I call them the “zombies,” the institutions being propped up by government bailouts. Companies like Citigroup Inc. (NYSE: C), Bank of America Corp. (NYSE: BAC), General Motors Corp., Chrysler LLC, etc. On an operating level, these walking dead are sucking the life out of the recovery.

Unlike in previous downturns, huge resources have been devoted to propping up entities that should have been taken out of the picture.

Of course, it’s easy to avoid zombies directly. No one is going to force you to take a position in GM. But if you really want to know where to look for the bargains – for companies that have the greatest potential for serious growth in real numbers and real markets – you need to look for what I call “zombie-free zones.”

Unfortunately, the United States and the United Kingdom are not “zombie-free” zones – and thus offer the worst hunting ground available right now.

If you’re looking for something solid, there are only three places to aim your portfolio. In fact, my top three picks are…

Germany, Korea, and Canada.  All have an abundance of companies you can invest in with at least a good chance of not being forced to compete with the undead.

The Problem with Zombies

You see, the problem with zombie banks and companies is that they soak up resources that should be devoted to living banks and companies, while providing unfair competition that makes their competitors unsound.

It’s difficult to see this effect at the moment, because the U.S. Federal Reserve is propping up the banking sector. It’s much clearer in the automobile sector, where the zombies GM and Chrysler make it more difficult for Ford Motor Co. (NYSE: F) to compete. There’s no question that the continued existence of Chrysler after its first non-bankruptcy in 1979 drastically weakened Ford in the 1980s and 1990s.

There’s the effect on wages too. The United Auto Workers (UAW) union is a huge supporter of the GM and Chrysler rescues, partly because they keep UAW members employed at above-market wage rates. One certainly can sympathize with the great many American autoworkers that have lost their jobs, but by keeping the sector over-employed, the government is driving up wages and hurting businesses – particularly Ford, the only member of Detroit’s “Big Three” to not ask for a bailout.

The same effect can be seen in the banking sector. The bonus pool at JPMorgan Chase & Co. (NYSE: JPM) is partly inflated by the continued employment of all the Citibankers who should have lost their jobs. Since banking pay scales got over-inflated during the bubble, it is reasonable now for them to come back down to earth, but that’s not going to happen while banks are in their current undead state.

Turning to the international market, it is immediately clear that Britain has the same problem as the United States, only on a larger scale. Royal Bank of Scotland Group PLC (NYSE ADR: RBS) and Lloyds Banking Group PLC (NYSE: LYG), two of Britain’s largest banks have been kept open by the government. (Though, to be fair, Lloyds only got in trouble because the government made it acquire another failing bank, HBOS.)

Financial services is a huge part of Britain’s economy, which needs to diversify, but it won’t be able to diversify if so much of its talent is locked up in banking, and its best graduates are sucked into the high-paying dealing rooms of the City of London.

Japan has the same problem. Here the zombies are really ancient, cobwebbed skeletons left over from the 1990 collapse of Japan’s bubble. Some of them were put out of their misery by Junichiro Koizumi, the reformist prime minister, in 2003. Yet just this week we learned that many Japanese retailers face losses because of competition from The Daiei Inc. and Ito-Yokado Co. Ltd., gigantic retailing companies that were effectively bankrupt in 1993 but have been propped up by Japan’s banks. If you’re afraid of zombies, Japan is really creepy!

Historically, Europe is the continent where investors have suffered most from zombies propped up by governments. Certainly some countries, notably Italy, are attractive only for investment necrophiliacs.

Where to Find “Zombie-Free Zones”

There are some exceptions. Germany has only a few relatively small zombies. Both Sachsen LB and IKB Deutsche Industriebank AG, the banks that got in trouble buying U.S. subprime mortgage-backed bonds, have been sold to other buyers – Sachsen to a larger Landesbank and IKB to the private equity group Lone Star Funds. Whatever their subsequent fate, those banks are currently being managed on a profit-maximizing basis.

There is a large older zombie, Hypo Real Estate Holding AG, the former Bayerische Hypothekenbank, which got in trouble in the late 1990s lending to real estate in the former East Germany, but that appears an isolated example. Industrially, Germany has been admirably rigorous in cleaning up its dead companies, and with its new pro-market government looks attractive for zombie-fearing money.

In Asia, South Korea is probably your best bet. The country had a big zombie problem ten years ago, but that problem has been cleared up with the bankruptcy and reorganization of several conglomerates and much of the banking system. This time around, there have been few major casualties and so the economy looks relatively zombie-free.

Finally, there is our northern neighbor, Canada. Canadian housing never became as over-extended as U.S. housing, and the Canadian bank bailout was correspondingly smaller, with none of the banks facing bankruptcy. Canada had a bad zombie problem fifteen years ago from decaying heavy industry, but today those zombies are long gone and the Canadian economy is resilient. The most recent bankruptcy, Nortel Networks Corp. (OTC: NRTLQ) in Jan. 2009, is being handled in a thoroughly market-oriented fashion, with its assets being sold off piecemeal. So your money is safe in Canada – lots of snow, but no zombies!

Source: Why You Need to Look at these Three ‘Zombie-Free Zones’

• Nobel Prize-winning economist Paul Krugman said the United States needs to take aggressive economy-stimulating action or risk facing a lost decade of growth a la Japan in the 1990s. “We’re doing half-measures that help the economy limp along without fully recovering, and we’re having measures that help the banks survive without really thriving,” Krugman told reporters in Beijing, Reuters reported. “We’re doing what the Japanese did in the 90s.”

• European Central Bank President Jean-Claude Trichet said he and fellow policy makers are seeing the first signs of economy recovery. Recent reports are “encouraging, but it’s no time for complacency,” Trichet said at a meeting of global banks, Bloomberg reported.

• AstraZeneca plc’s (NYSE ADR: AZN) heart drug Brilinta beat blockbuster drug Plavix – of Sanofi-Aventis SA (NYSE ADR: SNY) and Bristol-Myers Squibb Co’s (NYSE: BMY) – in one of the largest comparative head-to-head drug studies, Reuters reported. Plavix alone nets about $8 billion and if approved, Brilinta would take a large portion of that.

• Intel Corp. (NASDAQ: INTC) may have to pay an antitrust fine of more than 1 billion euros ($1.36 billion) and stop giving discounts to computer sellers. The company faces awaits the decision of the European Commission on charges that it has been muscling competitors out of the European market, Bloomberg reported.

• General Motors Corp (GM) is open to moving its headquarters from Detroit. The company also may sell some of its U.S. plants and renegotiate its restructuring plan with unions as it heads toward probable bankruptcy, GM Chief Executive Officer Fritz Henderson said yesterday (Monday), according to Reuters. Henderson it was more likely that GM was headed for bankruptcy by June 1 – the U.S. government-imposed deadline for the automaker to restructure.

• Microsoft Corp. (NASDAQ: MSFT) plans to sell $3.75 billion of debt in its first bond offering, taking advantage of its top credit ratings to help fund a share buyback and technology investments.  The world’s largest software maker, whose shares have declined 34% in the past year, is seizing on a credit-market rally to help fund a $40 billion stock repurchase program. The company is also investing in data centers to compete against Google Inc. (NASDAQ: GOOG) in Internet search, Bloomberg reported.

• Dish Network Corp (NASDAQ: DISH) posted better-than-expected profits on Monday and lost fewer subscribers than most Wall Street analysts had forecast, sending its shares soaring, Reuters reported. U.S. satellite TV provider Shares rose as much as 21.5 percent in afternoon trading on the Nasdaq on the lower customer losses and indications that the company had started to get control over a long-standing problem with piracy with its set-top box software.

• Nortel Networks Corp (OTC: NRTLQ), North America’s biggest maker of telephone equipment, said yesterday (Monday) its quarterly loss widened as the global recession contributed to a 37% drop in revenue, Reuters reported.  Nortel, which filed for bankruptcy protection earlier this year, also said it is completing plans to decentralize some functions at each of its four main businesses to give it more flexibility as it decides which divisions to sell.

Source: Investment News Briefs Tuesday, May 12, 2009

• Nortel Networks Corp. (NRTLQ) said it plans to slash 3,200 jobs as part of the company’s efforts to climb out of bankruptcy protection. “With the unprecedented economic environment and resultant impacts on revenues, significant changes are required to regain our financial footing,” Chief Executive Officer Mike Zafirovski said in a statement, Bloomberg reported. “Tough decisions are being made to restructure the company and work towards a successful emergence from creditor protection.”

• Seed and fertilizer producer Agrium Inc. (AGU) made an unsolicited $3.6 billion bid for CF Industries Holdings Inc. (CF), a nitrogen and phosphate fertilizer producer. The $72-a-share proposal is 30% more than CF’s Tuesday closing price, and is a shot to dissuade CF from buying rival Terra Industries Inc. (TRA), Bloomberg reported.

• Ambac Financial Group Inc. (ABK) posted a $2.34 billion, or $8.14 a share, fourth-quarter loss. The bond insurer set nearly $1 billion aside for losses tied to residential mortgage debt, Reuters reported.

• U.S. President Barack Obama yesterday (Wednesday) nominated former Washington State Gov. Gary Locke – a Democrat with strong ties to China – as his choice for U.S. Commerce Secretary, the Voice of America reported. Locke, the son of Chinese immigrants, served two terms as Washington’s governor, making him the first Chinese-American governor in the United States. Locke was a strong proponent of trade with China during his time in office, and led several trade missions to the country. Two prior candidates withdrew – one over an ethics probe and the other over political differences with the new president

• Crude oil continued to rise yesterday (Wednesday) climbing $2.54, more than 6%, to settle at $42.50 a barrel on the New York Mercantile Exchange. The rally came after gasoline inventories showed a 1.7% rise in demand.

• The San Francisco Chronicle, founded during the gold rush of the mid-19th century, could be shut down, Reuters reported. The paper lost more than $50 million last year and this year’s losses to date are worse, according to its owner, Hearst Corp. “Survival is the outcome we all want to achieve,” said Hearst Corp Chief Executive Frank Bennack Jr. “But without the specific changes we are seeking across the entire Chronicle organization, we will have no choice but to quickly seek a buyer for the Chronicle or, should a buyer not be found, to shut the newspaper down.”

Source: Global Investment News Briefs Thursday, February 26, 2009