They’re at it again.

This time, the flashy headline writers grabbed onto the latest report from the National Association of Realtors, which stated that existing home sales climbed for the third straight month, and at a faster pace than economists expected.

And they were out in force again when the Commerce Department said new U.S. home sales saw an 11% bounce in June. On an annualized basis, that equated to 384,000 homes – 9% higher than estimates.

Collectively, new and existing home sales hit the highest level in eight months in June.

Sweet! Hand me some champagne – let’s celebrate. Or maybe we should hang on a sec… there’s a problem with these headlines. Here’s what you need to know about the real estate market, and what we really should be looking for.

The “Real” Story Behind The Real Estate Sales Numbers

While an 11% rise in new home sales within the real estate market certainly makes for good reading, it doesn’t mean much when it’s not put into perspective.

And the reality is that for a start, year-over-year sales are still down 21%. In addition, while it may well be a good time to grab a bargain, the government wants to hammer the point home by offering puffy incentives and tax credits when buying real estate.

But perhaps the most notable reason for the sales rises is the home defaults…

• Foreclosures hit a record over the first half of 2009, swamping the market with homes and pushing down prices.
• And as the National Association of Realtors notes, the percentage of homes sold as foreclosures totaled 31% in June. Although the rate is declining (down from 50% earlier this year), it’s still a hefty amount.

To understand how real people are being affected by the nascent housing recovery, look no further than the troubles Treasury Secretary Tim Geithner has had in trying to sell his house.

Frustrated at not being able to sell his $1.6 million New York mansion after three-and-a-half months on the market, Geithner has yanked down the “For Sale” sign. And that’s after he and his wife lowered the price to below what they paid for it in 2004. Having taken out a $1.25 million mortgage at the time, they’re now apparently renting the home at a loss.

Doesn’t Tim read the papers?

He didn’t seriously expect to sell Fort Geithner in such a short time in a market like this, did he? It’s tough out there, mate. First, you have to persuade buyers that it’s worth shelling out $1 million-plus for a house.

Then you need to convince them that the plans you have for the recovery will help the U.S. economy. But I digress. Haven’t we just seen some positive data for the real estate market?

Putting Perspective On The Price Figures

Last week also saw the release of the latest S&P/Case-Shiller Home Price Index – a closely watched gauge that monitors home prices in 20 major U.S. metropolitan area housing markets.

• Naturally, many outlets led with the news that the index registered a 0.5% rise in home prices in May, compared with April – its first monthly increase since July 2006.
• In addition, May marked the fourth straight month that the annualized rate of decline has slowed, with 17 of the 20 cities notching improved prices.

Good news, for sure. But let’s put it in context. The market hasn’t magically rebounded with a vengeance. In April, the year-over-year decline was 18.1%. May’s year-over-year figure rolled in with a 17.1% drop.

So while prices did rise month-to-month, the truth is that the real estate market isn’t exactly growing, nor are prices appreciating. It’s just stabilizing and beginning to undo some of the brutal damage from the past few years. Prices are still falling over the longer-term, albeit at a slower pace.

As S&P index chairman David Blitzer says: “On a year-over-year basis, home prices are still down about 17% on average across all metro areas, so we likely do have a way to go before we see sustained home price appreciation.”

And speaking of that, government figures show that the median sale price of a new home in June was $206,200, down 5.8% from May and 12% lower than June 2008.

You might say I sound more bearish than a Rocky Mountain grizzly, but it’s important to inject some perspective into the story, rather than just blindly absorbing the media reports.

What Will It Really Take For The Housing Market To Grow?

As I’ve said before, for the housing market to truly start growing again, it’s going to require a few key things.

• First, we need to see a reduction in the bloated number of available homes on the market. In that respect, it’s good to see the huge foreclosure rate declining, but those homes still need to be sold and prices still need to rise. And when you’re talking about a meaningful upswing, that brings me to another crucial requirement…
• As Tim Geithner just discovered, this is not an easy climate in which to sell a house. Buyers are strapped for cash and able to call more shots in a depressed market. Sellers are frustrated and forced to lower their asking prices to market value (and even that is often hard to gauge with the number of “distressed” sales – i.e. short sales or foreclosures).

Buyers and sellers alike will need to see U.S. job market growth in order to restore some confidence, not to mention wealth. Ironically, the precipitous plunge in the housing market has played a huge part in eroding both.

For example, home prices declines were partially responsible for a $13.9 trillion drop in household net worth during the first quarter, according to the Federal Reserve. And ominously, both the Fed and many economists believe the unemployment rate will top 10% by 2010.

There are other factors, of course. But these are two of the most critical ones that absolutely need to be part of the equation. And while the latest batch of more positive housing data is certainly good news, a real recovery will take time.

Meantime, if you’re looking for a bargain in the New York area, give Tim Geithner a call.

Good investing,

Martin Denholm

Source: Don’t Celebrate Housing’s Recent Uptick Yet

Frustrated at not being able to sell his $1.6 million New York mansion after three-and-a-half months on the market, Geithner has yanked down the “For Sale” sign. And that’s after he and his wife lowered the price to below what they paid for it in 2004. Having taken out a $1.25 million mortgage at the time, they’re now apparently renting the home at a loss.

Doesn’t Tim read the papers? He didn’t seriously expect to sell Fort Geithner in such a short time in a market like this, did he? It’s tough out there, mate. First, you have to persuade buyers that it’s worth shelling out $1 million-plus for a house. Then you have to convince them that it’s not made of cards – you know, like some of his economic theory.

But wait… haven’t we just seen some positive data for the real estate market? Yes, that’s true. But the foundation isn’t exactly rock-solid…

Do You Want The Real Story Or Just The Jazzy Headline?

Last week, my colleague Marc Lichtenfeld and I took a collective pop at some lazy journalists and other media cheerleaders. Their crime? Whipping the investment community into false optimism through misleading headlines regarding earnings announcements.

They’re at it again.

This time, the flashy headline writers grabbed onto the latest report from the National Association of Realtors, which stated that existing home sales climbed for the third straight month, and at a faster pace than economists expected.

And they were out in force again when the Commerce Department said new U.S. home sales saw an 11% bounce in June. On an annualized basis, that equated to 384,000 homes – 9% higher than estimates.

Collectively, new and existing home sales hit the highest level in eight months in June.

Sweet! Hand me some champagne and the fancy canapés.

Hang on a sec… here’s the problem with that headline news…

The Reality Behind The Sales Numbers

While an 11% rise in new home sales certainly makes for good reading, it doesn’t mean much when it’s not put into perspective.

And the reality is that for a start, year-over-year sales are still down 21%. In addition, while it may well be a good time to grab a bargain, the government wants to hammer the point home by offering puffy buying incentives and tax credits.

But perhaps the most notable reason for the sales rises is the home foreclosure situation. Foreclosures hit a record over the first half of 2009, swamping the market with homes and pushing down prices.

And as the National Association of Realtors notes, the percentage of homes sold as foreclosures totaled 31% in June. Although the rate is declining (down from 50% earlier this year), it’s still a hefty amount.

Here’s another dose of reality, ripped from yesterday’s housing headlines…

Putting Perspective On The Price Figures

Tuesday morning saw the release of the latest S&P/Case-Shiller Home Price Index – a closely watched gauge that monitors home prices in 20 major U.S. metropolitan areas.

Naturally, many outlets led with the news that the index registered a 0.5% rise in home prices in May, compared with April – its first monthly increase since July 2006.

In addition, May marked the fourth straight month that the annualized rate of decline has slowed, with 17 of the 20 cities notching improved prices.

Good news, for sure. But let’s put it in context. The market hasn’t magically rebounded with a vengeance. In April, the year-over-year decline was 18.1%. May’s year-over-year figure rolled in with a 17.1% drop.

So while prices did rise month-to-month, the truth is that the market isn’t exactly growing, nor are prices appreciating. It’s just stabilizing and beginning to undo some of the brutal damage from the past few years. Prices are still falling over the longer-term, albeit at a slower pace.

As S&P index chairman David Blitzer says: “On a year-over-year basis, home prices are still down about 17% on average across all metro areas, so we likely do have a way to go before we see sustained home price appreciation.”

And speaking of that, government figures show that the median sale price of a new home in June was $206,200, down 5.8% from May and 12% lower than June 2008.

What Will It Take For The Real Estate Market To Grow?

You might say I sound more bearish than a Rocky Mountain grizzly, but it’s important to inject some perspective into the story, rather than just blindly absorbing the media reports.

As I’ve noted here before, for the housing market to truly start growing again, it’s going to require a few key things.

First, we need to see a reduction in the bloated number of homes available on the market. In that respect, it’s good to see the huge foreclosure rate declining, but those homes still need to be sold and prices still need to rise. And when you’re talking about a meaningful upswing, that brings me to another crucial requirement…

As Tim Geithner just discovered, this is not an easy climate in which to sell a house. Buyers are strapped for cash and able to call more shots in a depressed market. Sellers are frustrated and forced to lower their asking prices to market value (and even that is often hard to gauge with the number of “distressed” sales – i.e.short sales or foreclosures).

Buyers and sellers alike will need to see U.S. job market growth in order to restore some confidence, not to mention wealth. Ironically, the precipitous plunge in the housing market has played a huge part in eroding both. For example, home prices declines were partially responsible for a $13.9 trillion drop in U.S. household net worth during the first quarter, according to the Federal Reserve. And ominously, both the Fed and many economists believe the unemployment rate will top 10% by 2010.

There are other factors, of course. But these are two of the most critical ones that absolutely need to be part of the equation. And while the latest batch of more positive housing data is certainly good news, a real recovery will take time. Meantime, if you’re looking for a bargain in the New York area, give Tim Geithner a call.

Source: What It Will Take For The Housing Market To Recover

Take Caterpillar (NYSE: CAT), for example. With a history dating back to 1925, the company is now the top manufacturer of construction, mining, and forestry equipment, plus industrial turbines and engines for machinery and power generation systems. Whether it’s construction, agriculture, energy, marine, or infrastructure, Caterpillar’s presence is splashed across several sectors.

It’s no surprise, therefore, that its quarterly numbers are always keenly anticipated and thoroughly scrutinized – not just because it’s one of America’s leading firms, but because it’s also a key indicator of economic health.

And its latest batch of results don’t bode well…

Caterpillar’s Second Quarter Crawl

Back in April, my colleague Karim Rahemtulla noted the importance of Caterpillar’s performance as a barometer for the wider economy.

It came as the company reported its first quarterly earnings loss since 1992, as profits sank by $112 million on a 22% drop in sales.

And the second quarter proved to be a struggle, too…

• Revenue: Plunged by 41% to a shade under $8 billion, led by a 43% drop in equipment and 32% fall in engine sales. It was the third straight month of equipment sales declines. By region, machinery sales tanked by 51% in North America… 61% in Europe… 47% in Latin America… and 25% in Asia-Pacific. Large equipment sales are Caterpillar’s biggest revenue generator.

• Profit: Got whacked by 66% – $371 million (60 cents per share), compared with $1.1 billion ($1.74 per share) in Q2 2008. This was due to falling demand for its products in the midst of a recession, but also from less obvious factors like lower commodities prices (and consequently profits) at some of Caterpillar’s key mining customers.

To see results like this, you’d think the company’s shares would be getting walloped. They’re not. The stock ended today up $2.81 (7.9%). And this month overall, the stock is up 17.9%.

And this highlights another key point: Earnings season is nuts.

Bring Out The Arbitrary Analysts And Fickle Investors

Remember that “artificial” good news I mentioned earlier?

With companies terrified of missing their earnings forecasts and seeing a subsequent stock drop, estimates are generally conservative. Very conservative.

With Caterpillar, for example, the average estimate from Thomson Reuters and Bloomberg analysts was 22 cents per share. The company actually earned 60 cents. Similarly, Caterpillar projects its full-year earnings to slide into a chasm-like range between $1.15 and $2.25 per share. Again, this blows away the $1.01 per share analyst estimates.

Do yourself a favor. Don’t pay any attention to analyst estimates at the moment – they don’t mean diddly. And take earnings reports for what they are – temporary catalysts that often don’t reflect the real story.

In April, Caterpillar CEO Jim Owens cited a “high degree of uncertainty” about the global economy, continuing, “It’s extremely difficult to know how our customers will respond during the remainder of 2009.”

If he doesn’t know, do you really think that analysts have a better idea? Or the investors who merrily pile on after the company beats arbitrary estimates?

Some of Caterpillar’s gains came courtesy of heavy cost-cutting measures (the company has shed 17,100 full-time workers since December and a further 17,000 contract and temporary workers), lower production, and a lower tax rate.

There is a bright side…

The “CAT Scan” Of The Global Economy

Even as the recession squashes demand for its products and a “great deal of economic uncertainty” exists, Caterpillar was able to raise its full-year earnings forecast from $1.15 per share to that range between $1.15 and $2.25.

As Owens states, this was due to “signs of stabilization that we hope will set the foundation for an eventual recovery.” He continued by saying that, “Credit markets have improved significantly. Fiscal policy and monetary stimulus have been introduced around the world, and we are seeing signs, particularly in China, that they are beginning to work.” Owens is complimentary of China’s massive infrastructure spending plan.

An improved global outlook is crucial for Caterpillar, given that about two-thirds of its sales came from outside the U.S. in 2008, according to Bloomberg.

At the moment, however, Caterpillar says the global economy could fall by more than 2% this year, compared with the 1.3% drop it forecast in April. And its predictions aren’t random. Bloomberg says Caterpillar correctly forecasted the U.S. economic recession in October 2007 – two months before it officially began.

The company says the U.S. economy was still in recession at the end of the second quarter and anticipates another decline in the current three-month period before growth picks up towards the end of the year.

This supports the view that while the recession is easing, it’s not yet over. For example, the National Association for Business Economics’ just-released quarterly survey says…

• Companies reporting earnings losses outnumbered those with higher profits for the sixth straight quarter.
• More than two-thirds of the companies said they laid off workers during the second quarter, compared with a measly 6% that added jobs – the lowest in the survey’s 30-year history.
• And Reuters quotes the survey: “Industry demand was still declining in the second quarter of 2009, but the breadth of decline had narrowed considerably since late 2008, raising prospects for stabilization in the second half of the year.”

Time will tell. Just be sure you get the full story beyond the headlines, the analysts’ estimates, and short-lived earnings reports in the meantime.

Source:   Earnings Reports: The Real Deal Behind Wall Street’s “Caterpillar Spin”

The “buy-and-holders” just got killed again…

With the market’s plunge last week, many regular shareholders have seen their portfolios awash with more red numbers.

Tough break for them. But savvy investors know that this offers a great chance to value shop and buy back in. And one of the most effective and profitable investment strategies that you can use in a market like this is one that generates income… no matter what happens.

This can be done by selling put options.

So let me show you a little more about this options trading strategy – how it’s done and how easy it can be for the average investor.

Busting The Myths of Selling Put Options

If you’ve gotten this far, you’re on the right track. Many investors hear the words “put options” and “selling” in the same sentence and head for the exit. Too complex. Too confusing. And downright scary. Or so the myth goes.

Let’s bust that myth right away: Selling put options isn’t difficult to execute. In fact, it’s actually easier than most investment methods.

When you place a put-sell trade:

• You don’t have to buy a stock.
• You don’t have to sell a stock.
• It’s got nothing to do with bonds or currencies.
• And there are no complex parameters to the trade.

Here’s the deal: You’re either going to make money, or you’ll end up investing in a company at a ridiculously low, discounted price.

What you try to do is buy stocks for the price you want. And just for trying, you get paid. Think of it like Priceline.com – where customers name the price they want to pay for airfare and hotel rooms – except with stocks. The biggest difference is that you’re getting paid for your time.

It works in rising markets… falling markets… flat markets… any market. It’s a regular stock-buying strategy with a profitable twist upfront. Here’s how you can use it…

Selling Put Options In Four Easy Steps

Have you ever wanted to buy a stock but passed because the price is too high for your liking?

Most ordinary investors would simply sit on the sidelines and wait for the price to fall to a better level. But smart investors know they can still get in the game by selling a put option on it instead.

Here are the four steps you need to take when selling put options:

• Pick your chosen stock.
• Decide on a lower price, where you’d feel comfortable buying the shares.
• Check the put option prices for that level. For example, if the stock is trading at $20 and you want to buy it for $15, you’d select the $15 strike price and an expiration month.
• You then sell those put options. Since each stock option contract is equivalent to 100 shares, you’d sell five put option contracts if you want to buy 500 shares.

When you enter a trade like this, you’re obligated to buy those shares at your stated strike price by expiration. Keep that in mind when selling the contracts, so you don’t overextend yourself. For example, if you sell one $15 put option contract, you’ll need to have $1,500 on hand by expiration day to cover the cost of the shares ($15 x 100 = $1,500).

Note: You don’t need to have all that money on hand while the trade is open. Your broker will only ask you to keep a fraction of that amount available – known as a “margin requirement.” Consider the trade as a “buy now, pay later” type of deal. You’re putting off paying for the stock until a certain scenario occurs (see below).

In exchange, the option buyer will pay you for each contract you sell while you wait. This is known as a “premium” and is deposited into your trading account. (The farther out the expiration date, the more money you’ll receive when selling the option.) Meanwhile, ordinary investors are waiting for the price to drop without collecting any money.

Okay, then what happens?

On options expiration day, you’ll have two scenarios when selling put options:

• If Your Stock Trades Below $15: For every put option contract you sold, you’ll be obligated to buy 100 shares at $15 each. This is what you wanted – a 25% discount from its $20 price when you executed the trade. Plus, you get to keep the money that the option buyer paid you. The shares will appear in your account on the Monday after option expiration. It will now be a regular long position and you must manage it as you would any other stock. That’s why it’s important you pick a price at which you’re comfortable holding the shares.

• If Your Stock Trades Above $15: The put options will expire worthless. You won’t get to buy the shares at your chosen price, but you will get to keep the money for selling the contracts, just for trying.

So regardless of what happens, you keep the money from selling the put options upfront. Now let’s bust another myth…

But Isn’t Selling Put Options Riskier Than Buying Shares?

Selling put options is no riskier than buying shares outright.

• When you buy shares, the risk is that you lose your entire investment.
• When you sell a put option, you’re obligating yourself to buy shares, too… but at a much lower level than the current share price.
• And if you do end up buying the shares, your risk will be the same as a regular shareholder.

The difference is that nobody pays you cash to buy stocks outright – but they do when you sell put options. Selling puts is just another way to invest in the options market.

While some brokers see selling put options as riskier than stocks (and require that you keep more capital reserves on hand), your risk only kicks in if you’re obligated to buy the shares. And even then, you’d simply be long on the stock, with the same risks as with any stock holding.

Perhaps the biggest obstacle for most investors is that you need to be “approved” to sell puts. This means that you must apply through your brokerage. It’s a simple process , similar to filling out forms when you opened the account.

If you have questions, contact their customer service department and they can help.

An Important Note on Selling Put Options

Many folks don’t know about option trading strategies like put-selling, and Investment U will be working hard to bring you more like this in the coming weeks and months. But we wanted to give you an example of what’s working in the market right now.

It’s certainly not as risky or complicated as some people would have you believe.

And for those of you who know Lee Lowell, you’ll know he’s not a gambler. In fact, he’s one of the most conservative, risk-averse investors I know.

That said, selling puts isn’t necessarily for everyone. You’ll need to check with your broker to make sure you’re approved to trade options – and specifically, selling put options.

Source: Selling Put Options: How It’s Done & How Easy It Can Be

The two emerging market nations – both members of the BRIC group (Brazil, Russia, India, and China) – will each welcome a major new IPO to their respective stock markets.

The fact that they’re debuting on the same day is purely coincidental, but the story here is that both are very significant not only to their own countries, but could also underpin the emerging market area.

Let’s take a look at these IPOs in the context of the broader emerging market topic… the effect this often volatile but flourishing pack of nations is having on the global economy – and how you can hitch a ride…

Emerging Markets Rebuilding Momentum

In the excellent movie “Wall Street,” Michael Douglas’s slimy Gordon Gekko character famously proclaims, “Greed is good. Greed works.”

Some equally unscrupulous Wall Street characters lived by this mantra. But they became so fat and bloated that they clogged the arteries of the entire financial system. Greed was most definitely not good – and it certainly didn’t work.

When the system toppled over, little was spared. Certainly not emerging market nations, which were unable to withstand the worldwide financial earthquake. While their GDP growth is rapid and their economies are flourishing, they’re still raw in terms of crucial elements like infrastructure, and are more susceptible to volatility.

So when the U.S. sneezed, the world caught Wall Street’s swine flu (ironically caused by swines in the first place). Emerging markets fared just as badly (or worse in some cases) as the U.S. and other global heavyweights like Japan and Europe.

But the big new IPOs in China and Brazil signal that the tide is gradually turning and emerging markets are rebuilding their momentum…

China’s 9-Month IPO Itch

The fallout from the global meltdown crushed China’s Shanghai Composite stock market by 60%, prompting regulators to impose a 9-month ban on new IPOs.

But on Monday, small-cap Chinese drug maker Guilin Sanjin Pharmaceutical Co. will end it by debuting on the Shenzhen market, the smallest of China’s exchanges. The move comes on the back of a scorching 58% climb for the Shanghai Composite this year, amid confidence that the government’s multi-trillion yuan of stimulus money will help the flagging manufacturing sector and trade market.

After a 9-month IPO absence, the decision to “start small” with the Guilin launch is a good one (the firm will offer 46 million shares). A mass relaunch, with bigger, more heavily hyped companies could put too many shares on the market at once – and high-profile disappointing debuts could knock confidence. When the ban was imposed, 37 companies had received IPO approval, so this may kick off a new wave.

Meanwhile, in Brazil…

Brazil Goes Big… And Lula Bangs The BRIC Drum

Like China, Brazil’s stock market is also up big this year. Not as big as Shanghai’s 58% surge, but the 35% year-to-date gain for Sao Paolo’s Ibovespa is still impressive.

Besides, Brazil is expected to take advantage of that run by notching up the biggest IPO of 2009 so far – and the biggest in its own history, too.

On Monday, credit card firm Visanet SA will hit the stock market – and is estimated to rake in $3.6 billion. That will thrash 2009’s current highest IPO – China Zhongwang Holdings, which launched on Hong Kong’s Hang Seng with $1.2 billion raised.

IPOs like these signal that the BRIC economies are once again on the move – with Brazilian president Luiz Inacio “Lula” da Silva banging the drum when leaders of the four nations met in Russia last week.

Quoted by Reuters, Lula proclaimed: “The good news is that rich countries are in crisis and emerging countries are making a huge contribution to save the economy and, consequently, save the rich countries. Wealthy countries are no longer the only ones that account for the world’s production capacity and consumption.”

That’s true. But how much of it is attributable to emerging markets?

Redressing The Global Imbalances… BRIC-Style

The BRIC meeting last week was a chance for the four leading emerging market nations to come together and plot their triumph over the mammoth, industrialized economies.

Okay, not quite. But in the first summit of its kind, the four countries definitely did discuss using their existing strength to enhance their fortunes on the global market even further.

In short, that means addressing the balance of the global financial system – a debate that included ideas on how to create more diversity away from the U.S. dollar as the world’s dominant currency and give the BRIC nations better representation on the global stage.

Or, as Lula da Silva and Russian president Dmitri Medvedev respectively put it, to “change the political and trade geography of the world” and “create conditions for a more just world order.”

Medvedev argues that you can’t have a balanced, successful global system if most of the markets are priced in U.S. dollars. He’d like to redress that imbalance by having Russia buy bonds from the other BRIC nations in return for them upping their ruble reserves.

But with the Russian ruble, Brazilian real, and Indian rupee down 35%, 25%, and 35% this year respectively, those currencies aren’t exactly blowing the dollar out of the water.

So can the BRIC succeed with its plans?

These Davids Won’t Slay Goliath… Yet

According to Reuters, the BRIC nations currently account for about 15% of the global economy.

In addition, while the U.S. racks up GDP of about $14 trillion per year alone, the BRIC nations’ combined total is only about $9.4 trillion. And the GDP per capita, poverty levels, and infrastructure in these countries are significantly worse than in the U.S., with America doubling the output of the BRIC countries combined.

So the BRIC group clearly has a long way to go to usurp the big boys. But Goldman Sachs predicts that by joining forces, it’s possible that the BRIC nations could surpass the G7 in 20 years time, with China’s economy climbing above the U.S.

However, with China’s GDP almost surpassing the combined total of its three fellow BRIC members, the group itself is imbalanced. In addition, the BRIC is not a formal union. All four countries have substantial differences and while they remain heavily tied to the U.S. and other big nations in terms of trade (with India and Russia receiving U.S. aid, too), there’s no way any of them want to rattle the saber by laying down the gauntlet. Not while they also hold almost one-third of U.S. Treasuries.

What they do have in their favor at the moment, though, is GDP growth…

An Emerging World Of Growth

China: 9%.
Russia: 8%.
India: 6.7%.
Brazil: 5%.

Those were the GDP growth totals for the BRIC nations in 2008, compared with the U.S. economy’s contraction of more than 6%. And even the BRIC’s current impressive pace is a slowdown from the red-hot growth seen before that.

What’s more, that growth isn’t artificially stimulated by government printing presses alone. The economies are growing in their own right.

This year, China and India are expected to grow by 7.2% and 6.2% respectively, with China accelerating to pre-global meltdown levels of 8% and 9% during the third and fourth quarter.

So with that, some investment options for you…

Investing In The BRICs

For the sake of diversity and ease of investment, I’m going to focus on ETFs here.

If you want a broad emerging market play, take a look at the iShares MSCI Emerging Markets ETF (NYSE: EEM).

For investments in the specific BRIC nations combined, consider these:

~ iShares MSCI BRIC (NYSE: BKF)

~ SPDR S&P BRIC 40 (NYSE:BIK)

And for investments in the specific BRIC nations individually, take a look at the following:

~ China: iShares FTSE/Xinhua China 25 Index (NYSE: FXI)

~ India: PowerShares India (NYSE:PIN) or WisdomTree India Earnings (NYSE: EPI)

~ Brazil: iShares MSCI Brazil Index (NYSE: EWZ)

~ Russia: Market Vectors Russia ETF (NYSE: RSX)
Best regards,

Martin Denholm

Source: Monday Will Be a Big Day for These Two Emerging Market Nations

According to the latest S&P/Case-Shiller Home Price Index, U.S. home prices fell an annualized 18.6% in February, compared with February 2008 – and a 0.4% improvement on the 19% drop in January.

Some have speculated that this news means we’ve hit the bottom and the market will now begin to trend upwards again.

Not so fast. Those folks must either be eternal optimists or very shortsighted. A 0.4% improvement is one of those “you have to start somewhere” pieces of good news, not a reason to celebrate.

The truth is, average home prices are still down 30.7% from the mid-2006 peak and are running at levels last seen in Q3 2003. We’re still a very long way from a solid housing market. And given that the S&P/Case-Shiller index reports figures from the 20 largest U.S. cities, there’s no doubt that we need to see more than just one month’s worth of evidence before forming many conclusions here.

Here’s what we can say, though…

Three Housing Market Headwinds

If you’re wondering whether this housing news is the first sign of some long-awaited stability for the housing market, or just an anomaly, consider this…

While nine of 20 cities in the index showed a price improvement in February and at least provided a glimmer of hope, remember that a prolonged decline often means the market requires a longer period of consolidation before it breaks higher over the long-term. Moreover, the market is fighting a fierce, triple-pronged headwind…

• Unemployment: With U.S. companies continuing to lay off workers in a desperate cost-cutting bid, this is hardly the kind of fertile environment that will kickstart enough home sales to cut into the bloated excess supply, drive prices higher, and improve the market. Unemployed Americans won’t even be thinking about buying new houses, never mind the struggle they’d face to get a decent loan or mortgage rate. As the job market goes, so goes the housing market.
• Confidence: The current economic and real estate climate has eroded confidence among would-be homebuyers. According to the Conference Board, the number of people who said they plan to buy a home in the next six months sank to a 26-year low in March.
• Excess Supply Of Housing: With America in the grips of a recession, jumping into a beleaguered housing market is low on Americans’ priority list. Existing home sales dropped by 3% from February to March and the U.S. Census Bureau said this week that the number of vacant homes hit a record 19.1 million in the first quarter. Plus, mortgage defaults and foreclosure rates are rising.

So expect to see home prices drift along rather aimlessly for now, while the punch-drunk market drags itself back together.

The Housing Market’s Silver Lining

Now for the housing market’s silver lining…

• First, although the U.S. still has way more houses for sale than demand calls for, the inventory of new homes for sale is currently 311,000 (10.7 months of supply) – the lowest number since 2001.
• Second, with the average 30-year fixed mortgage rate still holding steady at around 4.8%, it represents an attractive entry point for buyers. However, with the Fed having spent many of its bullets to drive the rate down already, it might not dip much lower. If Ben Bernanke and his fellow bankers make this point, it could tempt would-be homebuyers into the market, for fear of missing out on lower rates if they don’t.
• And finally, there are some pockets of strength across the U.S. – in some of the hardest-hit areas, too. For example, Business Week reports that home sales on Florida’s Gulf Coast, Inland Empire in Los Angeles, and the Las Vegas area jumped around 80% in February, compared with February 2008.

Moreover, the number of available homes in California tumbled from 15.3 months worth a year ago to 6.5 months in February is a good sign in terms of clearing the market and driving up prices. However, this may be the result of speculators or first-time buyers, who don’t put a home on the market in return. The sell-then-buy equation remains very tricky and a lengthy process in many areas.

One measure that California has passed in order to boost its market is a $10,000 tax credit to anyone who buys a newly built home.

Finding The Light At The End Of America’s Long Real Estate Tunnel

As Robert Shiller, economics professor and co-creator of the Case-Shiller index, states, “The market is still doing badly. But there’s always light at the end of the tunnel.”

In other words, while depressed prices, record low mortgage rates, and government incentives worth $8,000 in tax credits for first-time buyers may spark some buying, the current recession, high unemployment, and tight lending conditions mean we’re probably still a long way from the end of that tunnel.

However, when recovery does eventually take hold, it may be perennially popular areas that have suffered the most during the bust – like California, Florida, and Nevada – that will lead the way higher.

Source: The U.S. Housing Market: Is it Time to Start Buying Real Estate?

Alcoa (NYSE: AA) had the ominous and unenviable task of being the first of the Dow Industrials to step up to the plate. And like a tubby first baseman who’s spent the winter off-season shoveling down junk food, Alcoa swung and missed. Badly.

Already waddling around with debts of more than $10.5 billion, America’s largest aluminum producer reported further loss of half a billion dollars for the quarter (59 cents per share), as sales plunged by 41%. As a sign of how hard the recession has bitten the company, it compared to net income of $303 million (37 cents per share) in Q1 2008. It was the company’s first consecutive quarterly losses since March 1994.

The news wasn’t a surprise. As the recession squashes aluminum demand, prices have plummeted around 50% over the past year. At current levels, 70% of the aluminum industry is unprofitable, according to Svein Richard Brandtzaeg, CEO of Europe’s second-largest aluminum producer, Norsk Hydro.

And with Alcoa projecting a further 7% drop this year, it’s already laid off 13,500 workers and slashed production by 20% since mid 2008. Just last week, it announced that it will shut down half its out output (120,000 tons worth) at a factory in New York.

So is Alcoa’s news a sign of things to come this earnings season?

The Current Earnings Season In Context

Let’s set this earnings season in context…

It comes amid a sudden, surprising shift in investor sentiment. Out with the fear and panic that gripped the stock market during its winter of discontent. In with a frenetic four-week bout of buying to relieve oversold conditions. Here’s why…

• The Federal Reserve pumped $1.1 trillion into the credit markets.
• The G20 nations agreed a $1 trillion deal last week and a tripling of lending by the International Monetary Fund to emerging nations.
• The Financial Accounting Standards Board changed mark-to-market accounting rules, which should limit bank losses and boost lending.

Or perhaps Wall Street just has a case of Seasonal Affective Disorder as spring got underway.

Either way, when stocks are oversold, it doesn’t take much good news to trigger a rally. But here’s why you should keep that champagne on ice…

• The rally that has catapulted stocks 25% higher is dangerous, as it comes amid a bear market – often known for producing sharp, surprising rallies that can fool investors. Remember, this rally lifted stocks from 12-year lows and estimates suggest the economy shrank by 4.5% during the last quarter.

And against that backdrop, we’ve got a short-term downward catalyst in the mix…

Earnings season.

Watch For The Earnings Season Domino Effect

As we’ve seen so often over the past few months, investors have very little tolerance for bad news.

So brace yourself for an earnings season that will see S&P 500 companies’ profits slide 37%, according to Thomson Reuters. That would mark the seventh straight quarterly decline.

And if you’re looking to play sector trends, keep in mind that Alcoa’s dismal report could trigger a domino effect of poor earnings in industries that use heavy amounts of aluminum. For example, construction, manufacturing, and transportation industries like autos and aviation.

2 Tips To Combat Earnings Season

Here are a couple of other earnings season tips…

Earnings season is a notoriously difficult time to trade. Volatile price swings higher or lower are much more prevalent as companies release their quarterly reports and the market reacts to the news en masse.

And with the economy in recession, there’s a higher chance of bad macroeconomic data (poor unemployment news, for example) adding to the danger. Whether they occur post-market or pre-market, because these price swings are tough to predict, it’s essential that you’re prepared in advance, as it’s too late once the action is in progress.

Here are a couple of steps you can take to mitigate the risk…

• Position Size: Ensure that your portfolio is position-sized prudently. Don’t invest too much in one or two positions. Ideally, you should invest a similar dollar amount in each position and put no more than 1% or 2% into each position.
• Use Stop-Losses: You should be doing this anyway, but it’s particularly important during earnings season, as they protect you from a shock.

No matter which way your stocks move after earnings are released, the move will either be for valid, specific reasons, or a market overreaction (imagine that!) Make sure you know and understand them.

For example, a huge corporate loss, drug failure, or SEC investigation will hammer a stock. But even when the news is good – such as a big profit, takeover announcement, or strong future guidance – a stock can decline as investors take profits.

Earnings reports are usually short-term catalyst events. But it’s a time when the “herd mentality” can rule – especially when investors are more nervous than usual. Stocks can get rewarded or punished unfairly, so be prepared for price swings and react accordingly, whether that’s cutting your losses or locking in gains.

Martin Denholm

Source: Earnings Season: How to Prepare for Price Swings & React Accordingly

The closest fellow they’ve got is Wen Jiabao – China’s prime minister and a man intent on spending his way out of the country’s economic problems. He might just succeed, too. More on him in a minute.

While millions of Irish revelers (and wannabe Irish) were no doubt nursing ugly hangovers this morning, China has one of its own: A record 25.7% plunge in exports during February.

With the Chinese New Year holiday having occurred in late January this year, economists expected February’s numbers to look better than January’s 17.5% drop from a year earlier – or to at least stabilize. But instead, it highlighted a country with a split personality.

Let’s look at China’s Jeckyll and Hyde economy…

February Flop

On the one hand, it’s evident that China having a very hard time selling its goods to the rest of the world, which (like China) is in the midst of a sharp economic slowdown. For example, deep recessions have hit major export consumers like the U.S. and U.K., plus widespread weakness across Europe.

For a country whose massive export growth has formed the foundation of its economic explosion, it’s no surprise that with this pivotal sector having steadily declined since November, so too has China’s economic growth.

A government forecast puts China’s first quarter GDP growth at 6.5%, compared with the 6.8% fourth quarter figure. And as exports tumble, the World Bank now estimates 6.5% growth for 2009 overall, the weakest since 1990 and a sharp cut from its earlier 7.5% projection.

But on the other hand, there are signs that China’s stimulus program is working, with internal investment rising.

China Hopes For Some Bang For Its Yuan

While its export market is flagging, China’s government is trying to boost its prospects in a way that it can directly control: Spending.

And with a $585 billion stimulus package rolling through its economy, China is adhering to the notion that if you want the best results, you have to spend a bit to get them. China’s banks have lent more money over the past three months than in the past year, according to the New York Times. The number of loans in February alone quadrupled to just over one trillion yuan ($157 billion).

A large portion of the money is going towards repairing and rebuilding China’s aging infrastructure. The National Bureau of Statistics said fixed-asset investment spending shot up by 26.5% to 1.03 trillion yuan over the first two months of 2009, compared with the January-February period in 2008. That thrashed estimates by 5%.

In turn, the improvements could give China a crucial competitive advantage. While others bail out their economies and slide into debt, China is using its strong cash position (ironically borne largely from its export growth) to now help offset export declines and its reliance on that area by improving prosperity from within.

Already, railroad spending tripled over the first two months of the year – much-needed investment for an industry that has struggled to cope with industrial production and demand. That’s in addition to increased spending on the country’s roadways. Construction equipment sales are projected to climb by 20% over the second half of 2009. Education, research and development, and social programs are also enjoying increased spending.

In some ways, the global downturn has forced China to stop relying on its exports and real estate market for growth and instead adopt a wider, more strategic focus.

And there could be more on the way…

Back Up The Stimulus Truck

China’s Prime Minister Wen Jiabao is certainly bullish when it comes to spending money.

Four months after announcing the $585 billion stimulus package, Jiabao pledged to “significantly increase” spending in a speech two weeks ago. He reiterated that more recently in saying that the government has “reserved adequate ammunition” to “introduce new stimulus at any time.”

He may need to, in order to meet his government’s 8% GDP growth target and stem the tide of rising unemployment. With 20 million migrant Chinese workers now jobless and blue-collar job wages falling, it puts additional pressure on China’s fragile pension and healthcare systems – and heightens the prospect of social unrest.

But with all the new money washing through its economy, China is still a viable investment…

In The Year Of The Ox, Should You Be A China Bull?

“As long as the government’s stimulus measures to boost domestic consumption are properly implemented, investment growth will continue to accelerate, making up for the loss of exports.”

So says Ma Jiantang, head of China’s National Statistics Bureau. And given the surprising speed with which many investors have jumped off the China bandwagon, that bodes well for those who still retain some perspective.

Despite cutting its forecast for China, the World Bank says China will fare better than most other economies, driven by its stimulus efforts. In addition to huge infrastructure spending and bank lending, retail sales were up 15.2% over the first two months of the year, with auto sales rocketing 25% higher. And the Shanghai stock market is up 22% this year, too.

Plus, firms like Intel (Nasdaq: INTC) and manufacturers Hon Tai (Taiwan) and IMI Plc. (Britain) are boosting their operations and employment in China.

What’s more, in the wake of the government loosening regulations on Chinese companies wishing to make foreign acquisitions, the commerce ministry is sending a delegation to Europe, specifically on the hunt for buyout targets in a range of industries.

It’s not all rosy in China, of course. The country is suffering at the hands of the global economic downturn like many others. But China is using the wealth and prosperity it’s built up over the past several years to deal from a position of strength.

So while some headlines may play up the doom and gloom, it’s also clear that the China bull is still alive and kicking in some areas.

Source: China’s New Bull Run

Actually, it’s not fear. It’s pure irrationality, as top-quality stocks have been spanked down to bargain-basement levels, despite no discernable change in their businesses.

But business is still booming in the biotech sector…

Over that time, we’ve seen three huge buyouts occur in the Big Pharma/biotech area…

It started in January, with the news that Pfizer (NYSE: PFE) would shell out $68 billion to buy Wyeth (NYSE: WYE).

And things really got rolling this week, with the news that Merck (NYSE: MRK) will acquire Schering-Plough (NYSE: SGP) for $48 billion and that Roche and Genentech (NYSE: DNA) have finally concluded protracted negotiations that will see Roche buy the biotech superpower for $47 billion.

Total value of done deals: $163 billion. And in a market where access to capital has supposedly dried up.

The question is: Could these Big Pharma mergers signal a shift in sentiment and a bottom for the broader stock market?

If you’re looking for a simple, one-word answer… no.

But if you don’t take your investment advice from such in-depth, hard-hitting features as the “Lightning Round,” I invite you to keep reading…

The Credit Is There… But Only For The Right Deal

There’s no doubt that it’s tough to get credit these days. But as the merger deals above show, capital is clearly available for the right deals.

For example, in order to finance its deal with Genentech, Roche issued nearly $33 billion in notes. In addition, Pfizer received over $22 billion in loan commitments from various banks to complete its transaction. And similarly, J.P. Morgan (NYSE: JPM) slapped down $8.5 billion so Merck could fund its deal with Schering-Plough.

Again, this has occurred during one of the most fear and panic-ridden periods in stock market history. And it’s come despite frequent comparisons of the Depression Era. Listen to the media too much and you’d expect to see the world in a grainy, brown hue every time you look out the window.

Don’t get me wrong here: I’m keenly aware that the economy is in bad shape. No one has ever accused me of being a Polyanna. But my point is that it’s not necessarily all doom-and-gloom (as some would like you to believe).

These healthcare/biotech mergers indicate the beginning of a thaw in credit markets and hopefully the start of a healing process for the markets. Notice that I’m not calling it a “bottoming process” because as I said last week, I do believe we’ll see new stock market lows.

But as more deals get done, investor and lender confidence will slowly return to the market. And I do think more acquisitions are imminent – particularly within the biotech sector…

The Biotech Sector – A Wave of Consolidation

The biotech sector is likely in store for a wave of consolidation. While the above-mentioned Big Pharma companies have boosted their pipelines and created massive biopharma companies with their acquisitions, there are still many pharmaceutical companies that desperately need to fill their pipelines.

And that bodes well for biotech – particularly when you consider that the largest biotech company after Genentech is Amgen (Nasdaq: AMGN), which boasts a market cap of $48 billion.

After that, Gilead Sciences (Nasdaq: GILD), which just announced a $1.4 billion takeover of CV Therapeutics (Nasdaq: CVTX), is next at $40 billion. Then the market thins considerably, with only three companies that have market caps over $10 billion and 11 companies with market caps of $1 billion or more.

For example, Merck could buy Biogen (Nasdaq: BIIB) and Genzyme (Nasdaq: GENZ) for less than it cost the firm to buy Schering-Plough.

The point is: Even though the biotech sector has outperformed the S&P 500 during the bear market, many biotech stocks have become cheap.

In fact, pharmaceutical companies wouldn’t even need to raise capital to buy a BioMarin (Nasdaq: BMRN), or Xcelerated Profits Report portfolio member Medivation (Nasdaq: MDVN) and many others like them.

Our 2 Favorite Emotional Friends: Fear And Greed

When managements are scared they hunker down and hang on to capital. But when opportunistic executives add to their businesses – even during downturns – that kind of optimism and activity is healthy. They’re essentially expressing their confidence that conditions will improve.

Remember… emotions control the stock market as much as fundamentals. And as we’ve mentioned in previous columns, fear and greed are the two main players. So when investors see this kind of activity, they start to think about their own opportunities, rather than cowering in the corner in the fetal position like so many have for the past few months.

Big Pharma Falls For Attractive Biotech

As we’ve seen recently, Big Pharma has already fallen for some of the most attractive biotech names. And as some more choice companies begin to get snapped up, you might see a rush into the sector by other Big Pharma firms to grab the existing quality companies before someone else does.

Mix in this momentum with some speculation and that could kick prices higher, causing Big Pharma executives to pull the trigger before valuations get too expensive.

The economy is still bleeding, but these recent acquisitions indicate that the patient is no longer spurting blood all over the emergency room floor. Eventually, it will stabilize and walk on its own again.

When it does, the strongest drug companies will be the ones that took advantage of this unique opportunity to fill their pipelines with products from inexpensive biotech companies.

Source: The Biotech Sector: Big Mergers Could Mean Big Gains For Biotechnology