But given the economy’s strong performance following the financial meltdown that crushed economies the world over, it looks like Brazil’s time is now.

Brazil’s gross domestic product (GDP) contracted 0.8% year-over-year in the first quarter and 0.8% from the fourth quarter. That beat analysts’ expectations but wasn’t enough to keep the country from sliding into its first recession since 2003. However, the economy is already showing signs of recovery and many economists believe Brazil is already on the rebound and poised for a strong second half.

Brazil’s GDP likely grew 2.2% in the second quarter compared with the previous quarter, according to a report by Bank of America Corp. (NYSE: BAC).

Nelson Barbosa, Brazil’s economic policies minister, optimistically told the Rio de Janeiro-based O Globo newspaper that Brazil’s economy will grow by 4-5% this year.

That kind of optimism in July helped Brazil’s benchmark Bovespa stock index book its best monthly gain since 1998.  The index jumped 2.3% to 55,997.81 – its highest level in 11 months. It’s up about 50% this year, outpacing even the red-hot MSCI Emerging Markets Index. The Dow Jones Industrial Average and S&P 500 Index are up just 5.8% and 11% respectively.

Analysts that were skeptical of Brazil’s economic growth in the heady years leading up to the financial crisis pointed to the country’s supposed reliance on high commodities prices and exports.

No doubt, the country benefited a great deal from the commodities boom that drove up prices for Brazilian exports like iron ore, steel, and soybeans. But in eviscerating commodities prices and ravaging the market for exports, the financial crisis demonstrated that Brazil is more than a one-trick pony.

Sublime political stewardship leading up to and during the crisis kept Brazil’s economy well intact when global economy seemed to be falling apart. Stringent financial regulation shielded Brazil from the worst of the financial crisis, while government tax cuts and a growing middle class buoyed the country’s economy as exports dried up.

Back to the Future: Brazil’s Troubled Past Preserves its Present

Indeed, the very financial crises that had Brazilians believing their country would never find its place among the world’s elite economies endowed the nation’s policymakers with a streak of caution as they entered the 21st century.

“We are used to dealing with challenging environments, for our institutions and our regulations,” Alexandre Tombini, director for regulation at Brazil’s central bank, told the Financial Times. “Everything we have done since the mid-1990s has tended to take a more cautious approach.”

For instance, banks in Brazil are required to keep capital reserves that equate to at least 11% of their total assets. That’s high by most international standards, but many banks maintain capital ratios of 16% or more.

Banks are also required to keep 30% of all deposits at the central bank. That makes borrowing more expensive, but it also made it possible for Brazil’s central bank to dole out $51.4 billion (100 billion reals) overnight to ensure banks were adequately funded.

Brazil’s high interest rates are another reminder of the hyperinflation that overwhelmed the economy in the 1990s. But those rates also kept lenders from getting carried away, and now that the crisis has subsided, inflation has been crushed and rates are plunging.

Brazil’s official IPCA consumer price index advanced 0.24% in July after posting a 0.36% gain in June, according to the Brazilian Census Bureau (IBGE). The rolling 12-month rate sank to 4.5%, down from 4.8% in the 12 months through June.

Brazil’s central bank has lowered its primary interest rate, the Selic-base rate, six times this year, with the most recent a 0.5% cut after the bank’s July 21-22 meeting. The benchmark rate currently stands at a record low of 8.75%.

With inflation subdued, most analysts believe the rate will be kept at its historically low level until at least 2010.

“With inflation under control, I believe it will permit the Selic to be maintained at this low level until at least the middle of 2010.”Alex Agostini, chief economist at local ratings agency Austin, told The Wall Street Journal. “I don’t seen any inflationary pressures on the radar. The inflation scenario is so well behaved that it could give the central bank room to make another rate cut at the next meeting, even though the signals coming from the central bank have indicated there will be a pause.”

And while U.S. regulators are only now looking into the inconsistencies and manipulations wrought by irresponsible futures trading, Brazil has long held the reins tight on such activity. Short selling – selling shares you do not own – is allowed, but naked short selling – selling shares that you don’t have – is kept under wraps by fines for traders who can’t to deliver shares they have sold within three days.

Additionally, brokers in Brazil are obligated to provide information by every client. That means a Ponzi scheme like the one orchestrated by Bernie Madoff would never have worked in Brazil.

Retail Remains Resilient

Just as Brazil’s regulators have taken their cues from past mistakes, Brazil’s growing middle class – which now encompasses more than half the country’s population – has been hardened by tough times and proven resilient throughout the current crisis.

May retail sales advanced at an annual pace of 4% and June sales are expected to have increased by 6.5% year-over-year. Furthermore, an IBGE survey showed that nine out of 10 retail sectors showed month-on-month sales increases.

“Brazil has had so many crises over the years, people got used to them,” David Neeleman, the founder of JetBlue (Nasdaq: JBLU), who last December started a low-cost Brazilian airline called Azul told BusinessWeek. “I don’t think they’re at all fazed by this crisis-everyone seems to be focused on buying their first car, getting their first credit card.”

Credit card purchases have grown by 22% a year over the past decade, BusinessWeek reported.

However, Brazilian consumers also got a helping hand from the government, which cut income taxes and reduced levies on a wide range of durable goods.

In April, the government cut taxes on construction materials, cars, and household appliances. The end result was a 5.7% rise in spending on construction materials in May and an 8% surge in auto sales.  Rejuvenated auto sales hit a record-high 300,000 in June.

And increased sales led to increased production. Industrial output rose for the six straight month in June, climbing 0.2% on a monthly basis.

“Brazil has proved it can govern itself and keep the economy on track in very difficult times,” Riordan Roett, a professor at Johns Hopkins University’s School of Advanced International Studies, told BusinessWeek.

Buying Into Brazil

Brazil has also proven that it has a strong consumer base of its own ready and able to fuel economic growth, even as exports falter. In fact, exports account for a mere 12% of Brazil’s $1.5 trillion economy.

From 2001 to 2007, the poorest 10% of the population enjoyed a 49% increase in real income, Brazilian economist Marcelo Neri told the Miami Herald, describing what he called “Chinese-like growth.”

Roughly 27.8 million Brazilians – out of a population of nearly 200 million – joined the consumer economy from October 2003 to October 2008, according to Neri.

About  8 million jobs have been created in that time, while the minimum wage has increased 45%

That makes Brazil a very attractive destination for investment.

In an April Buy/Sell/Hold column, Money Morning contributing editor and emerging markets specialist, Horacio Marquez, recommended Petroleo Brasileiro (NYSE ADR: PBR) for several reasons – the rising prices of oil in the next few years, the discoveries of large oil fields off Brazil’s shore, and increase local demand from the country’s growing population and income levels.

Another commodity play is Vale S.A. (NYSE ADR: VALE), the world’s largest iron ore exporter and a key supplier to China’s exuberant infrastructure expansion. Vale will benefit not only from increase in demand when global economies (and trade with them) recover, but also the rebound of commodity prices across the board.

Martin Hutchinson, another Money Morning contributor, recommends Companhia de Saneamento Basico, orSabesp (ADR: SBS), which operates the water-and-sewage system for Brazil’s Sao Paulo region. Sabesp currently has a P/E ratio of 6.92.

“Now that’s a growth business, and one that’s not dependent on commodity prices,” he said.

Finally, the iShares MSCI Brazil Index ETF (NYSE: EWZ) has been recommended by both Marquez and Hutchinson. The ETF aims to measure the performance of the Brazilian equity market. It has net assets of $8.58 billion, a Price/Earnings (P/E) ratio of 12.75, and a dividend yield of 3.66%.

Source: With One of the Hottest Economies on the Planet Brazil is Finally Living Up to Its Promise

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

One day I told my lovely wife to get her passport ready because we were going to Moscow.  She was quite excited because Moscow is a shopping mecca with many historical sites to see.  But, I assure you—I was there for business.

We traveled to Russia in December of last year and I saw firsthand how the country operates.  I observed that the Russians are a hard working and productive people that just want the best for their families.  Russians are striving for a better quality of life just like anyone else.  I knew right away that the country offers investor’s high profit potential.

I assure you that Russia is still a super power and their society is quite advanced.  The energy sector in Russia is still a powerful force in the world.  Plus, Russia is one of the biggest producers of palladium, platinum, diamonds, nickel and gold.  Russia is a natural resource power house and should do great as commodity prices skyrocket.

When I got back to America I watched the Russian markets for some time and waited for the right moment to tell you to invest.

Then on 04/09/09 in this column, I wrote:

“the Russian market is way oversold and now is a good time to be a contrarian investor and invest when no one else will.”

I told you to buy the Market Vectors Russia ETF (RSX).  This Exchange Traded Fund holds a basket of Russian stocks and seeks to mirror the Russian stock market as measured by the DAX Global Russia+ Index.

I hope you took the advice.  If so, you’re sitting on a 39% gain in just 53 days.  And that’s not the only profitable advice you’ve received for free in these pages…

In fact, just this year I sent you lots of big winners including:

7% SPDR Gold Shares (GLD)
21% iShares Silver Trust (SLV)
85% Freeport-McMoRan Copper & Gold Inc. (FCX)
45% Plum Creek Timber (PCL)
13% PowerShares DB Agriculture ETF (DBA)
26% iShares MSCI Brazil Index (EWZ)
39% Market Vectors Russia ETF (RSX)
29% PowerShares India ETF (PIN)
18% iShares FTSE/Xinhua China 25 Index ETF (FXI)
13% The Coca-Cola Company (KO)
11% Market Vectors Agribusiness ETF (MOO)

If you missed this opportunity to get into any of the above positions, it’s not too late.  Each one of these picks has the potential to run much higher.

I’m sure you are happy we deliver these great ideas for FREE in this Investor’s Daily Edge daily newsletter.  Our staff here at Investor’s Daily Edge strives to give you information that can help you accumulate wealth and enhance your financial well-being.

Now I have an important favor to ask of you.  I need you to tell your friends and family to sign up for our free daily newsletter.  Simply just tell them to go to http://www.investorsdailyedge.com/ and sign up.  Or forward this email to everyone in your address book.

We currently have over 300,000 elite members like you getting Investor’s Daily Edge on a daily basis.  Our goal is to get to one million subscribers.

Tell your friends and family that can benefit from independent and profitable financial insight.

Thank You,

Ted Peroulakis

Source: The Russia Pick I Recommended to You Is Up 39 in 53 Days

India’s ruling Congress Party has a goal of helping India’s poor and pushes free-market reforms.

After this election, India is apt to open up its retail, insurance and banking sectors to more foreign investment.   Moreover, the government may reduce its ownership in refineries, banks and fertilizer companies.

This election could pave the way for a large amount of capital to flow into Indian stocks.

Bombay Stock Exchange stocks are taking off as investors look optimistically at a critical election victory for the Congress Party-led alliance.

The best way to play India: PowerShares India (NYSE: PIN). This Exchange Traded Fund holds a nice basket of Indian stocks and seeks to mirror the Indian stock market measured by the Indus India index.

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

China’s economy is in the midst of a seismic shift whose cracks reveal underlying hazards, according to a new article in the Far Eastern Economic Review.

Titled “The Great Crash of China,” it was written by Brian Klein, an International Affairs Fellow of the Council on Foreign Relations.

Mr. Klein has observed changes in the so-called Chinese Economic Miracle that show China as a precocious adolescent capable of turning into either a rocket scientist or a Communist thug.

He begins with the premise that “China is widely believed to be immune from the economic shock waves making their way around the world from the U.S. to Europe and Japan.”

However, China’s relative immunity from the subprime crash and credit crunch does not mean the country isn’t facing significant economic challenges. In fact, Mr. Klein posits: “China’s economy is actually facing a fundamental structural adjustment that has arrived much earlier than expected.”

Put under his microscope, he saw that China is experiencing “decreasing foreign demand for inexpensive manufactured goods, the misallocation of vital investment, and product safety concerns are straining China’s manufacturing base and challenging the tenuous linkages between continued economic growth and a rising middle-class.”

This new observation leads him to challenge the “conventional wisdom that China’s domestic demand is increasingly responsible for driving growth, not exports, giving the Chinese economy a natural buffer against wild swings in the world economy.”

The conventional wisdom is based on China’s new middle class continuing its consumer spending on very same things American’s bought with their home equity loans: TVs, computers, washing machines and cars.

The difference between the Chinese and American consumers, though, is that while we bought Chinese products, the Chinese consumers are buying domestic products that prop up their own economy.

As Mr. Klein writes: “At first glance the statistics look promising. Consumer spending is up 22%, inflationary pressures are receding as food prices drop, and strong foreign exchange reserves continue to accrue ($1.8 trillion as of July). Fixed asset investment is rising as well (up 27% in the first eight months of 2008) and China’s sovereign debt rating is improving (S&P has raised long term ratings to A+.)”

But delving into these numbers, he uncovers a startling trend: “By the end of 2007 almost half of China’s GDP growth was attributed to exports and government consumption, a dramatic reversal from 2003 when growth was dominated by investment and private consumption.”

Apparently, Chinese consumers have put their savings into the stock market and real estate. With the Chinese markets down significantly over the past 12 months, these new capitalists have taken a bath.

At the same time, Chinese investors continue to pour their money into real estate, despite a downturn in both commercial and residential sectors.

The deterioration of real-estate of course hits the economy with a double whammy: losses to investors and unemployment for construction workers.

Suddenly, China and the U.S. are looking very similar through the eyes of consumers. “…Consumer confidence, according to official Chinese statistics, is drifting downwards and Western ratings on Chinese commercial banks, the holders of unused commercial real estate, are being lowered,” he writes. “Those on the cusp of entering the middle class are faring poorly as tens of thousands of small and medium sized enterprises go bankrupt.”

In addition to the stock markets and real estate, investments in manufacturing are slipping. As we have already reported, low-cost manufacturing in China is eroding with those jobs going to countries such as Vietnam, Thailand and even Pakistan.

While the Communist Party wants to China to instead provide high-value manufacturing, the government hasn’t really put in the place the mechanisms for a smooth transition. The consequences are similar to what we experience here in the U.S: a loss of important, but low-paying factory jobs.

Mr. Klein asserts: “Unless current expansionary monetary and fiscal policies are directed at skills development, an expanded intellectual property rights enforcement bureaucracy and research and development capacity, China may be running headlong into a great economic brick wall. Rising middle class expectations, shrinking manufacturing jobs, and a lack of qualified workers are more of a threat to continued economic growth than the People’s Bank of China’s exposure to U.S. Treasury bonds.”

In conclusion, he speculates that the success of the Summer Olympics may be China’s last big hurrah for quite a while.

If the reforms that come out of the meeting are strong enough potash could see a major boost, according to emerging markets expert Irwin Greenstein.

Irwin says there are nine major potash players worth a look. Depending on the outcome of the CPC’s Beijing powwow, Potash could become one of the best indirect China plays out there.

Potash is a major component in fertilizer. It has greatly benefited from the emerging market boom, as people overseas move up to the middle class. That means more meat on the table and the adoption of Western diets, such as fast foods, which are laden with meat.

As a result, meat consumption in China has tripled in the last 20 years to 70 million tonnes and is expected to grow further.

The connection, of course, is that cows, pigs and other farm animals are fed grains, which need fertilizer to grow.

The price of phosphate has hit $1,000 a ton, up from $365 last year, according to Green Markets. The price of a ton of potash has gone up over 200%.

China is susceptible to potash prices. Earlier this year, China agreed to pay $576 per ton of potash, up $400 from its previous deal in 2007, to Canpotex, a potash export cartel protected by an exemption in Canada’s Competition Law.

As China Daily reported, the CPC decided China must unswervingly push forward rural reform. In this process, efforts must be made to consolidate and strengthen agriculture to solve the issue of feeding more than 1 billion citizens.

The CPC now wants to rely more on domestic production over grain imports. The goal is to accelerate agricultural modernization and protect farmers’ rights.

Between droughts, pollution and the August 2008 earthquake China’s agricultural sector has experienced dramatic setbacks. During the earthquake thousands of hectares of farmland were destroyed, millions of farm animals died, grain stores collapsed and thousands of pieces of machinery were rendered useless.

A considerable share of wheat crops could not be harvested due to the lack of labor. Much of the wheat harvested before the earthquake – around 350,000 tonnes in Mianyang Prefecture – was damaged in the collapse of grain stores.

In addition, thousands of greenhouses have collapsed, causing severe losses of vegetable crops. Vast seed growing areas in the province have also been badly hit by the earthquake

Pesticides and fertilizer shortages endanger food production, according to the UN’s Food and Agriculture Organization.

January 2007 saw China impose new taxes on grain exports. The duty on corn and rice has been set at 5% – a complete about-face from when Beijing was giving farmers sizable tax rebates for their grain exports.

Although China is the world’s biggest grain producer, it has been immune from the food inflation running rampant throughout the world.

Potash may be one of the best indirect China plays you can make.

Potash is used in 150 countries. Only 12 countries produce it. The US is the top potash importer, followed by China, India and Brazil.

Saskatchewan is the largest potash production region in the world, and many of the top potash producers are traded on the TSX.

Some of the companies worth investigating include:

– Potash One Inc. (TSX:KCL)

– Potash North Resource (TSX-V:PON).

– Potash Corporation of Saskatchewan Inc. (TSX:POT)

– Agrium Inc. (TSX:AGU)

– Mantra Mining Inc. (CVE:MAN)

– Raytec Metals Corp. (CVE:RAY)

– Anglo Potash Ltd. (TSX:AGP)

– Athabasca Potash Inc. (TSX:API)

– Migao Corp. (TSX: MGO)

The BBC reported in July that China’s exports grew at their slowest pace in four months in June, causing its trade surplus figure to fall by more than 20% from a year earlier.

In turn, the government may attempt to slow the growth of China’s currency, which makes Chinese exports more expensive.

China’s gross domestic product grew 10.4% in the first half of the year and is expected to further decline to around 9% in the coming months, according to the China Daily. The Standard Chartered Bank estimates China’s GDP growth could further slow to 7.9% next year.

When the government tightened credit since second half of last year, many businesses including those from the Pearl River Delta to the Yangtze River Delta, both China’s major economic powerhouses accounting for about 30% of the GDP, had been “pushed to the wall,” said the China Daily.

But tighter credit isn’t the only issue…

Chinese companies that supply U.S. retailers with billions of dollars worth of goods every year face a painful squeeze as the yuan rises. This of course is aggravated by the descent of the economies in the U.S. and Europe.

According to the China Daily article, the provincial government in Guangdong will put in 50 billion yuan in the coming decade to build industrial parks and improve infrastructure. It’s the way of helping stave off the move of manufacturing to low-cost markets such as Vietnam.

The shift from China to cheaper emerging markets is a trend I call “beach-ball economics.”

For example…

Turn back the clock to V-Day, and Japan is reduced to rubble from the A-bomb. But over the next 25 years, Japan’s economy saw an economic boom that lasted until the first oil crisis of 1973.

During that wild and woolly quarter century, Japan evolved from manufacturing simple cheap commodities like beach balls to more sophisticated and expensive products that revolutionized consumer markets: cars, digital TVs and computers.

In turn, countries such as South Korea and Taiwan took up the slack making your favorite rainbow-colored beach ball. Today, South Korea had displaced Germany and Japan by sending America’s highest-quality economy import car to our shores.

While the Georgian conflict grabbed the headlines, a related news piece out of London was all but buried. To see the entire opportunity, however, you really need to follow the bread crumbs, which lead you to Southeast Asia.

It’s all about logistics, says Irwin. In particular, the challenge now facing China of sourcing reliable supply of oil that doesn’t rely on pipeline transportation.

Oil giant BP PLC announced it shut down an oil pipeline that runs through Georgia as a precautionary measure against the violence. The 90,000-barrel-a-day pipeline to Supsa on Georgia’s Black Sea coast from Baku in Azerbaijan will remain closed indefinitely, although there is no apparent damage.

BP’s shutdown follows the closure of a pipeline operated by the company in the former Soviet Republic. It’s the larger Baku-Tbilisi-Ceyhan pipeline, knocked out of action after a fire last week on its Turkish stretch. This pipeline usually provides about 1 million barrels of crude to international markets.

What the IEA Said

At about the same time BP released its announcement, the London-based International Energy Agency said reduced oil consumption is expected to keep prices sliding from this year’s record highs.

U.S. and European consumers have reacted to the nose-bleed prices of oil by simply cutting back. At the same time, OPEC continues to pump more crude. The result is that oil prices have retreated around 20 percent since topping a record $147 a barrel in July.

China Bucks the Trend

The IEA noted that China is still bucking the trend toward reduced consumption. China has become the world’s second largest oil consumer, trailing the U.S. The IEA forecast Chinese demand will grow by 5.6% in 2008 and 5.7% next year.

What do these two, apparently unrelated news stories have to do with Southeast Asia?

In a word: logistics.

Global skirmishes make pipelines more vulnerable. For China, the challenge is sourcing reliable supply of oil that doesn’t rely on pipeline transportation. As it turns out, that source is right in China’s backyard: southeast Asia.

20 Billion Barrels of Crude

With 39,000 miles of coastline, nearly every country in the region is surrounded by water – offshore oil fields ready to give up their 20 billion barrels of crude. That’s 40 years’ worth of Saudi imports.

In 2003, Southeast Asia accounted for 13.6 percent of world oil production and 21.6 percent of gas production. As a source of energy, the region is super-hot. It’s set to grow 84 percent by 2008 to more than 2 billion barrels a year — matching OPEC’s exports to the United States.

Just last year alone, 230 exploration wells were sunk in Southeast Asia – leading to 40 new discoveries of oil and natural gas. Here are the region’s leading energy providers:

1. Vietnam is emerging as the fourth-largest oil producer in Southeast Asia.

2. Singapore supplies 60 percent of the world’s jack-up offshore rigs. These $180 million behemoths are in high demand after years of devastating hurricanes, tsunamis and typhoons.

3. Indonesia is the only Asian member of OPEC. About 80 percent of U.S. investments in the country are in energy.

4. Brunei Darussalam is a bustling hub for oil and gas concerns. In 2003, oil and gas contributed to 39 percent of the GDP and 87 percent of exports. The non-energy sector makes up 60% of economic activity, mostly in manufacturing and construction.

One way to get into these as an investor is through ETFs that bundle the best stocks available in each country. The timing right now may be in your favor.

Inflation is ripping apart some of these markets, despite surprising strong fundamentals. Some bargains may be available.

If in fact the IEA’ projection are correct about lower oil prices, this could be enough send emerging markets back up again sooner rather than later.