More single-country ETFs are on the way for iShares, which already touts an impressive list of single-country ETFs. Cinthia Murphy for Index Universe reports that the latest group of proposed funds covers a some areas that are already backed by ETFs, along with some first-of-their-kind funds.

The ETFs are:

iShares MSCI USA Index Fund: The U.S. fund is a diversified ETF that will essentially be a mid- and large-cap portfolio that tracks an index investing in securities from companies in the top 85% of the domestic space by market capitalization.

iShares MSCI Brazil Small Cap Index Fund: iShares’ take on Brazil’s small-cap market is perhaps an attempt to replicate the success Van Eck has had in that segment with its version of a Brazil small cap fund, Market Vectors Brazil Small-Cap (NYSEArca: BRF).

iShares MSCI Egypt Capped Investable Market Index Fund: The Egypt ETF will track an index of 41 companies, with most sector allocations dedicated to financials, industrials and telecommunications services.

iShares MSCI Ireland Capped Investable Market Index Fund: The Ireland fund’s benchmark held 21 names as of October, and focused primarily on consumer staples, financials and materials.

iShares MSCI Russia Capped Index Fund: This will track an index that is a variation of the MSCI Russia Index, the MSCI Russia 25/50 Index. While the new fund will invest in the top 85% of Russia-listed companies by market capitalization, it will also take into account investment diversification requirements that apply to regulated investment companies (RICs), under U.S. law. This fund would go head-to-head with the Market Vectors Russia (NYSEArca: RSX).

iShares MSCI Philippines Investable Market Index Fund: The Philippines ETF will replicate an index of 28 companies, mostly in utilities, telecommunications and financials.

The debuting ETFs focused on Ireland, Egypt and the Philippines could be the first country-specific funds available to investors for each of those economies .

Related posts:

1. iShares ETFs on the ASX
2. Year to Date Country Returns; US Lags
3. Country Market Performance Since the March 9th Low
4. Country ETFs Overbought
5. Country ETFs

It’s time to face facts, the old-time buy a few large-cap blue chips and hold them forever strategy has gone the way of the Dodo bird.

So, what’s the answer for this particular market?

Personally I swing. Swing trade that is.

I like swing trading for this market because it takes advantage of momentum… or trading in and out of stocks and sectors that are seeing a temporary boost. There’s no ‘buy and hope’ strategy at play here.

Let’s take a look at how swing trading works.

In a nutshell swing trading is… buying the lows and selling the highs. Ok, I know what you’re thinking… how do I consistently buy the lows and sell the highs? It seems like it is easier said than done.

Although there’s a lot of different ways to approach it, my favourite is looking for technically-based short-term trends. And taking a position to profit from the trend.

Here’s something you might not know; swing traders don’t care why a stock is trending. If the technical’s show there’s a trend, it’s not your job to figure out why. You just want to profit from it.

But here’s the catch… the stock market isn’t just flat over the last 10 years. It’s flat over the last few months too. Lots of volatility but no real trends.

You may be happy to see a flat market – especially after last year. But for swing traders like me a flat market is worse.

So how do you overcome a flat US market?

By not limiting yourself to just the stock market.

Here’s why. You won’t always find a trend in the US stock market. So I’ll trade foreign markets, bonds, commodities and even currencies. Until recently, access to these markets was difficult and often required separate trading accounts.

In the past, many individual investors found it hard to trade these markets. This helped give rise to the notion that a buy and hold strategy is the best way to invest.

Now, there’s an easy way to trade ASX stocks, foreign stocks, bonds, commodities, and currencies using momentum. It’s quick, cheap, painless and you can do it all from one trading account.

Want to know what it is?

That’s right, ETFs (Exchange Traded Funds). These are the one investment that can give you exposure to all of these markets. Today’s ETFs are revolutionizing the ability to trade currencies, commodities, and foreign markets. You can now really drill down and focus on specific subsectors of all these markets.

As I said… follow the trend. If you can’t find it in the US stock market, you now have easy access to an entire array of markets with ETFs.

I believe that the big money over the next few months and years will be found in the ’specialty’ ETFs that are popping up. The value of these ETFs can be derived from commodities like gold, currency pairs, corporate bonds, and any specific subsector you can think of. The list goes on and on.

And now you can go long or short with two or even three times leverage. Talk about spicing things up!

And remember as a swing trader you don’t care why the ETF is trending. The patterns and trends you use as a swing trader hold up regardless of the asset being traded. So you can apply the same technical analysis principles that you use with stocks.

Combining technical analysis, momentum trading, and specialty ETFs isn’t a bad way to trade this market right now. And it sure beats the heck out of buying a few blue chips and holding on for dear life!

Related posts:

1. Day Trading Profit Secrets – CFDs Contracts For Difference
2. CFD Trading: Going Long – Making a Profit
3. Profit Using Contracts For Difference
4. ETFs Increasingly Dominate Trading
5. Exchange Traded Funds: Trading Funds Like Stocks

“Historically, when silver gets going, it tends to make huge percentage moves. I think you can see that from the long-term chart below. For instance, back in November 2008, silver was selling for 8.65 an ounce. Today an ounce of silver is selling for 18.10 an ounce, more than double.

“Silver is now climbing back from a drastic correction, as you can see via the chart below. In December silver hit a high of over 19 dollars an ounce. Back in 1980 (and I remember this well) silver climbed wildly (limit up day after day), and it hit $50 dollars an ounce around January of 1980.

“Silver is now in an erratic bull market. How high it may go I don’t know, but I would not be shocked to see silver ultimately climb above its 1980 price of $50 bucks an ounce. Historically, once ounce of gold will buy around 15 ounces of silver. Today an ounce of gold will buy 62 ounces of silver. Silver compared with gold is dirt-cheap today.

“How to invest in silver? I like the 100 ounce bars if you can find them (they weigh about 8.5 pounds each). Or buy the 10 ounce bars. Or you can buy the exchange traded fund SLV.

“Yesterday, both gold and platinum closed at new highs for the move. Silver is lagging behind, but when silver finally catches up, it may be a stunner. Over the last year the price of silver doubled; gold didn’t perform that well.

“Below I show a point & figure chart of silver. The white metal is now in a well-established rising trend. The upside target is the 21 box. If silver hits the 22 box, that will light the fuse. If silver hits the 22 box, I will view the whole structure that you see on this chart as one huge base.

“To put it briefly, I like silver. Gold has one advantage over silver, every central bank owns some gold, and most want more.”

Source: Richard Russell

Related posts:

1. Why I am bullish on gold – Richard Russell (Dow Theory Letters)
2. Richard Russell (Dow Theory Letters): Potential buyers of gold?
3. Richard Russell (Dow Theory Letters): Are equities offering value?
4. What are the markets trying to do? – Richard Russell (Dow Theory Letters)
5. The Point & Figure – Richard Russell from Dow Theory Letters

If you’re bullish about Brazil, Russia, India, and China, then don’t forget there is an entire second tier of less-appreciated-but-giant economic growth stories — the MAVINS.

Commodities play a major role for these economies.

They are uniquely positioned to feed and benefit from global economic growth via their relative commodity advantages, yet at the same time, they have massive domestic market expansion opportunities due to a surplus of under-utilized land or people.

With the right policies, these nations are likely to blow away expectations over time and become leading powers in their regions. The MAVINS combined economies could easily equal 60% of today’s America by 2020, over 200% of today’s America by 2050, and then keep growing robustly thereafter

“M” Mexico

Don’t let recent criminal violence fool you, Mexico will become an enormous economy. Goldman Sachs even originally considered including the nation as a BRIC, but then removed it due to finding it ‘too developed’. Yet Mexico still has a very, very long way to go, with GDP per capita on a purchasing power basis of just $14,300 vs. America’s $47,500.

The country also boasts a growing middle class and a healthy population growth trajectory. At 111 million people now, Mexico is set to reach 125 million by 2020 and then 148 million by 2050.

Strategically positioned next to the world’s largest economy, Mexico will rapidly close the income gap it has with the U.S., essentially as a direct extension of the U.S. economy.

2020 Potential GDP in Today’s Dollars: $2.5 trillion* (17% of an America)

2050 Potentail GDP in Today’s Dollars: $10.9 trillion**  (75% of an America)

Source: CIA World Factbook, U.S. Census Bureau, GDP and GDP per capita using purchasing power parity

*Assuming a back-of-the-envelope ~5% real GDP growth, 1% due to population growth and 4% due to productivity.

**Assuming a back-of-the-envelope ~4.7% GDP growth, .7% due to population growth and 4% due to productivity.

“A” Australia

Australia is one of the most leveraged plays on global growth. Blessed as one of the richest commodities sources in the world, Australia literally provides the building blocks of Chinese growth and sits atop an vast reservoir of future wealth generation.

 In addition, it has a well developed manufacturing and services economy plus an enormous surplus of land.

Theoretically, Australia could one day be another America, if only they could solve the continent’s water shortages and then exponentially increase the population through progressive immigration policies and cheap land. Yet they’ll be huge even before considering such long-term population potential.

2020 Potential GDP in Today’s Dollars: $1.5 trillion* (10% of an America)

2050 Potentail GDP in Today’s Dollars: $5.8 trillion**  (40% of an America)

Source: CIA World Factbook, U.S. Census Bureau, GDP and GDP per capita using purchasing power parity

*Assuming a back-of-the-envelope ~5% real GDP growth, 1% due to population growth and 4% due to productivity. Population of 24 million as per current Census Bureau forecasts.

**Assuming a back-of-the-envelope ~4.8% GDP growth, .8% due to population growth and 4% due to productivity. Population of 29 million as per current Census Bureau forecasts.

 

 

“V” Vietnam

Vietnam will undoubtedly be one of the hottest individual growth stories this decade.

 Following the Chinese growth model, this communist country is rapidily liberalizing its economy while benefitting from the near-term political stability and centralized command and control that communism provides.

Agriculturally rich with a decent amount of oil, Vietnam is wasting no time to rapidly develop its manufacturing sector and move up the value chain. Coastally located with cheaper labor costs than many regional neighbors, relocating manufacturing to Vietnam will increasingly be a no-brainer. Even for Asian nations.

And its population will be huge. Already larger than France or Germany, Vietnam’s population will comfortably exceed that of Japan by 2050. Vietnam’s meteoric rise is virtually preordained.

2020 Potential GDP in Today’s Dollars: $550 billion* (3.8% of an America)

2050 Potentail GDP in Today’s Dollars: $3.6 trillion**  (25% of an America)

Source: CIA World Factbook, U.S. Census Bureau, GDP and GDP per capita using purchasing power parity

*Assuming a back-of-the-envelope ~7% real GDP growth, 1% due to population growth and 6% due to productivity. Population of 98 million as per current Census Bureau forecasts.

**Assuming a back-of-the-envelope ~6.6% GDP growth, .6% due to population growth and 6% due to productivity. Population of 111 million as per current Census Bureau forecasts.

“I” Indonesia

Despite decades of past military rule and corruption, today Indonesia is a fast growing economy, even if it comes in fits and spurts.

 It’s also come a long way politically and is one of the largest democracies in the world with 240 million people. That’s more than France, Germany, and England combined.

Standards of living have a long way to rise as well, with GDP per capita of just $3,900, which means tons of future potential. For example, if Indonesia could simply hit Mexico’s standard, its economy would be over three times its current size.

The country is rich in oil, gas, coal, tin, copper, silver, and gold plus conveniently placed much closer to China and India than many other commodities sources. Finally, its long-term potential as a consumer market is enormous given that by 2050 it will have 313 million people, more than the U.S. has today.

2020 Potential GDP in Today’s Dollars: $1.8 trillion* (13% of an America)

2050 Potentail GDP in Today’s Dollars: $9.3 trillion**  (65% of an America)

Source: CIA World Factbook, U.S. Census Bureau, GDP and GDP per capita using purchasing power parity

*Assuming a back-of-the-envelope ~5.9% real GDP growth, .9% due to population growth and 5% due to productivity. Population of 267 million as per current Census Bureau forecasts.

**Assuming a back-of-the-envelope ~5.7% GDP growth, .7% due to population growth and 5% due to productivity. Population of 313 million as per current Census Bureau forecasts.

“N” Nigeria

Nigeria is the most populous nation in Africa, and one of the most populous in the world, with 155 million people. Furthermore, it’s expected to maintain an exceptionally high population growth rate through 2050, with a projected future 2050 population of 264 million people.

 Undoubtedly the nation’s growth story remains in its infancy, but we shouldn’t dismiss this emerging African giant. Nigeria is growing and liberalizing its economy, having only recently emerged from its military past as a new democracy.

Extremely rich in oil, some might argue that Nigeria is just an oil-driven economy, but in the same sense it’s highly leveraged to global growth. Plus, it has huge domestic market potential. If the right economic policies can be maintained, it’s likely to diversify its economy over time. If GDP per capita could one day reach just Mexico’s current level, the economy would quintuple. 

2020 Potential GDP in Today’s Dollars: $630 billion* (4% of an America)

2050 Potentail GDP in Today’s Dollars: $3 trillion**  (21% of an America)

Source: CIA World Factbook, U.S. Census Bureau, GDP and GDP per capita using purchasing power parity

*Assuming a back-of-the-envelope ~5.4% real GDP growth, 1.4% due to population growth and 4% due to productivity. Population of 182 million as per current Census Bureau forecasts.

**Assuming a back-of-the-envelope ~5.3% GDP growth, 1.3% due to population growth and 4% due to productivity. Population of 264 million as per current Census Bureau forecasts.

 

“S” South Africa

South Africa is the most successful African

economy with strong modern institutions, vast commodity wealth (gold, platinum, coal, diamonds), and an excellent location at the tip of Africa.

 The nation has achieved a lot already, but there’s still a long way to go. While one portion of the population lives a developed-nation lifestyle, almost half the population remains below the poverty line according to the CIA World Factbook. This speaks to the economic potential South Africa could unlock, and surprise the world with.

We think it will happen. Already the economy is well diversified across mining, agriculture, services and manufacturing and, like other MAVINS, can feed into global growth with its commodities advantage while developing its domestic markets further. Positioned as the gateway to Africa, South Africa will be the continent’s financial hub as well. Look out for this rising star.

2020 Potential GDP in Today’s Dollars: $880 billion* (6% of an America)

2050 Potentail GDP in Today’s Dollars: $2.6 trillion**  (18% of an America)

Source: CIA World Factbook, U.S. Census Bureau, GDP and GDP per capita using purchasing power parity

*Assuming a back-of-the-envelope ~5% real GDP growth, 0% due to population growth and 5% due to productivity. Population of 49 million as per current Census Bureau forecasts.

**Assuming a back-of-the-envelope ~5% real GDP growth, 0% due to population growth and 5% due to productivity. Population of 49 million as per current Census Bureau forecasts.

 

 

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4. COMMODITIES. Why?
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The headline above could just as well apply to ETFs as a whole, where there are now over 100 issues that average in excess of one million shares traded per day. Just using ETFs from the million share club, an investor can go long or short stocks, use leverage, pick from a wide variety of sectors, tackle geographies as off the beaten track as Malaysia, make use of junk bonds and inflation-protected bonds, dive into commodities or real estate, and even take a position on the VIX. Better yet, most of these ETFs have options associated with them, which further broadens the investing opportunities that are available.

I am particularly fond of ETFs because of the broad range of asset classes, sectors, geographies and other investment ideas they make easily accessible. For the options trader, ETFs are a boon because these investment vehicles all but eliminate single stock risk in the form of earnings, M&A activity, executive shuffles, legal matters and a myriad of other company-specific events.

In 2010 I intend to give more attention to ETFs in this space in hopes of educating and encouraging those for whom the rapidly expanding ETF universe is a good fit for their trading goals and approaches.

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The move has been driven by a combination of year end position squaring, a more upbeat tone from the U.S. Federal Reserve Bank and not least the cut in Greece’s credit rating.

News this week that Standard & Poor’s had cut the credit rating of Greece, as it struggles with a huge budget deficit, highlighted the risk ahead for the Euro zone with other countries finding themselves in a similar situation. The ten year yield spread between German and Greek government debt rose above 2.5% putting the nine year old currency under some pressure as we head towards 2010.

The timing of the downgrade had maximum impact as markets are slowing down ahead of year end thereby leaving it extra exposed to adverse news. The continued dollar weakness that had been expected as an almost certainty has come under renewed scrutiny and over these past few weeks a more balanced view on the dollar has begun to emerge.

Gold in particular has been struggling with the continued dollar strength. This has got to be viewed in the context of how the market has been performing over the past few months with large flow of funds moving into a crowded space. The USD 1,100 level was tested this week which represents a near 11% correction from the highs made some two weeks ago.

Technically the USD 1,100 represents a decent level of support but continued dollar strength could trigger additional position squaring with the October high at USD 1,070.80 providing the next level of support followed by USD 1,030 which is trend line support from the October 2008 low. Upside resistance is firm at USD 1,142 for the time being and a close above is required before a new push to the upside can be established.

Until we know for sure why the dollar has found some traction, getting out of commodities as an automatic reaction seems premature. If it happens on renewed hope of a U.S. recovery it should be viewed positively and a decoupling of the inverse relation between strong dollar weak commodities could come to an end. Given the time of year it is too early to speculate and the main thing for investors are to have their exposure at comfortable levels.

The energy sector found some support this week as the inventory data showed big draws in crude and distillate as imports stayed low and demand began to pick up helped by colder weather. The most strikingly impact from colder weather in the U.S. has been the performance of natural gas which have rallied 33% this month most recently helped by a larger than expected reduction of NG in storage. The October to November downtrend has been broken and the January high of USD 6.24 is next level of resistance.

Crude oil found support and rallied on the storage data. Focus on the stronger dollar and sluggish outlook for Q1 2010 have so far kept prices under pressure during December but renewed optimism about the prospect for a global economic recovery helped prices put in the biggest weekly gain since October. Support was found below USD 70 and resistance is located at USD 75 on the front month continuation. Next week sees the expiry of the January contract with February becoming the new front month.

We have seen big differences in performance among commodities in 2009. This is worth keeping in mind ahead of the annual rebalancing from S&P GSCI and DJ-UBSCI between the 5^th and the 9^th business day in January. In order to keep the same base weighting between commodities in their portfolio they have to reduce positions of strong performers and add positions of weak performers from 2009.

Given the current performance this rebalancing will have the biggest negative impact on WTI crude and HG copper and positive impact on natural gas and corn. Given that total asset under management in these two commodity funds stands above USD 65 billion some impact can be expected.

Related posts:

1. Weekly Commodity Update
2. Weekly Commodity Update 23-11-09
3. Weekly Commodity Update 11-12-09
4. Weekly Commodity Update 11-1-10
5. Weekly Commodity Update 30.10.09

“Mobius, chairman of Templeton Asset Management Ltd., said he’s increasing holdings in all emerging markets, with particular focus on the four biggest developing-nation economies collectively known as the BRICs.

“‘BRIC countries are really at the top’ of our favorite holdings, Mobius, who oversees about $25 billion of emerging-market assets, said in an interview at the sidelines of a press conference in Istanbul today. ‘You can see BRIC countries have been best performing.’

“Russia’s RTS Index has surged 135 percent this year, the biggest gainer among 89 equity gauges worldwide, and Brazil, China and India rallied more than 75 percent as the global economic recovery spurred demand for commodity exports. While developed countries may shrink 4 percent this year, emerging markets as a whole may avoid a contraction with zero change in gross domestic product, Mobius said.

“While a ’sudden violent correction’ is likely in a bull market, investors should be ‘ready to buy’, Mobius told reporters.

“The biggest growth areas in emerging markets are in the consumer and commodity industries, with China and Brazil offering among the cheapest stocks worldwide, Mobius said.”

“The MSCI gauge of 22 developing countries is valued at 20 times reported earnings, according to data compiled by Bloomberg. The MSCI China Index trades at 17.7 times profit, while the MSCI Brazil Index is valued at 18.2 times earnings. That compares with a price-earnings multiple of about 30 for the MSCI All Country gauge of developed and emerging economies. The S&P 500 is valued at 22 times profit of the companies in the index.”

Source: Seda Sezer and Tian Huang

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1. Emerging Markets with Mark Mobius
2. Russia leading the BRIC Rally
3. Q&A on emerging markets with Mark Mobius
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This week was the last full trading week ahead of the U.S. Thanksgiving holiday next week. This normally signals the beginning of the winding down for year end. After that time many traders and funds begins to focus on year end and on how they should be positioned into the normally quiet month of December.

Some risk fatigue began to emerge towards the end of the week with energy and base metals giving up some of their recent gains. Whether it is that or just early position squaring time will tell.

The wall of money floating around in the financial system continues to benefit commodities as a way of diversifying portfolios and in order to shield investments from a non-negligible risk of a US debt and currency crisis.  A research note from a major bank sees flows into commodities this year of USD 60 billion which will bring the total amount invested up towards USD 240 billion at year end.

Most precious metals and some base metals made new highs for the year and the Baltic Dry bulk index, which indicates the cost of shipping dry bulk commodities around the globe, rallied sharply. Gold still catches most of the headlines as it despite moving into a very overbought situation continues to make new highs reaching USD 1.150, a 12.3% rally since the news about India buying IMF gold broke some weeks ago.

We see the break above the 2008 high as a signal that a new rally has been initiated which could take the price of gold towards an initial target of USD 1.300 followed by a potential 5 year target of USD 1.500. Gold still has a long way to go – both in terms of price appreciation and in terms of years of increases. It will at times be volatile, experiencing quarterly declines, but the overall direction will be higher

Near term however gold has moved into an extreme overbought situation which has not been seen for many years and we urge new investors to be patient as a correction back towards USD 1,120 and maybe even USD 1,100 is increasingly likely. The trigger for a correction could be the upcoming U.S. holiday next week as positions in correlated markets like the EURUSD could run into profit taking and thereby remove some of the recent support.

The energy sector continues to be driven by present reality versus future expectations as the overall demand situation still remains weak. Good demand from emerging economies continues to be off-set by continued weak demand from the developed economies.

On this basis the overall investor appetite for commodities is still the main driver of energy prices as investors seeks shelter and a hedge from the falling dollar. This tuck of war has kept Crude Oil range bound over the last month with USD 75 to 80 being the current range.

The global economic pick up over the last few quarters is still happening on the back of continued job losses and that leaves a big question about when and by how much consumption will pick up. For now though the worries about dollar weakness and future inflation should be enough to keep the prices supported over the coming weeks and months.

Technically the front month Crude of January is currently stuck in a bullish flag pattern between USD 75 to 80 range and just the last few days some risk adversity has been seen on the back of a stronger dollar. A greater bullish potential remains as long prices stays above USD 75, otherwise there is a risk of returning to the recent USD 65 to 75 trading range. Some position squaring ahead of the US holiday next week will probably be the main focus into the early part of next week.

Related posts:

1. Weekly Commodity Update
2. Weekly Commodity Update 21-12-09
3. Weekly Commodity Update 30.10.09
4. Weekly Commodity Update 11-12-09
5. Weekly Commodity Update 11-1-10

The success of the stimulus and the lofty economic numbers China has managed to produce amidst a global crisis has led many to claim China is the next great bubble.

We see five reasons China is not a bubble and believe that its prospects remain strong for at least the next 20 years.

1) Consumption continues to be strong
China is transitioning to a consumption-based workforce. Retail sales rose 16.2 percent in nominal terms during October and have been accelerating. The retail sales figure isn’t a perfect proxy, but it is the best available indicator of overall consumption because it does include sales to consumers and not just purchases made by the government.

We also saw strong growth in industrial production (IP) and power generation both were up more than 16 percent on a year-over-year basis in October. Housing starts were up more than 50 percent (yoy) for the second straight month.

2) Structural changes to domestic economy
We’re seeing a transition to a service-related economy. The service industry is the fastest-growing sector (roughly 20 percent faster than construction) and now accounts for one-third of China’s workforce.

In general, the size of the service sector is directly correlated to the amount of goods and services an economy consumes. This is why the government has spent such a large amount of the stimulus on areas that benefit the domestic market – that’s where it thinks the economy is headed.

3) Stimulus exit strategy in place
China’s stimulus exit strategy is simple – create a strong economic base that the private sector can launch from. After private investment surpassed that of state-owned enterprises in September, the two flip-flopped during October.

Given the environment, month-to-month fluctuations like this are to be expected since private investment is dependent on how willing Chinese citizens are to put their own money at risk. Even though Beijing is determined to wean China’s economy off of government stimulus, the government will not hesitate to ramp up activity should the private investors become risk-averse.

4) Government controls on flow of money
After lending more money over the first five months of 2009 than all of 2008, we’ve seen loan numbers come down. There’s a longstanding pattern of new loans slowing down during the second part of the year as banks have historically rushed to meet government-mandated loan quotas.

The magnitude of this year’s slowdown – trillions of yuan – is evidence of Beijing’s dedication to prevent a bubble from forming. Once the figures grew too large, the government moved quickly to hit the brakes.

While US regulators have many holes to plug in order to keep the economy afloat, the limited number of investment options available to Chinese citizens – basically stocks, bank savings and property – makes it easier for the government to institute controls.

This is what happened in 2007 when the government forced a slowdown in the housing market before it overheated. After its economy grew 12.6 percent in the second quarter of 2007, China took more aggressive actions to cool its economic growth. The government raised lending rates and also raised reserve requirements to shrink the pool of money available for lending.

5) China’s long-term goals match up with short-term goals
In the US, the Federal Reserve and policymakers are faced with conflicting goals. They need people to spend in order to get the economy rolling again, but their end game is to have the American people spend less and save more.

It’s the opposite for China.

The problem in China is excess savings and not enough spending. The short-term and long-term challenges are the same – to get people to spend more.

Recent signals that China will begin letting the yuan appreciate against the US dollar are not new. For several years, Beijing has stated a gradual appreciation of the yuan will benefit the economy, and CLSA expects Beijing to resume a 5 to 7 percent annualized appreciation process about midway through 2010.

Rapid economic growth may be common in emerging economies, but there’s only one China. Already the world’s third-largest economy on a nominal GDP basis and second-largest based on purchasing power parity, the Chinese aren’t making a break from the back of the pack – they’re leading it.

Domestic consumption, the rise of the service sector and increased private investment won’t make China immune to economic bubbles, but these strengths will provide some protection from external forces.

Source:  Romeo Dator

Related posts:

1. Commodities Bubble? Or Credit Bubble?
2. Ready to Ride the Golden Bubble
3. China: Signs of a recovery – already?
4. One Last “Bubble” Remains to be Popped
5. China – better days ahead?

(1) Interest rates are at zero, which means the ‘opportunity cost’ of owning gold now is highly favorable. You sacrifice no yield in owning gold vs. Treasury bills. T-bills pay you nothing, so you might as well have your money in gold.

(2) The Bernanke Fed will evidently stop at nothing in its all-out attempt to ‘jump start’ the wobbly US economy. This means spending and building debt at a never-seen-before rate. This will result in inflation. The Fed can create fiat money – any quantity at will, but it cannot direct where that money will go. So far, the money is not going into the economy, banks remain reluctant to lend and consumers are reluctant to spend. The newly-created money has been going into bank reserves and into the stock market. Stocks have been rising on an ocean of liquidity. The sinking dollar has been a huge help to the big Dow-type stocks which benefit from their ability to export. This is resulting in world-wide central bank inflation as the banks seek to devalue their money in an effort to keep the dollar strong.

(3) The world’s central banks are now seeking to protect themselves from a falling dollar by buying gold. After years of selling gold, ironically, the central banks are now buying gold. In today’s Wall Street Journal we see the headline, ‘Central Banks Join A New Gold Rush’. This is indeed ironic. In swapping their own paper for gold, many central banks are admitting that gold is superior to the very paper they are creating out of thin air.

(4) Many nations are now seeking to boost the ratio of gold to paper in their reserves. The US has the largest ratio of gold to junk fiat paper, 77.4%. But the US stupidly only places the value of our gold at $42.22 an ounce. If the US marked our gold to market, it would be a tremendous help to our government’s balance sheet. But the US prefers to live in a fantasy world where gold is worth less than $50 an ounce!

Germany has 69.2% of its reserves in gold.

Italy has 66.6%.

France has 70.6%.

UK has 17.6% (after idiotically selling most of its gold near the low below $300 an ounce).

Japan has 2.3% of its reserves in gold.

India has 4.0%.

Russia has 4.3%.

China has 1.9%.

It’s easy to see that Russia, India and China are low on gold. All three would like to at least double the percentage of gold in their reserves. The race is on for these central banks to accumulate gold without running the price of gold sky-high.

(5) In the US, literally no one owns gold. Rather, US citizens are selling their gold (jewelry) to companies who are advertising that they’ll buy ‘your overpriced’ gold for cash.

(6) A few nations are actively promoting the ownership of gold. China, the world’s biggest miner of gold, has been encouraging its people to buy gold. In London, Harrod’s department store is now selling gold coins and bars to anyone who has the paper to buy gold. Within a year or so, I expect public buying of gold to reach a crescendo. Interestingly, most Americans have never seen a gold coin.”

Although gold certainly looks bullish on a medium- to longer-term horizon, one must be cognizant of the precious metal perhaps having risen too much too soon for the moment. David Fuller (Fullermoney) said: “On a very short-term technical basis, gold is temporarily overbought following its steady march higher ever since the market was surprised by India’s purchase. Today’s small key day reversal suggests that a pause and consolidation may now occur, possibly similar to the small reactions and trading ranges seen in September and October. However, we may also see a briefer and shallower consolidation, as is often the case when a trend becomes more widely recognised and therefore attracts participation.”

Sources: Richard Russell

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3. Richard Russell (Dow Theory Letters): Silver – “poor man’s gold”
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5. Decline of the US dollar – Richard Russell

The BRIC countries (Brazil, Russia, India, China) have been standouts this year.  Russia is up the most out of all countries with a gain of 126.71%.  Brazil, China, and India are all up more than 70%.  Along with Russia, the Ukraine, Argentina, and Peru are up more than 100% year to date.

Eleven countries are down so far in 2009.  Ghana is down the most at -48.26%, followed by Puerto Rico (-40.56%), Bermuda (-38.36%), and Costa Rica (-35.37%).

Source:Bespoken Research

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5. Country ETFs

As investors know, gold is currently the commodity of the day, and as shown in its chart, it is currently trading right at overbought territory.  Silver and platinum have rallied along with gold, but they don’t quite have the relationship with the dollar that gold has, so investors haven’t plowed into them as much.  Corn, wheat, orange juice, and coffee have also all done well recently.

Source: Bespoken Research

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As printing presses are running at full speed to produce ever-increasing quantities of fiat money as governments engineer the greatest asset price reflation in human history – and the US greenback is heading South – the longer-term fundamental case for the yellow metal is arguably positive.

“The gold bug has caught several big hedge fund managers this year including John Paulson of Paulson & Company, Kyle Bass of Hayman Advisors and David Einhorn of Greenlight Capital, who believe enormous monetary and fiscal stimulus that has been injected into the global economy will eventually result in hyperinflation,” said The New York Times.

The gold price is not only making headway in US dollar terms, but also in most major (and minor) currencies as illustrated by the table and graph below. This is a manifestation of increased investment demand, whereas the initial rise in the gold price from its low in 2001 ($250) was mostly a reflection of US dollar weakness.

Illustrating the message even more vividly, is the chart below of gold expressed in a basket of emerging-market currencies by dividing the dollar bullion price by the Wisdom Tree Dreyfus Emerging Currency ETF (CEW).

The shorter-term technical picture is also looking interesting.

Seasonally, the period from November to December has traditional been good for gold, with average gains ranging from more than 1% to almost 2.5% since 1970.

I remain bullish on gold in the medium term, especially as I believe the vast money printing by central banks could set off strong inflation pressures down the road. I will not be surprised to see bullion remaining in a secular uptrend in the medium term. Add bullion to your portfolios, but given the notorious volatility of the metal only do so on pullbacks.

Research: Prieur du Plessis

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The rebound in GDP however positive unfortunately came about primarily due to a rise in consumer spending helped along by various government subsidies such as “cash for clunkers” and tax credits for homebuyers. Both these subsidies have now been removed and the big question going forward is weather higher consumption can be sustained without government support.

Despite the rise in economic activity household disposable incomes fell during the quarter as unemployment kept rising. This lack of consumer confidence will play an important role during the next few months and whether the risk appetite will stay very much depends on economic data, crucially U.S. employment data next Friday.

The two main market drivers once again decided the direction during the week as early dollar strength combined with a 5.5 pct sell off in the S&P 500 sent commodities looking for support. Interesting support levels were tested in the process but the U.S. number were good enough reason to halt the return of risk aversion.

Crude Oil rally ran out of steam this week as weaker stock markets and an unexpected build in Gasoline inventories gave bears the excuse to test support that they had been looking for. The sell off only lasted a few days as support from previous highs around USD 77 halted the move.

Near term we expect continued consolidation with the range trading being the favoured strategy by most traders. Look for support at USD 77 followed by USD 75 and resistance at USD 82 (100 week moving average) followed by USD 85.

U.S. natural gas prices slipped after inventories rose 25bn cubic to another record of 3,759 bn cubic feet. One piece of good news is that is now highly unlikely that the national working capacity limit of 3,900 bn cubic feet will be breached as winter demand will increase over the next few weeks .

The market is however still left with a huge overhang of supply which has put the new front month of December under pressure as soon it became the spot month. Unless we see a change in weather forecast further upside seems limited. The December contract on Nymex will be stuck in a wide USD 5.45 to 4.35 range until further news becomes available.

The brief return of risk aversion which saw the dollar at one point strengthen by 2.5% also made an impact on gold thereby confirming the continued strong relationship between the two.  Spot gold dropped 4% but found support at the previous high at USD 1024.30 before rallying strongly ahead of the weekend.

Technically the new trading range continues to take shape with support at USD 1024 now confirmed and resistance at USD 1070 having proved solid over the last month. Additional strong support can be found at USD 995 which is trend line support from the 2008 low.

A worrying development recently has been the renewed rally in the price of rice. According to the U.S. Rice Producers prices may return to record levels as bad weather curbs output in major growers including India. In addition the increased cost of oil has pushed up the cost of fertilizers boosting prices further.

Everyone remembers the food price protests that swept the globe last year after fears of supply shortages prompted prices to surge to a record of USD 25 per 100 pounds in April 2008. The Philippines has brought forward rice imports for 2010 after cyclones have reduced the domestic output while the situation in India is being watched closely. So far they have not any plans to import rice as its reserves are adequate.

During the week CBOT Rice for January delivery reached levels not seen since January this year. Look for resistance at USD 14.80 on the front month continuation while a break could set up a move back towards USD 16.35.

In summary commodities had the biggest rise since May primarily driven by agricultural and energy markets with the CRB index rising 10%. Going into November continue to look for clues in the dollar, stock markets, weather forecast and economic data, especially U.S. employment data next Friday November 6.

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ETFs are passively managed investment funds traded publicly on stock exchanges in the same manner as traditional stocks. An increasingly popular product, ETFs combine the benefits and ease of investing in stocks with the advantages of managed fund investing and ready-made diversification of index tracking.

ETF investing with Total Trader

• Lower management fees than traditional managed funds
• Easy access
• Intraday liquidity
• Bought and sold through major stock exchanges like stocks
• Linked to major market indexes
• Suits both shorter term traders or longer term investors that wants to diversify

ETF Growth

About ETFs

What are Exchange Traded Funds?

Exchange traded funds (ETFs) are index funds or trusts that are listed on an exchange and can be traded in a similar fashion as a single equity. Today, the number of ETFs available continues to grow and diversify. Investors can buy or sell shares in the collective performance of an entire stock portfolio, or a bond portfolio, as a single security. Exchange traded funds allow some of the more favourable features of stock trading, such as liquidity and ease of equity style features to more traditional index investing.

Each ETF tracks an index or benchmark, meaning the objective for an ETF is to replicate the performance of the index or benchmark that the ETF is tracking. ETFs track specific stock, bond, commodity or currency indices, some of which have a regional focus, while others have a sector focus, thus making them ideal for diversifying portfolios

ASX ETFs  

Domestic - Investing in ETFs is easy as they trade in exactly the same was as any other share on the Australian Stock Exchange.

Four of the major providers have ETFs and ETCs on issue on the Australian Stock Exchange. These providers include ETF Securities, iShares, State Street Global Advisers (SSgA) and Vanguard Investments.

ASX code of popular Domestic ETFs (ASX Code – Fund Name)

SFY – SPDR S&P/ASX 50 Fund
STW – SPDR S&P/ASX 200 Fund
SLF – SPDR S&P/ASX 200 A-REIT Fund

Click here for a full list of ETFs availiable on the ASX

Commodity ETFs

Exchange Traded Commodities (ETCs) are similar to ETFs, except they track the performance of an underlying commodity index rather than stock market index. ETCs are also traded in the same manner as stocks but provide exposure to a range of commodities and commodity indices, which include energy, agricultural, metals and softs.

ETCs are open-ended securities, like ETFs, and are also asset backed by physical bullion or commodity (futures) contracts.

Benefits of Commodity ETFs:

• Easy access the markets – ETCs are traded as stocks on major  exchanges
• Low cost (yearly Management Expense Rates as low as 0.39% for some ETCs)
• High liquidity (matching the underlying commodities physical or futures markets)
• Daily transparent pricing
• No margin calls, need to roll contracts or risk of delivery associated with Futures

Emerging Markets ETFs

ETFs are a great way to invest in often difficult to access emerging markets such as China, India and South America. An emerging market economy is defined as an economy with low to middle per capita income. Such countries constitute approximately 80% of the global population and represent about 20% of the world’s economies.

Major ETF Providers

http://www.claymore.com/etfs - Claymore Securities offers a lineup of ETFs that track key market segments.

http://www.holdrs.com - HOLDRs (Holding Company Depository Receipts) are a group of unmanaged sector portfolios developed by Merrill Lynch that do not track specific equity indexes.

http://www.iShares.com -  iShares are a family of ETFs managed by Barclays Global Investors (BGI). Products cover multiple asset classes including stocks, bonds, and commodities.

http://www.iPathetn.com -  iPath are a series of ETNs managed by Barclays Bank that cover currency, commodity and emerging market indexes.

http://www.powershares.com -  The PowerShares offers a family of ETFs that utilize a proprietary model called Intellidex to screen a large group of stocks for those that have the best potential for capital growth. Each ETF portfolio strives to keep market exposure to specific segments within the U.S. economy and is rebalanced quarterly.

http://www.proshares.com -  ProShares offers a lineup of ETFs that are leveraged and inverse performing funds.

http://www.rydexfunds.com -  Rydex Investments offers a lineup of ETFs that offer both long market exposure and inverse market performance.

http://www.spdrindex.com -  The Select Sector SPDRs are ETFs designed to follow the 9 key industry sectors within the S&P 500.

http://www.spdrs.com -  State Street Global Advisors manages a diverse line of ETFs that cover major stock and bond indexes along with specialized asset classes like gold (GLD).

http://www.vanguard.com/etf -  Vanguard ETFs follow broadly diversified stock and bond indexes. Fund investors that own conventional Vanguard index mutual funds may convert to Vanguard’s ETF share class for a small fee.

http://www.wisdomtree.com -  WisdomTree Investments offers ETFs that are fundamentally weighted according to dividends and earnings.

CFDs on Exchange Traded Funds (ETFs)

We offer a range of CFD over ETFs which allows you to have all the benefits of an ETF but with added gearing. Find out more about CFDs

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The price of gold closed at record highs today exceeding $1,040 per ounce throughout the day.  While gold is at record highs in dollar terms, the commodity is still down 10% from its highs when priced in Euros and Yen.  As shown in the charts, the price of gold is up considerably over the last five years, but the recent run has only been strong in dollar terms.  This indicates that the strength is solely a function of a weaker dollar rather than any real pickup demand.

Gold Analysts Are Far From Gold Bugs

Below we highlight a price chart of gold since the start of 2008 along with the median price estimates of gold analysts across Wall Street going out to 2013.  The price estimates shown are quarterly through the first quarter of 2011, and then yearly from the end of 2011 through the end of 2013.  Based on these estimates, gold analysts don’t seem too worried about a falling dollar and rising inflation. 

Their current estimates for the end of 2009 are at $960, and they get up to $1,000 by Q3 2010 before progressively dropping all the way down to $800 by the end of 2013.  This isn’t to say that there aren’t analysts expecting gold to be higher than it is now in the coming years, but the collective estimate is currently for the metal to head lower.

Related posts:

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Source: Bespoken Research

Source:

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Natural gas, on the other hand, has made a significant move higher and broken its long-term downtrend.  With gold charging higher, silver and platinum have also moved up, but they haven’t broken to new rally highs yet.  This is a key signal that the gold move is pretty much based solely on the dollar’s move lower. 

Looking at the rest of the bunch, copper has actually been trending downward, corn has bounced nicely recently, wheat is close to oversold levels, and coffee and orange juice are in neutral territory.

Source: Bespoken Research

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In the days ahead traders will be watching the S&P 500 stock index closely after the break below USD 1,034 on Thursday.  Activity reports from purchasing managers in the US, UK and the euro zone have left the markets struggling ahead of the US Q3 earnings season which kicks off on October 7. The unemployment rate rose to a 26 year high as employers continue to cut jobs. Next Wednesday consumer credit which last month fell by a surprising USD 21.6 bn will be watched closely.

Meanwhile the Euro has begun to weaken somewhat against the dollar falling to EUR 1.4480, a three week low, ahead of important support at 1.4440. At the same time we have seen the yen strengthen against both the dollar and the euro which normally indicates that risk willingness is declining.

Crude Oil reacted strongly to the weekly U.S. storage data rallying back to the USD 70 level after having reached a low of USD 65. For now the upside seems pretty limited as economic data during the week indicated that the U.S. economy is still in the midst of the recession. Also the uncertainty about the direction of the dollar and stocks will play its part in keeping the upside capped for now.

Technically crude oil for December delivery is stuck in a range between trend line resistance at USD 71.90 and 100 day moving average support at USD 67.80. The outer range is now USD 65 to USD 75.

Natural Gas traders returned to the supply situation this week after a month long rally had elevated prices by 67%. The USDA said that underground supplies of natural gas were up 64 billion cubic feet to 3.589 trillion cubic feet, a new record high and up 16% from a year ago.

Technically a gap on the continued spot month chart down to USD 4.035 is in danger of getting filled. This could indicate another 10% drop from current prices on the new front month of November. The USD 4.00 level coincides with 200 day moving average so it will be a good support level.

Gold continues to trade sideways either side of USD 1,000 with sellers emerging on any uptick due to an overhang of speculative long positions. Some disappointment has begun to emerge as investors gets worried that a correction is needed before the next attempt on the 2008 high at USD 1,032.70. Inflation worries have eased further with the forward expectation having dropped to 2.85% from 3.31% back in August (chart below).

Nervousness about the health of stock markets as we head into the Q3 earnings season has not lifted prices and more importantly the risk of a stronger dollar could pull it lower. Technically stay long of Gold above USD 985 but take profits towards USD 1,020 and look for better levels to buy. Keep a close watch on a break below USD 970 as it could signal a deeper and longer correction which would force many to adjust their near term forecasts.

Grain and oil seeds markets continue to watch weather forecasts closely as we enter into the US harvest season. Fears about frost as seen a couple of weeks back is the main factor that could interrupt what is expected to be a record harvest for Soybeans and second largest for Corn. The USDA will update their current yield estimates, production and supply-demand outlooks on October 9.

Corn for December delivery is confined to a USD 300 to USD 350 range with prices having held up despite the record harvest expectations.  A break above USD 350 should trigger a move towards the August high at USD 376.

Soybeans for November delivery meanwhile lingers at the bottom of its USD 880 to 1035 range with the record harvest forecast keeping prices under pressure. Look out for a break above USD 940 as it could trigger a move back towards USD 977.

Related posts:

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As oil has moved to the bottom of its trading range in recent weeks, natural gas has finally moved to the top of its range.  Natural gas also just broke above its one-year downtrend line, and now traders will focus on resistance that was made at its highs earlier this year.

Metals have settled down over the past few days as the dollar has ralllied.  After trading above $1,000 for a short time, gold has moved back down to $992.  Corn and wheat remain in downtrends, while the breakfast drink commodities (orange juice and coffee) have charts that look like a heart-rate monitor with multiple spikes and falls over the past few months.

Source: Bespoken Research

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With the exception of a few Asian countries, most indices shown below are trading into overbought territory.  China’s Shanghai Composite is the only index trading below its 50-day moving average.  Australia, Brazil, South Korea, Taiwan, the UK, and the US look to be the most overbought of the bunch.  After trading in perpetual downtrends for nearly all of 2008 and the first few months of 2009, most countries have now been trading in solid uptrends for five months now, with only a brief pullback here and there.  Brazil, China, Hong Kong, India, Malaysia, Mexico, Singapore, Sweden, Spain, South Korea, and Taiwan have all taken out their 52-week highs in recent months, while the rest still have a bit further to go.

Source: Bespoken Research

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3. 2009 Country Stock Market Performance
4. Commodity Snapshot
5. Sector Snapshot

Source: Bespoken Research

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What do these countries have in common? One major theme is that they tended to have lower financial vulnerabilities due to more restrictive regulation and less developed financial markets, as well as larger and stronger domestic markets that sustained domestic demand. Moreover, they had the resources to engage in countercyclical fiscal and monetary policies, actions that were not possible in past crises. In contrast, countries that borrowed heavily to finance domestic consumption in the days of easy money are now facing sharp economic contractions. Despite the relative strength of these countries, however, their ability to return to sustained growth will depend on structural reforms that support consumption.

Latin America

A couple of countries in Latin America have thus far been able to weather this crisis better than their neighbors. Brazil and Peru stand out for their relatively healthy fundamentals and financial systems. Both countries have benefited from being relatively closed economies and from having diversified export markets and products. They also took advantage of the boom years (2003-08), reducing external vulnerabilities and increasing savings (fiscal and international reserves). By the time these the crisis hit, both countries had well regulated financial systems that saved them from being contaminated by toxic assets. The fact that their domestic credit markets are at an early developmental stage, so consumption is not very dependent on credit, helped them shelter internal demand. Finally, these countries enjoyed strong policy credibility.

Brazil

The Brazilian economy is definitely showing signs of resilience, given the massive adjustments among the developed economies. As early as Q1 of 2009, GDP data showed signs of resilient consumption despite the contraction in investments and the collapse of the industrial sector. Throughout the second quarter, manufacturing continued to show very weak performance vis-à-vis 2008 levels, although the sector has shown some tentative signs of improvement on a monthly basis. In the meantime, the retail sector continues slowly to adjust to a much less favorable environment than in 2008, and sales growth keeps on moderating, due to slower real income growth and a challenging credit atmosphere. Yet consumer confidence, which has now almost returned to precrisis levels, could support consumption, despite the labor market losses to come. The central bank’s own assessment of the state of the economy suggests that the monetary and fiscal stimuli will remain in place to help the recovery process. The fiscal packages for infrastructure and the housing sector, as well as the tax breaks to the auto industry and capital goods sales, should in part support the labor markets and the expansion of domestic production.

Peru

Peru’s economic performance has been relatively strong compared to its global and regional peers despite slowing sharply. In fact, Peru’s economy continued to grow in Q1 2009, with domestic confidence holding up and real lending to the private sector keeping growth at high levels. Construction projects continued, and the currency did not experience sharp fluctuations. Although Peru’s economy might contract mildly in Q2 and Q3 2009 due to tardy monetary policy actions and slow implementation of fiscal stimulus (an infrastructure development program), these programs are likely to take hold and prompt the economy to bounce back by the end of the year. A high level of international reserves also helped the central bank avoid destabilizing currency movements and properly provide liquidity to the financial system. Moreover, previous liability management operations helped Peru to reduce risks associated with maturity and currency mismatches, and to reduce external debt.

Asia-Pacific

Australia

Australia narrowly escaped a technical recession by force of luck and policy. Despite a slowdown in global manufacturing activity, China and other emerging markets continued to tap Australia’s abundant natural resources, boosting Australia’s net exports in 2009. Meanwhile, a leap in fiscal spending and a reduction in policy interest rates prevented a sharp falloff in consumer spending and housing prices. Thanks to resilience in Australia’s twin pillars of growth, exports and domestic demand, expenditure GDP growth turned positive in Q1 2009. Production and income measures of GDP nevertheless indicate Australia is effectively in recession, but the good news is that the bottoming of production around the world suggests Australia will avoid technical recession this year and that its effective recession will be brief.

China

China’s aggressive fiscal and monetary stimulus helped reaccelerate growth in the first half of 2009 from a near stall at the end of 2008. Manufacturing is expanding, new orders are up and the property market correction has been clipped. Yet it remains uncertain whether the government’s response merely bought time. China’s stimulus adds its own risks, including those of asset bubbles, overcapacity and nonperforming loans. Yet there are some signs that, supported by government incentives, domestic demand has been stronger than anticipated. A sustained increase in consumption, which has lagged overall growth in recent years, would require a reallocation of funds domestically, likely through patching holes in the Chinese social safety net. The Chinese stimulus has been dominated by infrastructure projects, which could boost productive capacity but would do little about structural factors that keep national savings rates high. However, there could be space to implement some such countercyclical policies in H2 2009 and 2010. If so, the Chinese recovery could have greater legs and could provide more support to other countries. If these efforts fail or are delayed, however, Chinese and global growth could be much more sluggish.

India

Despite slowing from highs of 8% to 9% growth, India’s economy will grow close to 6% in 2009. Amid domestic and global liquidity crunch, large domestic savings and corporate retained earnings are financing investment. Sluggish labor market and wealth effects have hit urban consumption. But low export dependence, a large consumption base and the high share of employment (two-thirds) and income (one-half) coming from rural areas has helped sustain consumption. Pre-election spending, especially in rural areas, and high government expenditure, are also pluses. Timely monetary and credit measures have played a key role in improving private demand, liquidity and short-term rates and reducing the risk of loan losses. Credit is largely channeled by domestic banks, especially state-controlled ones, which have low loan-to-deposit ratios and little exposure to toxic assets. IT exports have held up despite repercussions on jobs and consumer spending. The oil price correction cushioned India’s trade deficit and large foreign exchange reserves helped the country withstand capital outflows in 2008. High returns in real estate and infrastructure and planned liberalization also helped boost capital inflows and asset markets when global risk appetite revived recently.

The Philippines

The Philippines’ stalwart consumers saved the economy from the recessions that plagued its more export-dependent neighbors. Remittances proved surprisingly resilient despite the global economic slowdown as Filipino laborers, especially professional or skilled workers, continued to find strong demand overseas. This was partly due to the government’s diligence in forging new hiring agreements with several countries. Unperturbed remittance growth shielded domestic demand from high unemployment rates at home, which is obscured by the country’s very loose definition of employment. In the meantime, however, dependence on external demand for Filipino labor denotes a lack of progress in developing the local economy. Apart from land grabs by Persian Gulf countries, the Philippines has attracted little foreign investment of the kind needed to create jobs and lift Filipinos out of the poverty that afflicts a third of the country’s 90 million people.

Indonesia

The global downturn and commodity correction have hit Indonesia’s exports and government revenues. But a low export-to-GDP ratio and a greater reliance on domestic demand relative to its Asian peers have cushioned growth. The Chinese stimulus is, to a degree, boosting commodity exports. Fiscal stimulus and election spending, along with monetary, credit and foreign exchange measures since late 2008, have sustained private demand and financing needs, despite tight external credit. Corporations’ external liabilities and banks’ nonperforming loans are significantly lower compared to those of the 1997-98 crisis. External loans and attractive yields, meanwhile, are financing the fiscal deficit. A revival of risk appetite and the carry trade has buoyed capital inflows. Swap agreements with Asian central banks have cushioned exchange-rate pressures and the scarce foreign exchange reserves. Favorable election outcomes and aggressive antiextremist measures have boosted investor confidence despite some recent risks, and investors are bullish about ongoing reforms and unexploited opportunities in the resources sector.

Europe

Poland

Amid the general Eastern European malaise, Poland’s economy has been a bright spot. In the first quarter, the economy posted positive real growth of 0.8% y/y, outperforming all other E.U. economies with the exception of Cyprus.

Why is Poland a standout? For starters, Poland’s economy did not boom to the same extent as its regional peers in the Baltics and the Balkans, and therefore did not build up the same level of accompanying external imbalances, which helps explain its milder downturn. Second, as Eastern Europe’s biggest economy, Poland has a large domestic market, making it relatively less dependent on exports to ailing Western Europe. Third, the country’s flexible exchange rate and record-low interest rate have helped cushion the slowdown. Finally, Poland proactively distinguished itself from others in the region and boosted investor confidence in May by securing a $20.5 billion flexible credit line from the IMF, a special facility reserved for emerging markets with strong fundamentals. While Poland’s economy has weathered the global turmoil better than its regional peers, a rapid recovery is unlikely and the outlook is not without risks. In particular, Poland’s fiscal situation is deteriorating, which will likely push back the country’s planned euro adoption in 2012.

Norway

Although Norway’s economy slipped into negative growth in the fourth quarter, its downturn will be among the mildest of advanced economies, with analysts expecting a contraction in the range of 1.0 to 2.0% in 2009 and a return to growth in 2010. What set Norway apart are years of current account and budget surpluses (both in the double digits as a percentage of GDP), a sizable public sector and a hefty war chest of oil revenues amassed in the Government Pension Fund. Consequently, Norwegian policymakers have had ample room to use fiscal and monetary policy to soften the downturn.

Statistics Norway estimates the impetus from fiscal policy in 2009 to be 3% of mainland GDP–the strongest stimulus since the 1970s. Meanwhile, the benchmark interest rate is at an all-time low of 1.25%, down from 5.75% in October 2008. Also helping to alleviate the pain of contraction is the fact that Norway’s economy is well equipped with automatic stabilizers. Given Norway’s comparatively bright outlook, there is talk that the country will be the first among advanced economies to hike rates. The central bank sees the first hike coming in Q2 2010, though some analysts think it may come earlier.

France

The French economy managed to avoid a recession in 2008 and is expected fare best among the big four euro zone member countries in 2009. France’s more balanced domestic demand-led growth model has served it relatively better during a synchronized global downturn. The large social safety net fully served its automatic-stabilizer purpose in a countercyclical manner. Fiscal measures were targeted to the short term and included mostly nonrecurring spending. France’s relatively healthy banking sector received targeted support and is in a position to fully sustain the recovery in the euro zone.

North America

Canada

Despite relatively sound finances that helped it outperform the rest of the G7 in 2008 and early 2009, Canada’s exposure to the U.S. for trade and investment suggests its recovery may lag that of the U.S. (a trend that Q2 2009 data seems to support). However, a more consolidated financial sector with lower leverage, lower default rates and a revival of domestic demand should support recovery in 2010, albeit one characterized by below-potential growth. Canadian households and corporations still have more access to credit than their U.S. counterparts, a factor that helped buffer Canada from a more severe property market correction. Yet the nascent revival in consumption may be weaker than the Bank of Canada expects. The rebound in commodity prices is mixed news. Higher commodity prices and greater demand for metals, if not yet for oil and cheap natural gas, should contribute to an expansion of mining and energy output–but too strong a surge could boost the Canadian dollar, exacerbating Canada’s manufacturing weakness as it boosts labor costs.

Middle East and North Africa

Overall, countries in the region were relatively sheltered from the financial spillovers, but suffered from reduced demand. Expansionary fiscal policies throughout the region and effective–if in some cases belated–financial-sector support offset the export and investment weakness. The GCC countries most reliant on foreign financing to fund credit expansion, such as the UAE, are suffering the sharpest effects. However, past savings provide a cushion. In the long-term the region’s growth outlook depends on the price and effective deployment of its hydrocarbon endowments.

Egypt

Despite Egypt’s GDP growth slowdown to well below recent trends in 2009 (about 3.8% instead of the 7% in 2007 and 2008), the country has been able to weather the financial crisis better than its peers. The narrow exposure of Egypt’s financial sector to foreign structured finance, coupled with a low reliance on foreign bank loans, sheltered the country. Egypt’s countercyclical monetary and especially fiscal policies also shielded the economy somewhat, and previous reforms reduced financial vulnerabilities. Doubling the country’s stimulus package took the budget deficit to 6.9% of GDP for the last fiscal year (similar to the previous one). Should the FDI slowdown persist, financing this deficit will be more costly, however, and political issues surrounding the succession of Egypt’s president could potentially hamper reforms.

Qatar

Driven by an increase in liquefied natural gas (LNG) exports and government investment, Qatar is expected to be one of the fastest-growing economies in the world, with real GDP growth verging on the double digits in 2009. Government support allowed Qatar’s financial sector to more easily weather the turmoil than some of their Emirati or Kuwaiti counterparts. Noticeably slower growth in the economy’s nonhydrocarbon sectors, combined with lower loan growth, contributed to lower profitability and the weakening of balance sheets, prompting the government to buy stakes in local banks, as well as property and equity holdings on the balance sheets of local banks. Qatar’s relative strength contributes to the fact that Qatar’s sovereign wealth fund was among the first to return to significant foreign investment.

Lebanon

Lebanon appears to be withstanding the crisis remarkably well. The Lebanese banking sector was protected by regulations that restricted investment in subprime assets and in general kept Lebanese banks isolated from foreign credit. Domestic political uncertainty also added to the isolation. Unlike most emerging and frontier markets–but like Morocco and Tunisia–Lebanon continued to attract an impressive inflow of funds in 2008, although at a slower pace, meaning its asset markets outperformed. The recent political stability has given a boost to the tourism and real estate sectors. Stronger performance, however, would require Lebanon to more aggressively reduce its extensive debt burden, something which may not happen until 2011.

Source: Nouriel Roubini

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As shown, the energy and metal commodities are all currently at or above their trading ranges.  Even natural gas, which has been in a perpetual downtrend, has moved into overbought territory over the last couple of weeks.  Interestingly, gold is going up along with oil and the stock market, and the falling dollar definitely has something to do with it. 

The agricultural commodities like corn and wheat aren’t spiking along with energy and metals, which is a positive for those worried about food inflation.  And finally, coffee has bounced nicely in recent weeks after falling to the bottom of its range.

Source: Bespoken Research

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The only commodity currently overbought is copper.  Oil, natural gas, gold, silver, and platinum are all right in the middle of their trading ranges.  Corn and wheat have been tanking lately and are getting close to the bottom of their normal trading range.  And coffee and orange juice are finally seeing some reversion to the mean after seeing some short-term divergence a couple of weeks ago.

Source: Bespoken Research

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One thing I eventually discovered from covering the same markets day after day, month after month, was that the vast majority of the time the vast majority of the markets’ overall fundamental and technical situations did not change on a day-today basis. Yet, as a market reporter I was conditioned to write about why the market went up one day and why the market went down the next day, and so on.

Even though a market may have been in a very narrow trading range for days or weeks, I had to ask the traders and analysts every day to come up with some fresh fundamental and\or technical reasons why that market moved only a fraction. Reporting on the New York “soft” futures markets (coffee, cocoa, sugar, cotton and orange juice) is especially difficult for a reporter. He or she needs to dig up and write about some fresh-sounding news every day. The soft markets many times just do not have much fresh fundamental news on a daily basis — or sometimes even on a weekly basis, for that matter. Conversely, it was easier covering the financial and currency markets because there was usually at least one government economic report that came out every day that would make those markets wiggle a bit. Or, some government official (like Greenspan) would make comments to which those markets took notice.

As time went on and I came to better understand markets and market behavior, and as I studied specific trading strategies, I realized that the day-to-day market “noise” is not of much use to most traders. Here’s a specific example of market noise:

Recently the live cattle futures market was up a bit on a Monday due to talk that the cash cattle trade later in the week would be at higher money. On Tuesday the futures market dropped a bit because of ideas the cash cattle market trade later in the week may not be at firmer money, but steady at best. Nobody was trying to manipulate the live cattle market that week. It was just a case of differing opinions getting center stage when the market closed on different sides of unchanged.

For a trader who tries to follow the near-term fundamentals in a market too closely, hearing that kind of conflicting news can be a nuisance at least, or a factor that prevents successful trading results at most. It’s not easy for less-experienced traders to ignore the differing daily drumbeat of fundamental news that is reportedly impacting a market.

The lesson here is that prudent traders should not become overly sensitive or reactive to most of the day-to-day fundamental news events that are reported to be moving the market on any given day. What is important for the trader is that he or she recognizes and understands the overall trend of the market, and that daily market “noise” is usually an insignificant part of the overall process of trading and of market behavior, itself.

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On the energy front, oil and natural gas have declined quite a bit over the last week.  Oil remains in the center of its trading range, however, while most other commodities are now in oversold territory.  Gold, silver and platinum have all pulled back sharply since early June, while corn, wheat, and coffee have fallen off a cliff.  The one commodity that has bucked the overall downtrend is orange juice.  It was in oversold territory just a couple of weeks ago, but it has rallied nicely in recent days.

Source: Bespoken Research

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Source: Bespoken Research

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What sectors are you looking at now?
Commodity stocks look attractive because many of them have declined below their intrinsic value and we expect the global demand for commodities to continue its long-term growth. Consumer stocks also look attractive. With rising per capita income and strong demand for consumer and other goods, the earnings growth outlook for these stocks is positive.

Will the global equity market retest the low point in March?
There is always the possibility of this happening and it could be triggered by something totally unexpected, such as war breaking out on the Korean peninsula or a massive global flu pandemic. As I have said, markets will continue to be volatile as global economies remain fragile and we should see rises and falls in the months ahead.

Which country do you expect to be the best performer among the BRIC markets?
That would be impossible to say at this time but we think China has a good chance of achieving that goal. Of course, I’m talking about measuring that move from the beginning of this year. Russia also looks very undervalued.

In view of China’s strong market performance, would you say that it’s in a bull market?
You can see that it is a bull market since the increase has been so dramatic, but it would be difficult to call it a sustainable bull market in view of its very sharp rise. I still feel we will face volatility and there will be corrections along the way. We do, however, expect China to continue to lead the global market recovery.

Will the Chinese government propose another stimulus package in 2009?
That all depends on the success of the measures already in place. They clearly have the resources to do this again. We should expect them to act if current measures and programs do not produce the desired results.

You mentioned in October that Russia’s cheap stocks were a once-in-a-lifetime opportunity. Since then, the RTS Index fell a bit more to 498, then subsequently doubled. After that great performance, are stocks still good value, or is it time to take a breather?
Russian stocks still look cheap. Yes, they have risen dramatically from their low point but they are still a long way from their previous high. Of course, the PE has risen this year but Russian stocks, as represented by the MSCI Russia index, are still trading at a single-digit PE of 6.8x as of end May, 2009 – an increase from an even lower 3.4x as of end December 2008.

Do the economic problems within Russia – unemployment rising to 10%, inflation at 13%, and possible GDP contraction of 6% – undermine the investment case for the country right now?
These factors will have a short-term impact on the market, but we always evaluate companies on a long-term basis – taking a five-year view. Thus, we are in fact able to benefit from buying stocks at cheaper prices now.

Do you see any parallels between the market crash of 1998 in Russia and the one over the last year? Is there fear focused on this market that leads to sharper crashes than elsewhere? Did you learn anything in 1998 about Russia that helped you navigate this crisis?
No, because Russia and most other markets are in a much stronger position, financially and economically, than they were in 1998. Russia has built up strong foreign exchange reserves and trade surplus that have enabled it to withstand external shocks to its economy.

The Russian market was also affected by the correction in commodity prices due to its high exports of oil and other commodities, as opposed to any extraordinary fear focused on this market. However, we maintain the view that commodity prices will continue to increase in the long term due to greater demand from emerging markets and a relatively inelastic supply. This will thus benefit Russia in the future.

The most important lesson we’ve learnt from 1998 or any other crisis is that markets always recover – it’s just a matter of time. Thus one should always maintain a long-term and patient view with regard to investing.

Lastly, you have been investing in the emerging markets for the last four decades. Being an expert in investing in emerging markets, do you have any advice to share with investors during the current market situation?
It is very important for investors to remember some key principles: (1) diversify – it is important to diversify in order to minimize risk – this is why investing in a diversified mutual fund is best for investors, (2) look globally – no country has a monopoly on good opportunities so you must search globally – this is why we have global emerging-market funds, (3) be patient – don’t expect to obtain quick gains – the long-term investors do best, (4) don’t invest unless you understand the investment you are making – understanding will strengthen your confidence and enable you to make long-term investments.

Source: Mark Mobius

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Exchange-traded funds (ETFs) are a simple, low-cost way to overcome this home bias and get more exposure to offshore markets such as in fast-growing emerging economies.

This ‘home bias’ is by no means unique to Australia – investors worldwide favour domestic shares to overseas markets – but the extent of the bias is magnified in Australia because the sharemarket here represents such a small proportion of global capitalisation.

There are several compelling reasons why a significant home bias may be sub-optimal within a global framework:

• Differing sector breakdowns across regions (because of specialisation) mean that a domestic share portfolio will never be as well diversified as a global portfolio.
• Because Australia represents a very small percentage of global sharemarket capitalisation, opportunities therefore exist for exposure to stronger-performing offshore markets.
• Many emerging economies have had much stronger recent growth than their developed counterparts, fuelling much discussion about their potential to deliver strong future returns.
• Access to international markets has never been simpler, easier or more cost-effective.

‘Developed bias’ in international shares

Most international equity allocations are benchmarked to a broad, developed index (for example, the MSCI World ex-Australia index), with little or no exposure to developing countries, or emerging markets. However, the emerging markets represent around 11 per cent of the MSCI All Country World index, more than either Japan or the UK and almost four times larger than Australia’s weight.

Therefore, within the (arguably neglected) international equity allocation, there exists another bias towards developed markets at the expense of the emerging and frontier countries. We explore these markets in more detail below.

Recent institutional appetite for emerging markets

Flows to emerging markets funds during the first quarter of 2009 were estimated to be about US$3.5 billion by Barclays and Morningstar. Strong flows continued through April also, with US$1.05 billion flowing into the iShares MSCI Emerging Markets Index Fund alone during the month.

These recent robust (primarily institutional) flows have created speculation of whether it is the right time to begin investing in emerging markets.

Historical performance and correlation

Emerging markets suffered badly during the global market turmoil, falling close to 50 per cent from their peak in late 2007, similar to Australian equity market performance.

Despite these falls, long-run performance of emerging markets has been strong, with a historical average return of 8.7 per cent a year between January 1990 and May 2009, compared with 4.5 per cent from MSCI World ex-Australia index and 8.6 per cent from the S&P/ASX 300. However, the volatility of emerging markets returns has also been higher – annualised risk of 21 per cent compared with 13 per cent and 14 per cent for MSCI World ex-Australia and S&P/ASX 300 respectively.

Although emerging markets returns have moved more in sync with the developed world recently, investors should not necessarily assume that higher correlations will persist. The chart below shows the 12-month historical correlations of the MSCI Emerging Markets index with the S&P/ASX 300 and MSCI World ex-Australia.

Correlations of MSCI Emerging Markets
Index with other markets

The chart highlights how unstable correlations can be, especially over short periods. Using short-term historical correlations as predictors of future values is therefore a very unreliable method of forecasting future correlations

Rationale for possible strong emerging markets performance

As mentioned, there has been recent speculation as to whether the rapidly growing emerging economies will deliver strong sharemarket returns. Reasons include:

Economic growth

Australia accounted for just 1.2 per cent of 2008 world GDP, with the US and Europe each making up more than 20 per cent of global economic output. Outside the developed economies, the emerging markets accounted for 28 per cent of total global economic output, driven largely by Brazil, Russia, India and China (commonly referred to as the ‘BRIC’ economies) contributing a combined 22 per cent.

Not only do the emerging economies now make up a significant portion of the global economy, but they have also been growing much faster recently than the developed economies, with 2008 real GDP growth of 6.3 per cent, compared with 1 per cent for the developed economies. Australian real GDP grew by 2.2 per cent during the same period.

This strong real GDP growth for emerging markets is expected to continue, with forecasts of 0.5 per cent in 2009 and 4.7 per cent in 2010, compared with developed market expectations of a 3.6 per cent contraction and 1.3 per cent growth respectively, according to BGI and JPMorgan.

Because of this strong recent and forecast economic growth, the emerging markets have been the focus of much discussion about their potential to deliver strong future investment returns. As the economic development of emerging countries continues, their sharemarkets should become increasingly attractive as part of a diversified international equity portfolio.

Strong fundamentals

In April 2008, price/earnings (P/E) multiples were approximately 15.7 times and are now significantly lower with 12-month trailing P/E of 9.1 and forward P/E of 10. Given these current low valuations relative to historical averages of 14 times, some investors believe that emerging markets are relatively cheap and provide opportunity for strong future returns.

Commodity exposure

Many emerging countries are rich in natural resources. As developed markets poise for a recoverym there is likely to be a need for commodities from emerging markets. In addition, developed markets generally rely on the goods and services produced by emerging markets. Exports from emerging markets may also help them to recover before developed markets.

Improved market access

Along with the recent rapid growth of many of the emerging economies, their equity markets are also rapidly becoming larger with improved market liquidity, breadth and accessibility.

Brazil, Russia, India and China now account for almost 15 per cent of global publicly traded shares. Although a large proportion of the shares issued in these countries are still not available for direct investment by foreign investors, they are becoming increasingly more accessible over time. Thus the significance of emerging markets is likely to increase in the foreseeable future.

Access emerging markets on the ASX with iShares

In the past, gaining exposure to many international markets (especially those less developed), was costly and difficult, if not impossible, particularly for individual investors. This was largely because of a lack of liquidity in the underlying markets, foreign investment restrictions, political and regulatory instability, and prohibitive transaction costs.

Since the cross-listing of iShares exchange-traded funds (ETFs) on ASX, investors wanting to gain simple, transparent and cost-effective international diversification can do so with ease and precision, across a range of developed and emerging markets.

ETFs enable investors to gain broad exposure to entire sharemarkets with relative ease on a real-time basis and at a lower cost than most other forms of investing, thus overcoming many of the barriers mentioned.

For example, an Australian investor can gain exposure to the broad MSCI Emerging Markets index by buying a single ASX-listed ETF (ASX code: IEM). For those seeking more focused exposures, iShares ETFs are listed on ASX covering Taiwan (ITW), South Korea (IKO), China IZZ) and the four BRIC countries (IBK).

Source: Ben Garland

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Source: Bespoken Research

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He said the Indian and Asian rally was started by local money, which according to him was a big long-term positive. He added that Asia and emerging markets (EMs) would be the biggest beneficiary of the Fed’s monetary easing. He also said liquidity could lead to massive asset bubbles in Asia and EMs.

Q: What have you made of the markets’ move in the past few weeks?

A: I was expecting what I call a counter-trend rally, driven by a counter-trend rally in the S&P this year. The key point is that the S&P in the fourth quarter last calendar year went further below its 200 DMA, and at any point since 1932, in the midst of the Great Depression. So, it was almost inevitable that we were going to have a counter trend rally at some point in 2009. Actually, I thought it would start with the arrival of the new administration in January-February, but it didn’t start so much.

My guess as to how far this rally can go is 1000-1050 on the S&P, but I am viewing this as a counter-trend rally in a secular bear market for the US. I have a different view for Asia and India. I believe Asia and India remain in a secular bull market. So I have a fundamentally different view for the Western world and Asia.

Q: How would you describe what happened in 2008 then in India and other Asian markets like China? Deep cyclical correction? Over 10-15 months in an overall secular bull market?

A: I would describe that as a deep cyclical correction in Asia and EM driven by massive collective damage from what was going on in the Western financial system. That is why with my Absolute Return Portfolio I have been recommending to investors from the middle of 2007 only to own my recommended portfolio, by hedging the Western financial risk by being short on Western financial stocks. But in my view, the sell-off in Asian stocks last year was exacerbated by dramatic liquidation by foreign money, particularly by hedge funds and so-called funds of funds.

What is positive in the rally that began in Asia in October-November last year is that we’ve seen growing local investor participation in Asian market, so the people who bought earlier in this rally since late last year weren’t foreign fund managers but local investors throughout the region. That growing local investor participation is a long-term positive.

Q: So are you saying that the secular bull market has commenced again in India and other Asian markets?

A: Yes, I think it has recommenced. Two technical pieces of evidence support that view. First, Asian markets and EMs have been leading this rally ever since they bottomed last October-November. Second, when the S&P made a new low in March, the Asian markets and EMs did not make a new low. That is technical evidence to me that Asian markets and EMs have become the asset class of choice in global equities.

In the very short term, because Asian markets and EMs have outperformed dramatically, there is some scope for the S&P to outperform. However, in the long run, in my view, the asset class of choice in which to remain fundamentally overweight is Asia and EMs.

In my view, the biggest beneficiary of the dramatic monetary easing, quantitative easing undertaken by the Western central banks led by the Fed, won’t be American/British consumers or American/British stock markets. The biggest beneficiaries will be Asia and EMs. In fact, the dramatic monetary easing could lead to massive asset bubbles in due course in Asia and EMs because the excess liquidity will flow to the best growth story and the best growth stories in the world are Asia and EMs. They have the best demographic dynamics and have the healthiest economies because, unlike the Western world, they do not have the structural leverage problems.

Q: Often, the measure of the restart of a bull market after a bear market is when the previous highs get taken out. How long is it before you think India and other Asian markets can take out their old bull market highs?

A: I don’t assume that happens quickly, because I am bearish on the Western world. If I wasn’t bearish on the Western world, then I would say very quickly, but I am. So in my view we are in a process here, we have commenced a process of incremental decoupling from Western markets. At the beginning of 2008 many investors in China and Indian equities believed in decoupling but by the end of 2008, after a dramatic collapse in Asian stock markets after the Lehman bankruptcy, investors stopped believing in decoupling and started believing in the absolute opposite.

The absolute opposite was an export-correlated train wreck with the US consumer. People became extremely negative on the most important EM story, which was not India but China. This year the Indian and Chinese economies have shown growth momentum; those very bearish concerns were misplaced. So we now have some empirical evidence that Chinese and Indian economies are able to decouple to a certain extent from the American economy, from the American consumer.

The American economy is not growing, so that is building confidence in asset classes. We have begun the process of incremental decoupling. But I think unfortunately when the S&P turns down again, when people realise that it is an L-shaped situation in the US, not an U-shaped or V-shaped recovery, you will get renewed correction. But my view is that next time the Western stock markets go down the Asian markets will prove much more resilient. But this process is incremental; it is not going to happen on a 12-month view.

Q: How bearish are you on the US markets?

A: I would expect a retest of the 660 level in due course in the US if the equities correct and it coincides with the new dollar rally because the dollar rally is on deleveraging. But if the dollar keeps declining, the lows on the S&P need not be so large because some of the downside will be taken on the dollar.

Q: Even if the S&P were to go for a retest you think none of the EMs, including India, will go for a test of their 2008 lows?

A: I don’t believe in a world where the S&P revisits the lows of March. I don’t think the Asian equity markets, India, will revisit the lows because the Indian economy has demonstrated its domestic demand-driven resilience this year. We are now getting people talking of 5.5-6% growth – a few months back the RBI had come out with statements that growth was going to be much slower than expected and it said that growth was going to be 6%.

Reality is that at the beginning of this year investors thought 6% was not attainable, but the data that have been coming out have been a positive surprise. The Indian economy is keeping its growth – not by artificial stimulus measures by the government – so basically the data have been a positive surprise this year and the government has been another positive surprise, which has been a clear mandate that should allow a more coherent policy that should allow for a renewed vigour in the infrastructure cycle now.

Q: How positive is the election?

A: I don’t want to over-dramatize it because of the Indian government’s history of disappointing on reform expectations. But I what I do think is positive is that most foreign investors were on the sidelines before the election as they knew the situation is inherently unpredictable. So because of the clarity and because you don’t have a weak coalition government, I think that was a major catalyst for foreigners to reinvest in India, and logically the sector that should benefit is the infrastructure sector. The other point is that it has removed the risk that the fiscal deficit in India could get out of control.

Q: What are you overweight on in India and China?

A: I am overweight both on India and China but in the last quarter more India, because I was more overweight China in the first quarter. But in my long only portfolio, I am 33% in India and my biggest weight is in Indian banking though I did add an infrastructure name after the election.

Q: Public sector units or private sector?

A: Both, but if I were making a new allocation it would be to a private sector bank.

Q: This trait to tanking up to defensives, you think that trend is over?

A: Tactically, Asian markets have had a big rally and people were fortunate to be in the high-beta names and they should be thinking of moving to less-high-beta names now, 70-80 on the oil price, you should reduce the beta names. But I would reduce in the commodity-driven stocks, not banks.

Q: Do you find any discomfort with regard to valuations in India?

A: PEs look scary in India, especially infra, but India is a genuine domestic demand-driven growth story. So it deserves a high PE premium. On a price to book basis India looks undemanding. The whole risk in Asian valuations is in the potential negative correlation to the Western world.

Source:Prieur du Plessis

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China’s PMI seems to indicate that the country might have seen the worst of the GDP growth statistics. (The Hong Kong PMI is used as a proxy of the Chinese PMI prior to 2004.)

Source: Plexus Asset Management (based on data from I-Net Bridge)

Importantly, China’s PMI for new export orders shows the Index again expanding (i.e. above the 50 level) and, based on the close relationship with the Metals Index, should provide further support for commodity prices.

Source: Plexus Asset Management (based on data from I-Net Bridge)

David Rosenberg, the closely followed chief economist and strategist of Gluskin Sheff, argues in a newsletter on Monday that the Asian economic revival, with strength spreading across the continent, may be for real. This is, needless to say, bullish for the commodity complex, with gold, copper and oil all having broken above their 200-day moving averages just as the US dollar has cracked below its key support level.

“The US is still the largest economy in the world by far, but it is losing its dominance each year and the fact of the matter is that it is a mature service-driven economy. Emerging Asia in general, and China in particular, are still the marginal buyer of basic materials, and their economic success is more critical to the outlook for commodities,” said Rosenberg.

He highlights that the world has just endured the steepest world economic setback in 70 years and yet commodity prices across a broad front – gold, oil, copper, soybeans -  managed to bottom at their highest “recession levels” of all time. “This attests to the supply discipline by today’s resource companies compared to their predecessors, and affirms our belief that what we experienced last year was a severe cyclical correction in what is still a secular bull market – you can connect the dots on the chart and see that the CRB looks a lot like what the S&P 500 looked like in the months following the sharp 1987 collapse,” said Rosenberg. It seemed like the end of the world in October of that year, and yet in retrospect it was just the fifth year in what proved to be an 18-year secular bull phase.

My research concurs with Rosenberg’s conclusion that commodities still seem to be in a supercycle that was only temporarily interrupted by the global economic malaise. As inflation money finds its way into commodities, it is still not too late to purchase these, but only on price corrections that are bound to occur from time to time.

Source:Prieur du Plessis

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Source: Bespoken Research

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As shown, the Russian stock market ETF (RSX) is the most overbought, trading 36.17% above its 50-day.  India (INP) ranks second at 35.72%, followed by the steel ETF (SLX), emerging market Europe (GUR), metals and mining (XME), and Singapore (EWS).  The majority of the ETFs on this list track countries.  The rest are generally concentraded in the commodities area.

Source: Bespoken Research

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I would not be surprised to see EEM finding increasing resistance at several stages in the 34-40 range, but for now at least, I see no reason to exit EEM at least until its performance relative to the SPX begins to falter.

Source:Bill Luby

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Source: Bespoken Research

Expand your portfolio with ETFs on eBridge Trader, it is an easy as trading Stocks or CFDs.

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4. Commodity Snapshot
5. Commodity Snapshot

The USD is in wave b down, currently in wave 5 of (C). We should see further downside before a strong rally in wave c up. Crude is in wave b up, currently in wave 5 of (C). Crude is an excellent example of a bear market correction, since we would want to see at least 3 waves (an abc) complete from the peak. If you are not familiar with Elliott Wave, you can examine the completed decline on any chart that has had a parabolic advance in a so called bubble. The decline completes as 3 waves, with wave b up, as the bear market rally. This rally also coincides with the other markets.

The charts are aligning for a reversal similar to last July before the commodities and markets crashed. Its deja vu before history repeats itself. We still need to see further upside for the DOW, but the next decline should take out the March lows. We still need to see the USD and Euro (not shown) hit their targets before the reversal. The metals still have further upside as well, but we should see a strong correction similar to the one last year, before the bull advance resumes. Many of our charts illustrate triangles or ending diagonals patterns, which indicates a top is near and we could see a reversal as early as next week. The reversal could extend a bit longer, so keep an eye on the USD, when it hits the target and bounces above the top trendline, we expect all of the markets to roll over at the same time.

USD

Crude

 We called the top for Crude on the day that it rolled over, with the first downside target of $55.

These charts are only a guide so that you can follow the action and watch the expected action. The action could play out exactly as illustrated or it may need minor adjustments as we follow it through.

Source: by Dan Stinson

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Source: Bespoken Research

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The continued weak economic outlook in Europe and the U.S. and subsequent drop in demand has been the main focus for the bears over the last few months. However crude has now rallied nearly 100% from the January lows and many are beginning to adjust their outlook.

OPEC at their meeting in Vienna refrained from further production cuts, something that is currently difficult to do as some members has been cheating and producing more. Instead they switched to verbal intervention as Saudi Arabia said that the global economy can handle a $75-80 Oil price as they saw demand picking up most notably in Asia. Front month Crude Oil broke above 200 day moving average at $62.18 and this strong technical picture helped drive prices above $65 this week

Up until recently the main factor driving Oil prices higher were the support from rallying stock markets combined with the weaker dollar.  This last move however has happened without the support from the U.S. stock market as no new highs has been seen for over two weeks now.

What has been seen is a rally in government bond yields as traders continue to sell bonds on the basis that yields could continue to rise as governments are struggling to finance ever increasing budget deficits. This week US 10 year yields rose to 3.71%, a level last seen in November 2008 long before Central Banks began Quantitative Easing.

Rising bond yields has unnerved investors and the subsequent risk of a dollar collapse or reemerging inflation are driving investors into commodities.

Technically the rally in Crude Oil is now well established and short sellers have got to be patient. With the break above $62.18 traders now look for a move back to the November high of $71.77 followed by the 38.2% retracement at $76.30.

On the downside $62.25 needs to give way before talk of a correction can begin followed by major support at $59.50. One major word of caution is the RSI level which indicates the market is overbought and the risk of a downside correction could be happening soon. 

I will be keeping an eye on the S&P 500 index which is currently stuck between 200 day moving average resistance at 930.50 and strong support at $885. Continued rise in bond yields and subsequent dollar weakness will be supportive for commodities.

Meanwhile precious metals continue to be driven higher by some of the already mentioned factors. Silver is heading for its biggest monthly gain in 22 years and Gold is back to a three month high with $1,010 again coming into play.

Flows into ETF Gold funds has not increased during the week which leaves us a little concerned about the sustainability of this rally. In the near term however the dominant factor behind moves in Gold will be moves in the US dollar which to certain extend is driven by movements in bond yields.

A further weakening of the dollar combined with geopolitical risks out of North Korea may revive investment demand for Gold and take it back towards the February high at $1010.

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Source: Bespoken Research

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Source: Bespoken Research

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An interesting analysis by the Goldman Sachs Global Economics team suggests that every major economy has possibly already seen its worst rate of GDP decline, either in Q4 of last year or Q1 of this year (see graphs below). “Emerging markets are likely to see a return to trend growth about six months, on average, before advanced economies. Similarly, emerging markets on average will close their output gaps – the difference between actual growth and trend growth – about two years before advanced economies,” said the economists.

Although the Goldman team are not under the elusion that they will be entirely correct on the timing of these events, they do feel more confident about the relative order in which countries/regions will reach the above milestones. The analysis leads them to the following market implications as summarized in the report:

• Equity markets have most likely bottomed and volatility should start diminishing.
• Countries that get back to trend growth sooner will tighten monetary policy sooner.
• Countries that get back to trend growth sooner should see their currencies strengthen.
• As the output gap will take many years to close, there should be limited pressure on prices and wages. Deflation will still be a greater concern in the short term than inflation.

• Emerging markets, particularly Asia, should offer more opportunities for outperformance for equities and forex, and could support commodity prices, especially industrial metals.

Source: Peter Berezin and Alex Kelston, Goldman Sachs – Global Economics

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MSCI emerging markets ETF  moved to a fresh new high last week . Compare that to the S&P 500 as it threatened to move below a near-term support.

Source: Michael Kanh

Learn how to diversify your portfolio with Exchange Traded Funds – it is as easy as trading stock.

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By the end of the week the dollar was at a four month low against the euro and commodities were up sharply, partly because commodities are seen as an effective hedge against inflation.

In the chart of the week below, I have captured a chart of the Rogers International Commodity Total Return Index ETF (RJI) versus the U.S. dollar. The chart shows that the dollar peaked in mid-December and has declined steadily to a current level that is comparable to where the dollar was trading in mid-September.

The drop in the dollar has helped to lift prices of dollar-denominated commodities and provided some assistance to commodities as they formed a bottom in mid-February. During the course of the past three months, commodities have had two up trending periods, each of which was followed by a consolidation period. With the dollar breaking down and falling below support at the end of the week, commodities could be preparing for another upward leg soon.

source: StockCharts

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“Oil prices reached $62/bbl last week, despite lofty US oil inventories (notwithstanding this week’s inventory decline) and the fact that Americans are driving much less than last year. The higher price of oil reflects in part the upturn in Chinese oil imports and car sales at a time when oil production is lagging. Russia continues to have difficulty boosting output and oil production has been flat for most OPEC countries. Saudi Arabia has cut production sharply.

“As with other commodities, oil should benefit from both a weaker US dollar and a shift in investor portfolio preference toward real assets as a hedge against inflation. The upturn in our global leading economic indicators is another positive sign for the commodity complex. Bottom line: Our strategists have upgraded commodities to overweight recently, with energy at the top of the buy list. Investors should consider playing the oil bull market by buying North American exploration and production stocks, or by going long the Norwegian krone and the Canadian dollar.”

Source: BCA Research

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Dmitry Astakhov, via Reuters/RIA Novosti, via Kremlin
With an economy heavily skewed toward energy, Russia saw its stock market rebound to become one of the world’s best performers after falling the most last fall. Here, President Dmitry Medvedev, center, visits an oil refinery in the city of Khabarovsk.
After the sell-off last year pushed the valuations of Russian companies to record lows, rising energy prices in recent months have drawn investors back into the market, traders said, even as the government has twice downgraded its expectations for growth this year.Other big emerging markets, including China, India and Brazil, have rebounded sharply in recent months on signs that the fractured global economy may be beginning to heal, but none have been more buoyant than Russia.

When the authorities reported this month that industrial output declined 16.9 percent in April, the stock market still continued a five-day streak.

“Investors are not analyzing macroeconomics when deciding whether to invest in Russia,” the chief economist in Moscow for Merrill Lynch, Yulia Tseplayeva, said.

“They look at oil prices, and believe that when oil prices rise so will the Russian market,” she said. “And that is true.”

Officials now expect a contraction of more than 6 percent in the Russian economy before it begins to improve. Yet investors who braved the yo-yo bounce in the Russian market have profited handsomely.

The Micex index of major Russian company shares, for example, is up 105 percent after bottoming out on Oct. 27. It rose 19.66 points, or 1.9 percent, on Friday to close at 1,054.03.

For some investors, the very air of dismal news hanging over the country inspired contrarian bets in February and March that shares were oversold.

“It seemed a consensus emerged generally that Eastern Europe was going to hell,” Ian Hague, a partner at Firebird Capital Management, a New York hedge fund that focuses on the former Soviet Union, said by telephone. “When you see that, it is very bullish. Because the reality is never as bad as people’s fears.”

Firebird, after selling Russian shares in the second half of 2008, reinvested in February, he said.

But for all Moscow’s effort to diversify the economy, the rise in Russian equity values has closely tracked the price of oil, by far its largest export commodity – much as the market plunge last fall coincided with the collapse of oil prices.

Money is trickling back into Russian investments. For now, the inflow has not balanced the outflow of capital as companies repay foreign banks for loans that are not being rolled over. But the new money coming in was very nearly equal to the outflow in April, according to an estimate by Merrill Lynch.

In that month, the central bank reported a net loss of $2 billion of capital. Since roughly $10 billion in loan payments came due in April, the investor inflow probably was about $8 billion for the month, the bank said.

And the Russian stock market bounce came in spite of looming troubles in the real economy that analysts say make it look tenuous.

But given Russia’s dependence on the boom-and-bust commodity price cycles, a lack of so-called long money investing in the economy and a good deal of jitters about political stability and relations with the West, Russia’s stock market probably will remain highly volatile.

In fact, since its inception after the collapse of the Soviet Union, the Russian stock market has been either in the top five performing markets in the world or the bottom five in every year except one, according to Renaissance Capital, a Moscow brokerage.

Source: ANDREW E. KRAMER

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Source: Bespoken Research

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Few quick points which I think are interesting:

• Gold started to sell off about 10 days before equities rallied as money was pulled from the golden safe haven and rotated back into stocks. Now gold is moving higher and the broad market is starting to roll over.
• I find the broad market moves in 6-8 week cycles and it looks like the market peaked last week (week 8).
• Looks like we had some capitulation volume during the top last week and big selling again today as equities tested the high.
• Trading inverse etf funds I find are the best way to take advantage of this possible setup. Members will be able to profit from the lowest risk setup I can find.

The Gold Sector

Gold had a nice move higher today with fears of inflation, the broad market correcting and the USD which is dropping like a rock. I have provided a few charts to help you get a better view of what’s happening and how I see things.

The Bullish Percent Index of Gold Miner Stocks

This chart tells us the percentage of gold mining stocks which are currently on a point and figure buy signal. Currently 80% of gold stocks are in a bullish chart pattern and the good news is that we can still see this chart move to the 90 and even 100 level.

I like to watch this chart for short term over bought or over sold levels which occurs when this chart is in the Wave Top or Wave Bottom Zones. This allows me to tighten my stops to lock in short term profits.

Gold Stocks Price Action

As you can see from the chart below, gold stocks broke out of their trend channel this week. It will be exciting to watch and see what happens over the next few days. This type of price action is what the broad market did in March and April. As prices break through the top trend line we could very well see a jump in prices as investors panic and buy into gold stocks so they do not miss the next move.

Gold GLD Active Trading Chart

Gold looks like it wants to run higher but it will find resistance at the upper channel trend line. If this price level is breached then I think we will see gold surge much higher.

Weekly View of Gold

Here is a quick look at the weekly chart of gold. It shows that prices may take a few months for gold to retest the $1000 level if the trend continues higher. The large reverse head and shoulders pattern looks very promising for higher prices as well.

Weekly Silver Active Trading Chart

This chart clearly shows the potential that silver has over the next few months.

Crude Oil Active Trading – Weekly Chart

Crude oil made a new 6 month high this week. Money has been flowing into commodities the past couple weeks as traders and investors try to protect them selves from the over bought equities market. This weekly chart and really most weekly charts generate clean buy and sell breakout signals.

TheGoldAndOilGuy Trading Conclusion:

I think gold and silver will do very well over the next couple weeks. Depending on how strong the pullback is for equities it will play a roll in the price of precious metals. If we get a really strong reversal and rally then I don’t think gold and silver will do as well.

Looking at oil it’s more difficult to say what could happen. If the equities market drops fast then I think it will pull oil with it as investors lose confidence and oil demand will continue to decrease.

We have some very exciting opportunities ahead of us and its important that we keep our risk low while taking advantage of current market swings using stocks, etf’s and commodities. My focus is to keep overall risk under 3% for all my trades and to add to winning position and cut losses quickly.

Source: Chris Vermeulen

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As shown below, oil has rallied nicely but it is currently in overbought territory and at the top of its uptrend channel.  After staging a comeback in recent weeks, natural gas has sold off again in recent days.  Gold and silver have been rallying recently as well as the dollar has declined.  They aren’t quite yet above their normal trading ranges, but they’re getting close.  Corn, wheat, orange juice, and especially coffee, are trading near or above overbought levels.

Source: Bespoken Research

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