Since the stock market rally reached a pinnacle nearly two weeks ago, the Dow Jones Industrial Average has lost about 3.3% while the Standard & Poor’s 500 Index has fallen about 3.7%. And if this week’s earnings report come in below expectations, the rally that helped stock prices surge more than 50% could come to an abrupt end.

Fortunately, many of the companies set to report earnings this week are traditionally strong performers and for the most part, companies that have weathered the financial crisis. But not all of them have met Wall Street’s expectations.

The quarterly results for five companies in particular – Yum! Brands Inc. (NYSE: YUM), Alcoa Inc. (NYSE: AA), Costco Wholesale Corp. (Nasdaq: COST), Monsanto Corp. (NYSE: MON) and PepsiCo Inc. (NYSE: PEP) – will of particular interest to investors.

Yum! Brands Inc.

Scheduled to report today (Tuesday), the Louisville, Ky.-based Yum! will be one of the first companies to report its quarterly take.

As owner of the Taco Bell, Kentucky Fried Chicken (KFC) and Pizza Hut brands, Yum! is the world’s largest restaurant company. Even more impressive, the company has beaten the market’s consensus forecast in the last four quarterly reporting periods.

Analysts’ estimates for the quarter ending September 2009 range from a low of 52 cents a share to a high of 63 cents a share, with a consensus of $0.59 a share. Yum will lean heavily on its international business if it’s going to continue its trend of topping analysts’ estimates.

Yum! is a well balanced company with about 41% of its 2008 operating profit coming from the United States and the rest from overseas – particularly China.

By 2013, China will account for 40% of Yum’s operating profit – up from 28% in 2008 – while the United States and the rest of the world will each account for a 30% share, according to company projections.

KFC, in particular, has long seen its most robust growth coming from China, with less than 10% of its franchises on the mainland accounting for more than a quarter of the company’s earnings.

Yum! added 328 new restaurants in the second quarter, including 118 in Mainland China.

“Yum!’s global growth potential, consistent performance and track record of generating strong free cash flow give us the confidence and ability to return significant cash to our shareholders even in these challenging economic times,” said Yum! Chief Executive Officer David Novak.

An analyst with Credit Suisse Group AG (NYSE ADR: CS) earlier this week told Barron’s that Yum! shares deserve a better premium because of its large international footprint and ongoing reallocation of capital.

Yum! shares should trade at a premium to their peer group and could climb nearly 25%, a the analyst said.

Shares of Yum! surged 5.13% yesterday to close at $34.85.

Alcoa Inc.

Though its release comes a day after Yum’s, Alcoa’s quarterly report marks the unofficial start of earnings season.

Hit hard by the collapse of commodities prices and sluggish industrial demand, Alcoa has missed earnings expectations in three of the past four quarters. And the company’s latest earnings report will likely show that its struggles continued, albeit at a slower pace.

Alcoa is expected to report a net loss of 12 cents per share for the three months that ended in September. That’s down substantially from a profit of 37 cents a share in the same period last year, but would be a marked improvement on the 32 cents a share loss the company posted in the second quarter.

Indeed, Alcoa’s earnings will provide an important look at just how far global demand for industrial metals has come. Hopes are high, as Alcoa stock has surged more than 143% since mid-March.

Deutsche Bank AG (NYSE: DB) analyst Jorge Beristain has increased his rating of Pittsburgh-based Alcoa to “Buy” from “Hold” and increased his price target to $17 from $12.

The upgrade partially reflects Deutsche Bank’s higher price projections for base metals. The bank sees base metal prices climbing an average of 31% next year, on account of strong third-quarter “price surges” and increased demand from China, Beristain said in a note to clients.

“China’s seemingly insatiable appetite for industrial raw materials has led to record high imports in many metals and a consequent tightening in market balances,” he said.

Alcoa’s stock rose 4.68% in trading yesterday, to close at $13.42 a share.

Costco Wholesale Corp.

Costco is the largest membership warehouse club chain in the world by sales volume. That makes it an ideal choice for cost-conscious consumers. Costco has enjoyed seven straight years of earnings growth, but the company’s past two quarters have disappointed investors.

The third time might be the charm for the nation’s largest warehouse chain. William Blair & Co. LLC analyst Mark Miller last month upgraded the stock to “Outperform” from “Market Perform” and after the company stepped up sales in August.

Sales at established locations declined 2%, beating Wall Street expectations for a larger 5.7% decline.

“With the step-up in sales during August and positive takeaways from our meeting last week with [Costco Chief Financial Officer] Richard Galanti and [Vice President of Financial Planning and Investor Relations] Bob Nelson, we are more confident that sales and earnings could meaningfully surpass Street expectations over the next year,” said Miller.

Like Yum!, Costco could receive a significant bump from its overseas operations, as recent store openings in Asia have been strong and the dollar has weakened.

For the third quarter, the average analysts’ estimate is for a profit of 76 cents a share – a 17% drop from the 92 cents a share it earned in the same quarter last year.

Costco CEO Jim Sinegal said earlier this month in an interview with Motley Fool that he expects his company to turn around regardless of whether or not the economy experiences a quick recovery.

“We can always blame bad sales on weather and on economic conditions and everything else,” he said. “But when we have the right merchandise out on the floor, it sells. … [We] don’t like the fact that the [average customer] basket is down, but we certainly like the fact that the customers are coming back more frequently and, as things turn, they will start to buy again. Now it is on us to get the hot merchandise.”

Costco stock edged up 0.73% yesterday to close at $56.88 a share.

Monsanto Co.

As the world’s largest producer of genetically modified seeds, Monsanto is a closely watched biotech bellwether. Like Alcoa, Monsanto was hit in recent quarters by a drop in commodities prices, as well as a drop in demand for its products.

However, the company announced an acquisition, a partnership, and a divestiture in its fiscal fourth quarter. It is expected to squeeze out a one cent per share profit, compared to three cents per share loss in the same quarter last year.

Monsanto’s acquisition of WestBred LLC – a Montana-based company that specializes in wheat germplasm – will bring wheat into its seeds and traits portfolio, and its joint venture with Dole Fresh Vegetables, Inc. will put more genetically modified vegetables on Monsanto’s plate. Meanwhile, Monsanto’s divestiture of its global sunflower assets to Syngenta brought in $160 million.

The company also shed 9,000 employees in a bid to cut costs, and despite being heavily targeted by anti-trust groups and chief rival E.I. du Pont de Nemours & Co. (NYSE: DD), Monsanto insists it’s on track to more than double its 2007 profit by the year 2012.

“We have committed to using our technology to double yields in our three core crops – corn, soybeans and cotton – by 2030, while reducing our use of key resources by one-third per unit produced,” said Monsanto Chairman and CEO Hugh Grant. “Innovation has us well on our way to achieving this, with our most robust pipeline ever. We’re on the verge of an unprecedented technology explosion that will deliver the types of products growers want most – those that offer greater yield and value.”

By 2012, Monsanto expects its gross profit from its core seeds and traits business to be between $7.3 billion and $7.5 billion – about 2.5 times its 2007 level. Grant said this increase will be facilitated by the development of seven new “high impact technologies” that by 2020 will boost revenue by $3 billion.

Monsanto has reported better-than-expected earnings in the past three quarters, and at Monday’s close of $74.85 a share is an undervalued stock according to Morningstar.

“Monsanto is a fierce competitor that continues to dominate a market that it essentially created more than a decade ago,” said Morningstar senior analyst Ben Johnson. “Through its ongoing commitment to research and development and assertive capital allocation, the company has positioned itself to grow value for its shareholders over the long haul.”

PepsicCo Inc.

Of all the companies reporting this week, PepsiCo has generated the most buzz. Bullish speculators yesterday piled into PepsiCo call options after Deutsche Bank raised its earnings for the salty-snack-and-soda giant.

Call volume surged by nearly 700%, according to optionMonster.

Deutsche Bank raised its price target for PepsiCo shares, which closed yesterday at $60.85, to $70 from $66. The bank maintained its buy rating on the stock, and said shares have been negatively affected by an “unwarranted deal overhang” related to the company’s acquisition of Pepsi Bottling Group Inc (NYSE: PBG).

PepsiCo in August said it would merge with Pepsi Bottling, as well as invest in Russia, during the three months that ended in September, and is expected to post a profit of $1.02 per share – four cents per share less than a year ago. Revenue for the quarter is expected to come to $11.3 billion, about the same as last year.

PepsiCo has only missed expectations in one of the past four quarters, and by just two cents at that.

Source: The Five Stocks to Watch This Week

The world’s second-largest foodmaker went public with its bid for Cadbury earlier this week after being snubbed privately. Kraft’s offer – a 31% premium to the chocolate maker’s Friday closing price of $37.46 a share, but less than  – “fundamentally undervalues” Cadbury, it said. The offer is less than 15 times Cadbury’s 2008 earnings before interest, tax, depreciation and amortization (EBITDA).

“Any follow-up offer by Kraft would likely involve a higher price,” Moody’s Investor Service senior analyst Brian Weddington said in a note. “The increased leverage that would result under the proposed transaction would be considerable.”

Increased leverage could be a boon to Cadbury and its investors, as The Hershey Co. (NYSE: HSY) will likely throw its hat into the bidding ring, one person familiar with the matter told The Wall Street Journal.

“Hershey recognizes that Cadbury is the last major confectionery company potentially available and, as such, is likely to make some response,” the person told The Journal. Nestle Chief Executive Officer said his company is always “open to acquisition opportunities if they fit strategically.”

Some analysts have Hershey teaming up with rival Nestle SA to make a joint offer for Cadbury and splitting its business, Reuters reported.

If Kraft and Cadbury can reach an agreement, it would be “bad news” for Nestle, Icap PLC analyst Andy Smith told Bloomberg News. “[Nestle has] the firepower to counter if they want.”

Cadbury and Kraft’s combined sales in 2008 were $51 billion, roughly half of Nestle’s in the same period.

However, Hershey’s position is less flexible.

The Pennsylvania chocolate maker has $1.7 billion in net debt and a market capitalization of $8.9 billion. Cadbury is valued at $17.7 billion, so any takeover by Hershey would require serious financing, according to The Journal.

Hershey could pursue a joint effort with Nestle, but that would mean turning Cadbury’s lucrative gum business over to the Swiss candy company to take to avoid antitrust issues.

Cadbury has almost 29% of the global gum market. The other big player in the sector is privately held Mars Inc., which became the world’s largest confectioner last year when it teamed with Warren Buffet’s Berkshire Hathaway Inc. (NYSE: BRK.A, BRK.B) to buy chewing gum icon Wm. Wrigley Jr. Company for $23 billion. Berkshire owns about 9.4% of Kraft’s shares, according to Reuters.

In January 2007, Cadbury Chief Executive Officer Todd Stitzer agreed with Hershey’s then-Chief Executive Officer Richard Lenny to remove that obstacle and suggested they create a “global confectionary powerhouse.” But any potential merger was held back by Cadbury’s beverage business, which included Dr. Pepper and Snapple.

Cadbury spun off its beverage business in May 2008, which resulted in the birth of the Dr. Pepper Snapple Group Inc. (NYSE: DPS).

Chances for a reverse scenario of Cadbury acquiring Hershey are slim, as the Hershey Trust is set on protecting the Hershey name and keeping it an American company.

“Simply put: We will not sell the Hershey Co.,” Hershey Trust Chairman LeRoy Zimmerman said in an opinion piece published last year in the Patriot-News of Harrisburg, PA.

While a number of analysts expect Kraft to raise its bid for Cadbury, the foodmaker is in a tight position because it does not have that much room to maneuver without threatening its balance sheet or risking its investment grade credit rating. The company already has almost $19 billion of bonds outstanding, according to Bloomberg.

Other companies mentioned as possible suitors are Kellogg Co. (NYSE: K) and PepsiCo Inc. (NYSE: PEP).

The worst economic downturn since the Great Depression and rising commodity costs have sent consumers looking for less expensive products at the grocery store, limiting companies’ ability to grow. As with Mars’ acquisition of Wrigley last year, companies are looking to consolidation for growth.

“Consolidation in the food sector has long been anticipated,” an unnamed merger advisor told Reuters. “Given the drop in [bottled] water revenues, Nestle and Danone are thought to look at acquisitions to spur revenue growth.”

For Kraft, a successful acquisition of Cadbury would spur its growth by expanding its presence in emerging markets like China, Brazil, Russia, and especially India. Cadbury is deeply entrenched in British Commonwealth nations such as India, where it has been selling chocolate for more than 60 years.

A takeover of Cadbury India “would open up a $500 million chocolate market which is growing at 15% per year,” Angel Broking Ltd. analyst Anand Shah told The Journal.

“I believe that in the current global economy, the growth prospects are constrained,” said Kraft Chief Executive Officer Irene Rosenfeld.

Shares of Kraft closed at $26.85 yesterday (Wednesday), up 1.51% or 40 cents, while Cadbury closed at $51.80, down .15%, or eight cents.

Source: Kraft’s Bid for Cadbury Not Sweet Enough

However, the stock has underperformed since the market began its rebound on March 10. And since the end of March, Pepsi’s shares have lagged those of arch rival, The Coca-Cola Co. (NYSE: KO), since the end of March, as well.  I recommended Coca Cola last week after the company reported stellar growth in the emerging markets.

While Pepsi’s less-than-stellar performance is not yet a major concern, the trend is discomforting.  In addition, there has been a major divergence in the strategies of these two companies.

While both Coke and Pepsi divested of their bottling operations many years ago, Pepsi just agreed to buy back two of them: Pepsi Bottling Group Inc. (NYSE: PBG) and PepsiAmericas Inc. (NYSE: PAS). And it paid a stiff premium in each deal, about 24% and 23%, respectively, above their pre-deal market prices. The total value of the deal was a cool $7.8 billion.

Now allow me to say that these companies are impressive operations by themselves:

• Pepsi Bottling Group is PepsiCo’s largest bottler. The company takes in $14 billion a year and operates in the United States, Canada, Greece, Mexico, Russia, Spain and Turkey, and boasts 67,000 employees.

• Pepsi Americas is PepsiCo’s second-largest bottler. It brings in $4.9 billion annually from operations in the United States, Ukraine, Poland, Romania, Hungary, the Czech Republic and Slovakia.  In addition, its new joint venture covers the Caribbean and Central America.

So why bother with these acquisitions?

The justification for this move is that “in a rapidly changing, more-complicated global market, a leaner, more agile business model is pretty important,” said Pepsi Bottling Group Chief Executive Officer Eric J. Foss.

Pepsi touted the tie-up itself, citing such advantages as attempting to create a more-flexible, efficient and competitive system that is more inclusive of other Pepsi brands.

The idea is that a merged operation will allow for much faster introduction of new products, for bundled offers, for enhanced customer service, and for cost savings from redundancies and economies of scale.

Sure, we can buy into many of those ideas, which are sure to result in some gains.  In fact, we can even envision the many new marketing initiatives that will result from these acquisitions.

But make no mistake: What has pushed Pepsi to go in this direction is the superiority of Coca Cola in the emerging markets.  While both firms prided themselves on product innovation and marketing, Coca-Cola has come out on top, as I wrote last week.

In addition, the capital requirements of a bottling and distribution operation are very high and the return on equity is much lower than Coca-Cola’s core business of creating the product, marketing it, and selling the concentrate and bottling rights to bottlers.  This decision will make less cash available in the immediate future for stock buybacks and dividend increases and represents a big gamble.

There are two pressing questions to have in mind:

• Will the marketing synergies PepsiCo claims it will garner from the deals be successful in winning market share away from its rival and thus justify the added capital requirements of the newly acquired operations?
• And will Pepsi be able to capture the synergies from the merger fast enough?

What’s for sure is that Pepsi’s action goes against its decision to concentrate on its core competencies. Management theory has proven time and again that companies should concentrate in one segment of the entire value chain (in Coca Coal’s case, product innovation and marketing) and leave the less-attractive and less-profitable areas to others.

Furthermore, it’s clear to me that “asset-light” companies – firms such as C.H. Robinson Worldwide Inc. (NYSE: CHRW), which divested assets that have large financing requirements and that carry large fixed costs – reduce the cyclicality of the business, and thus reduce the risks to profits from economic downturns.  That means “asset-light” companies are preferable to “asset-heavy” companies.

Therefore, my bias is against the added complexity and capital requirements involved with the Pepsi deal.  And we must now wait to see if the company can deliver on the two key questions above.  But we can never count out Pepsi’s innovation and resiliency, and so we will give them the benefit of the doubt.

PepsiCo stock closed down 9 cents, or 0.16%, at $57.74 a share Friday. That’s up 32% from its hit 52-week low of $43.78, reached in Early March.

Recommendation: “Hold” PepsiCo Inc. (NYSE: PEP), but do not add to your position, and give preference to Coca Cola’s stock – at least until Pepsi is able to prove that it can execute the merger efficiencies and win market share from its arch-rival (**).

** Special Note of Disclosure: Horacio Marquez holds no interest in PepsiCo Inc.

Source: Buy, Sell or Hold: Will PepsiCo Inc.’s (NYSE: PEP) Recent Acquisitions Pay Off?

Coca-Cola beat earnings, increased guidance, increased dividends and reinstated its stock buyback program.  The company plans to repurchase $1 billion in shares of stock in the second half of 2009.  What more do we need?  The answer is: Consistent performance.

As I tracked the developments in Coca Cola and their global markets, I ascertained that my original view remains unchanged and Coca Cola should keep growing profits consistently, which should keep propelling its stock up.

Remember, on March 9, a few of weeks after our Coca Cola recommendation, I called the U.S. market turn by recommending a pro-cyclical energy play with Diamond Offshore Drilling Co. (NYSE: DO).  That call coincided with the turn on Diamond Offshore stock as well, which has since soared about 67%.

Earlier, on October 27, I had called for the turn on iShares MSCI Brazil Index (NYSE: EWZ), which has since soared more than 90%.

The point is that emerging markets, as was my thesis, are going to turn around much faster and come back much stronger than developed economies.

Prudent emerging economies – like Brazil and Chile – having enjoyed a few years of exponential growth in commodity prices did not over-extended themselves. Instead, they captured a sizable portion of those huge price increases and turned them into huge national savings, improving their fiscal positions.  They kept their banks clean and disciplined and became net creditors to the world.

So, while the advanced economies are saddled with debt, many emerging economies are the exact opposite.  Their fiscal positions are strong; their social security systems are not in peril, and their population growth means strong economic growth.

So, my initial thesis was predicated primarily on the fact that strong growth in emerging markets would lead to success for major international players.

While it’s true that Coca-Cola’s soft drinks are consumer staples, which are very resilient in economic downturns, the company’s biggest advantage is that a full 75% of its income is generated abroad.

Additionally, Coca-Cola is the most widely recognized brand name in the world.  With a distribution network that covers more than 200 countries and a 50% of the global market for carbonated drinks, Coca-Cola is the poster-child of a multinational.

What’s more, having kept its rival PepsiCo Inc. (NYSE: PEP) at bay by beating them in the market, their price wars are not an issue any more.  This is crucial because pricing power has returned.

The strong U.S. dollar shaved 14% off of operating income during the quarter, but this is a temporary phenomenon, since the dollar is likely to remain week in the months to come.

Meanwhile, Coca-Cola continues to excel in emerging markets, just as we anticipated.  While overall volume growth was 4%, up from 2% in the first quarter, emerging markets took the prize: China was up 14%, India 33% and Brazil up 5%.

India, for example, has a high birth rate and 1 billion people with an average age of 25 years, and going lower.  This is a very receptive crowd for carbonated, sugary drinks, especially as their income soars.

Hence, with the strong recovery in China, India, Brazil and Russia, and many more emerging markets, plus the renewed weakness in the U.S. dollar, Coca-Cola should continue to perform in the second half and beyond.

Coca-Cola stock closed Friday up 17 cents, or 0.34%, at $49.84 a share.

Recommendation: Buy The Coca-Cola Co. (NYSE: KO) at market(**).

(**)  Special Note of Disclosure: Horacio Marquez holds no interest inThe Coca-Cola Co. (NYSE: KO).

Source: Buy, Sell or Hold: The Coca-Cola Company (NYSE: KO) Continues to Deliver Knockout Profits

Source: Investment News Briefs Thursday, July 9, 2009

Without some big event or monolithic development coming down the road, there’s no reason for investors to care about these tiny companies.

You see, the majority of investors are only interested in making 5%–10% per year. That’s pretty much the maximum you can expect to gain if you are investing in blue chips. Here at Penny Sleuth, we view the stock market a little differently.

We want the money multipliers — double-, triple-, even quadruple-digit gains. For that to happen, we need some kind of spark to set our penny stocks apart from the rest. After all, there are currently over 6,000 to choose from.

So, what kind of catalysts can make a penny stock pop? Let’s look at a couple big ones:

• Commercialization — After years of research and development, and sometimes painstakingly long clinical trials and efficacy tests, there comes a time in any successful start up company’s life when it needs to actually manufacture and sell its products or services. Just take a look at what happened to Tata Motors Ltd. (NYSE: TTM)…

As you might already know, this was the growth story of last year, and it continues to today. Tata is the Indian car giant that made its mark on the global economy, when it released the world’s cheapest car.

In March of this year, the company commercialized a new product. It started selling the Tata Nano in India. Investors were so excited by this car design, they started buying enormous amounts of Tata stock. Since the company started pre-selling the car, shares are up 165%.

• Buyout Candidates — Sometimes, it’s as simple as waiting for a larger competitor to buy the penny stock. When one company buys another, they agree on a price. Many times, that price is much higher than what the soon-to-be-purchased company’s share price is currently trading. This gives those shareholders an instant gain.

A few weeks ago, I discussed the consolidation of the soda industry. Both PepsiCo Inc. (NYSE: PEP) and Coca-Cola Inc. (NYSE: KO) are buying out their bottling operations to save on expenses and double spending.

Pepsi is in the process of buying its two largest bottlers: PepsiAmericas and Pepsi Bottling Group. Shares of both of these companies popped more than 22% the day it was announced. From their March lows, PepsiAmericas is up 67% and Pepsi Bottling Group is up 94%.

• Legal Battles — The last of the major catalysts is court rulings. In many cases, a simple ruling can make or break a penny stock. Hardly any company has been entrenched in the courtroom like TiVo Inc. (NASDAQ: TIVO).

We wrote about TiVo back in December 2007. Its revolutionary digital recording technology is both a huge moneymaker and a legal nightmare. You see, plenty of other competitors claim rights to certain patents TiVo profits from.

It takes a tech geek to decipher the differences between most of its intellectual properties, which isn’t usually a prerequisite for a judge. For the last five years, TiVo has been tied up in court with its competitor EchoStar Communications Corp (NASDAQ:SATS), now part of Dish Network Corp. (NASDAQ:DISH), over a patent dispute. The court finally ruled in favor of TiVo, rewarding the company $103 million plus interest.

Upon the day of the ruling, shares of TiVo jumped 53%. This gain sent TiVo’s stock over $11 per share and out of penny stock land. That just a drop in the bucket of what a lawsuit ruling can do for a company. Imagine what $103-plus can do for an even smaller company…

These are just four types of things to consider when thinking about buying a penny stock. But even if you do have the perfect catalyst lined up, that’s only the beginning.

Sincerely,
Jim Nelson

Source: How to Tell When a Penny Stock Will Pop

• The housing market showed further signs of bottoming in April, as pending sales of previously owned U.S. homes saw their biggest monthly gain in seven and a half years, the National Association of Realtors reported. The number of Americans signing contracts to buy previously owned homes climbed 6.7% in April, more than forecast and the fourth increase in five months. The report supports the case for a housing bottom made in Money Morning on Monday, where it was noted that housing prices are starting to move upward in western U.S. markets and should soon slowly begin to rise in hard-hit east coast markets.  “Based on what we just heard, we are now formally calling for the end of the housing depression and that we increasingly think that the housing market is beginning to turn up. All signs are pointing to a bottoming out now of the housing market” Bernard Baumohl, Chief Global Economist at the Princeton-New Jersey based Economic Outlook Group, told Reuters.

• Detroit’s ailing Big Three automakers, all reported that May sales in the U.S. fell less than analysts’ estimates while Toyota Motor Corp. (ADR NYSE: TM) and Honda Motor Co. (ADR NYSE: HMC) did worse than expected. Sales at General Motors Corp. (NYSE: GM) dropped 30% from last year, Ford Motor Co.’s (NYSE: F) sales fell only 24% and Chrysler LLC plummeted 47%, better than estimates, as shoppers returned to showrooms.  Deliveries at Toyota plunged 41% and Honda plunged 42%. Among Japanese carmakers, only Nissan Corp sales exceeded estimates, falling only 33%, Bloomberg reported.

• Microsoft Corp (Nasdaq: MSFT) said on Tuesday its new Windows 7 operating system, which will replace the unpopular Vista, will be available on October 22, well ahead of its original schedule and in time for the holiday shopping season, Reuters reported.  Windows 7 was originally scheduled to launch at the start of next year, but Microsoft confirmed last month that it would push up the schedule to allow sales during the year’s busiest buying period.

• The U.S. Federal Reserve Bank has successfully pulled the economy back from the brink, Dallas Federal Reserve Bank President Richard Fisher said yesterday (Tuesday).  The Fed official also said that conditions are “getting less worse” over time and the Fed needs to unwind its new, expansive credit programs as soon as it can, Reuters reported.  Furthermore, the U.S. central bank needs to make it clear it will not “monetize” the rapid expansion of U.S. debt, Fisher told a gathering of community leaders at a Dallas Fed event.

• Unemployment in Europe rose to 8.6% in April, up from 8.4% in March and 6.8% during the same period last year. Although the economic downturn in Europe is showing signs of slowing, the employment rate typically lags behind economic health.

• Pepsi Bottling Group Inc. (NYSE: PBG) Chairman and Chief Executive Officer Eric Foss is being promised a minimum $16.5 million in severance pay and stock benefits if PepsiCo Inc.’s (NYSE: PEP) takeover succeeds. He earned $6.1 million in total compensation last year. Pepsi Bottling, along with PepsiAmericas Inc. (NYSE: PAS) rejected a $6 billion acquisition attempt by PepsiCo, calling it “grossly inadequate” and “not acceptable.” Pepsi Bottling and PepsiCo are now locked up in a lawsuit, with PepsiCo accusing Pepsi Bottling of adopting a “poison pill” takeover defense that restricts its rights as a shareholder.

Source: Investment News Briefs Wednesday, June 3, 2009

The identity of the bank that is alleged to have failed the bank stress test was not revealed.

The bank-stress-test findings were reported yesterday (Sunday) by CNBC.com, which said it obtained the information from a source that it did not identify. The source did not identify the company, CNBC.com reported.

“At least one firm – under the [bank] stress test assumptions – will require more capital,” the source said.

The bank-stress-test results were contained in a two-dozen-page report that the government released Friday. But the results had already been “conveyed” to the firms, meaning the bank in question is aware of the U.S. central bank’s assessment, according to the published report.

This round of bank stress tests was essentially a two-step process. The first step – outlining how the banks have been analyzed – was taken care of with the report released over the weekend.  The second step – releasing the results to the public – will be taken care of when the actual results are released May 4, which is one week from today (Monday).

Neither the U.S. Federal Reserve nor the U.S. Treasury Department would comment.

The bank stress tests have a very specific purpose. Financial institutions that are found to have inadequate capital will have six months to raise the money via the private sector. If that doesn’t work, the government has said the financial institutions will be eligible for an infusion of capital via the federal government’s so-called “Capital Access Program.”

U.S. Treasury Secretary Timothy F. Geithner said he would be open to banks repaying their Troubled Asset Relief Program (TARP) loans, as long as the availability of credit (borrowing) was not adversely affected.  As a Money Morning special report detailed last week, the credit markets don’t seem to be loosening up: Lending dropped by more than 20% from October 2008 to February 2009, despite initiatives to encourage such activity.

According to the conclusion of the report released over the weekend, “most banks currently have capital levels well in excess of the amounts needed to be well capitalized.”

However, as Money Morning has reported, the tests have become a “no-win” situation for the Obama administration.

“There are two things that are terribly wrong,” William M. Isaac, the Secura Group chairman who served as head of the Federal Deposit Insurance Corp. (FDIC) from 1981 to 1985, told CNBC.com. The first problem – and a big one – is the fact that the details were announced at all.

“I can’t imagine what Treasury was thinking when it made that move. It has been causing incredible angst in the markets,” said Isaac. “The second big problem is that the Treasury is directing the stress testing, apparently with direct involvement of the White House at the highest levels. Bank regulation by law is supposed to be carried out by the independent banking agencies without any political interference.”

Market Matters

As Money Morning reported Friday – in a Wall Street version of the old “he said/(s)he said” drama, Bank of America Corp. (BAC) Chairman and Chief Executive Officer Kenneth Lewis claimed that ex-U.S. Treasury Secretary Henry M. “Hank” Paulson Jr. and central bank Chairman Ben S. Bernanke threatened to remove him from office if he backed out of the Merrill Lynch & Co. Inc. (SQD) merger or (publicly) discussed the mounting losses.

Paulson had previously testified that Lewis must have misinterpreted their comments, but then seemed to blame Bernanke for the threat (Translation: Paulson tried to throw Bernanke “under the bus.”).

New York Attorney General Andrew M. Cuomo has been investigating the activities surrounding the merger to determine why shareholders were kept in the dark about the financial “challenges.”

Shifting to autos, Italy’s Fiat SpA (OTC ADR FIATY) emerged as a potential major global player as it attempts to forge a partnership with (soon-to-be-bankrupt?) Chrysler LLC, and also has interest in buying General Motors Corp.’s (GM) Opel unit. Meanwhile, GM will be closing 13 production plants over the summer to trim inventory and seems likely to miss a $1 billion debt payment due June 1 as it too moves closer to bankruptcy protection.

How bad is GM’s plight: GM may close its Pontiac division after 82 years of operation, The Wall Street Journal and MarketWatch.com reported over the weekend.

While the earnings news of the week found plenty of winners and losers, ultimately analysts perceived a bit of “cautious optimism.”  Bank of America and Morgan Stanley (MS) failed to live up to the favorable showings by Wells Fargo & Co. (WFC) and other financials, though techs like Texas Instruments Inc. (TXN), Apple Inc. (AAPL) and International Business Machines Corp. (IBM), beat Wall Street expectations, and brought new hope that the downturn was nearing an end. (Watch for an updated “Hot Stocks” feature on IBM here in Money Morning later this week).

Unfortunately, Microsoft Corp. (MSFT) posted the first quarterly revenue decline in its 23-year history, though investors still cheered its ability to reduce costs during these challenging times for PC sales. McDonald’s Corp. (MCD), AT&T Inc. (T), and Ford Motor Co. (F) were among the diverse group of companies reporting better-than-expected results, while United Parcel Service Inc. (UPS), Caterpillar Inc. (CAT), and Continental Airlines Inc. (CAL) issued disappointing numbers.

Amazon.com Inc. (AMZN), the subject of a recent “Buy, Sell or Hold” feature here in Money Morning, bucked the negative trend facing many retailers and posted higher quarterly earnings and revenue.

Additionally, U.S. retailers J.C. Penney Co. Inc. (JCP) and Coach Inc. (COH) each expressed positive sentiment that sales activity seems to picking up.  Oracle Corp. (ORCL) snapped up Sun Microsystems Inc. (JAVA) for $7.4 billion after IBM chose to pass, and PepsiCo Inc. (PEP) is attempting to purchase two related bottling companies as corporate execs seek favorable deals in this environment.  Such merger-and-acquisition (M&A) transactions often signal boardroom confidence and also indicate that the “worst” part of a downturn may be over.

Oil prices surged above the $51-a-barrel level late in the week as traders overlooked the higher inventory levels and instead focused on some favorable signs that the economy may be closing in on turnaround mode.

With a six-week winning streak on the line, investors offered their best “clutch hitting” late Friday, pushing all major indexes to higher levels. Early in the week, after investors digested negative news from the likes of Bank of America and GM, prognosticators said the weekly stock-market winning streak was all but over. However, some better-than-expected earnings and economic reports brought out the “bulls” for one final run.  The Nasdaq Composite Index ended the week in positive territory, and the other equity indexes were virtually flat from last week’s closing levels (with the Dow Jones Industrial Average suffering a slight decline).

Economically Speaking

According to the International Monetary Fund (IMF), the global downturn will be far worse than previously expected.  For 2009, the IMF expects the world economy to contract by 1.3%, its first such decline in 60-years, with over 10 million employees losing their jobs.  Unfortunately, its projections for the United States are even more dire (-2.8% for the year), with domestic financial institutions suffering $2.7 trillion in losses, almost twice the IMF’s prior estimates from just six months ago.

While much of the economic data of the week confirmed the IMF’s weak projection, analysts found a few positive signs that the downturn very well may have bottomed out.  While both new home sales and durable goods orders declined in March, the results beat the weaker Street expectations and came in the aftermath of some (relatively) strong February numbers.

In another promising sign of stability within the housing sector, the median price of an existing home sold in March actually rose for the second straight month.  Still, the record unemployment filings last week revealed the ongoing difficulties facing job seekers amid these tight labor conditions.  Likewise, leading economic indicators, a predictive report, dropped for the third consecutive month and many economists expect the recession to last at least until late third quarter.

Weekly Economic Calendar

Source: Controversial Stress Tests Reveal Only One Bank Needs Capital, but Worries Remain

As Coke’s third largest market – trailing only the United States and Mexico – China is already a centerpiece of the company’s global growth strategy. When the company announced better-than-expected fourth-quarter results last month, it reported that China jumped 29% last year, while U.S. sales actually fell by 1%.

So it’s no surprise that China will overtake both Mexico and the United States to become the company’s largest market by 2018, Coke President and Chief Executive Officer Muhtar Kent told The Financial Times.

The $2 billion Coke has earmarked for China includes $90 million for a research-and-development center in Shanghai, the financial center on China’s East Coast. It also includes capital for new production plants, distribution infrastructure, and sales and marketing. However, it does not include Coke’s pending buyout of China Huiyuan Juice Group Ltd., China’s largest juice company.

Coke launched a $2.4 billion bid for Huiyuan Juice last September. At HK$12.20 a share, the deal valued Huiyuan at a 195% premium to its market value prior to the offer. But even though the deal is generous by most standards, government approval is still pending.

Huiyuan Juice is a household name in China, and controls 42% of the country’s pure-fruit-juice market. Regulators are debating whether a partnership with Coca-Cola – which controls 54% of China’s soda market – would be in violation of newly enacted monopoly laws. PepsiCo Inc. (PEP) has just a 31% share of China’s soda market.

The buyout is further complicated by strong nationalistic feelings, similar to those sparked in the United States when InBev NV went public with its bid for Anheuser Busch. However, many state-run Chinese companies have aggressively pursued foreign targets, which could make it hard for China to close the door on Coke.

In Australia, for instance, the government has a few Chinese investments coming under review:

• Hunan Valin Iron and Steel Group Co. is attempting to expand its stake in Fortescue Metals Group Ltd. to 17.4%.
• China Minmetals Corp. has launched a $1.7 billion bid for OZ Minerals Ltd.
• And Aluminum Corp. (ADR: ACH) of China plans to invest $19.5 billion in Rio Tinto PLC (ADR: RTP), the world’s third-largest mining company.

If Beijing sends Coke packing, it could send a message to the rest of the world that China plays by different rules at home than it does abroad. Many investors are also waiting on the Coke deal as a barometer of China’s attitude towards inbound M&A deals, and Beijing’s willingness to cooperate.

The deadline for the deal’s completion – March 23 – is a little more than a week away. And while China Commerce Minister Chen Deming has said that Beijing’s decision “will not be influenced by any (external) factors,” some analysts think Coke’s recent announcement could help tip the scales in its favor.

“Coca-Cola’s investment is a positive for the Huiyuan acquisition,” Kevin Luo, a consumer goods analyst with Guotai Junan Securities HK Ltd., told Bloomberg News. “This investment will help create jobs, which would obviously be welcomed by the government, so even though it won’t have a direct impact on the acquisition’s approval, it can’t hurt.”

A recent government survey showed that slightly more than 15% of China’s 130 million migrant workers – about 20 million people – had lost their jobs and returned to the countryside by the start of the Chinese Spring Festival on Jan. 25.

Regardless of the deal’s outcome, CEO Kent says Coke has only “scratched the surface” of the Chinese market and will continue to further its presence in the region.

“Coca-Cola is proud to be a long-term partner of China, and our commitment and confidence in China never wavers,” Kent said.

Long History

Coke has a long history in China. The company first opened bottling plants in Shanghai and Tianjin in 1927. A third plant opened in Qingdao in 1930, according to the Asian Institute of Management’s AIM Center for Corporate Responsibility.

The company re-entered China in 1979 – after a three-decade absence – following the re-establishment of relations between China and the United States. In fact, Coca-Cola was the first U.S. consumer product to return to that promising Asian market.

It had its first new plant up and running in China a year later. By the end of the 1990s, it had several dozen plants and bottling operations in that market.

Coke Rides International Growth to Profit

In announcing the better-than-expected results last month, Coca-Cola reported its ninth-straight quarter of double-digit earnings per share (EPS) growth and third straight year of meeting or exceeding its long-term-growth targets. Excluding one-time items, the Atlanta-based company’s 64-cent EPS represented a 10% gain from last year’s fourth quarter.

For all of last year, cash flow from operations was $7.6 billion, an increase of 6% from the $7.1 billion recorded for 2008.

And at a time when many U.S. companies are cutting their dividends – or eliminating them altogether – Coke boosted its payout by 8%.

“Simply said, we were built for times like these,” Coke CEO Kent said during a conference call. “We enter 2009 with the same mindset as one year ago: Deliver on a consistent set of strategies and initiatives that provide us a disciplined road map to operate in the best consumer business in the world, a business with significant long-term opportunities.”

A large part of Coke’s growth can be attributed to the company’s international sales, which – with a boost from China – delivered 6% growth for both the fourth quarter and full year.

“Because 75% of the company’s sales come from outside the United States, this is the kind of stock that’s worth owning long-term,” Money Morning Contributing Editor Horacio Marquez said in a recent ‘Buy, Sell or Hold’ column. “So, if you are worried about the housing meltdown and the prospects for the U.S. economy, this soundly-managed U.S. company already gives you global diversification in the places that matter most today – the emerging markets.”

Source: Hot Stocks: Coke’s $2 Billion China Play Will Add Fizz to its Profits

This from Money Morning:

The second phase of emerging markets expansion is well on its way – a period of self-sustaining growth, driven by consumer growth and infrastructure spending.  And Latin America, following China and other Asian economies, is one of the key global pillars of growth that will save the global economy and the U.S. financial system from total collapse. But not all the countries in Latin America will go on to prosper.  There is a wide gulf in the policies that will continue to separate the winners from the losers.

Let me explain.

In a recent article in our affiliated monthly newsletterThe Money Map Report, Money Morning Investment Director Keith Fitz-Gerald made three important points:

• The emerging markets (of which Latin America is the second-most-important leg) will play a growing role in the continued long-term growth of the world economy.
• The U.S. economy will continue to grow long-term, but its relative importance in the world economy will continue to decline.
• In the near term, the emerging markets could well play a determining role in keeping the overall global economy – and the U.S. financial system – from dropping into a depression-like funk that we won’t be free of for years. Emerging economies in Asia and parts of Latin America have huge cash reserves, much of which will be invested in infrastructure projects over the next 20 years.

In the next three years, China, alone will invest as much as $725 billion in infrastructure, while Brazil will invest $225 billion for the same purpose.
This is important to remember, given that the dramatic sell-off the emerging markets have experienced has many investors doubting the ability of these countries to “decouple” from the global economy.  The reality of the situation is that most investors and pundits are failing to differentiate between economic decoupling and market decoupling.

The Gloomy Present

While growth in emerging economies has dropped slightly, the prices of securities and currencies in emerging markets has fallen drastically.   Many investors think that the U.S. economic crash will lead to a dramatic drop in U.S. orders of emerging-market products, which will cause those economies to drop off. That, in turn, would squeeze the profits and market valuations of the companies that operate in these economies.

But that’s a mistaken assumption. And here’s why.

In Brazil, for instance, exports account for a mere 13% of gross domestic product (GDP). In China, exports are just 10% of GDP. So some contraction in U.S. and European orders can easily be counterbalanced by fiscal and monetary stimulus in these countries.

On Oct. 27, in the depths of a rabid, indiscriminate sell-off, I published an extremely bullish piece on Brazil. Since that article was published, Brazil went on to rally as much as 47%. As of Friday’s close – even after some subsequent profit-taking – the exchange traded fund (ETF) that represents the Brazilian market (NYSE:EWZ) is still up 21% (and has risen as much as 42% since my recommendation).

And most emerging markets economies have plenty of fiscal and monetary maneuvering room. Leading the pack is China, which accounted for some 27% of global growth last year, and which has continued to use both fiscal and monetary tools to keep itself on a solid growth path.

It recently slashed interest rates again, down to 6.66% (a lucky number in the Chinese culture, meaning “things (are) going smoothly”).  With record foreign reserves of $1.9 trillion, China also approved a “fast and heavy-handed” $586 billion stimulus, mainly in housing and infrastructure, to be implemented through 2010.  And the Chinese yuan will drop almost 7% vis-a-vis the U.S. dollar to cushion losses in trade.  It has also lowered taxes on investments in capital goods.  And in a key move that’s been almost totally overlooked by the media, China has made huge market-oriented reforms in agriculture.

China has just allowed its 780 million farmers to rent, transfer or utilize as collateral their rights to their lands and eliminated all taxes on agricultural production and to farmers.  This will allow for a massive increase in the scale of production by consolidating companies.  In this way, China will keep its 120 million hectares dedicated to agriculture exclusively, with no possibility of urbanization, while at the same time allowing the millions of small farmers to sell out, and get capital to move to the cities.  This will not only increase the productivity of Chinese farming dramatically by allowing for economies of scale to work and attracting billions in investments, it also will create a huge incentive for these millions of farmers to move to the cities, boosting housing and infrastructure demand.

Brazil’s plans are very similar to those of China. There’s a:

• Strong fiscal stimulus, allowing a drop in the value of the real currency (a decline that’s already been substantial) in order to cushion exports.
• An easing of capital requirements to Brazil’s strong banking system, which will incentivize housing and car loans.
• Export financing.
• And huge local infrastructure projects.

There is another little-understood phenomenon that cushions the blows for emerging economies: Intra-emerging market trade has become increasingly important.  By now everybody understands that iron ore from Brazil and coal and oil from other emerging markets is flowing into China in order to fuel China’s massive infrastructure buildup and growing consumer demand.

The Breakdown on Brazil

Increasingly, a growing proportion of the infrastructure needs of industrial goods being bought by emerging economies are goods produced by other emerging economies.  Trade between Latin America and China has increased by 13 times since 1995, from $8.4 billion to $100 billion.  And China, now the second-most-important commercial partner to the region after the United States, has finally been accepted as a member of the Inter-American Development Bank, committing itself to contribute $350 million to the bank. As an example of this growth in industrial trade, Argentina just bought 279 subway cars from China’s CITIC Group.

However, not all trade with China has been successful, due to China’s notable deficiencies in quality control, especially in health standards.  For example, Latin American imports of medicines manufactured in China had catastrophic results in Panama two years ago, where more than 100 people died and hundreds more became ill from medications containing toxic Chinese glycerine.  Recently, Panama detected toxic chemicals in imported Chinese sweets and crackers and Argentina’s customs recently seized Chinese 20,000 thermos containers for having elevated content of toxic chemicals.

And all of this means that there is a market disconnect between the prices of Brazilian shares and those elsewhere in Latin American equities and the fundamentals of the underlying companies, that we will see played out in the next and subsequent years.  Why?

Just because huge financial losses by banks precipitated a massive de-leveraging cycle, which means they had to sell their holdings, regardless of merit. And that included big sell-offs in preferred investments, including the hugely promising and profitable Petroleo Brasileiro SA (Petrobras) (ADR:PBR), Vale (ADR:RIO), and many others.

Sign up below… and we’ll send you a new investment report for free: “Credit Crisis Report.”

And what is worse, their sales hit the stop losses of major hedge funds, who were also leveraged in such favorite plays as commodities, steel, coal, agro, emerging markets and even defensive stocks such as the U.S.-based Pepsico Inc. (NYSE:PEP).

When you have the proprietary positions of banks and hedge funds all trying to get out of the same door at the same time because of risk management issues, you get the current disconnect between market fundamentals and pricing.

Another impact that we have to understand is that the ongoing dramatic interest rate drops in all major G7 economies and the more than $3 trillion in G7 fiscal programs will have a marked impact on growth next year, containing what would have been a much nastier economic contraction.  But while G7 countries will barely grow between negative 0.5% and a positive 1% in 2009, with the worst contraction front-loaded and recovering in the second half, emerging economies will grow at a minimum of 4%, and in the case of China maybe as high as 10%.

In my October Brazil analysis, I detailed the massive stress that Brazil came under in 1995 because of another exogenous shock: The Mexican devaluation, the so-called “Tequila effect,” which ricocheted around the world, and which caught Brazil in 1995 in a much weaker position than it is in today. Back then, Brazil had a much higher level of debt, much lower reserves, a fiscal sector that needed huge reform, and a much lower capacity for exports.  Brazil dealt with this massive stress effectively and went on to work at each one of its weaknesses in the next 13 years, getting itself into a position of strength today.

While having the temptation and the perfect excuse for a default right at hand, Brazil proved its seriousness back then by taking the hard, but certain road to progress, keeping its international commitments and gradually affecting strong structural reforms.  Since then, it has become a net creditor to the world; it controlled inflation, and avoided an overheating of its economy with tight fiscal and monetary policies during the recent run-up in commodity prices.

This is paying off strongly today.  The policies, run day to day by a sophisticated technocracy led by top economists and international bankers, many of which held top positions in leading international banks, has allowed Brazil to move forward and to anticipate GDP growth of 4% to 5% for the New Year.
Hence, Brazil is by far my favorite Latin American play for 2009.

Checking Out Chile

Following closely behind, and hindered only by its small size, is the poster child of fiscal and monetary prudence: Chile.

Chile, which came out of its 1970s default by eliminating its foreign debt and successfully restructuring its banking system, has made every effort to maintain very prudent fiscal and monetary policies and to diversify its exports away from copper, which, being the largest exporter of the metal in the world, still accounted for 38% of its GDP.

Today, Chile exports many diversified products, including agricultural products, wine, fertilizers and industrial wares.  And because it’s situated on the Pacific Coast, it is geographically well positioned to trade with the fastest-growing markets in the world – China and the other emerging Asian tigers.

But Chile, in order to minimize the cyclical nature of its economy due to the wide fluctuation in the price of copper, decided years ago to start a “rainy-day” fund, which would accumulate wealth in the good years and be used to soften the blow in the bad ones.  Now, Chile boasts a $28 billion sovereign wealth fund, accumulated almost completely from its copper profits.  That’s almost equal to a staggering 14% of the country’s GDP in cash savings!  This will enable Chile to implement counter-cyclical policies to keep growing at 3.5% to 4% next year – or about the current rate of growth, even with the worldwide meltdown.

Chile already has started to deploy this capital, having passed a $1.15 billion government plan on top of last month’s $850 million to stimulate housing and small-business lending, injecting that capital into a government bank that will make available loans for small businesses.

Avoid Argentina

Chile’s fiscal prudence is in direct contrast to Argentina’s lack of discipline.  Argentina’s Peronist government, which squandered the agricultural commodities bonanza in fiscal spending, is now is trying to use its majority in both houses in Congress to pass the nationalization of the privatized pension funds under the excuse of “protecting them from market volatility.”

These funds, which now have successfully grown to more than $30 billion in size, or 73% of the government’s budget and have returned an average of more than 13% a year since inception will allow the government to cover its fiscal gap and debt maturities next year and to financed public works and consumption projects.  The government, at the same time, is suffering from an important loss of confidence, as evidenced by its need to resort to police controls in order to prevent the illegal purchase of U.S. Dollars.  Argentina might end 2009 with growth of negative 2% and unemployment of 10%.  Stay away.

A “Maybe” for Mexico

Mexico, given its strong links to the United States, is receiving a heavy dose of external shocks on many economic and financial fronts – especially where the United States is concerned: It’s being hit by a drop in exports (the United States is the main component), the drop in oil prices, lower tourism (its largest proportion of travelers is from the United States), falling U.S. investments in Mexico, and reduced remittances from Mexicans working in the United States back to their Mexican relatives.

In addition, many companies suffered strong losses in their derivatives hedges, banks have had to reduce lending due to reduced liquidity and the Mexican peso has lost some 22% of its value against the U.S. dollar.  Mexico’s growth in the New Year may fall to about 1% from 2008’s 2.4% pace, and the country is on its way to approving the first budget with a fiscal deficit in four years.  The government’s target will be negative 1.8% of GDP, in order to stimulate the economy.  Mexico, seeing its oil production declining, is seen moving soon towards opening some oil areas for exploration and development, which some estimate could add another 1% to GDP.

Once the U.S. markets have stabilized, Mexico’s stocks will be an incredible buy once more, since they discount a very bad scenario at these prices.

A Case Against Colombia

Colombia, another country that has merited a lot of attention, given its staunch support of U.S. anti-drug and anti-money-laundering efforts, has seen its free trade agreement with the United States inexplicably delayed.

The country foresees a tightening of credit conditions, so it is moving up its peso-based borrowing to this year.  Next year it will issue only $1 billion in foreign bonds and tap $1.4 billion from multi-lateral lenders.  So the refinancing risk for Colombia is muted, given the small amounts involved, and the country’s economy should expand a minimum of 1% in the New Year, even in the worst economic scenario. However, Colombia could grow as much as 4% under a moderate scenario.

That would represent a big drop from the 8% growth recorded this year.

The story in Colombia has been the curbing of inflation, and how far behind the curve the central bank has been, at least as recently as July, when it boosted rates up to 10% and then kept them there.

These ultra-high interest rates, combined with the global slowdown, have blunted demand for consumer products in Colombia. Since the passage of the trade pact is a situation in flux, I want to wait and see right now.

I will not go into the economies of Venezuela, Bolivia and Ecuador, which, with massive intervention by their governments and advances against property rights, are experiencing severe economic and political stress, and which do not offer the guarantees needed for foreign investment.

Source: Some Latin American Markets Show Profit Potential in the New Year, While Others Pose Risk

[Editor's Note: This is the eighth installment of our “Outlook 2009” series, which looks at the global investing outlook for the New Year.]