to the IMF, will account for 70 percent of the world’s growth going forward, yet they represent only 10.9 percent of global stock market capitalization. China by itself makes up 15 percent of the global economy but less than 2 percent of market cap, while the United States provides 21 percent of output but 43.4 percent of market cap.

Most investors weight the American and European markets too heavily. This is partly due to home bias in investing, but it is really more like a drunk searching for his keys under the lamppost. He searches there not because he is likely to find his keys but because there is light. In the same way, most investors in emerging markets do not look for the right data and merely decide to either take risk and invest or reduce risk and withdraw funds. Their investments into emerging markets are unsystematic.

Most investors buy or sell emerging markets indiscriminately based on their willingness to take on further risk or shed risk. Figure 15.6 shows the extremely high correlation between the VIX Index, global equity volatility, and the U.S. dollar versus South African rand exchange rate (USDZAR). You can’t make up charts like this.

During the emerging markets rally in 2006 and 2007, almost all markets traded in line with the others. Figure 15.7 shows that for much of 2006, the Indian Sensex and the Mexican Bolsa Index had a 96 percent correlation, even though their economies could not have been more different. (File under the “investors are lemmings” category.)

Emerging markets could easily be the next bubble. However, they don’t even need to be the next bubble or the next big thing for investors to profit from them. As recessions ended in the United States and Europe in 1992 and 2003 and central banks kept liquidity flowing freely, almost all emerging markets rallied indiscriminately.

Loose liquidity and undervalued emerging market currencies are leading toward excess foreign exchange reserve accumulation and loose credit conditions. Underleveraged emerging markets with higher velocity will continue to benefit from the accommodative monetary policies of a developed world beset with high debt and low monetary velocity. Continued reserve accumulation can lead to inflationary pressure, overinvestment, complications in the management of monetary policy, misallocation of domestic banks’ lending, and asset bubbles.

Difficult Choices

We have written about the difficult choices developed countries will face as they deal with the hangover from too much debt. Emerging market countries face the flip side of the same problem. They are, for the most part, underleveraged and have higher monetary velocity, yet they are importing the loose money policies from the United States and Europe.

What can emerging markets do to try to reduce inflows of hot money and prevent bubbles? There are a number of tools available to policy makers of liquidity-receiving economies in response to excess global liquidity and large capital inflows. As the IMF has pointed out, emerging markets can allow a more flexible exchange rate policy. They can accumulate reserves (using sterilized or unsterilized intervention as appropriate). They can reduce interest rates if the inflation outlook permits, and they can tighten fiscal policy when the overall macroeconomic policy stance is too loose. All of these involve difficult tradeoffs where the costs and benefits are not obvious.

The bottom line is that governments around the world need to be alert and make difficult choices to deal with a world excess liquidity. From an investor’s point of view, we would enjoy the current ride in emerging markets but recognize that they are high beta to the U.S. economy and stock markets. The next time the United States goes into recession—and there will be a next time—it is likely that emerging markets will suffer significant losses. So, emerging markets are a trade and not a long-term investment.

That being said, at the bottom of the next U.S. recession, we think emerging market countries could see their economies and stock markets finally decouple from the United States, and at that point, they could become the trade of the decade. We suggest that investors use the time to find specific stocks and not just country ETFs, or find someone who can do that work for you. Fortunes can be made if you do your homework.

Snowbird, New York, Portland, and La Jolla

Let me remind you that my conference in La Jolla is filling up and the registration deadline is looming. As I said last week, at my Strategic Investment Conference, the first two questions that each speaker will get at the end of their presentation will be, first, “What will happen when QE2 goes away?” and second, “Under what conditions will the Fed launch QE3?”

I will pose them to Martin Barnes, Marc Faber, Louis-Vincent Gave, Paul McCulley, David Rosenberg, and Gary Shilling – and John Paulson has agreed to speak as well! They will be joined by Neil Howe (The Fourth Turning, and demographics guru) and George Friedman of Stratfor, as well as your humble analyst and Altegris partner Jon Sundt. I mean, really, is there a conference anywhere this year that has a line-up that powerful?

The conference is April 28-30 in La Jolla. It is filling up fast. You can register at https://hedge-fund-conference.com/2011/invitation.aspx?ref=mauldin. Sadly, it is for accredited investors only, but I will report back to you the answers from the speakers to those questions.

As noted at the outset, I am in Zurich tonight. The weather in Europe this week has been fantastic, some of the best I have ever had. London, Malta, Milan, Zug, Zurich – just brilliant. I had dinner outside with Massimo Lattman on Lake Zurich tonight. A very successful entrepreneur and manager, he had such great stories and insights to share, on a gorgeous night. You live for moments like that.

Saturday I am off to Snowbird, Utah, for my partner at SMG Steve Blumenthal’s 50^th birthday party, then on to New York on Sunday for meetings and media to help promote the book. I will detail the schedule next week.

I will also be providing the keynote address for the West Coast-based investment advisory firm of Arnerich Massena at their 2011 Investment Symposium, on April 11-12, in Newberg, Oregon, outside of Portland.

OK, don’t tell my kids about this next bit. (When we travel together, I am a bit of a stickler about schedules. Moving seven kids and their families with kids can get to be a logistical issue. Dad can get on their case if they don’t move fast enough.

So, last night I was with Niels Jensen on the train from Milan to Zug, our destination a quaint little “village” in Switzerland near Zurich. Lots of fund managers are moving there for tax reasons, lifestyle, etc. It was late and I was writing away on the train, deep in my creative throes, charmed with an idea for a new research report I am writing. Niels said, “John, you might want to pack up. We are getting close.” I looked at my watch and thought I had five minutes, so I kept typing away. Creative juices and all, you know? You’ve got to give the Muse her lead.

However, we pulled into the station sooner than I expected. I started packing up quickly, but there were a lot of wires and stuff. Spilled the last of the Prosecco on my coat (is that maybe why I thought I was creative?). I ran to the door, only to have it close and lock, and watched Niels, standing with my luggage on the platform, waving goodbye as the train pulled out! Nothing to do but feel like an idiot and travel on to Zurich, then take the next train back (this one with local stops) to Zug. I got to the small hotel. No one was at the desk or would answer the phone. Not knowing what to do, I looked around and saw there was a key on the counter. Next to it was a note reading, “Mr. Mauldin, your luggage is in your room. Have a good night.” Anywhere else this is an invitation to free luggage. In Zug, I guess, this is how they take care of latecomers.

The next day, as we are back at the train station, heading for Zurich, this gentleman walks up and asks, “Are you John Mauldin? I have this new econometric model I’ve been wanting to show you.” So, on the train to Zurich I looked at feedback mechanisms and how they can be used to analyze markets. Actually quite intriguing. It is a small damn world, but a really fun one.

It is time to hit the send button. The wake-up call will come way too soon. But, there is a party going on underneath my hotel room window. They are singing songs from the ’60s and ’70s here in the Old Town in Zurich. Maybe just one drink and then bed. Have a great week! Auf wiedersehen!

Your loving Switzerland analyst,

John Mauldin

Uh Oh - China's Property Market

VinnyCatalano — Fri, 25 Jun 2010 17:02:00 GMT

Is the bubble about to burst?

"China Vanke - the country’s biggest property developer is slashing prices for its new properties by 20 per cent, according to reports in China Business News and the Shanghai Morning Post."
FT.com/beyondBRICs, June 25, 2010

Plus, this

The Meaning of Dubai's Financial Crisis for Emerging Markets

CharlesKrakoff — Mon, 30 Nov 2009 22:16:00 GMT

It must be fun to spark a world financial panic and then go on a five-day vacation. By now everyone knows that on Wednesday of last week, right before the Muslim world shut down for the Eid-al-Adha festival, Dubai World, the flagship investment company owned by the Government of Dubai and/or Dubai's ruler Sheikh Mohammed bin Rashid al-Makhtoum, announced a standstill on its debt repayments, with specific reference to a $4 billion bond payment that Nakheel, a Dubai World property development subsidiary, is due to pay in December. The world has now, finally, woken up to realize that the Dubai miracle is built on sand, both literally and figuratively.

I hate to say I told you so (why do people always say that? I'm usually delighted to say I told you so), but in a blog post that appeared on this site last July "Can Dubai Come Back?" I advised investors to steer clear of Dubai, pointing out that "rampant intermingling of public and private funds and little transparency over who owns and owes what," it was hard to know exactly what is going on inside any company. By all indications Nakheel and also Emaar, another state-owned property developer, were perilously close to insolvency if they hadn't already crossed the line. Nakheel had shelved development of the second and third Palm Island projects and Emaar, developer of the world's tallest building Burj Dubai, was trying to get itself acquired by Dubai Holdings. Arguments about whether or not all these companies were then or are now insolvent are pretty much beside the point. I likened the Dubai property and investment markets to a game of three-card monte, where losses and liabilities could be moved about and hidden from view. Given the interlocking nature of UAE companies, when you buy a share of one it's hard to know who else's hidden risks and liabilities you're buying too.

Today, the first day of trading in the UAE since last Wednesday's market close, the Dubai Stock Exchange closed down 7 per cent and Abu Dhabi's 8 per cent. DP World, a profitable Dubai World ports operating subsidiary, saw its price drop 15 per cent. Some analysts now predict that the Dubai property market, already down around 50% from its peak, could drop a further 40% for a total 70% peak-to-trough decline.

For those of us not resident or invested in Dubai, the question is whether Dubai's woes will spread to other markets. This possibility of contagion, especially to other emerging markets, is foremost in many people's minds, especially since statements by the government of Abu Dhabi and by the UAE federal government have put paid to the assumption that Dubai World as a state-owned enterprise enjoyed some implicit government guarantee against insolvency. The famed Mark Mobius of Templeton Asset Management has warned that a default by Dubai World could trigger defaults - especially of state-owned companies - in other markets and could lead to a 20 per cent drop in emerging markets overall. This could easily happen, since many investors seem unable to distinguish one emerging market from another, but is the risk based on anything more substantial than the madness of crowds?

I think not. Dubai's slump may be deeper and more protracted than anyone expected, but Dubai's rulers have never ceased to astound with their imagination and audacity. I wouldn't write them off just yet, though investors and Dubai's richer cousins in Abu Dhabi may use the occasion to force Dubai's companies and government to operate with greater transparency. This would be a good thing.

As for other markets, their exposure to Dubai is minimal. It's important to remember that total foreign claims on UAE debtors amount to only $123 billion: a lot of money to be sure, but not really that much in the global scheme of things. Over 40% of that debt, or $50 billion, is held by British banks, but that is almost pocket change compared to the size of the losses and rescue packages earlier this year. The British government has already put over $120 billion into the rescue of three big banks since the start of the financial crisis last year, and has just pledged another $43 billion for the Royal Bank of Scotland (RBS) alone.
As for other emerging markets, most of them are built on a real - as opposed to a financial - economy. It is hard to imagine the Dubai crisis registering as more than a blip on markets in Brazil, India, Indonesia, South Africa, Egypt, or China, since these markets consist largely of companies that grow, extract or manufacture physical products or that supply essential services like telecoms. Even most of the banks in these countries are likely to be less exposed to Dubai than their counterparts in Britain. Any short-term sell-offs in otherwise sound emerging markets represent good buying opportunities rather than a call for a retreat to safety. Besides, in today's world can anyone tell me what is safe?

Some emerging markets funds have been hit by the crisis. The Market Vectors Africa Exchange-Traded Fund (AFK) closed down just over 3 per cent today and is down more than 6 per cent over the past five days, but it is up more than 60% since its February 2009 low. Even T. Rowe Price's Africa and Middle East Fund (TRAMX), which has over 12% of its holdings in UAE property and financial investments, lost 3.4 per cent today but is still up more than 60 per cent over its March 2008 trough. The ING Russia Fund (LETRX) fell more than 4.2%today, though whether that has anything to do with Dubai is unclear. Maybe Russia, whose economy is increasingly dominated by state-owned companies known for a lack of transparency but which some investors may think are implicitly backed by the Russian government, is suffering some contagion. Even so, it is up more than 175% since its low in February 2009.

Most of my other emerging markets holdings, including the MSCI Brazil Index ETF (EZW), the Market Vectors Indonesia ETF (IDX), the MSCI Thailand Index ETF (THD), Cemex (CX), and Brasil Foods (PDA), closed up today. It's impossible to know whether Dubai has any more nasty surprises to reveal, but on the evidence so far the fallout from Dubai's crisis is going to be limited to the Emirates and their fellow GCC (Gulf Cooperation Council) members.

Disclosure: AFK,TRAMX,LETRX,EZW,IDX,THD,CX,PDA Long

Association for Investor Awareness - Week of 08/27/2009

AIAAdvocate — Thu, 27 Aug 2009 19:06:00 GMT

In This Issue:

The Outlook Is Better For An Improving Economy
Profit Growth Can Be Misleading
Big Companies Still Have An Advantage
Emerging Countries Are Making A Strong Recovery
Two Long Term Dividend Payers Look Good
Fasten Your Seat Belts, Oil Prices Are Roaring Back
The Bottom Line This Week

It's been a bear market for bears recently as their many doom-and-gloom pronouncements have gone wanting. The old bull just won't quit, despite all the logical arguments that predict his demise. It's a good lesson that paying attention to what is actually happening in the stock market is more profitable than following theories. Mother Market always has the last word.

The numbers tell the story. Since our last letter on July 29, the Dow and the Nasdaq have gone up 5.2% and 2.9% respectively. In only one of the four weeks did the market slide into negative territory, and then by less than 1%. By contrast, the best week registered a 7.3% gain. That's the sort of tailwind we like to have.

The Outlook Is Better For An Improving Economy

Of course, the rally could come to grief overnight. Stocks are rising on the expectation that the economy is finally coming out of recession, and companies will again make oodles of money. The unofficial office pool index suggests that most people on Wall Street think growth rates will be higher than Grandpa Bernanke at the Fed is predicting.

One accomplished tea leaf reader we talked to said his off-the-record prediction is that growth may exceed 4% next year. That would be quite a jump from two points behind the zero line, which is where the economy is today.

Profit Growth Can Be Misleading

Even if the economy doesn't win the long jump next year, most well-run companies should continue to see their profits increase. That's because nearly all of them have been on lean-and-mean programs that have cut costs to the bone. So even though revenues have been abysmal, profits have been on an upswing.

Of course, lean-and-mean can only go so far. At some point, all the useful cuts will have been made and profits must come from actually selling more goods. That change will mark the real beginning of a recovery.

Big Companies Still Have An Advantage

The big blue chips have a king-sized advantage when it comes to selling more products, even if the optimists are wrong and the U.S. economy just dribbles along. The global economy, where most mega companies do most of their business, is still doing well – and it should do even better next year. If so, the multinationals will once again prove that big is the size to be in the 21^st century world.

The stronger global economy will also help many U.S. firms that don't have facilities overseas. Many exporters are beginning to see their order books fill up as foreign firms ramp up their operations to meet their expected needs. As a significant side benefit, rising exports will help the U.S. trade balance, which has been suffering mightily for several years.

Emerging Countries Are Making A Strong Recovery

Speaking of the global economy, nobody is doing better than the emerging market countries. You may remember them from a few years ago when they were also on a roll. However, the high achievers plunged when their main customer, the U.S., slipped into the red.

Now many developing countries are growing quickly again. This time around, the countries are tapping into their own regional markets rather than putting all their efforts into winning U.S. orders. Fortunately for the local suppliers, the approximately 2.5 billion people in developing countries want just as many plastic salad shooters and cars as their American counterparts.

Doing best of all are the BRIC countries (Brazil, Russia, India, and China). The first two are in the catbird's seat for growth because they are major suppliers of energy and raw materials to industrial countries of all sizes.

From an investor's standpoint, emerging markets still look good for long-term portfolios because they are many years away from reaching their peaks.

To that end, we once again recommend the iShares MSCI Emerging Markets Index ETF (EEM) http://finance.yahoo.com/q/bc?s=EEM. When we first presented the fund on June 26 it was $32.32. The price is now $36.47, a 12.8% gain. We think more is on the way, but we can expect some bumps along the road. Emerging markets will always be volatile, which is why we think the best way to invest is with a diversified fund.

Two Long Term Dividend Payers Look Good

Closer to home, we continue to recommend stocks that pay rising dividends. Although fears about inflation are continuing to make the rounds, deflationary forces are still at work in our economy. As long as that situation continues –which we think will be longer than most people think— the buying power of dividends will increase.

If you purchased a selection of the blue chip companies we have been recommending in recent months, you probably don't need to make additions to your dividend portfolio. But if you want to gild the lily, we think you should add Sysco Corp. (SSY) to the group. http://finance.yahoo.com/q/bc?s=SYY

Sysco is the leading supplier of food to colleges, hospitals, corporate cafeterias, hotels, and restaurants in the U.S. The company has been winning many orders because it can operate more efficiently than its customers can do on their own. At the same time, Sysco can usually provide a better and more diverse menu.

We think Sysco has excellent prospects for several years of growth. The company has been strengthening its business capabilities by purchasing other food suppliers in its field. As a result, Sysco will be coming out of the recession much better equipped to generate new business than any of its rivals.

Sysco also shines in the dividend department. The company currently boasts a 3.8% yield which should increase by 10% annually for the next few years. The stock price is also likely to do well.

Another stock with an attractive yield is Abbott Laboratories (ABT) a 121 year old company that produces and sells healthcare products throughout the world. http://finance.yahoo.com/q/bc?s=ABT

Abbott, of course, is best known for its many successful pharmaceuticals. But the company also offers a variety of diagnostic products that are in widespread use. In addition, Abbott produces infant formula and adult nutritional drinks – and it supplies stents, vessel closure devices, and related products for coronary applications.

One of the reasons we think that Abbott is attractive is the stock is down due to all the worries about a national health care program. If such a plan is passed, there is a possibility that drug prices will be forced down. However, we think the large increase in the number of people who will receive care will more than make up for the shortfall.

Abbott's yield currently stands at 3.5%. As with Sysco, Abbott Labs will probably continue to increase its annual payout, as it has been doing for 37 straight years. Nearer term, the stock should make an attractive catch-up move once the outlook for national health care clarifies.

Fasten Your Seat Belts, Oil Prices Are Roaring Back

Although it has not yet caused gasoline prices to shoot up, the price of oil has more than doubled since its low point earlier this year. In fact, at about $75 a barrel, oil is about half way back to its all-time high of $149 that it set during the late, great economic boom.

The main reason oil prices have been rising strongly is China and other developing countries have been buying all they can find. The countries are stockpiling as much as possible because they think that supplies will become tight again as the global economy improves. We think they are right.

China is not just buying oil, it is also buying producers. The country has become Brazil's biggest customer, and is rumored to be in negotiations to purchase the largest oil company in Venezuela.

In Africa, where there are few local oil companies with which to do business, China's approach is to extract the oil itself by setting up its own operations. Local governments and warlords are happy to give China a free hand to do whatever it wants in exchange for their piece of the action.

The price of oil is like the proverbial tide that lifts all boats. When it goes up so do the profits for companies that sell it. Since ExxonMobil (XOM) has a delightfully large amount of the stuff, we think it is the company to buy. http://finance.yahoo.com/q/bc?s=XOM

The Bottom Line This Week

Like the Energizer bunny, the stock rally just keeps going. The downside with both the bunny and the rally is, when the end comes it will be sudden. Therefore, we think this would be a good time to take some profits off the table, and to put stop loss orders on everything else.

Two new companies that look very good to us are Sysco Corporation and Abbott Laboratories. Because they are in defensive sectors, the stocks should not be as sensitive to a market correction as their more aggressive cousins. We also like the dividends the two companies pay, and the prospects for more.

With oil prices on a tear again, this appears to be a good time to buy more ExxonMobil, a stock we recommended on several occasions.

Until Next Time

The AIA "Advocate For Absolute Returns", a publication of The Association for Investor Awareness, Inc., tracks market trends, industry news, the SEC, global trade and finance and Washington developments for you because they affect your investments. But who doesn't? Many sources report these issues as abstract facts. We feel that's not enough. The AIA Advocate's job is to warn you of what's important and how these developments translate to ground-level forces and threats that directly affect your wealth as well as your current investment opportunities. Not just information, but information you can use. Until next Thursday...

Is the Rest of the World Ready for a Unified BRIC?

Anonymous — Fri, 10 Jul 2009 20:37:00 GMT

"The Vital Wave Consulting" blog has an interesting post from June 26 - "Is the Rest of the World Ready for a Unified BRIC?" - about the previous week's summit in Moscow of the four "BRIC" countries: Brazil, Russia, India, and China. The article points out that trade among the four countries is too small to justify talk of a new trading bloc, but remarks that they have some common interests with respect to world trade, notably reducing reliance on the U.S. dollar. The BRIC countries are hard to overlook. Together they comprise about 43% of the world's population and 15% of its GDP, and hold over 40% of the world's gold and foreign exchange reserves. Their economies are growing at more than double the pace of developed economies. That they are holding a summit at all indicates that they are looking for ways to throw their combined weight around for mutual benefit.

Talk of unification, however, is premature and largely misplaced. Though their interests may coincide and overlap in some cases - as happens within any grouping of countries - they also diverge in many important respects. Brazil, of which Charles de Gaulle once said"It is the country of the future. And it always will be," finally seems to be realizing its potential. Its huge and productive agriculture sector, sophisticated manufacturing base, liberal market-oriented reforms, and new discoveries of big offshore oil deposits all but guarantee Brazil an important place in any new economic and geopolitical landscape. Russia is past its peak. Its economy depends on primary resources no less than Saudi Arabia's. Strip out the oil and gas and minerals - as well as the nuclear weapons - and Russia is of no more consequence than Saudi Arabia. I am willing to bet that within 50 years, and possibly much sooner, Russia will be less of a player on the international stage than Nigeria. India has undertaken profound economic reforms and has escaped from what used to be called the "Hindu rate of growth." Its sixty years of nearly-unbroken democratic governance are an inspiration. But its bureaucracy stubbornly resists change, ethnic tensions and conflict with Pakistan remain close to the boiling point, and for all its reforms India still maintains one of the most protectionist trade regimes on the planet. China's potential seems limitless, provided the rest of the world can provide the raw materials it needs to grow.

How much do these countries really have in common? True, they have issued joint statements calling for increased representation in international organizations and institutions like the World Bank and the IMF, though it is hard to see China and Russia, with their permanent seats on the U.N Security Council, agreeing to admit Brazil and India to the club. India's farmers are inefficient and highly regulated and subsidized, hence its then- Trade Minister's insistence on wrecking the 2008 Doha Round trade talks in order to keep the right to impose swingeing tariffs on agricultural imports. In this it was supported by China, which has a hugely inefficient agriculture sector of its own, and resolutely opposed by Brazil and other big agricultural exporters in the "Cairns Group," which includes Australia, Argentina, Canada, Chile, New Zealand, South Africa, and Thailand. Russia, which was close to final WTO accession talks, has just shelved its application, promising to re-submit a joint application with Belarus and Kazakhstan.

Vital Wave is half right when it says that for global businesses the BRIC countries "are an essential factor - as a group and individually - when setting growth strategies." They are an essential factor, but individually rather than as a group, and there is little to suggest that this will change in the near to medium term.

(Disclosure: I own shares in ING Russia Fund: LETRX; IShares MSCI Thailand Fund, NYSE: THD; Sadia S.A., NYSE:SDA; IShares MSCI Brazil Fund, NYSE: EWZ; and Market Vectors Indonesia Fund, NYSE: IDX)

Originally published on the Emerging Markets Outlook blog by Chip Krakoff

Russian Rumors...

ChuckButler — Thu, 28 May 2009 14:40:07 GMT

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In This Issue..

* dollar rallies on N. Korea warning...
* Emerging Markets decouple...
* A debt upgrade for New Zealand...
* Swiss francs rise despite SNB warnings...

And Now... Today's Pfennig!

Russian Rumors...

Good day... And a Thunderin' Thursday to you! Yes, the rain continues here in St. Louis, but that's normal for this time of year. But the rain brings the thunder... And so it is a Thunderin' Thursday!

Well... The dollar came back with some vengeance yesterday pushing the Big Dog, euro, back well within the 1.38 handle, and all the other little dogs, other currencies, followed. There wasn't data to speak of yesterday to push the dollar higher, it was simply a case of fright, as safe haven flows went the dollar's way after the news of a N. Korea attack warning spread throughout the markets.

Funny thing... I get a daily email from a news source that gives the highlights at mid-day... And yesterday, the email said, well, the email didn't really "say" anything, it can't talk! Any way, the email contained these two headline stories... 1. Crude rises for third session... And 2. Gold down for second day... I then glanced at the screen, and saw Crude Oil trading down on the day, and Gold up $5.80 on the day... So much for that news source, eh?

Yesterday, I talked about the high yielders, highlighting Brazil's return to a Current Account Surplus... But the high yielders have more to say about the dollar's future value... You see, it's more than the Commodity Currencies... It's also the Emerging Markets currencies, which seem to have a life of their own. There was a lot of talk last year about how the Emerging Markets economies had decoupled from the U.S. and a U.S. slowdown would no longer affect them negatively as a U.S. slowdown would have in the past. For a few months there, the decouple story was laughed at, as the Emerging Markets sold off just like everyone else. But then, like the Phoenix Bird, they rose from the ashes... And it's these Emerging Markets currencies that have taken the biggest bite out of the dollar this year!

OK... This is not an endorsement to run out and buy Chilean pesos! You've got to be very careful with these Emerging Markets currencies, as they are smallish, they are illiquid in most cases, and they have wild swings. Take for instance two more "mature" Emerging Markets, Brazil and South Africa... These two do NOT fall into the illiquid category... But currencies like S. Korean won, and Chilean pesos definitely do!

The real point here was to talk about the decoupling... It's happening just as those that saw that it could, said it would. It just took some time to get legs underneath themselves. Remember last year they called the action from July to December, "De-Leveraging"... This simply meant people were selling everything non-dollar and buying dollars... You might recall me questioning this thinking, but who am I to say this was wrong! Well, I read yesterday that this price action in Emerging Markets is being called the "Re-Leveraging"!

Speaking of an Emerging Markets Country / currency... The Russian ruble (illiquid!) was in the news yesterday... And here's where, I just didn't get the dollar strength yesterday... Here's the skinny... Rumors were flying around yesterday that Russia is planning to revise the weightings in their basket of currencies they use to value the ruble... The rumor had the weighting in euros for the basket, changed from 45% now, to 55% in October, and 60% in December....

Now... If true... This would be HUGE for the euro! Now we just need to all be Sherlocks and find out what's going on here... The Truth is Out There!

OK... Back to the majors!

The euro has recovered a bit this morning on the news from the European Commission, who, this morning said that European Confidence in the economic outlook increased to a 6-month high this month... The people surveyed repeated the thought that record-low interest rates, and the Government spending plans may be starting to work, and the economy may have bottomed... Hmmmm... I hate to be the bearer of bad news to these people, but I don't think their economy has bottomed...

I say this because I truly believe there's another hic-cup for not only the European economy, but the U.S. economy. I see where quite a few economists are now saying that the U.S. recession will in this year... Hmmm... Here's what I think... I do think that we'll see a quarter later this year with positive growth... But then I think it's followed by a negative growth quarter, thus... A bump...

And... Yesterday, I talked about how we might be seeing the end of the link between stocks and currencies, and stocks had gained the previous day, and currencies had not... Well, yesterday stocks sold off, and so did currencies... But this time, I think it had more to do with the N. Korea news than any "link" between the two... I really do think we're beginning to see a break... Let's hope so, because that would mean that we're taking baby steps toward getting back to "fundamentals"...

And these fundamentals include the fact that stocks and currencies have a low correlation to each other, and different pricing mechanisms...

U.S. Treasury yields continue to climb with the 10-year Treasury gaining 19 Basis points in yield yesterday... That pushes the annual climb in yield for this note to 148 Basis points... Hey! You can't say I didn't bring this to your attention before it happened!

My friend, Bill Bonner, had this to say about Treasuries yesterday in the Daily Reckoning (www.dailyreckoning.com) "The US Treasury market is in a bubble. Like all bubbles, it will pop. And as always, when bubbles pop, there are those who get hurt - and those who profit. The difference is how well you're prepared for it."

Oh, and one more thing... With Treasury yields rising... Mortgage rates will HAVE to follow... And that's not going to make Messrs Obama, Bernanke, Geithner and anyone else involved in artificially keeping mortgage rates low, happy... But, that's fine with me! I don't really care if they are happy with this development or not! They are responsible for this rise in yields, so they can only be unhappy with themselves!

In New Zealand overnight... The 2009-2010 Budget printed, and showed remarkable restraint (for New Zealand!) The Finance Minister, Mr. English, then spoke about how near term deficits are high, he believes that they are at a "peak"... Which is Finance Minister parlance for: We'll see our debt to GDP ratio shrink from here on out! That kind of talk is manna from heaven for kiwi investors, and the folks over at S&P liked it too, as they immediately raised the outlook for New Zealand's debt from negative to stable...

Last week, we had S&P lower the U.K.'s debt outlook and the pound sterling took off for higher ground... Sort of backwards thinking, eh? Any way... Kiwi has responded favorably for the time being, but without the Big Dog, euro, off the porch chasing the dollar down the street, kiwi will have a difficult time adding to these gains...

Someone asked me yesterday why I hadn't mentioned the Canadian dollar / loonie lately, given my statement that crude oil was rising yesterday... OK... The reader was right! I should have been all over the loonie like a cheap suit! The Loonie has gained 13% since March 1st, and Crude Oil has moved from $40.15 to $63.40 since March 1st...

It was a year ago, that the loonie was basking in the sun of parity with the U.S. dollar... All the talk then was that the loonie could go into uncharted waters VS the dollar... We all know that didn't happen... And the reason? Oil fell and commodities like Gold fell... But guess what's happening again? Oil and Gold are rising again... Hmmmm...

I saw something yesterday that hit me as strange... Forbes Magazine had a lead story titled: "Make A Buck On The Rising Euro"... The reason I found this strange, is that I've heard Steve Forbes talk the past few years and each time he emphasizes that the dollar is strong and will remain strong... But now his magazine had a story on how to make money buying the euro... Which means, to make money in the euro, (for dollar based investors) the dollar would have be weak! Strange, eh?

Anyway, the writer, Ryan Campbell, goes on to talk about how the euro has risen VS the dollar since March (something I told you weeks ago!), but also adds that the "charts sound the all-clear for euro bulls." Interesting... I hadn't heard from my charts guy lately, maybe this will wake him from his slumber!

And Swiss francs continue to defy the Swiss National Bank (SNB)... Francs have pushed to near 92-cents... Recall that the SNB issued verbal warnings pre- 90-cents that they were not happy with franc strength... Well, apparently that's all the SNB has... Verbal warnings, because they have not stepped in front of this franc fueled bus!

And Swedish krone is seeing some selling pressure this morning, as the old story regarding the Eastern European Banking woes, was brought up again... This is old news! Wrap it up in newspaper and carry it out with the other trash!

So... As I get ready to head to the Big Finish, I see that the currencies, led by the Big Dog, euro, are getting off the porch once again to chase the dollar. One currency that's not participating is the Japanese yen, which has taken a big spill overnight to near 97... However, that bad performance in yen hasn't spilled over to other currencies...

Currencies today 5/28/09: A$ .7840, kiwi .6255, C$ .8955, euro 1.3895, sterling 1.5960, Swiss .9195, rand 8.0425, krone 6.4730, SEK 7.7690, forint 204.30, zloty 3.2250, koruna 19.2450, yen 96.90, sing 1.4525, HKD 7.7530, INR 47.66, China 6.8289, pesos 13.24, BRL 2.04, dollar index 80.75, Oil $63.43, Silver $14.94, and Gold... $952.10

That's it for today... It's breakfast sandwich day on the desk... Every Thursday, I buy and our little Christine flies... I used to pick them up when I came in, but they would be stone cold by the time everyone else comes in, so now Christine does the picking up! Yahoo! Friday is bagel day, as my old latte' buddy Michelle, still picks up bagels. We used to do go to get the bagels together, along with a latte'... But... I had to stop drinking latte's and caffeine altogether. UGH! Last day of school for my kids! Time for Alice Cooper's School's Out For Summer! I don't want to miss this tomorrow, so I'll talk about it today... Sunday is our cake baker, Cheryl Harper's birthday... Happy Birthday, Cheryl! A big trading day for Chuck and Jen today, so, I'll get started... I hope your Thursday is Thunderin' in a good way!

Chuck Butler
President
EverBank World Markets
1-800-926-4922
1-314-647-3837

Rally for International Markets: Herald End of Bear?

Emerginvest — Tue, 17 Mar 2009 21:36:00 GMT

I am probably not the first, and definitely not the last, to write about the recent surge in stock markets worldwide. It has been so long since investors have had a strong rally like that to play with. Now that markets have rallied almost 10% worldwide in one week; one question remains: Is it safe to invest in stocks again?

For many months now, investors have been trapped in a fake bear market rally that proved to be short lived. Markets worldwide have continued to hit long-time lows in February and March ’09. The strong rebound this past week has surprised quite a few people and it was clear that short sellers had to cover their positions after Tuesday’s rally. Many are still skeptical stocks are a good play right now, however, this time they could be different for few reasons:

Banks sent positive signals with Citigroup, JP Morgan and Bank of America announcing that they all made a profit in January and February. It is definitely a sign of relief for investors as rumors of bankruptcy and nationalization have persisted in markets recently.
Economic indicators are turning positive for the first time in many months (see graph from the WSJ below). Previously, a market rebound typically occurred while economic data was still in a free fall. The recent turn around in economic data could indicate support for a strong stock market rally.
Many indices are hitting important long term support level which could also bring more buyers in the market (CAC40 is right on its 2003 support level …)

There is exceptionally strong evidence that the recent announcement by three of the biggest banks in the US (that all three made profits in January and February), at a time when almost everyone gave up on them, was the trigger for the rally. It is still unclear and too soon to really say that the worst is over for these banks, but we can now admit that the FED actions the past few months have been a success and that it clears the sky a bit.

Both the CAC and the Dow rebounded on strong support levels and are expected to continue their rally for couple more weeks (weekly charts). On the other hand, the Nikkei 225 is still below a long term support level of 2003 but rebounded strongly when the index retested its last October low. However, recently the correlation between the Dow and the Nikkei225 has been 0.98, which makes me believe that any rebound in the US stock market will also be felt in Japan.

I have a feeling we are going to enjoy watching CNBC or Bloomberg TV over the next couple weeks and it will certainly be an enjoyable change of pace to actually look forward to reading the Wall Street Journal or the Financial Times.

Disclosure: Emerginvest is an international finance portal, providing analysis and data on 120+ world markets to help individuals find investments from around the world. The author, Olivier Levant, does not intend this to be actionable investment advice.

Investing Strategies with the Baltic Dry Index

Emerginvest — Wed, 04 Mar 2009 22:32:00 GMT

Investors are continuously searching for a leading indicator that would give good entry and exit signals and prevent investors from losing money. Today, it would be foolish for someone to claim that a reliable indicator exists. Even the famous Merton and Scholes, after the collapse of LTCM, agreed that there is no such crystal ball, especially given the current market. However, investors can rely on few financial indicators to measure the state of the global economy the same way lights at the cross road gives you the signal to stop or keep on driving. Today, two of the most used indices followed by investors are the London Inter Bank Offered Rate (LIBOR) and the Baltic Dry Index (BDY). This article will take a look at the Baltic Dry Index since it is a bit more straightforward and easily digestible.

What is the Baltic Dry Index and what does it measure?

The Baltic Dry Index is a daily average of prices to ship raw materials using Dry Bulk Carrier. It represents the cost paid by an end customer to have a shipping company transport raw materials across seas on the Baltic Exchange, the global marketplace for brokering shipping contracts. The Baltic Exchange is similar to the Chicago Mercantile Exchange in that it is a medium for buyers and sellers of contracts and forward agreements (futures) for delivery of dry bulk cargo. The Baltic is owned and operated by the member buyers and sellers. It is an index free of speculation as only members of the exchange can trade the index.

What does it really mean and how can investors take advantage of the shifts in the Index?

The level of the index represents the price industrial companies are willing to pay to ship raw materials across the world. It is, therefore, a good indicator of the supply and demand for raw material across the world. The higher the index the stronger the demand for iron ore, coal or cement. And inversely, the lower the level, the weaker the world demand for raw materials. Since raw materials demand is directly linked to economic growth around the world, the BDY is often used as a leading economic indicator by economists. However, it is an imperfect indicator as prices are driven by few others forces than just the supply and demand of raw materials:

Fleet Supply: the higher the number of ships the lower the premium paid by buyers.
Weather: during the winter in the Northern hemisphere, price tends to be higher due to increase in demand for coal or other commodities used in the heating process.
Bunker Price: bunker oil represents about 1/4 of the vessel operating cost. So when oil prices increase around the world like in 2007 and 2008, it tends to distort the BDY from reality.
Port Congestion: ports’ infrastructures around the world are obsolete and need to be improved. As a result ships are stuck in traffic at the entrance of ports, which tends to put upward pressure on price during a period of strong global economic growth like in 2007 and 2008.

How can investors play a rebound of the Index like the one observed since December 2008 (the index increased from 600 to 2000)?

An increase in the BDY expresses a stronger demand for commodities, and therefore one could argue that it would be a good time to buy stocks in the automobile or construction sectors. However, an increase in the BDY typically indicates that there is an expectation for an increase in demand for finish goods 6 to 12 months from now. Therefore, it might be best to hold off on buying automobile/construction stocks until that 6-12 month timeframe, and instead invest in the shipping companies as they are the ones impacted directly by the increase in the BDY in the short term.

In the chart below, you can see the correlation between the share price of the three biggest Japanese shipping companies and the BDY since 2000. Japan has historically always been a leader in maritime transport, which would suggest companies like Mitsui OSK Line or Kawasaki Kisen when playing a rebound in the BDY. However, you can invest in other companies like: China Ocean Shipping Company (COSCO), China Shipping, Frontline or BW Gas.

The recent rebound in the BDY has been as rapid and violent as the crash of the index from 12000 to 600 in 2008. The reason for the sharp increase in the BDY since December seems to be caused by the need for Chinese manufacturers to rebuild their inventories to more sustainable levels. It is doubtful that the index will continue to increase given the global recession, and it is probably too late now to invest in shipping companiesm as most of them already had a 40% rebound since December. However, it is advisable to keep an eye on the BDY over the next few weeks to have an idea on the direction the global economy is taking.