But the renewed interest in ethanol proved to be short-lived, as oil retreated below $20 a barrel just four months later. As a result, many of those smaller ethanol companies couldn’t survive as profitable alternative energy investments.

Flash forward to today, where we’ve seen crude oil prices double in just the past four months. Worldwide oil demand has soared, particularly from fast-growing countries like China and India, and although the global downturn has seen the pace of demand slow, when the global economy gets back on track, it should prove even more bullish for oil.

But there’s another sector that should rise, too…

Rising Oil Prices Spark Interest In Alternative Energy

With oil prices rising again recently, it’s sparked yet another conversation about the viability of certain alternative energies.

One ETF that tracks the performance of clean energy firms is the PowerShares WilderHill Clean Energy (NYSE: PBW) – a widely traded vehicle that gives you exposure to this still-growing sector in a safer way than investing in individual companies.

While firms like Exxon Mobil (NYSE: XOM) rake in billions of dollars per quarter from oil, PBW invests almost entirely in experimental, technology-focused “green” companies. And while these guys stand to benefit from higher oil prices just like specific oil companies, their success depends more on regulatory changes, subsidies and a global recognition of the need for alternative energy solutions.

The Alternative Energy Market Gets More Attention

When it comes to the alternative energy market, wind power, solar, hydroelectric, geothermal and nuclear power have all received attention over the past couple of years.

But when the oil market first began its march towards record high prices, it was the ethanol industry that took center stage and triggered the wider debate over cleaner energy resources.

However, the ethanol market faces a battle. Despite the government’s intervention and subsidies for the industry, newer technologies are needed in order to make ethanol more viable – and the industry’s companies profitable. A good example is Pacific Ethanol (Nasdaq: PEIX) – a company that Bill Gates invested in heavily a few years ago, paying $12 a share. Today, the stock trades for just $0.40.

Below is a daily chart of PowerShares WilderHill Clean Energy (NYSE: PBW), which is currently at a critical juncture:

Chart: http://www.investmentu.com/images/iu063009chart.gif

Three Scenarios for the Clean Energy Fund

As you can see, when the stock market bottomed out in March and oil prices retested their lows, PBW’s Clean Energy Fund did the same.

Since then, however, PBW has doubled off those lows to the June 10 high of $11.37. This is right around the swing high of $11.40 that it tested back in November, before it pulled back to the trendline drawn off the March lows.

In addition, the 50-day and 200-day moving averages are very close to crossing one another – a development that sometimes indicates a short-term top.

So what we have here is a relatively clear-cut conclusion…

• A close above $11.40 would be bullish and should lead to higher prices.
• However, a close below the trendline, currently around $10, would be bearish over the short-term.
• A close or two below the 50-day and 200-day moving averages, which are currently around $9.50, could lead to a move down to $8 or lower.

Source: Alternative Energy Investments: Three Scenarios For Clean Energy

But the renewed interest in ethanol proved to be short-lived, as oil retreated back below $20 a barrel just four months later. As a result, many of those smaller ethanol companies within the alternative energy market couldn’t survive.

Flash forward to today, where we’ve seen crude oil prices double in just the past four months. Worldwide oil demand has soared, particularly from fast-growing countries like China and India, and although the global downturn has seen the pace of demand slow, the global economy gets back on track, it should prove even more bullish for oil.

But there’s another sector that should rise, too…

Viable Alternative Energies: The Clean Energy Tracker

With oil prices rising again recently, it’s sparked yet another conversation about the viability of certain alternative energies.

One ETF that tracks the performance of clean energy firms is the PowerShares WilderHill Clean Energy(NYSE: PBW) – a widely traded vehicle that gives you exposure to this still-growing sector in a safer way than investing in individual companies.

While firms like Exxon Mobil (NYSE: XOM) rake in billions of dollars per quarter from oil, PBW invests almost entirely in experimental, technology-focused “green” companies. And while these guys stand to benefit from higher oil prices just like specific oil companies, their success depends more on regulatory changes, subsidies and a global recognition of the need for alternative energy solutions.

The Government Is Helping… But This Industry Still Faces A Battle

When it comes to the alternative energy market, wind, solar, hydroelectric, geothermal, and nuclear power have all received attention over the past couple of years.

But when the oil market first began its march towards record high prices, it was the ethanol industry that took center stage and triggered the wider debate over cleaner energy resources.

However, the ethanol market faces a battle. Despite the government’s intervention and subsidies for the industry, newer technologies are needed in order to make ethanol more viable – and the industry’s companies profitable. A good example is Pacific Ethanol (NASDAQ: PEIX) – a company that Bill Gates invested heavily in a few years ago, paying $12 a share. Today, the stock trades for just 40 cents.

Below is a daily chart of PowerShares WilderHill Clean Energy (NYSE: PBW), which is currently at a critical juncture.

Three Scenarios For The Clean Energy Fund

As you can see, when the stock market bottomed out in March and oil prices retested their lows, PBW did the same.

Since then, however, PBW has doubled off those lows to the June 10 high of $11.37. This is right around the swing high of $11.40 that it tested back in November before it pulled back to the trendline drawn off the March lows.

In addition, the 50-day and 200-day moving averages are very close to crossing one another – a development that sometimes indicates a short-term top.

So what we have here is a relatively clear-cut conclusion…

• A close above $11.40 would be bullish and should lead to higher prices.

• However, a close below the trendline, currently around $10, would be bearish over the short-term.

• A close or two below the 50-day and 200-day moving averages, which are currently around $9.50, could lead to a move down to $8 or lower.

Source: The Alternative Energy Market: Bullish & Bearish Scenarios For NYSE: PBW

When Japan’s so-called “Lost Decade” began with a bang in the early 1990s, she was an “OL” – an office lady – working in one of Japan’s mightiest corporations and she kept her job, despite the downturn.

She was one of the lucky ones. Her employer was a mainstay electronics producer and a key exporter, meaning the company’s business remained reasonably healthy.

This time around, she’s a housewife and mother. And she’s worried. Her husband, Masao, works at a local manufacturer that’s cut back production to only four days a week. He’s taken a part-time job, schlepping boxes overnight at the local convenience store, to make up for the reduced pay. Their son, Daiki, is headed for college – and for an uncertain future.

“I don’t know if I have the strength to go through this again,” she said. “This time, it’s worse,” noting that Japan never really recovered from its “Lost Decade.”

Anatomy of a Lost Decade

Having spent a substantial amount of time in Japan over the past 20 years, I agree and I’m struck with a tremendously foreboding sense of déjà vu that I just can’t shake no matter how hard I try.

What happened in Japan is being replayed in the United States – in exquisite detail, and with a bit of agony, too. Since 2001, I’ve been warning anyone who would listen that the Japanese experience was only a precursor to what we could experience here.

Naturally, that’s been a controversial view, particularly since it’s virtually unthinkable for an entire generation of politicians and financiers who thought they “knew better” and that it could never happen to us.

But lately, it’s not so unthinkable. In fact, if I were to take the names out of the Japanese experience, the story could easily be the one that’s unfolding now.
In the late 1980s, Japanese companies ran the planet. A strong currency, solid work ethic and close government connections created an unstoppable growth machine – referred to by the U.S. media as the “Japanese juggernaut,” or the “Japanese Superman.”

In the interest of additional growth and financial modernization, Japan deregulated its financial markets and began lowering interest rates. Not surprisingly, the Nikkei 225 stock index more than tripled in less than five years, companies blossomed and the use of debt skyrocketed.

Sound familiar?

Then all hell broke loose.

At the same time, real estate values began to waver, the government figured out that the entire Japanese financial system was a house of cards leveraged against collateral that didn’t exist and that wasn’t properly valued in the first place. And the Nikkei has collapsed to where it stands today – at one-fifth the value it had attained in 1989.

Once-stalwart companies began defaulting on loans and many went out of business entirely. Individuals couldn’t repay their debts. Real estate values fell dramatically and today remain as much as 50% below their 1989 peak. People simply turned over the keys to their homes to the banks or, like the family immediately behind our house in Kyoto, simply disappeared in the middle of the night, never to be seen again.

Unemployment rose to an unthinkable 5.5%. Suicides soared. And homeless camps, which Japan had never seen before in the post-war era, go-go years, dotted the banks of the rivers that wind their way through major cities like Tokyo and Osaka. In our neighborhood, the Kyoto city government built a brand new bathroom building for the children’s playground only to watch as a troop of six homeless men moved in – and refused to leave for the next four years. We also watched ubiquitous, blue-tarped “houses” appear under each bridge spanning the scenic Kamo River.

They disappeared when Japan’s economy improved in the late 1990s, or early this decade. They’re back now.

Making matters far worse, at the same time all of this was happening, deflation set in with a vengeance and brought matters full circle. Lower prices meant lower margins. Lower margins meant lower production and the need for lower production, in turn, created the need for smaller work forces.

Fast forward to today.

A Painful Replay

This same downward spiral that played out in Japan in the early 1990s seems to have taken hold here in the United States. Economists called this “excess” capacity and said that a short period of readjustment would be followed by new growth. But instead, they’ve gotten just more misery punctuated by a few fits and starts of economic recovery. And the resultant record job cuts hardly point to an imminent turnaround.

Even so, many people here in the United States remain in denial. They simply cannot accept that what happened in Japan appears to be replaying itself out here. They reason that our government is taking more aggressive action than the Japanese government did, that our corporations are better managed, that somehow they’ll pull through based on demand and, my personal favorite, that our bubble simply wasn’t the same as Japan’s.

They’re right … it’s worse.

According to a report in the Global Mail, in 1989 the Japanese economy needed a mere three yen of credit to make one yen of national income. Here in the United States, we’ve needed $8 dollars of credit for every $1 dollar of national income. And we may need more. In Japan, the “bubble” grew for only a few relatively intense years from 1985-1991. Here in the United States, it’s been allowed to fester for 30 years.

When the Japan’s bubble broke, it was a creditor nation, which means, overall, there was more money flowing into Japan than out. At the time, Japan had $1 billion surplus on any given day.

When the U.S. financial crisis started, this country was running a $2 trillion deficit, meaning we’ve spent that much more than we earn as a nation. Now, factoring in the stimulus plans and all sorts of bailouts, we’re arguably approaching $14 trillion.

In 1990, the Japanese were saving 17% of their income. At the moment, Americans have practically no savings to fall back upon and our savings rate has, in fact, gone negative several times in recent years (however, some reports indicate that U.S. savings rates have risen in recent months).

But what really makes me stop and think twice is this: At the time Japan’s bubble burst, the island nation still had extensive trade with its partners, and consumers around the world were spending. So there was a cushion. This time around, spending has ground to a halt and there literally is no safety buffer.
Just last week, in fact, Money Morning reported that Japan’s exports were cut nearly in half last month as the global downturn crushed demand for the country’s electronics and automobiles, a development that increases the odds that the Japanese yen could be poised for a tumble.

That, more than any reason is why the U.S. government – right or wrong – has stepped in to become the risk taker of last resort.

While that may actually be a good thing from the standpoint of intent, it hasn’t been great from an execution standpoint.

In as much as the U.S. stimulus programs being enacted by central bankers around the world will eventually take hold, that suggests that investors should continue to invest – albeit super selectively – throughout this mess in a couple of areas:

• Bond markets are especially overbought and I can’t think of more spectacular profit potential particularly at the long end of the spectrum. The U.S. government may borrow as much as $3 trillion dollars in 2009 alone, and it’s likely rising rates are not far behind.
• The Japanese yen itself seems ripe for a fall, so shorting both the Japanese markets and the yen itself may wind up being an outstanding choice, especially once the reality of falling global demand sets in.
• And, of course, infrastructure. Despite the fact that the world is pulling in its horns, the infrastructure we use is not getting any younger particularly with regard to electricity. Even if expansion plans are put on hold, existing grids will require repair and constant upkeep. The last thing any government will let happen is a complete collapse of the power grid, because it would mean the end of civilization as we know it, thanks to the social chaos that would ensue.

Source: Although Experts Said it Could Never Happen, U.S. Crisis Looking Like a Repeat of Japan’s “Lost Decade”

Japanese exports fell by 45.7% in January from a year ago – the steepest decline since 1957 – as exports to three of Japan’s biggest overseas markets fell by record levels. Exports to the United States fell by 52.9%, exports to Europe declined by 47.4%, and exports to Asia dropped by 46.7%, Japan’s Ministry of Finance reported.

The sharp drop in exports has had a crushing impact on Japan’s trade deficit, which grew for a fourth straight month to a record $9.84 billion (¥952.6 billion). But the impact on the nation’s leading corporations has been even more devastating.&

Many Japanese blue chips, such as Toyota Motor Corp. (ADR: TM) and Sony Corp. (SNE), have been saddled with plummeting profits and forced to reduce capital expenditure and employment.

“The pressure on companies to cut jobs and investment is rising and that will make the recession deep and protracted,” Yasuhide Yajima, a senior economist at NLI Research Institute, told The New York Times.

While automakers General Motors Corp. (GM) and Chrysler LLC have been emasculated by rising unemployment and slumping confidence in the United States, Japanese carmakers are faring little better. Japan’s auto exports, which account for 20% of all the country’s exports, plunged 66% from last year.

Toyota, the world’s biggest automaker, said earlier this month that it would likely post a $4.9 billion (450 billion yen) operating loss for the year ending March. The company has never before posted an annual loss.

Toyota said earlier this month that it would cut pay for factory executives and eliminate bonuses for all salaried production unit staff. The company has also created an optional program for assembly workers who wish to leave voluntarily and offer voluntary buyouts to plant workers in North America.

Toyota has slashed global production by 43% last month, the most since 1987.

Meanwhile Sony posted a loss of $19.9 million (17.96 billion yen) for its fiscal third quarter ended Dec. 31, with net profit falling 95%. The company has forecast an annual operating loss of $2.9 billion.

Japan’s gross domestic product (GDP) shrank at an annual 12.7% pace in the fourth quarter of 2008, and the unemployment rate jumped half a point to 4.4% in December.

“My friends tell me that factories in the normally highly industrialized Osaka area have shifted to 15-day-a-month production schedules, and many salary men (Japan’s iconic office superheroes) are being encouraged to seek ‘arubaito‘ – or part-time work – to make ends meet,” said Money Morning Investment Director Keith Fitz-Gerald. “And those are the people who are still fortunate to have jobs.”

Shorting the Yen

In addition a dearth of global demand for its products, Japan has also been plagued by a rising yen, which has made its products more expensive to foreign countries. However, the yen has quickly reversed course with deterioration of Japan’s economy.

The yen has tumbled 6.4% against the dollar this year, according to Bloomberg News. Last year, bolstered by its safe haven status, the currency rose the most of 171 currencies tracked by Bloomberg, climbing 23% versus the dollar and 29% against the euro. The yen has traditionally been viewed as one of the world’s “safe haven” currencies.

“With Japan’s trade data deteriorating sharply now, the Japanese yen is finally following suit,” Mansoor Mohi-Uddin, chief currency strategist at UBS AG (UBS) wrote in a note to clients yesterday (Wednesday). “Japan’s currency potentially has a lot further to slide if investors stop perceiving the yen as a safe haven and trade the currency instead on Japan’s worsening export numbers.”

Bob Parker, who helps oversee $600 billion as chairman of Credit Suisse Asset Management (ADR: CS) in London, told Bloomberg that there’s a “reasonable probability of a breakout” that will drive the yen down 3% to 100 per dollar.

“That’s why shorting the yen may wind up being one of the most fundamentally successful investment choices we can make in today’s mad markets,” said Money Morning’s Fitz-Gerald.

Japan’s Exports are Halved by Crisis, Boosting the Odds for a Drop in the Yen

Money Morning first reported in January, that China was building stakes in some of the world’s largest natural-resource companies, which have been made vulnerable by depressed commodities prices, tumbling profits and falling stock prices. In the scant few weeks since that Money Morning report was published, Aluminum Corp. of China Ltd. (ADR: ACH), or Chinalco, has invested $19.5 billion in Australian/British mining giant Rio Tinto PLC (ADR: RTP), and China Minmetals Corp. acquired Australian zinc miner Oz Minerals Ltd.

China Development Bank has been particularly active. Earlier this week, the bank lent $15 billion to OAO Rosneft Oil Co., Russia’s state-owned oil company, and $10 billion to the Russian state pipeline monopoly Transneft (PINK: TRNFF). In return for the needed financing, Russia agreed to supply China with 15 million tons of oil annually for 20 years.

China Development Bank struck a similar deal with Petrobras Friday, agreeing to loan the Latin American energy giant $10 billion to help finance deepwater oil exploration off the coast of Brazil.

Oil exploration will be carried out with the participation of Sinopec (ADR: SHI), the Chinese state oil company, the Macauhub reported.

The contract will be finalized within the next two months so it can be signed when Brazilian President Luiz Inácio Lula da Silva visits China in May, according to Petrobras Chief Executive Officer Sergio Gabrielli.

In addition to the exploration partnership, the deal signed between Petrobras and Sinopec includes the supply of 60,000 to 100,000 barrels of oil per day in the current year. Petrobras also signed a memorandum of understanding with state company China National Petroleum Corporation (CNPC) for the supply of 40,000 to 60,000 barrels per day.

Brazil is necessarily the country that comes to mind when taking inventory of the world’s top oil producers. It currently has about 12 billion barrels of proven reserves, but that figure could grow substantially now that a number of very rich deposits have been found off Brazil’s shores.

Petrobras happened across the second-largest oil find in two decades last year when it found between 5 billion and 8 billion barrels of untapped light oil in the Tupi basin. Even more impressive are the unofficial figures from a new reservoir, known as Carioca. That field could hold 33 billion barrels of oil and gas, which would make it the world’s largest discovery in at least 32 years.

With discoveries like these Brazil, currently ranked 13th on the list of the world’s top oil producers could, could easily move into the top ten.

The only problem with the Tupi and Caricoa oil fields is production costs. The Carioca discovery, for instance, is located 170 miles offshore, more than 6,000 feet under the surface of the water, and is trapped beneath a shelf of salt 500 miles long and 125 miles wide.

Developing oil fields such as these will be very costly and with crude oil trading below $40 a barrel financing is imperative. In that sense China couldn’t have timed its investment in Petrobras any better.

Petrobras said it plans to invest $174.4 billion from 2009 through 2013, compared with the $112.4 billion planned for investment for 2008-12. The company will invest $28.6 billion in 2009 alone.

In 2008, trade between China and Brazil totaled $36 billion making China Brazil’s second largest trading partner.

Source: China Continues its Commodities Binge with Brazilian Oil Deal

• The Securities and Exchange Commission yesterday (Tuesday) charged Texas financier R. Allen Stanford and three of his firms with a “massive” fraud that centered around high-interest-rate certificates of deposit, and raided some of the companies’ offices, MSNBC reported.  In a complaint filed in federal court in Dallas, the Securities and Exchange Commission alleged Stanford conducted a fraudulent investment scheme in an $8 billion CD program that promised “improbable and unsubstantiated high interest rates.”

• Trump Entertainment Resorts Inc. (TRMP), the three Atlantic City casinos once run by Donald Trump filed for Chapter 11 bankruptcy protection yesterday (Tuesday) – for the third time. Trump was frustrated that bondholders and their allies on the board rebuffed his offer to buy the company and take it private. “Other than the fact that it has my name on it – which I’m not thrilled about – I have nothing to do with the company,” Trump told The Associated Press.

• American Express Co. (AXP) and Capital One Financial Corp. (COF) fell in trading yesterday (Tuesday) after they reported overdue loans and payments increased in January.  American Express, the biggest U.S. credit-card company by purchases, said defaults on loans packaged into securities rose to 8.29% from 7%, while payments at least 30 days overdue climbed to 5.28% from 4.86% in December. Capital One said that defaults rose to 7.82% and late payments reached 5.02%, Bloomberg reported.

• Wal-Mart Stores Inc (WMT) posted profits that beat Wall Street forecasts, and said it expects to outperform rivals as the global downturn forces shoppers to seek low prices, Reuters reported. Fueled by sales at its namesake U.S. discount stores, Wal-Mart has been outpacing competitors like Target Corp. (TGT) and Costco Wholesale Corp. (COST), as well as lower-priced department stores like J.C. Penney Company Inc. (JCP), in recent months as consumers stretch limited budgets by shopping its stores for necessities like food and medicine.

• Four executives at Research in Motion Ltd. (RIMM), the maker of the Blackberry phone, agreed to pay more than $2.2 million to settle claims by U.S. regulators that they backdated stock options for eight years, Bloomberg reported. The executives agreed to pay fines totaling $1.4 million and return more than $840,000, which represents the value of the backdated options they had exercised, the Securities and Exchange Commission said. By backdating options, companies retroactively change grant dates to periods when share prices were lower, boosting recipients’ profits while potentially distorting earnings.

• U.S. oil prices fell more than 7% yesterday (Tuesday) below $35 a barrel, as grim economic indicators battered markets and raised concerns about slumping demand, Reuters reported.  U.S. crude for March delivery fell to $34.82 a barrel, down $2.69 from Friday’s close. London Brent crude for April delivery dropped $1.91 to $41.37 a barrel. A report that eastern Europe’s economic slump will further drag down Western banks raised fears that emerging economies will deepen the recession in the U.S.

Source:Global Investment News Briefs Wednesday, February 18th, 2009

It’s an important question for any investor if they plan on making any long-term investment decisions during this global downturn.

Financial newsletter writer John Mauldin gives us a big clue of what’s to come in an article he wrote earlier today…

One of the best gauges of an economy is tax collections. No one pays taxes unless they have to, so collections are a real-world, real-time analysis of the US economy. And the best source I know of for tracking taxes is The Liscio Report, by Philippa Dunne & Doug Henwood.

Tax collections are down. Philippa and Doug give us the actual numbers, which are not pretty. Bottom line? “What does this all mean? It suggests that the consumer retrenchment in this recession will be deep and long, and will probably continue into any recovery. The American consumer is no longer the world consumer of last resort, and that’s an enormous change for both this country and the rest of the world to get used to.”

(You can learn more about the Liscio Report at www.theliscioreport.com.)

If American consumers are spending less, this means the world’s savers (Asians) would have to become spenders (like Japan did during its “Lost Decade”) for the global economy to rapidly rebound.

But Chinese exports were down 17.5% in January. And imports were down 43.1%.

And down from the double-digit GDP growth rates earlier this decade, Chinese GDP grew only 6.8% last quarter (which means recession in China).

China has already shed 20 million jobs (with estimates from the Telegraph.co.uk of50 million more on the way). And Beijing is implementing its $586 billion to stimulate its own economy.

So if China isn’t selling an increasing amount of goods and its consumers are buying less, then how could China keep the world economy from shrinking?

It won’t.

The reality is that China (and Asia in general) is far too export reliant, and the U.S. is far too import reliant. And as long as this imbalance exists, it’s going to be difficult for the global economy to recover.

That means making mid-term market bets on shaky emerging-markets might be a real nice (and easy) way to lose money.

Instead, what you want is steady-eddy income from stable, cash-rich American companies that have virtual monopolies… companies like Microsoft (NASDAQ:MSFT).

Microsoft is a solid company because…

• It holds $20 billion in cash and only $2 billion in debt. Refinancing isn’t an issue. And it has plenty of cash to make it through a downturn and pay shareholders dividends.

• The Windows Vista operating system replacement, Windows 7, is due out by January of 2010. I’ve personally tested the beta, and it’s leaps and bounds better then Vista. There’s been a lot of positive hype around this release, too. So Microsoft should do very well once it hits the market.

Microsoft is a virtual monopoly! Its operating system was the choice of 89.6% of Web users in 2008. Any new upgrade means hundreds of millions buyers will buy

It’s not going to be tough work getting through the next few years of an underwhelming economy. But by holding a strong company like Microsoft, you’re assured that your money is in a safe place and will grow in the years ahead.

Stay free,
Charles

This from Money Morning:

If you’re an emerging-markets investor, and you happened to peruse the study that the Institute for International Finance released this week, you must’ve experienced alarm – if not panic. The IIF expects the inflow of private funds into these markets to plunge to only $165 billion this year – an amount that’s just 18% of the $929 billion that flowed into these very same markets in 2007.

For investors, the message is clear: We’d better concentrate on those emerging markets whose inhabitants have hefty piggybanks of their own.

The details of the investment slowdown are as alarming as the headline. Bank loans to emerging markets will decline from an inflow of $165 billion to a net outflow of $61 billion. Private non-bank debt investment will decline from $125 billion to $31 billion, and even official flows will decline from $41 billion to $29 billion.

Net portfolio equity investment will remain negative, though the outflow will be only $3 billion compared to 2008’s $89 billion. Only direct foreign investment will increase, rising 12% from 2008 to $195 billion.

In terms of regions, emerging Europe will suffer worst, with inflows plummeting from 13% of regional gross domestic product (GDP) in 2007 to just 1% in 2009. Latin America will also suffer, with inflows dropping from 11% of regional GDP to 3%.

Overall, inflows to emerging markets will drop by 5.8% of emerging market GDP between 2007 and 2009 – almost double the declines of the late 1990s crisis (3.7% of emerging market GDP) and early 1980s (3.2%). Emerging market cash flows will also be affected by the need to repay $223 billion of private market debt this year.

This will cause a reordering of the economic pecking order in the emerging markets.

From 2003 to 2007, the availability of natural resources and/or cheap labor was more important than high foreign reserves or a big domestic savings base, so Argentina (natural resources) and emerging Europe (cheap labor, relative to the EU average) did well. In 2009, access to capital will be more critical than either of those other strengths. Countries without a large domestic savings base, or with substantial balance-of-payments deficits, or with low foreign exchange reserves, are likely to suffer badly.

Many emerging Europe countries have balance of payments deficits exceeding 10% of GDP so will suffer badly. Within that region, the Baltic states – fairly uncorrupt and friendly to foreign investment – will do much better than Romania and Bulgaria, which are both corrupt and xenophobic.

In Latin America, Brazil has an excellent domestic savings base, which it has been nurtured by policies that keep interest rates much higher than the rate of inflation. It is also quite friendly to foreign direct investment. Hence, in spite of its high foreign debt, Brazil should do fine.

Conversely, Mexico has a lower domestic savings base, relies heavily on remittances from Mexicans in the United States (which have declined sharply) and is quite hostile to foreign investment, particularly in the energy sector. Hence it is likely to have a tough year.

In Asia, China – with huge domestic savings, $1.95 trillion in foreign exchange reserves, and low foreign borrowing – will do fine. Conversely, India’s high domestic savings are offset by a profligate government, which runs a wasteful deficit of more than 10% of GDP. Hence India is quite reliant on foreign borrowing, and is likely to have problems.

For investors, the message is clear. Our emerging markets investments must be concentrated in countries that will not be badly affected by the decline in foreign capital inflows, preferably where domestic savers have piggybanks that are large enough to fund expansion locally. In particular, without delving into particular stocks, the following country-specific exchange traded funds (ETFs) are worth looking at:

• The iShares MSCI Brazil Index (NYSE:EWZ) has net assets of $3.4 billion, a Price/Earnings (P/E) ratio of 7.0, and a dividend yield of 6%. Money Morning Contributing Editor Horacio Marquez recently recommended this Brazilian ETF in this weekly “Buy, Sell or Hold” series.
• The iShares MSCI Chile investable index (NYSE:ECH) has net assets of only $112 million and a P/E of 13. However, Chile is interesting because it built up a reserve fund of $21 billion (12% of GDP) during the years when copper prices were high – it is thus not dependent on foreign-fund inflows.
• The iShares FTSE/Xinhua China 25 Index (NYSE:FXI) invests in the 25 largest Chinese companies. Net assets are $5.9 billion, its P/E ratio 10, and its yield 2.7%.
• The iShares MSCI Taiwan Index (NYSE:EWT) has net assets of $1.3 billion, a P/E of 9 and a yield of 8%. Taiwan is highly liquid, with large reserves, a high savings rate and almost no foreign debt
• The iShares MSCI Singapore Index (NYSE:EWS) has net assets of $800 million, a P/E of 9 and a yield of 8%. Like Taiwan, Singapore is highly liquid, with large foreign exchange reserves and little debt. Taiwanese and Singapore companies may indeed benefit from the liquidity crunch by finding attractive investment opportunities in regional cash-short emerging markets with high growth potential, such as Vietnam.

Source: The Five Most Promising Emerging Markets ETFs for 2009

For investors in survivor mode, the report may be interpreted as an investment roadmap with a relatively safe course.

The report, titled Global Employment Trends, is an annual survey from the International Labour Office (ILO), arm of the U.N that brings together governments, employers and workers to jointly shape policies and programs for fair and humane employment practices.

Based on new developments in the labor market, the report says global unemployment in 2009 could increase over 2007 by a range of 18 million to 30 million workers, and more than 50 million if the situation continues to deteriorate.

The ILO also said that in this last scenario some 200 million workers, mostly in developing economies, could be pushed into extreme poverty.

The lowest unemployment rate was observed in East Asia at 3.8%, followed by South Asia and South-East Asia & the Pacific where respectively 5.4 and 5.7% of the labor force was unemployed in 2008, according to the ILO.

As per the report, three Asian regions – South Asia, South-East Asia & the Pacific and East Asia – accounted for 57% of global employment creation in 2008. In the Developed Economies and European Union region, 900,000 jobs were lost in 2008.

Compared with 2007, the largest increase in a regional unemployment rate was observed in the Developed Economies and European Union region, from 5.7 to 6.4%. The number of unemployed in the region jumped by 3.5 million in one year, reaching 32.3 million in 2008.

In looking at the breakdown of the Asian regions identified in the report, we see countries where cheap labor abounds. While this may not be the best possible news for the ILO, the lower unemployment rates in Asia could show an acceleration in outsourcing – not just from the industrialized West, but from mature emerging markets such as China and India.

For example, South Asia consists of India, Pakistan, Bangladesh and other countries. Pakistan’s large-scale manufacturing efforts have stumbled over the past few years due to rising commodity costs. Now that commodity prices have plunged, and manufacturers seek out lowest cost providers, Pakistan could see a turning point in this sector.

Bangladesh, meanwhile, has seen exports rise 60% since 2004. It is now the second largest exporter of apparel to the U.S. market after China.

Southeast Asia consists of Cambodia, Laos, Myanmar, Thailand, Vietnam and Malaysia. Given their proximity to China and India, these countries could see trickle-down business as the two emerging-market giants move away from knock-offs to creating original intellectual property.

In East Asia, the countries to watch for growth are Hong Kong, Macau, Japan and South Korea. Although the global recession has certainly put a damper on these fast-growing economies, the investment returns from these regions could outpace industrialized countries based the ILO’s employment numbers.

This could be a prudent time for investors to investigate ETFs and other funds that get you into these markets without the risk of cherry picking stocks.

This from Rude Awakening:

Welcome to “The Great Suppression.” The government keeps trying everything it can to suppress the unfolding economic bust. Whether the Great Suppression succeeds or not is beside the point. What concerns us is that its actions will have consequences in the marketplace. And as investors and speculators, we have to think about what those might be.

It’s sometimes uncanny how history repeats itself. Historian Frederick Lewis Allen writes about the New Deal of the 1930s in his book The Big Change: “It rewrote a good many of the rules of the economic game as played in America.” The steps the government took resemble what’s happening now an awful lot.

“The New Deal,” Allen continues, “continued to prop up ailing corporations through Hoover’s RFC; made arrangements to prevent near-bankrupt firms from going broke; aided farm owners and homeowners in meeting their mortgage payments; underwrote the financing of new housing enterprises; insured bank deposits…” And on and on.

It also went into the business of stimulating the economy directly by “building dams, bridges, parkways and playgrounds on a grand scale.” If FDR walked the Earth again, Obama’s stimulus would look familiar.

Over the weekend, we got more details of Obama’s stimulus plan, which comes with a price tag of at least $820 billion (and climbing). Some of the projects of interest to us include:

• Renovate 10,000 schools
• Build more than 3,000 miles of new or modernized transmission lines and install 40 million “smart meters” in homes
• Weatherize at least 2 million homes and 75% of office buildings
• Launch 1,300 wastewater projects, 380 drinking water projects and 1,000 rural water and sewer system projects
• Repair and modernize thousands of miles of roadways.

“Shovel ready” is the hot new phrase in Washington these days. It means a project is all set to go as soon as the money arrives. The list of projects for Obama’s plan are shovel ready — so they say. As soon as Congress approves the deal, the money goes right to work, like a needle sticking into a vein.

Our infrastructure stocks have been among our best performers over the past year.

Insituform Technologies (Nasdaq:INSU), for instance, continues to announce new contract wins. (See Rude Awakening from July 23, 2007 – Pipe Down!) The company repairs water and sewer pipes with a trenchless technology that does not require you to dig up the pipes. We’re up about 37% on that, a welcome spot of green in what has otherwise been a tough row.

Ameron Intl. (NYSE:AMN) is another infrastructure play. It has a water pipe business, which ought to benefit from the slew of water projects. Scott Black, of Barron’s Roundtable, had Ameron as one of his stock picks for the year. “In Arizona, Nevada and California, a lot of shovel-ready water projects are waiting for a go-ahead,” Black said.

“Ameron makes wind towers, too, and infrastructure products. It owns 50% of Tamco, which makes steel rebar for highways, bridges and overpasses.”

He also pointed out Ameron’s good backlog. “For each $100 million incremental increase in revenue under an infrastructure bill, based on 22% margins, they’d make $15.3 million after taxes,” he says. “Ameron… is cheap based on both tangible book value and expected earnings. It’s an interesting way to play a pickup in infrastructure in California and the West.”

Others in our portfolio that may see some increase in business thanks to the swell of money from Obama’s bill include Gorman-Rupp (AMEX:GRC). I updated this one in your last issue. GRC makes a variety of pumps. It has exposure to a number of markets affected by the stimulus plan, including municipal water and wastewater systems.

I like Gorman-Rupp for a lot of reasons, as I outlined in the issue. Chief among them is a rock-solid balance sheet — excess cash and no debt — and a good long-term track record. While not stone-cold cheap at 16 times earnings, it’s not a bad price to pay for an unlevered business earning a steady (and resilient) 16% return on capital with good growth opportunities in front of it.

Viterra (TSE:VT), as I mentioned in this column last week (”Investing in Food“), is another very compelling investment. The company, which operates in various aspects of the Canadian grain handling and agribusiness, posted very impressive numbers in the fourth quarter.

In a year which most would rather forget, Viterra’s business shined. For the year, it booked $1.31 in earnings, up 56% from a year ago, thanks to closing the (brilliant) acquisition of Agricore. At today’s price of $9.25, Viterra trades for only 7 times earnings. You’re not going to find many companies putting up those numbers available at 7 times earnings — and Viterra is financially strong.

Viterra generated $400 million in free cash flow in 2008. That on a market cap of just over $2 billion, for a 20% free cash flow yield. There is a lot of room for error when you buy stocks at those kinds of valuations. And the outlook here is still bright if you believe agriculture markets will be strong, as I do.

In today’s Financial Times, there was a story on a new report from the London-based think tank Chatham House. As the FT reports: “The world faces ‘the real risk of a food crunch’ if government does not take immediate action to address the agricultural impact of climate change and water scarcity… ‘Food prices are poised to rise again.’”

This is something I’ve been writing about here and in C&C. I think we’re looking at a strong back half of the year for grain prices as global grain stocks fall. That will be good for a lot of our ag-related names, including Viterra, but also for our irrigation play Lindsay Corp. (NYSE:LNN). (See Rude Awakening from July 4, 2007, “The Most Dangerous Religion.”) The latter is another nice pickup here, with no net debt and trading for less than 10 times earnings.

Irrigation and fertilizers play a big role in boosting yields and producing more food. Viterra, a sort of toll road on grain traffic, also benefits. For now, these stocks look cheap. But the market won’t be able to ignore the numbers as we roll through 2009. Good results and rising grain prices will attract attention.

Already, wheat, corn and soybeans are up 15%, 17% and 22%, respectively, since December. As the FT notes: “In contrast with other raw materials such as oil or aluminum, which have plunged back to the levels of 2002-2005, agricultural commodities are trading higher than they were 12-18 months ago.”

As I write, the S&P 500 is down about 8% in the month of January. Barring a rally, we’re on pace for the worst January on record for the S&P 500 since 1970, when the S&P fell 7.7%. I pass this onto you so you appreciate the historic nature of this market we are in. It’s been difficult to show any gains investing on the long side.

But when you invest in good names with valuable assets and quality businesses, their stock prices will – eventually – reflect the good things going on under the hood.

Source: The Great Suppression