Here are three reasons why…

• Growth Doesn’t Pay

The justification for investing in emerging market stocks has always been the same – growth in emerging markets will far outstrip growth in the developed world and therefore, the profits will be greater.

After all, doesn’t it make sense that a company doing business in a country with GDP expanding at a 7% annual clip will earn way more than a company doing business in a country with GDP contracting?

Seems logical and if that’s the case, emerging markets are definitely the place to be right now. Barclays estimates developing Asian economies will grow by 5.2% this year, compared to a 2.3% contraction for the United States.

Here’s the rub: the classic justification is flawed. High economic growth does lead to higher profits for individual companies. But it doesn’t translate into higher stock returns for investors.

Based on decades of data from 53 countries, London Business School professor Elroy Dimson recently proved countries with the highest growth produce the lowest returns (6% per year), while countries with slowest growth produced the highest returns (12% per year).

How can this be? It’s simple, really. Attracted to higher growth, investors end up paying higher prices for emerging markets stocks, which cuts into returns.

Emerging Market Investors Violating Primary Rule of Investing

In other words, when it comes to emerging markets, investors lose their senses and consistently violate the primary rule of investing to buy low and sell high. And that’s certainly happening now…

• Valuations Hardly in Bargain Territory

If success in emerging markets boils down to buying in at the right price, now is not the right time.

The MSCI Emerging Markets Index trades at 17.8 times earnings, the highest level since the index peaked in late 2007. In comparison, the S&P 500 trades at 17.2 times earnings.

Moreover, the historical average for the MSCI index is roughly 14 times earnings, making current prices seem a bit stretched.

• No Safe Haven… Nasty Corrections Are the Norm

While emerging markets stocks can make you a fortune in a hurry, they can just as easily ruin you. Just consider:

• In the six weeks following Lehman’s collapse, emerging markets shed 47%, slightly more than the S&P 500 index, proving higher economic growth provides absolutely no buffer.

• After advancing more than 20% for five straight years through 2007, emerging markets cratered 53.3% in 2008. Remember, the S&P 500 “only” dropped 37.6% last year.

• In 2000, when the U.S. market slid 9.1%, emerging markets tanked 30.8%.

Emerging Markets Headed For Short-Term Profit Correction

Bottom line, I’m convinced emerging markets are headed for a short-term profit taking correction.

• Historical data proves these markets are susceptible to such sell offs.
• Valuations are getting stretched.
• And investors have never been more enamored with such stocks.
• Even the financial press can’t resist the euphoria. Yesterday, Bloomberg ran a feature entitled, “Emerging-Market Stocks to Gain Further After 52% Rally This Year.”

But make no mistake. This is a classic case of investors chasing performance. Such a strategy always fails. Or as Humphrey Neill put it in The Art of Contrary Thinking, “When everyone thinks alike, everyone is likely to be wrong.”

Don’t be everyone.

Instead, consider selling short the MSCI Emerging Markets Index Fund (NSYE: EEM).

Or at the very least, check your asset allocation.

If you’ve got more than 20% of your portfolio in emerging markets, you could be in store for a nasty setback. To avoid it, I recommend you take some profits off the table while you still can.

Good investing,

Lou Basenese

Source: Emerging Markets: A Contrarian Take

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

A quick glance at the scoreboard proves my criticism was spot-on…

While the S&P 500 Index slumped 38.5% in 2008, 30 countries witnessed drops of 50% or more. Even more telling, the poster children for the decoupling trade: Brazil (-41.2%), Russia (-72.4%), India (-52.45%) and China (-65.39%) didn’t escape punishment either, despite wild predictions they would…

Clearly, the old adage still applies, “When the United States sneezes, the rest of the world catches a cold.” (Or in some cases, like Russia, they get pneumonia.)

So why resurrect the past? Because decoupling diehards won’t let this junk science die. And sadly, another warning is in order…

Decoupling 2.0 – Redefining The Theory

On the back of an impressive rebound in emerging markets this year, the decoupling chatter is back. Only this time, followers are calling it “Decoupling 2.0.” And they’ve redefined their theory…

As The Economist reveals, “Decoupling 2.0 is a narrower phenomenon, confined to a few of the biggest, and least indebted, emerging economies.” Ones with “strong domestic markets and prudent macroeconomic policies.”

Funny. I read that “redefinition” and think how badly some pundits want decoupling to work out.

It’s still the same farce, however.

• You see, globalization – an undeniable, decades-old, economic force – created one quantum entanglement.
• World markets are inextricably tied together in knots, whether we want them to be or not.
• And if they can ever be untangled, it will take years (likely decades), not a few quarters.

So, as the Decoupling 2.0 banter picks up, let me offer up a dissenting voice – and warn you.

First, don’t be mislead by the headlines…

• Yes, Chinese stocks are up 44.6% in 2009.
• Yes, Brazil rebounded 39.7%.
• Yes, India staged a 51.6% comeback.
• Yes, Russia came roaring back 72.1%.
• And yes, the United States only mustered a pathetic 0.22% gain.
• But nothing’s really changed.

The United States remains the engine of economic growth. How else do you explain the fact that the equity markets continue to move in lockstep?

As you can see in the chart below, some of the BRIC nations started to rebound sooner, but they sold off in February, just like the United States. And they didn’t really gain momentum until after signs that the U.S. economy would fight another day materialized.

Chart Source: Bespoke Investment Group

Decoupling Advocates: Countering The Obvious With Nonsense…

Decoupling adherents will counter this evidence, saying the equity markets might still be coupled, but the underlying economies most certainly are not. Nonsense.

If an economy is doing well that means businesses are doing well. And if businesses are doing well – and most are publicly traded – stock markets will be doing well. You can’t separate the two.

That leads me to the second part of my warning. Whatever you do, don’t abandon your U.S. investments or significantly overweight your portfolios to these “decoupled” international markets.

If you did so the last time, your portfolio got hammered. In fact, if you moved all your investments into China or Russia at the start of 2008, like some investors I know, you’re still worse off than the patriotic fellow that invested in nothing but U.S. stocks.

A hypothetical $100,000 portfolio of U.S. stocks is now worth $61,655, compared to $50,046 had you held all China stocks, and $47,500 had you had nothing but exposure to Russian stocks.

While Decoupling May Be A Farce – Don’t Ignore Emerging Markets

Let me be clear, although decoupling is a farce, that doesn’t mean we should ignore international and emerging markets altogether. That would be foolish. These markets lay claim to stronger domestic growth and more options (higher interest rates and billions in foreign reserves) to stimulate further growth.

What I am recommending, instead, is that you capitalize on these strengths in a more intelligent manner. Instead of going “all-in” so to speak, place a more reasonable wager. Specifically, stick to the tried principles of asset allocation. After all, the theory behind it won a Nobel Prize. Meanwhile, Decoupling 2.0 isn’t even legitimate enough to garner a nomination.

So instead of plowing all your money into international stocks, only allocate a portion. At The Oxford Club we recommend a 30% allocation to international stocks. That’s just the right amount of exposure to profit, without taking unnecessary risk.

In terms of specific investments, I recommend the low-cost, no-hassle, diversified, indexing approach.

• Either the iShares MSCI EAFE Index (AMEX: EFA), which holds positions in 838 companies.
• Or the iShares MSCI Emerging Markets ETF (AMEX: EEM), which holds positions in 340 companies.
• If you want a more concentrated, high profit potential pick, hire a professional. Specifically Mark Mobius and the Templeton Emerging Markets Fund (NYSE: EMF). No one can touch his 40-year track record in emerging markets, even recently. Since the March 9 bottom, his closed-end fund is up 65%.

Good investing,

Louis Basenese

Source: Decoupling Is Still Dead And Here’s The Proof

Earlier today, I proved the notion to TFN Strategic Trader investors as I alerted them to lock in profits of up to 90% on a recent position. You may have read about it.

If not, do it here.

But when it comes to volatility, nothing is as topsy-turvy as the political mess in Korea. Now that Russia is warning of a possible nuclear battle, the stakes are increasing by the minute. With every missile North Korea fires, the situation gets more and more critical.

As usual, the options market offers the best short-term opportunity to take advantage of the situation.

Here’s how.

The instant a malicious shot is fired, global markets are going to react, but none more so than the already overbought emerging markets.

As volatile as it gets

I could come up with a list of reasons why the MSCI Emerging Market Index (EMI) is overvalued, but the underlying issue is the world’s smallest and fastest-growing markets remain derivatives of the American economy. In other words, they depend on a healthy America for growth.

While the equities market and yesterday’s consumer sentiment figures may show America is on a track to recovery, most economic data and earnings figures have yet to share the sentiment.

That means without the threat of nasty political action in Asia, emerging markets are in trouble. Add in the growing conflict and the sector looks downright risky. One bullet is all it will take to send the EMI, with its large exposure to Russia, Taiwan and much of Asia’s smaller components, into a tailspin.

Investors with a short position in an ETF like iShares MSCI Emerging Market Index (NYSE:EEM) stand to make strong profits just on the eventual decline of the index to fair value. Add in a political battle and the opportunity soars.

Savvy investors should be looking at mid-term put options on the EMI. The iShares ETF offers plenty of opportunities. I see more than a few good deals with September expirations.

Source: Will You Be Ready When They Push the Button

Indeed, its largest first-quarter investments included:

• $50.9 million in Vanguard Emerging Markets ETF (NYSE: VWO)
• $1.5 million more iShares MSCI Brazil Index ETF (NYSE: EWZ)
• $1.1 million more into in iShares FTSE/Xinhua China 25 Index ETF (NYSE: FXI)
• $877,700 into Van Eck’s Market Vector Russia ETF Trust (NYSE: RSX)
• $817,300 into iShares MSCI Mexico Index Index (NYSE: EWW)
• $390,400 more into iShares MSCI South Africa Index (NYSE: EZA)

Harvard’s fund also took a first-time, $45.5 million position in iShares MSCI South Korea Index ETF (NYSE: EWY), as well as two foreign titans – a $16.7 million stake in China Mobile Ltd. (NYSE ADR: CHL) and a $12.6 million stake in Israel’s Teva Pharmaceuticals Industries Ltd. (NASDAQ ADR: TEVA).

Obviously, an institution such as Harvard does its homework before making such an aggressive play call, and committing so much money to the emerging economies of the world – global regions whose stock markets took even bigger hits than the United States’ Standard & Poor’s 500 Index.

Since the market bottomed out at 676.53 on March 9, the S&P 500 has gained an impressive 34.2%.

During that same span, however, the ETFs that received Harvard endowment dollars have handily trounced the performance of that U.S. bellwether index. Just as an example: Vanguard Emerging Markets ETF is up 58.1% and iShares FTSE/Xinhua China 25 Index ETF has gained 51.2%.

And the overall MSCI Emerging Markets Index ETF (NYSE: EEM) – which measures a 26-country-tracking index of the same name – is up 55.2% since the bottom.

Emerging Market Professors

One of the market professors Harvard is listening to is Robert G. Doll Jr., vice chairman and chief investment officer for private equity fund BlackRock Inc. (NYSE: BLK). Doll said earlier this week that the global economy has likely seen the worst of the worldwide financial crisis, and that developing economies are already emerging from recession.

“If, in fact, we have seen a bottom in markets and economies are going to recover, the emerging parts of the world will recover the most and the fastest,” Doll told Bloomberg News. “After all, their recessions were largely unwanted inventory build-up and not the credit bust in the Western world.”

Earlier this month, Doll said he believed the S&P 500 would fall from its current levels (which it had), and then rally to end the year at around 1,000 – for a gain of about 11%.

“Emerging markets, if they are going to do better than that, are going to do closer to 20%,” Doll said. “There are some that already have. Some have done better than that.”

A couple weeks before Doll’s vote of confidence, Mark Mobius, famed investor and head of Templeton Asset Management Ltd., said that emerging-market stocks are building a base to enter a bull market at the end of the year, Bloomberg reported.

“We are at the base-building period for the next bull market,” Mobius told Bloomberg while attending a conference in Indonesia. “What I see happening is perhaps this continuing till the end of the year, and then a breakout.”

Many of these emerging and developing economies are on the cusp of breaking out, but are being held back by the drought of others. The ultimate catalysts that set them loose will be falling interest rates and easing inflation, Mobius said.

In the first week of May, about $4 billion was pumped into emerging-market equity funds. It was the largest weekly inflow since December and the eighth-largest on record, MarketWatch reported. Most of that went into ETFs, and long-term positions at that.

Not coincidentally, the specific countries seeing the largest inflows are represented in Harvard’s portfolio. Brazil posted its second-largest weekly inflow on record. China, India and Russia also saw huge gains, MarketWatch reported.

Those four markets – Brazil, Russia, India and China – comprise the so-called “BRIC” economies of the world.

Emerging Market ETF Plays

How to capitalize on emerging markets reemergence from recession depends on your risk tolerance. And risk levels can vary by country and investment sector.

Carl Delfeld, head of global investment advisory firm Chartwell Partners, noted that while the U.S. financial sector is the chief culprit of the global financial crisis, some healthy-capital foreign banks are currently very nicely positioned because they didn’t get involved in the bad U.S. debt, and because they have the fastest-growing growing base of consumers in the fastest-growing markets.

And a good way to play this trend could be the soon-to-be available Global Shares Dow Jones Emerging Markets Financial Titans ETF, Delfeld writes in the May 25 issue of Forbes magazine. Of the fund’s top-10 holdings, four are China-based, three Brazil and two India.

More speculative investors might be interested in another new ETF, the WisdomTree Dreyfus Emerging Currency Fund (NYSE: CEW), a basket of 11 equally weighted emerging market currencies that are rebalanced every quarter.

The currencies in the fund are the Brazilian real, Mexican peso, Chilean peso, Israel shekel, Turkish lira, Polish zloty, Chinese yuan, South Korean won, Taiwan dollar, Indian rupee and the South African rand.

For more general plays on specific countries, Harvard’s list of new investments could be a good starting point.

Money Morning Contributing EditorHoracio Marquez recommended iShares MSCI Brazil Index (EWZ) in his popular “Buy, Sell or Hold” column last October. It’s also one of the five emerging market ETFs that Money Morning’s Martin Hutchinson recommended earlier this year. Others included iShares MSCI Chile Investable Index (ECH), iShares MSCI Taiwan Index (EWT) and iShares MSCI Singapore Index (EWS).

Source: Looking For the Next Global Profit Play? Take a Look at These Emerging Market ETFs

The problem I have with this dogmatic definition of a bear market rally is the following: Assuming (and this isn’t a forecast, since I really haven’t the foggiest idea where stock markets will be in six or 12 months’ time) the S&P 500 moved up to 1350 and then declined to 500, as an investor should you care if the move to 1350 — a 100% gain! — was a bear market rally?

My impression is that investors’ fixation on the recent rally being a bear market rally has actually kept most investors on the sidelines and hoarding cash. Now, put yourself in the shoes of a fund manager who, in the last 18 months, has lost 50% of his clients’ money and missed the recent rally (34% for the S&P 500). What is he likely to do? I would think that he would be inclined to purchase equities as they correct the sharp advance since early March, especially as the economic news in the near term becomes less negative.

Based on our conversations with numerous managers in recent weeks, we believe that most quantitative managers’ portfolios were not positioned in expectation of a rally. Of the nearly 80 managers we have talked to, only one manager said they were up since March 9th and the clear majority admitted to being notably down or stopped out on their positions. These managers were both long-only and long-short quant managers using market neutral and non-market neutral strategies, sector neutral and non-sector neutral strategies, longer term and intermediate-term holding periods. It is fair to say that just about everyone is bewildered and trying to understand when this rally will end.

Another factor to consider is that there has been a significant improvement in the technical position of world stock markets. In the US the largest number of new 12-month lows was reached in October. At the November 21 low at 741 for the S&P 500, the number of new lows had already contracted, and even more so at the index’s March 6 low at 666. Also, market breadth and the number of stocks moving above their 200-day moving averages have taken a decisive turn for the better, indicating that the stock market advance is broadening and that the number of stocks that have bottomed out (at least in the intermediate turn) is expanding.

I have explained repeatedly in the past that if a government is really determined to try and postpone an inevitable collapse by “printing money” in order to lift or support asset prices, it can be done. However, the result of such a monetary policy is to lower the purchasing power of its paper currency, with catastrophic long-term consequences for its economic and financial volatility.

It forces individuals and institutions with cash to buy something…anything. So, this cash is channeled into gold and/or different paper currencies, commodities, equities, bonds, real estate, and consumer goods and services, but obviously with different intensities and at different times. For instance, at some times, such as in 2008, more money will be allocated to gold; while at other times, such as since early March, more money will flow into equities and industrial commodities. It is well understood that these money flows are driven largely by speculative activity (and more than a little dose of manipulation). The result in all asset markets is very high volatility and price fluctuations that don’t appear to make any sense to most market participants and observers who don’t understand the new rules of the investment game that were brought about by “money printing”.

This is where we are today, irrespective of whether or not you and I like policies of “quantitative easing, massive bailouts, and frightening fiscal deficits” and their long-term consequences! Another positive factor for stock markets is that a large number of Asian stock markets and individual stocks in the region had already bottomed out in October and November of 2008 and didn’t confirm the new low in the S&P in early March.

In Asia, the Taiwan and Shanghai indexes, and Korea’s Kospi Index, are all up by more than 50% from their late October 2008 lows. (The Shenzhen Index is up 90%.) But it is not only the Asian equity markets that have outperformed the US and Western European markets over the last few months; since late January 2009, the RTS Russian Index is up 66% and the MSCI Emerging Market ETF is up by 55% from its early November 2008 low.

This is not to say that the global economy is about to embark on a strong and sustainable growth phase. It also doesn’t mean that a new bull market in global equities à la 1982– 2000 has begun. But I think that, at least in nominal terms (inflation-adjusted), the global printing presses being run by the world’s central banks and fiscal deficits have begun to impact asset prices positively. Therefore, in the case of resource and mining stocks, as well as Asian equities (and, for that matter, most emerging and other stock markets around the globe), the lows thatwere reached between October and March of this year are likely to hold — that is, for now.

The markets that have the highest probability of having made major longer-term lows are resource-related equities, emerging markets, and Japan. Conversely, the asset market that has the highest probability of having made a secular high (such as Japan in 1989, or the Nasdaq in March 2000) is the US long-term government bond market.

Despite a still-weakening economy and massive quantitative easing, long-term bond yields appear to be on the verge of breaking out on the upside. I have listed again below all the equity recommendations I have made since December 2008. Some of these equities have already moved up substantially (resource and mining companies, in particular) and, therefore, I would only buy most of these recommendations on a correction.

In addition, a number of BRIC and other (mostly emerging market) closed-end country funds and ETS were recommended, such as Brazil ETF (EWZ), the Templeton Russia Fund (TRF), the Greater China Fund (GCH), the Asia Pacific Fund (APB), Taiwan iShares (EWT), the Japanese ETF (EWJ), the Japan Smaller Capitalization Fund (JOF), the Morgan Stanley India Fund (IIF), the Turkish Fund (TKF), and the MSCI Emerging Market ETF (EEM).

In the US, late last year we recommended buying the iShares iBox Investment Grade Corporate Bond (LQD) and Nicholas Applegate Convertible & Income Fund (NCV), while earlier this year we recommended the accumulation of stocks of high-tech companies such as Cisco (CSCO), Intel (INTL), Oracle (ORCL), and Yahoo (YHOO). More recently, we recommended beaten-down insurance companies and financials as rebound candidates, including Leucadia National (LUK) and CNA Financial (CNA), Citigroup (C), the BKX, the Financial Bull 3x Shares (FAS), and the Financials Select Sector SPDR.

The market’s advance had been broadening and that more and more groups such as airlines (AMR), homebuilders (TOL, CTX, HOV), and cyclicals such as Dow Chemical (DOW), International Paper (IP), and Alcoa (AA) are showing signs of having bottomed out. Among commodities, I am particularly intrigued by natural gas. There are natural gas ETFs (UNG, GAZ), but costs are high. A better way is probably just to buy future contracts, or Pioneer Natural Resources (PXD) or the First Trust ISE Revere Natural Gas Index Fund (FCG).

Source: What to Buy…or Not Buy

This from Investment U:

With the stock market’s historic drop this year, some investors have fled to cash. Others are cautiously buying. Most, however, are sitting on their hands.

They shouldn’t be.

Even if you lack the cash – or the willpower – to buy into this market, there is still a very smart move you can make: switch.

Switch from your poor-performing, high-cost, tax-inefficient stock and bond mutual funds to index funds or exchange-traded funds (ETFs).

It’s a very smart move. Here’s why…

Why Choose Exchange Traded Funds Over Mutual Funds?

Compared to exchange traded funds, most mutual funds are a lousy deal, here’s why:

• Each year more than three-quarters of them fail to match the performance of their benchmarks.
• Many are loaded with front-end or back-end loads, 12b-1 fees, high management costs and other expenses.
• Moreover, even when these actively managed funds fall sharply, they still often distribute annual capital gains to shareholders, in effect handing shareholders a paper loss and a tax bill at the same time.

Don’t stand for it. Now is your chance to fight back.

Switching to Exchange Traded Funds Will Save On Taxes

Switch from your underperforming mutual funds to index funds and exchange-traded funds – and save yourself thousands of dollars in taxes in the process.

The IRS allows you to take losses each year to fully offset any realized capital gains. And also allows you to take capital losses to offset up to $3,000 in earned income.

In a year as nasty as this one, of course, you probably don’t have too many realized capital gains to worry about.

You should make this switch anyway. The IRS allows you to carry forward your losses indefinitely to offset future capital gains.

As bleak as the outlook is today, there will be capital gains in your future and, eventually, the tax on them is going to be higher than it is now.

Aside from the thousands you’ll save in taxes (and expenses) in the years ahead by making this switch to exchange traded funds, there is an important psychological reason to do it.

When you get your statements in 2009 and beyond, instead of looking at a smorgasbord of losing positions you’ll be looking at winners. You may not end up buying at the very bottom – few do – but you will have bought a whole lot closer to it than you did originally.

Exchange Traded Funds – Turning Market Lemons Into Lemonade

So take the lemons the market has handed out so abundantly this year and turn them into lemonade with exchange traded funds. Here’s how:

Sell Your Losing	Replace It With:
Gold Stock Funds	Market Vectors Gold Miners ETF (NYSE: GDX)
U.S. Large-Cap Stock Funds	S&P 500 ETF (AMEX: SPY)
U.S. Small-Cap Stock Funds	Vanguard Small Cap ETF (NYSE: VB)
International Stock Funds	iShares MSCI EAFE (NYSE: EFA)
Corporate Bond Funds	Vanguard Total Bond Mkt ETF (NYSE: BND)
Junk Bond Funds	iShares High Yield ETF (NYSE: HYG)
Inflation-Adjusted Bond Funds	iShares Lehman TIPS (NYSE: TIP)
Emerging Market Stock Funds	iShares Emerging Mkts (NYSE: EEM)

Using Identical Exchange Traded Funds As Smart Tax Moves

If you’re already invested in exchange traded funds, incidentally, you can still make the same smart tax move by selling your losers and moving into virtually identical funds.

For example, you can take a loss in one S&P 500 Index Fund (AMEX: SPY) and replace it with, say, this S&P 500 Index Fund (AMEX: IVV). Even though these funds have the same benchmark and are virtually identical, they are different funds, so the IRS allows the switch.

(For a complete list of ETFs at Fidelity.com.)

However, you cannot sell a fund and buy back the exact same one and qualify for this deduction (unless you wait at least 30 days). If you do, you run afoul of the wash-sale rule.

Incidentally, if you own individual shares that are down but for which there is no logical replacement (think Apple or Berkshire Hathaway) and you don’t want to sell and risk that the stock will be substantially higher 30 days from now – always a possibility from these depressed levels – you can double down on your stocks now, then sell your higher-cost shares the last week of December. (You will, of course, be doubling down on your risk for the next 30 days.)

If you plan to do this, however, you need to do it by the end of the month. Once November ends, it will be too late to do it for the year.

Bear in mind, you cannot take tax losses in an IRA, 401(k) or other qualified retirement plan. But you should still consider making the switch to ETFs and index funds for the cost advantages and psychological benefits I’ve described.

Source: Exchange Traded Funds: An Investment Move You Need to Make…

Indeed, emerging markets continue to post strong growth rates while the industrialized economies continue to struggle. Markets from the U.S. to the Eurozone are drowning under debt deflation tied to a financial crisis, rising long-term unemployment and declining standards of living.

The emergence of China as a major financial power combined with rich commodity-producing nations of Brazil, Russia and the Gulf States all point to a bright long-term outlook for emerging market plays.

It’s worth noting that emerging nations hit a bear-market low in late 1998 following the Asian economic crisis and the Russian ruble collapse.

At the time, this marked the best market-timing purchase among select global indices. We may see the same opportunity emerging here in the U.S. in the S&P 500.

For now, the S&P 500 Index remains hostage to a credit squeeze, deflation in housing, and a decline in domestic consumption. But that may all change soon.

Amid a 13-month credit crisis affecting most of the developed world, the United States might be at the cusp of outpacing other markets over the next decade. What happened in the emerging markets 10 years ago suggests this might be possible, at least from a contrarian investor’s standpoint.

Developed Markets in the Doghouse for the Last Decade

Anyone who loaded up on major industrialized markets since 1998 has earned poor returns in nominal terms and negative results adjusted for inflation. U.S., European and Japanese equities have ranked as some of the worst investments over the last 10 years in dollar terms as two bear markets, including the current credit crisis, deflates long-term returns.

Emerging markets, however, have earned impressive inflation-adjusted returns over the last decade and have protected investors from inflation.

Indexing, unfortunately, has done a poor job over the last 10 years for major market investors.

Major markets are defined by the (MSCI) World Index, created in 1969. These include the United States (48%), Canada, Europe, Japan, Hong Kong, Singapore, Australia and New Zealand.

Since 1998, the MSCI World Index has gained just 2.7% per annum. That return trails not only T-bills over the same period but also inflation. That strands investors with a negative real return of about -1.3% per annum.

That’s hardly impressive.

What’s even more depressing is the fact that those returns include the benefits of dollar depreciation vis-à-vis foreign currencies in the index, or 52% of the World Index. A plunging dollar didn’t help results, either.

If global investing isn’t your thing, staying at home didn’t boost your portfolio, either.

Home-Grown Investors Watch Their Portfolios Crash and Burn

Since 1998, the S&P 500 Index has rallied only 2.5% per annum. Adjusted for 4% annual inflation over the same period, investors have actually lost 1.5% per year over the last decade.

The only broad global index to post solid inflation-beating returns since 1998 are the emerging markets.

Emerging Markets Rise from the Ashes

In 1998, Russia’s economy collapsed. The Russian government defaulted on its foreign debt obligations while the ruble went into a freefall.

In Asia, regional governments exhausted their central bank reserves defending overvalued currencies. This all lead to the destruction of credit that began the summer of 1997.

This was exactly the time to aggressively buy emerging markets, and eventually, commodities. Oil prices bottomed north of US$10 a barrel in late 1998.

As we all know, this story changed quickly. Aided by rising prices for commodities, emerging markets went on to post the most impressive gains in the last 10 years. And it’s not surprising.

After all, the emerging markets are home to the world’s fastest-growing economies supported by bulging trade surpluses, booming foreign-exchange reserves and in most cases, healthy balance sheets.

There’s no doubt that in the longer term, emerging markets will become larger and therefore dominate global stock market performance. Growth rates will certainly continue to outpace the major markets for years to come. But a marked slowdown in exports and a prolonged commodity slump might also crimp the near-term prospects for emerging markets.

It is possible that after years of huge triple-digit gains the emerging markets can lag the major markets. That’s especially the case after the crippling declines we’ve seen in the financial stocks. A recovery, however short-lived, will boost the value of U.S. equities because financials comprise more than 15% of the broader market and more than 20% across Europe.

Financials Will Dominate

History strongly suggests that financials will eventually form a bottom and lead another broad rally for major market equities.

It might be hard to make a long-term case for financial services as industry business models have radically changed and have been compromised by the credit squeeze. Still, a major advance in emerging markets can happen even for a short period of time.

I’m certainly not long-term bullish on U.S. or European stock markets. The smart money will remain committed to emerging markets, including new frontier markets like Vietnam, Bangladesh, and Botswana among others. Plus, China, India, and Brazil are superb growth stories for the next 10 years.

But it might be time to start looking carefully again at U.S. stocks as foreigners return to positions that have been severely slumped over the last few years. A stable dollar would go a long way in solidifying this possibility.

ERIC ROSEMAN, Investment Director

Source: U.S. Stocks Have the Potential to Dominate Global Markets Post-2008

Global inflation is now a major worry for investors. Many emerging markets nations were keeping a lid on inflation with fuel subsidies. Sky-high crude oil prices have put a stop to that. Now they are passing costs onto consumers.

And a slowdown in US and Europe could impact growth, according to the Bank for International Settlements (BIS) — the Switzerland-based central bank for central banks.

This year, emerging markets nations have had a 6.7% consensus growth forecast, not far below the average of 2003-2006 boom. “Nevertheless, the potential knock-on effects of financial market turmoil in the major centres increased the risk of a slowdown in (emerging markets),” said the BIS.

However, Jim Stanton says he has found one emerging-market fund that hasn’t broken down. It is at a very critical area that offers a couple of opportunities…

Over the past five years, one stellar ETF performer is the iShares MCSI Emerging Markets Fund (AMEX:EEM). Over that time, it’s surged more than 400%. Since May, however, it’s endured some selling pressure, along with the rest of the world’s indexes.

The fund’s major stock holdings come from assets in Brazil, China, India, South Africa, Russia, Mexico, Taiwan, and South Korea, which make up about 80% of the fund. So you can see that it’s well diversified. However, no more than 15% of its assets come from any one country.

The weekly chart below only accounts for the last two years, but as you can see, there is a clearly defined uptrend line off the June 2006 low, which it’s testing for the third time in 2008.

This means EEM is at a critical decision point.

The Bearish Angle: A weekly close below the trendline, which is $133, would be bearish, bring on more selling, and should see a continuation of the worldwide correction.

The Bullish Angle: There is resistance at the $140 level and if EEM can manage to stay above the trendline and then close above $140, it would provide a good,  low-risk buying opportunity. If this occurs, I would use a close below $133 as a stop.

Source: Sector Watch: Two Ways To Dodge America’s Mid-Year Malaise With iShares