That’s because too many investors have lost fortunes trying to call Japan’s market bottom ever since the Nikkei 225 index began falling from its peak of 40,000 in 1989. So naturally, skepticism runs deep about any real improvement over there.

But this time may be different.

Really.

After all, Japan has a new government with new ideas of how to run the country. In taking office last September, the Democratic Party of Japan (DJP) officially ended more than half a century of dominance by the Liberal Democratic Party (LDP).

The last time such a large political switch happened was in 1867 when Japan’s imperial court toppled the long-ruling Tokugawa Shogunate. That action successfully catapulted the country into modernity. And this newest change could have a similarly significant affect, possibly even driving the Japanese stock market to greatness once again.

Sure, as Investment U’s Small Cap and Special Situations Expert, Louis Basenese, recently said, betting on Japan “is about as popular as a geek on prom night.” But he still concluded that investors who want low risk and high return “can’t ask for a better opportunity.”

I couldn’t agree more. Contrarian investors need look no further than Japan.

Why It’s Worth The Heckling

Anybody who puts money into Japanese small-caps should expect at least a few weird looks or snickers, and maybe even a less flattering name or two. Those stocks are too often illiquid, little researched and family-dominated. And savvy investors know that.

Yet by ignoring them altogether, they overlook some of the cheapest opportunities in the world. Japan’s small-cap market abounds with companies valued at deep discounts to their assets. More than 60% of them currently trade under their book value… exactly the kind of discounts that made Warren Buffett rich.

Just take Katsuragawa Electric, which makes wide-format printers. It has annual sales of about $200 million, $55 million net cash on its balance sheet and total net assets of about $190 million. And at its recent peak in 2007, it made a net profit of around $17.5 million.

Yet the company’s full valuation on Japan’s Jasdaq stock exchange amounts to less than $40 million. That means that every one dollar put into Katsuragawa shares yields $1.39 in net cash and $4.81 in net assets, while costing the investor only a little over twice the company’s peak earnings.

Enticing, right?

Return On Equity

Of course, there’s a reason why those small companies cost so little.

Japanese brokerage firm Nomura estimates a mere 4.7% return on equity for small caps this year, as compared to 6.6% for all Japanese companies and 13.4% for stocks in the developed world.

Fortunately, a projected earnings recovery over the next few years could push return on equity to 7%. That, in turn, could rally small-cap share prices up more than 50% just to keep up with other markets. And even if it doesn’t, low return on equity indicates a lot of room for improvement, something investors should pay attention to.

Let me explain…

Investors who put their money into highly valued stock market like the U.S. depend on real earnings growth to push their shares upward today, despite already historically high profit margins. But investors in Japanese small-caps only need companies to start using their balance sheets more efficiently to wow everybody and collect the resulting profits.

For that to happen, management needs to start viewing shareholders as vital pieces of their businesses instead of nuisances as they have in the past.

The evidence points to them catching on slowly but surely.

In 1992, only 12.1% of small Japanese companies even bothered with investor relations meetings. But Nomura reports that by 2007, that percentage rose to 63.7%. Likewise, the government is actively trying to improve minority shareholder rights and corporate governance in a number of ways, including requiring independent, non-executive directors.

Those efforts on both the political and corporate side should change Japanese business for the better and in turn, benefit the markets.

Four Ways to Invest in Japan’s New Revolution

American investors who want to buy Japanese small-caps have a few options, including purchasing specific exchange traded funds (ETFs).

• Despite having different holdings, iShares MSCI Japan Small Cap Index (NYSE: SCJ) and SPDR Russell/Nomura Small Cap Japan (NYSE: JSC) have very similar sector weightings.
• For that matter, so does WisdomTree Japan SmallCap Dividend (NYSE: DFJ), an ETF that Investment U Chief Investment Strategist Alexander Green mentioned in his own article on Japan last month.
• Or for those interested in closed-end funds, Japan Smaller Capitalization Fund (NYSE: JOF) trades at a discount to its net asset value of about 10%, giving investors a further discount on already deeply discounted stocks.

My contrarian bet is that those deeply discounted stocks will rise as Japan puts itself back together.

Good investing,

Tony Daltorio

View original at: Investment U

(DJP) Japanese Small-Caps Hold Big Rewards For Contrarian Investors

The China bulls and bears have been going at it lately.

The bears argue that the country is creating a nasty bubble, especially in its infrastructure and real estate markets. Famous short seller Jim Chanos has even called China’s real estate market “Dubai times 1,000… or worse.”

Of course, the bulls staunchly decry that statement. But when people like Jim Chanos speak, investors should take a second look at their positions. Could the bulls be wrong and the bears be right?

Investors need to look into the matter further before they can safely invest in China.

The Investing Community’s Bubble Fears

The trading community has a few good reasons to dislike China…

For one, the Chinese economy used to depend on investments for 25% of its GDP. But that number is fast climbing towards 50%, fueling fears of overcapacity.

However, the investment-to-GDP ratio is similar to Japan’s several decades ago. The smaller Asian country invested heavily in the same areas during the 1960s. And that strategy worked out just fine for it at the time, regardless of what happened later on.

But even faced with those facts, many bears still side with Mr. Chanos. They think that too much money infused into any market so quickly creates real estate and other kinds of bubbles.

They’re quick to point out examples too, like the newly built town of Chenggong. Practically empty right now, it lies close to the large city of Kunming in the Southwest.

Yet while critics jump on it as proof of a bubble, they should look a bit closer before they leap, specifically at Kunming’s vastly overcrowded conditions. Since Chenggong provides a close commute with more breathing room, it will attract families and businesses alike. In fact, the local government already has plans to move many offices there over the summer.

It also hopes to reduce Kunming’s traffic issues by building 15 new bridges and a light-rail network connecting Chenggong to the city center. And China has plans to build a high-speed rail line spanning the 1,250 miles between Kunming and Shanghai. That will bind the once isolated area even closer with the national economy.

Those types of projects simply mark China’s new focus on previously underdeveloped regions. It already devoted significant time and resources to the eastern coastal areas… Now, it’s the southern and western sections of the country’s turn.

The bears worry that regardless of the reasoning, the flood of lending from China’s local governments especially could turn into bad debt very easily. Northwestern University’s Victor Shih believes they have debts of around $1.67 trillion… more than double the official estimate, and equivalent to a third of GDP.

Fortunately, that lending should pay off though.

The Reasons Behind China’s Investment Boom

China intends its investment boom to push exports more heavily on its up-and-coming southeastern Asian neighbors instead of the floundering U.S. It believes that improving those links could potentially double its trade with them.

With that in mind, it already finished one bridge linking Kunming to Bangkok, Thailand. And it has almost completed another between Kunming and northern Vietnam.

Of course, the Chinese government also has a few other reasons for investing so heavily. Already in the process of creating an airport for Kunming, it wants to turn the city into a tourist hot spot.

And on a larger scale, the nation is trying to cope with the results of its one-child policy. As the working population declines, analysts see savings dropping as soon as 2015. When that happens, its graying society won’t be able to produce the finances needed for such bold projects. So China wants to get as much done as possible in the next five years.

Two Picks for China

In the end, Jim Chanos can read into China what he likes. But he seems to be interpreting the story incorrectly, just like so many before him have.

Over the last decade, investment gurus have raised the alarm about the same issues. Yet back then – as now – the Chinese economy continued to steam along. Returns on capital remained stable and corporate profits increased.

Bearish investors lost out on the opportunity to make significant money over the last 10-15 years. And they’ll continue losing out for the next decade or so if they keep ignoring that high rates of economic growth can solve overcapacity and overinvestment issues. In addition, with $2.4 trillion in foreign exchange reserves, China can easily recapitalize its banks if necessary.

It has before. Successfully.

Investors who want to take advantage of the bullish view can look into two solid exchange-traded funds.

The new Emerging Global Shares China Infrastructure Index Fund (NYSE: CHXX) consists of 30 Chinese companies that work in the sector. And the Claymore/Alpha Shares China Real Estate ETF (NYSE: TAO) tracks over 40 companies in both the Hong Kong and Chinese real estate sectors.

Down nearly 20% from its peak, you’d better believe it’s a steal.

Good investing,

Tony Daltorio

View original at: Investment U

(TAO) Jim Chanos Is Wrong About Investing in China

What’s your current F.U.D. level?

That is… Fear, Uncertainty and Doubt.

When it comes to situations like the Greek debt crisis, you want to make sure it’s low. That’s because if you want to profit from volatile events like this, the best way is to take the emotion out. Leave the F.U.D. to others.

That’s what savvy investors do – and I’m going to show you how to do it here.

Many economists have weighed in with their take on Greece’s troubles and whether it will be able to make good on its debt obligations while still remaining part of the greater European Union.

One of the best ways to play this problem is to bet against the euro versus the U.S. dollar. Why?

• A fiscally weak Greece (plus the other so-called “PIIGS” nations) can drag down the entire Eurozone. That makes the euro less attractive versus other currencies – particularly the dollar.
• Interest rates will begin to rise in the United States – a development that will make dollar-denominated investments more attractive.
• The U.S. economy is rebounding faster than Europe’s. It notched up a 5.9% annualized GDP rate during the fourth quarter of 2009.

So you can see that the stars are aligning for a pro-dollar, anti-euro trade.

But how could tiny Greece have caused all this mess?

Europe’s Band of Bumbling Brothers

Around the same time that the North American Free Trade Agreement (NAFTA) was launched during the Clinton administration, European countries formed their own economic and monetary group – the European Union.

While NAFTA aimed to create a free trade zone (in particular, to open up more trade with Mexico), the European Union took this one step further. It decided on a common currency – the euro.

The Eurozone countries (Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia and Spain) all use the euro – a landmark agreement that saw currencies like the French Franc, German Mark, Spanish Peseta and Greek Drachma disappear.

Upside: The prospects were encouraging. Like NAFTA, when goods and services move freely between economies, thus reducing or removing tariffs and other barriers, the positive aspects of free trade are realized.

Downside: With all nations using one currency, it means the weakest link(s) can compromise it. To combat this, the group established the euro convergence criteria, hoping to ensure that weaker countries wouldn’t destabilize the currency. Greece met the criteria in 2000 and was admitted on January 1, 2001 (after the initial launch of the euro).

But with so many countries involved, it’s virtually impossible to avoid pitfalls. It isn’t just one country that causes concern; it’s every country.

(By the way, if NAFTA gone in this direction, it would have established one common currency for the United States, Canada and Mexico. And while the dollar has certainly faced many challenges over the past few years, imagine if its worth was tied into the success of the Mexican Peso. A frightening prospect.)

So how does Greece fit into this mess?

Greece Stumbles Through Europe’s Back Door and Causes a Ruckus

Eurozone members agree to abide by a number of criteria, including limits on inflation, budget deficits and national debt. While many nations have flouted one or more of the restrictions, many have said that Greece is the worst offender.

Why? Because its old currency – the Drachma – was already weak and in exchanging it for the relative security of the euro, it stood to be better off.

So in sum: You had a nation that needed to become part of a broader economy and currency. You had a nation that perhaps exaggerated the strength/stability of its economy. And plopped within a fledgling economic zone, dedicated to rivaling North America as the world’s largest.

Good call!

The Euro Is Set to Fall Versus the Dollar

The Eurozone is well aware of this crisis and has a number of potential responses…

• It could simply kick Greece out. But the ramifications would be severe. With other economies under question (the rest of the PIIGS, for instance) the world would simply wait to see who got booted out next. And since markets hate uncertainty, this would undermine the very foundation of the Eurozone.
• Europe could bail Greece out. However, doing so would imply that the next country to teeter would also be bailed out. Europe seems to be headed in this direction. And while it could save the euro, it’s likely to weaken investor confidence.

In a free trade world, currencies have value relative to other currencies. It’s quite often a zero-sum game. So here’s why the U.S. dollar is set to take advantage of this situation…

If doubts about the Euro persist (and those doubts aren’t likely to disappear anytime soon), the euro’s prospects will have greater F.U.D. That means investors will likely flock to safer havens like the dollar.

Given that the dollar has taken a beating for several years and that U.S. economic prospects appear to be more promising than Europe’s in the near-term, I anticipate the flow of funds to move from the euro and into the dollar. You can play this in a number of ways…

• Go long or short on the dollar and euro.
• Use foreign-denominated CD’s. EverBank’s Dollar Bull CD allows you to take a bullish long-term position on the dollar, versus the euro.
• Invest in ETFs: The PowerShares DB US Dollar Index Bullish Fund (NYSE: UUP) is bullish on the dollar versus other world currencies. Alternatively, the UltraShort Euro ProShares (NYSE: EUO) would be an aggressive anti-euro play. The ETF seeks to replicate twice the inverse of the euro/dollar daily price change.

Good investing,

Gary Spivak

View original at: Investment U

(UUP) Enough Dra(ch)ma: The Euro Will Thrive… When PIIGS Fly!

So much for the oil rally.

The market started 2010 in blazing fashion, with March oil futures tagging $84 a barrel. Next stop: $100, right? A price not seen since the fall of 2008. Not so fast…

The market has suddenly lost its momentum and the price slumped to under $70 last Friday – its lowest level in five months.

If you want to know why, look no further than the U.S. dollar, which has warmly welcomed 2010 and rallied higher (just as my colleague Alexander Green predicted, by the way). A higher dollar generally makes commodities more expensive for other countries, thus prompting a sell-off in oil and other commodities.

As you can see from the chart below, oil futures are currently trading below the all-important 200-day moving average – a level that many market makers (as I used to be at the NYMEX) follow in order to set the price.

Bottom Line: If oil can’t pop back above that line within a few days, there could be more room to go on the downside – particularly if the dollar keeps rallying.

How to Profit: Depending on your outlook, there are two ways to play the oil market.

• United States Oil (NYSE: USO): This is the ETF that tracks the front-month oil futures.
• Oil Futures Options: If you want to play oil more directly, head to the futures options market on the NYMEX. Always stick with limited-risk option strategies, since oil is pretty darn volatile.

Gold Loses Its Glow

Speaking of the dollar, two commodities that had a massive party while the greenback got spanked were gold and silver.

But they’re flagging a bit now.

Take gold, for example. Having topped out at $1,230 an ounce in late December, the price has now dropped a sizeable $160 to around $1,070. Looks like that run to $2,000 that some pundits have predicted is on hold for now. It may be a long time before gold ever trades that high.

The Bottom Line: As you can see from the chart of April gold futures above, the technicals suggest that the $1,020 level is a solid support level.

How to Profit: If you’re looking to play the market from the long side, the main options are similar to oil…

• SPDR Gold Shares (NYSE: GLD): Like USO, the ETF tracks the front-month gold futures.
• Gold Futures Options: You can also go for futures options that trade on the COMEX. Again, stick to limited-risk option strategies.

How to Hedge Your Bets As Silver Breaks Below Support

As for silver, it’s followed gold’s lead, except for one key factor: It’s currently trading under the 200-day moving average. Having traded up to a high of $19.50 as recently as December 2009, it’s now hovering around $15.20. That’s $21,500 per single contract. Imagine holding 100 contracts?!

The Bottom Line: Because it’s breached that 200-day support level, silver might not hold up as well as gold in the near future. But if gold starts to move higher, silver will be sure to follow. Tread lightly with this market, as it can move fast.

How to Profit: If you’re not sure which way a market will move (in this case, silver), there are two options strategies that can take advantage of a move in both directions – a straddle or a strangle. In a sense, you’re taking a bullish and bearish position at the same time. And while it costs more money to execute both trades (since you’re buying two options at once), the reward is unlimited.

• iShares Silver Trust (NYSE: SLV): This is the ETF and trades in the same way as USO and GLD.
• Silver Futures Options: These trade on the COMEX.

Getting An Early Jump on the Beans

Finally, let’s hit the soybean market.

The bulls start to come out of the woodwork in the early spring/summer here, with traders trying to gauge planting intentions, based on the carry-over amount from the previous year’s crop. In short, they’re trying to figure out if there will be enough supply to make it through the season.

But with the threat of drought, frost, or excess rain over the growing months, most traders like to gamble on the upside movement of soybeans. This is when you can see outrageous bullish spurts occur… only to be reversed within the next few days.

With soybean futures currently trading at near-term lows, taking a small bullish position at good levels now could reward you later.

The only way to truly play this market is via futures options that trade on the floor of the CBOT. Soybean options trade in the pit and on the CME electronic platform during the day and then exclusively on the electronic platform during the night.

You can buy outright call options, or call option spreads. I suggest looking at the November 2010 options to give plenty of time for the trade to mature.

Good investing,

Lee Lowell

View original at: Investment U

(USO) Four Commodities – Four Ways to Profit

Here’s a handy way to know when to sell your investments: everyone is talking about them.

There is an obvious corollary to knowing what to sell. If you want to know what to buy, consider what no one is talking about.

And that brings me to investing in Japan…

Investing in Japan: Land of the Rising Sun And Stock Market

From a high near 40,000 in 1989, the once-mighty Nikkei 225 – the equivalent of our S&P 500 – fell over 80% and hit a 27-year low early last year. It’s still more than 70% below the highs of 21 years ago.

The main culprit – aside from a real estate bubble that made the one here in the United States look bush-league – was misguided government policies. Japan waited too long to clean up its ailing banking system and spent trillions on public works projects that simply weren’t needed.

However, Japan has a new government that has promised to shrink the country’s massive bureaucracy and cut wasteful public spending. It also intends to end more than 20 years of economic stagnation by cutting taxes and focusing on small and mid-sized businesses.

Japanese stocks have rallied off the lows of 10 months ago. In fact, the Tokyo Exchange is one of the world’s best-performing bourses so far in 2010.

But it’s still among the cheapest and most unloved in the world. Virtually no one is enthusiastic about Japanese stocks.

And that’s excellent news…

Two Ways to Invest in Japan’s Economic Revival

Great opportunities are born when dirt-cheap valuations are married to investor disgust or apathy. And there are a number of good reasons to put money to work in Japan right now…

• A New Political and Economic Philosophy: Just as Ronald Reagan’s free-market policies ignited one of the great bull markets of the twentieth century, Japan stands at the threshold of a new era.
• Consumer Cash: Japanese consumers and investors are flush with cash. Having largely ignored domestic stocks after years of sub-par returns, the Tokyo market should lift off as that money begins to find its way out of mattresses and back into Japanese equities.
• Institutional Involvement: For years, global fund managers have outperformed the world benchmark simply by underweighting Japan. But if the bullet train takes off without them, they will be forced to dash after it.

If you want to invest in Japanese companies directly, there are plenty of Japanese ADRs (American Depository Receipts) available on the New York Stock Exchange.

But if you’re looking for a quick way to gain access to this market, consider these two ETFs…

• iShares MSCI Japan Index (NYSE: EWJ) for large-cap stocks.
• WisdomTree Japan SmallCap Dividend Fund (NYSE: DFJ) for smaller companies.

Both offer exceptional upside potential in the months ahead. And then, of course, investors will start talking about them.

Good investing,

Alexander Green

View original at: Investment U

(EWJ) Investing in Japan: Two Ways to Play Its Stock Market Revival

Economists have spent decades analyzing why some countries grow and others don’t.

You can talk for ages about factors like education, disposable income, export growth, interest rates, business and tax regulations, port traffic and 50 other variables. It all adds up to a complex equation.

But you can actually boil a big part of a country’s economic growth down to just one number – a number that you can predict for decades with near certainty. What’s more, it’s profitable.

Here’s how it works…

This Simple Number Can Trump the Statistics

Forget mind-boggling equations and the morass of government statistics. You can attribute up to one-third of a country’s growth rate to a single, simple factor: good, old-fashioned elbow grease.

That’s where the “dependency ratio” comes in. A dependency ratio measures the number of people either too young or too old to work, compared to the number of people within working age.

(For the statistic’s sake, the working age is considered to be 15 to 64. That’s not to say 64 is too old to work, though. Plus, I know plenty of 30-year-olds who can’t seem to get a thing done!)

Let’s deal with the United States first…

America’s Dependency Ratio: Better Than Average Now… But Faces Problems Later

The current dependency ratio for the United States is 49%. That means for every 10 working adults, there are 4.9 people that need to be supported, be it through social security or childcare.

Therefore, a lower dependency ratio is better for economic growth. Not only does it mean more people in the workforce are contributing to national productivity, but also that more resources can be directed towards investments in growth initiatives.

The United States ranks pretty well, compared to a worldwide dependency ratio of 52%. But there’s more to it than that – two factors affect the dependency ratio…

• Age: One way to get a lower dependency ratio would be to reduce the number of people above 65. Thankfully, though, nobody will try to do that without a major international outcry!
• Birthrate: Over the past 30 years or so, the American “baby-boomer” generation has fattened up the U.S. working-age population. That’s kept the dependency ratio low and resulted in much of the growth since World War II.

Unfortunately, this will come back to haunt us…

Why the United States Could Struggle with Economic Growth

With baby-boomers now entering retirement age, it will hike the dependency ratio up and stifle economic growth.

Since birthrates are measurable and the population at various ages stays pretty consistent for about 70 or 80 years, dependency ratios are predictable well into the future. Here’s how the United States looks…

As the ratio rises up to 2050, we’ll face an uphill struggle for economic growth.

It could be worse, though. Let’s see what country to avoid – and another set to grow explosively…

China’s Dependency Ratio: Who Will Look After Its Aging Population?

Imagine if you restricted your population to the point where families were only allowed to have one child over a 30-year spell.

• You’d initially have a great dependency ratio with fewer children to care for, which would spur shorter-term growth.
• But that artificially restrained younger generation would eventually have to care for its aging parents.

That policy is actually a reality. In China, authorities estimate that this prevented 250 million births between 1980 and 2000.

And you can see how that lower dependency ratio has contributed to China’s explosive growth. With the ratio currently under 40% China is in a perfect position. Unfortunately, the country will need to pay for it in the future.

Now, this doesn’t mean that Chinese stocks will dip over the next few months… but it might happen sooner than you’d think.

According to Wang Feng, a professor of Social Development at Fudan University: “The consistently low birth rate since the 1990s will cause a noticeable contraction in newly available labor. The section of the population between 20 and 24 years of age will decrease sharply from 125 million in 2010 to just 68 million in 2020 – a 50% decline in only 10 years.”

So what countries will benefit from a lower dependency ratio?

India’s Dependency Ratio: Want the Best Profits? Head East and South

Over the next five to ten years, watch for India to catch up to China in terms of economic growth. Without the one-child policy, it’s better positioned to take advantage of a favorable work-age ratio.

And if you’re looking for a way to take advantage of this trend, investing in an international ETF means you can inject some foreign diversity into your portfolio in just five minutes.

Look for PowerShares India (NYSE: PIN) to profit.

Other countries with beneficial dependency ratios include Nicaragua, Panama and Brazil. And with regard to Brazil, it also jives with more traditional economic analysis, which shows that the nation could outpace countries like China in the near future.

And to profit from the favorable Brazilian trend, funds like iShares MSCI Brazil (NYSE: EWZ).

Sometimes, it pays to not overthink situations, or get bogged down in a sea of conflicting statistics. Age is something that is difficult to fake. Finding the next high-growth country can be as simple as looking at some census data and buying an ETF.

Ahead of the tape,

Matthew Weinschenk

Editor’s Note: Exchange-traded funds are great investments if you’re looking to gain broad exposure to a particular country, sector, or industry. But what if you want to drill down even further and invest in companies directly? When it comes to foreign investing, this is a potentially tricky area, as it requires greater knowledge of the issues, yet the data isn’t as readily available.

Fortunately, Alexander Green knows exactly where to look to get the most reliable facts and profitable information on foreign firms – resulting in some outstanding gains. He’s laid out all the details about how you can diversify abroad and profit in this report.

View original at: Investment U

(PIN) The Dependency Ratio: Use This Number to Find the Best International Investments

“Progress, far from consisting in change, depends on rententiveness. Those who cannot remember the past are condemned to repeat it.” — George Santayana

China would do well to remember the lessons from the real estate collapse in the United States – because it’s heading down the same rocky path.

China’s National Bureau of Statistics just reported that property sales in the country surged by a massive 75.5% in 2009, adding up to a total of 4.4 trillion yuan ($644 billion). A 7.8% jump in December – the fastest pace in 18 months – ensured that 2009 ended with a bang. Shanghai alone saw a 126% leap in sales value last year, while Hong Kong’s real estate prices saw the biggest jump of any major world housing market, according to property firm, Knight Frank.

At first glance, you might think that such sizzling growth is a great sign for China’s continued progress. But a record number of new home loans merely gives the Chinese government a headache, as it tries to restrain what looks increasingly like rampant U.S.-style speculation.

Two of the world’s most successful investors and prominent, respected authorities on Asia just weighed in on the topic – and you can use their wisdom to profit…

China Applies the Brakes to Its Red-Hot Real Estate Market

Mark Mobius is an emerging market guru – and the man in control of $34 billion worth of assets at Templeton Asset Management Ltd.

He’s had his finger on the Asian economic pulse for many years and kicked off 2010 by reassuring investors that China’s red-hot real estate market isn’t about to tumble.

Mobius declares: “The Chinese will act rationally and they’re not going to kill the market. Prices are high, but I don’t see a crash.”

Hmm, that’s what people said about the U.S., too!

Still, the Chinese government seems to be doing what Mobius says and taking proactive steps. It just announced new measures aimed at slowing the pace of real estate growth without stifling the broader economy, which it expects to grow by 8% this year. Among them…

• It’s re-introduced a law that imposes sales tax on a home sold within five years of being bought.
• Banks must increase the amount of money they set aside for reserves.
• More rigorous requirements for anyone wishing to buy a second home – stricter enforcement a 40% down-payment.

Such restrictions should ease the market’s frantic pace somewhat and we may see a sharp drop in first quarter Chinese home sales.

But will it be enough?

This Renowned “China Bull” is Calling for Consolidation

It’s one thing to be bullish on a country or region. But when you move yourself and your family to the area in order to capitalize on that growth, you’re making an even bigger statement.

That’s what renowned investor, Jim Rogers, did in 2007. He also penned a book, entitled A Bull in China, which details the country’s enormous growth opportunities – and how to profit from them.

So when such a noted China bull calls for a consolidation, it pays to listen. And that’s exactly what Rogers predicts for China’s real estate market.

In an interview with Bloomberg, Rogers states: “Certainly, Shanghai real estate or Hong Kong real estate should decline. If anything’s in a bubble, that and U.S. government bonds are certainly very overpriced. China now realizes that they’ve created too much money, that prices are going up too much and they’re trying to slow things down. These things are designed to take some of the heat out of the economy.”

So what should you do? Amid the speculative fever, Rogers says he hasn’t bought Chinese stocks since late 2008. And while he hasn’t sold either, he does say “a consolidation is long overdue.”

This is a view that our own Louis Basenese shares. In fact, Lou’s been bearish on China since September, noting ten reasons why China will sell off. He reiterated that again in this “Bye-Bye, Shanghai” piece last week, so be sure to check them out to get Lou’s advice on how to profit.

And with the Shanghai Composite Index up 58% over the past 12 months, if you share this view on consolidation for China’s real estate market and broader stock market, here’s another quick way to profit. Consider a downside play on one of these ETFs:

~ iShares FTSE/Xinhua China 25 Index (NYSE: FXI): This is the most common and widely held Chinese ETF. The fund invests in 25 of China’s top publicly traded firms (on the FTSE/Xinhua China 25 index) and aims to track their performance. It’s up 72% over the past 12 months and is arguably best-placed to capitalize on a rise/fall of China’s fortunes.

~ SPDR S&P China (NYSE: GXC): This fund bases its returns off the S&P/Citigroup BMI China index. The portfolio holds China-based publicly traded firms that are available for foreign investors to trade. The fund has much less trading volume than FXI (a daily average of 120,000 shares, compared to FXI’s 19.4 million), but still has plenty of return potential. It’s chalked up an 88% gain over the past 12 months.

Best regards,

Martin Denholm

View original at: Investment U

(FXI) Is China Following America Into a Real Estate Bubble?

The latest annual survey data released from the London Bullion Market Association forecasts that platinum prices will range between $900 and $2,578 an ounce this year, with an average of $1550. If true, it lies very close to the current trading price of $1580, and would ensure a gain of 28.7% on the $1205 median for 2009.

That may seem optimistic, considering how much demand comes from the severely depressed global automotive sector. But that’s why platinum prices fell so badly last year, though they still posted a 58% gain by the end of the year thanks to stronger demand from emerging markets like China.

And this year promises to be even better.

Automotive Demand Spikes In China, And So Does Platinum Demand

Despite China’s fast-paced growth and quickly expanding middle class, few analysts predicted last year that the country would surpass the U.S. as the world’s largest auto market. Yet thanks in part to the economic crisis, America lost its top spot for the first time since Henry Ford created the assembly line… thereby saving the day for platinum prices.

Car sales in China shot up by nearly 53% to 10.3 million in 2009, while total auto sales – including heavy commercial vehicles – rose 46.2% to 13.8 million units. And while the government certainly fed into that whirlwind of spending with incentive programs, experts still expect the sector to post a solid year-on-year gain of 10 – 15% this year all the same.

Meanwhile, in India, suppliers are struggling to meet soaring demand. Two months ago, car sales jumped by 61% over the previous year and transactions of heavy-duty vehicles doubled. And between April and November, carmakers in India sold 20% more cars than the same time 2008.

Platinum demand from those countries alone weighs in heavily, easily offsetting the feeble U.S. market, not to mention that the commodity has far more uses than just manufacturing cars.

The Platinum Jewelry Market

Much of the demand for platinum comes from the jewelry market, where fashion trends and economic factors have increased interest in the metal.

Even when the West began thinking twice about buying any jewelry in the face of the economic crisis, China stepped in to buy large amounts at the resulting cheaper prices. Analysts expect the final figures to show that Chinese demand for platinum jewelry doubled, once again acting as a counter-weight to depressed consumers elsewhere.

According to Johnson Matthey, the precious metal refiner and consultancy firm, China’s appetite for platinum experienced a “dizzying increase” last year, rising 106% to 1.92 million ounces. And that demand helped worldwide orders rise by almost 80% to 2.45 million ounces… the first annual increase since 2002.

A Brand, New Way To Invest In Platinum

Investment demand for platinum rose right along with other reasons to purchase it in 2009 – up 13.3% from the previous year. And that appetite isn’t expected to go away in the next 12 months either, thanks in part to ETF Securities unveiling the first U.S., physically-backed, platinum exchange traded fund: ETFS Physical Platinum Shares (NYSE: PPLT).

Officially opened to public trading on January 8, 2010, it holds platinum ingots similar to how the SPDR Gold Trust ETF (NYSE: GLD) holds gold. That makes it much more attractive than its two direct competitors – UBS E-TRACS Bloomberg CMCI Long Platinum Total Return ETN (NYSE: PTM) and iPath Dow Jones-UBS Platinum Subindex Total Return ETN (NYSE: PGM) – both of which act as debt instruments that track the performance of the metal instead.

According to its creators, PPLT will start out with $500 million or roughly 329,000 ounces at current prices – a significant figure considering that the commodity’s surplus for 2009 was only about 100,000 ounces. And considering that production from South Africa, Russia and North America remains relatively flat these days, that number should stay significant for some time.

If it attracts individual investors the way SPDR Gold Trust ETF does – as it should – we could see some real fireworks as investors, automakers and jewelers all raise demand for the shiny metal.

Good investing,

Tony Daltorio

View original at: Investment U

(GLD) Why Platinum is the New Green

When salmon swim against the current, they know they’re taking a big risk. They know they’re easy prey for bears. Many get killed.

When investors swim against the current – defying conventional wisdom about a particular stock or sector of the market – they can make a killing.

That, in a nutshell, is the allure of contrarian investing.

The trick, of course, is not to blindly pick any investment that goes against the crowd, but instead to latch onto the contrarian opportunities that everyone hates, but which the fundamentals support. And do so before the rest of Wall Street wises up, too.

So with 2010 still in its infancy, I’ve got three contrarian opportunities for you to consider this year. I’ve tracked each of them closely over the past six months, and now is the time to take action…

Why? Simply put, there’s a definitive shift in sentiment afoot – something that often precedes a big change in price. In other words, this could be your “last call” to ante up on these contrarian trades. So here’s a rundown on each…

Contrarian Investment #1: Everybody Doesn’t Hate the Dollar Anymore

Six months ago, I was a pretty lonely man.

That’s because I was one of the only people suggesting that the U.S. dollar would rebound.

Rather than spell out all the reasons why, check out this pro-dollar article from my colleague, Alexander Green. He’s decided to buck conventional wisdom with me and sums up the argument very neatly here.

And it’s notable that other respected investment gurus have followed suit. Wall Street legends like Byron Wien and Jim Rogers, of all people.

When it comes to Rogers, he revealed he’s recently been buying dollars in recent months in anticipation of a near-term rebound. And a quick glance at the chart below from Bespoke Investment Group indicates that the dollar could be poised for a sustained rally, based on the technicals.

To see the chart in its original size, click here.

In making my pro-dollar argument, I indicated that the prospects for the dollar were strongest against the euro, since currencies trade in relation to each other.

And we can thank Greece’s near-default for opening up everyone else’s eyes to this fact, too.

But there are other fundamentals working against the euro. Namely, the winding down of government stimulus measures in the eurozone.

Once they end, demand will certainly suffer. And it will also draw attention to a key weakness of many European companies: They didn’t cut costs as aggressively as their American counterparts during the recession, so their bounce back to profitability will be subdued.

In addition, a strong earnings season for U.S. companies in relation to their European counterparts should accelerate the dollar’s rise and the euro’s fall.

Contrarian Investment #2: Bye-Bye Shanghai?

Boy, I really got the masses steamed with an article on the China sell-off four months ago.

All I did was suggest the country’s run-away stock market could use a cooling-off period – and gave 10 reasons why that would happen.

Some folks couldn’t bash their keyboards fast enough, with a few even calling for my resignation. Apparently, it was blasphemous to speak a bad word about China in the investment world.

Fast-forward to today and the list of parties taking a cautious stance on China is growing. For example…

• Pimco’s Bill Gross.
• Legendary short-seller Jim Chanos.
• The European Union Chamber of Commerce in China.
• Fang Gang, who heads the National Institute of Economic Research and advises China’s central bank.
• The China Banking Regulatory Commission.
• Stratfor, the global intelligence company referred to as the “Shadow CIA.”

I’ve even seen marketing pieces in the newsletter industry tapping into this change in sentiment.

Not only that, the fundamental evidence continues to mount in favor of a China correction.

For instance, data from the People’s Bank of China shows a 126.5% rise in overdue credit-card accounts. That’s bad news for any economy. But it’s terrible news for China bulls, who are counting on Chinese consumers to keep spending.

Again, the advice here is simple – and two-fold:

• At the very least, tighten up your trailing-stops on any Chinese stocks you own to ensure that you walk away a winner.
• If you can stomach being a contrarian, consider selling short or buying puts on Chinese stocks and ETFs.

Contrarian Investment #3: Stepping on the (Natural) Gas

“Is Natural Gas Down for the Count?”

Headlines like that dominated the newswires a little over a year ago. Some pundits even called for the price to drop to $1 per MMBtu, due to a supply glut.

Yet that’s precisely when I told subscribers to my VIP advisory, The Contrarian Strategist, that, “the cure for low prices will simply be, well, low prices” – and positioned them to profit accordingly.

Sure enough, natural gas prices have rebounded. And what a difference a year makes. I’m now seeing headlines like: “Natural Gas Stocks Could Have a Banner Year in 2010,” pop up everywhere.

Despite the increasing attention, I still think this contrarian trade has legs – especially with much of America enduring a brutal cold spell. Heck, snow is even falling in the southeast. And one Miami man died from hypothermia.

The longer this lasts – or the more frequently it occurs – the greater the chance that the natural gas supply glut will disappear and prices will rise. The low temperatures could also stymie or shut off production in Texas, Louisiana and Oklahoma.

Tack on natural gas’s emerging role as a “bridge fuel” to a greener and cleaner world, and many producers could enjoy a banner year, bringing their companies’ shares along for the ride.

If you want broad exposure, consider the First Trust Revere Natural Gas ETF (NYSE: FCG). It invests equal amounts in publicly traded U.S. companies that derive a minimum of 50% of their revenues from natural gas.

The fund uses a common-sense approach to make the selections. It scores each stock based on valuation (price-to-earnings and price-to-book ratios), profitability (return-on-equity) and correlation to natural gas prices. Only the top 30 make the cut. It rebalances the portfolio each quarter and has a modest expense ratio of 0.6%. But don’t delay.

Good investing,

Louis Basenese

View original at: Investment U

(FCG) Contrarian Investing – Why It’s Last Call for These Three Contrarian Investment Opportunities

“So what do you expect from the commodity markets in 2010?”

If I had a dollar for every time I’ve been asked this question over the past few weeks, I’d be able to buy myself an ounce of gold!

I’ll tell you what I’ve told my friends and colleagues: More of the same. Just because it’s a New Year doesn’t mean we should expect commodities to behave much differently than they did in 2009.

In my final Investment U column of 2009, I highlighted the crude oil and gold markets as the ones to watch as we head into this year. And neither has disappointed so far.

Although both have enjoyed impressive upward runs, they’re set to remain the key drivers within the commodities sector.

Here’s my latest analysis, along with some tips on how to profit…

Investors Locked In Oil and Gold Profits in 2009

It was no surprise to see investors lock in some profits from the gold and oil markets as 2009 came to a close.

In fact, oil futures shed $10 a barrel over the first half of December, striking a low of $70.83 before almost retracing the entire move. It ended 2009 with an $8.50 run to close out the year at $79.36 – a gain of around 43%.

As for gold, investors grabbed some major end-of-year profits here, too, sending the metal’s price down by $130 per ounce in December. Still, the 2009 closing price of $1,095 represented a gain of about 26% for the year.

But with 2010 now in full swing, the bottom-fishers and bullish participants have come back out to play, driving both of these markets right back up. Here’s what to expect…

Why Oil and Gold Will Head Higher… And How to Profit From It

As you can see from the charts below, traders haven’t hung around.

The price of oil has rallied by $4 to a 15-month high of $83.50, while gold has bounced off its December lows and added $45 an ounce to around $1,157.

From here, I don’t see any reason why oil and gold won’t continue their bullish moves. Consider these two factors…

• Inflation: We’re likely to see inflation tick higher at some point in 2010 – a scenario that bodes well for both commodities, as investors use them as hedges against higher prices.
• Speculation: Over the past year or two, both oil and gold have gained massive momentum from speculation. Once a commodity market gets going, speculators (such as banks, hedge funds, and large institutional traders) can drive the price considerably higher. This merely intensifies the move.

And there are a few ways to participate in bullish moves…

• ETFs: The easiest, quickest and often most cost-effective way to invest in oil and gold is to buy one of their respective ETFs (exchange-traded funds). They trade just like stocks on the major exchanges and aim to track the price of the underlying commodity. For example, you can go for United States Oil (NYSE: USO) or SPDR Gold Shares (NYSE: GLD) – playing the upside by either buying the shares outright, or through call options.
• Futures Options Contracts: A more direct way to play the oil or gold market is through futures options contracts, which trade on the NYMEX and COMEX, respectively. However, be sure to employ limited-risk investing strategies like credit spreads and give yourself a time horizon of at least three to six months with the options to protect yourself from price fluctuations along the way. The June 2010 contracts are very popular and liquid in both oil and gold.

Lastly, I want to highlight a commodity market that typically offers the best trading opportunities just once a year – during hurricane season – but which is facing a serious problem right now, too…

How Ice Could Heat Up Your Commodity Portfolio

Even Florida hasn’t been immune to the brutal cold snap affecting much of the United States at the moment.

But despite the cold, orange juice farmers in the state are sweating. The record low temperatures have the potential to hurt the orange crop.

The orange juice futures market has reacted to the lower crop yield scenario by scooting higher over the past two weeks. But beware: While conventional wisdom might be to play a continued price rise, the rally could be for naught. So far, we haven’t seen damage to the orange crop and a contrarian trade might be the best move here.

So if you’re looking to buck the trend and play this potentially overheated market to the downside, a bearish trade could prove very profitable if the orange crop emerges relatively unscathed. I suggest you look into limited-risk put option strategies, specifically put option debit spreads, using May 2010 options. Futures options on orange juice trade on the ICE/NYBOT exchange in New York.

Good trading,

Lee Lowell

View original at: Investment U

(USO) The Best Ways to Play Oil Gold and Frozen Florida Oranges

Investors hold to a myriad of catchphrases, proverbs and beliefs about everything from the traditional Santa Claus Rally to buying when there’s blood in the street… or passing up on immediate investments into any country that builds the world’s tallest building.

Admittedly, there is some truth in that last one – at least in the short term – but it doesn’t necessarily hold for the long haul. If it did, the United States stock market would have peaked decades ago.

Of course, the U.S. hasn’t held that claim to fame for some time. And on January 4, 2010, Dubai officially opened its 160-story Burg Khalifa, stealing thunder from the previous tallest building in Taiwan.

Further lending credibility to the theory, Dubai ran into trouble late last year as it tried to restructure $26 billion of debt connected to the government-connected Dubai World.

And now, some investors seem wary about investing anywhere nearby because of that.

But while they probably should stay away from Dubai for a while at least, its closest neighbors in the Middle East present what could turn out to be the most significant contrarian plays of the decade…

Fundamentally Sound With Money To Burn

Dubai may have bitten off more than it can chew, but Saudi Arabia, Qatar and Abu Dhabi have a lot more than man-made islands and tall towers to bank on… like two-thirds of the world’s oil and 45% of its gas reserves.

With minimal debt levels and over $1 trillion in oil reserves alone, those Gulf nations plan to spend at least $2 trillion on infrastructure projects over the next few years in order to properly diversify their economies.

And unlike the debt-fueled stimulus programs that many developed countries seemed to favor over the last year, Saudi Arabia, Qatar and Abu Dhabi are actually good for that money – even if oil prices drop to $40 per barrel, which they won’t.

As prices stand now, Saudi Arabia alone is increasing its reserves by over $350 million each day.

With that kind of backing, it’s no wonder that so many companies have eagerly agreed to participate in the infrastructure boom, especially since they already don’t have to worry about high taxes or expensive resources in the region. And real estate developers have access to free land as well.

Dubai aside, the financial sector in the region has weathered the financial crisis quite well.

Banks have made sizable provisions and reigned-in lending, with non-performing loans peaking in the next few quarters and a tremendous demand for further lending.

Equity Markets And ETFs In The Middle East

The Gulf region of the Middle East has another factor heavily in its favor…

As Saudi Arabia, Qatar and Abu Dhabi enter the main emerging market indexes in the next few years, foreign investors – who currently own less than 3% – should buy up as much as 57% more.

They pose quite the bargain now too, considering that they dropped by half last year without any significant recovery during the 2009 rally largely because they weren’t included in the indexes.

Though Gulf markets have traditionally traded at over 20 times earnings on high profitability and earnings growth, they’re only trading at nine times 2010 earnings today.

That’s why exchange-traded funds (ETFs) like Wisdomtree Middle East Dividend Fund (NYSE: GULF) and MarketVectors Gulf States Index ETF (NYSE: MES) look particularly good right now.

Wisdomtree allocates its portfolio to:

• Qatar – 33%
• United Arab Emirates – 17%
• Kuwait – 15%
• Oman – 4%

And MarketVectors takes its profits from:

• Kuwait – 45%
• United Arab Emirates – 25%
• Qatar – 20%
• Oman – 4%
• Bahrain – 1%

Like any other market, the Middle East poses certain risks, especially if oil does happen to drop significantly below $40 or if political strife gets out of hand.

Fortunately, it looks good going into 2010 and even beyond, presenting a great opportunity for contrarian investors to get in now while prices sit at historically low valuations.

Good investing,

Tony Daltorio

View original at: Investment U

(GULF) Forget Dubai: Two Timely Opportunities To Invest In The Middle East

The well-documented, post-recession rally for small-caps is not a sprint. It’s more of an endurance test, like a marathon.

But don’t just take my word for it. Take a look at the hard data…

• On average, small-caps outperform their large-cap neighbors for a full three years coming out of a recession, according to Morningstar.
• Coming off particularly nasty slowdowns, small-caps boast even more endurance. For example, after the 1973-1974 recession, small-caps trounced large-caps for an entire decade, returning an average of 28% per year.

Based on these historical measuring sticks, you can see that the current small-cap rally isn’t anywhere near an apex. It should continue for at least two more years – and potentially nine!

Note to Skeptics: Four Reasons Why Your Small-Cap Pessimism is Wrong

At this point, the skeptics in our midst might be tempted to shoot holes in my prediction, saying things like, “History doesn’t always repeat itself.” Or, “We need something more meaty than a few data points to prove that small-caps will lead the charge again.”

Fair enough. So let me assure you that the fundamental case for a prolonged small-cap rally is just as sound. There are plenty of reasons why small-caps have performed best coming out of past recessions. And they ring true in today’s market, too…

• Innovation: Small companies don’t care what is happening with the economy. They’re constantly innovating anyway – a phenomenon that is substantiated by Scott D. Anthony and Leslie Feinzaig of the consulting firm Innosight. In contrast, research demonstrates that larger companies cut back on innovation during downturns.
• Size: Because of their size, small-caps can adapt their strategies faster than bureaucracy-plagued behemoths during recessions. The result? Much more stable earnings. And a leaner, meaner organization poised to attack growth strategies once the economy picks back up.
• Niche Markets: Most small-caps operate in under-penetrated industry niches, devoid of much competition. In other words, their profit opportunities are young… and unlimited.
• Ignorant Wall Street: Most small-caps fly under the radar and scrutiny of Wall Street analysts. Consequently, management teams focus on long-term results, not unrealistic short-term expectations. In turn, their growth is more powerful and often undervalued… that is until it gets so strong analysts must pay attention. At that point, stock prices zoom to bridge the valuation disconnect.

If you’re sold on the positive outlook for small-cap stocks in 2010, you need to understand an important point before you load up on them…

Why Now Is the Time to Invest In Small-Caps

After such an impressive run in 2009, we can no longer buy any old small-cap stock, or a passive index fund like the iShares Russell 200 Index (NYSE: IWM) and hang on for the ride. Not if we want to bag the highest returns.

That’s simply because in addition to small-caps leading the pack, the historical record also indicates that the market follows another very predictable pattern…

Low-quality stocks – those that suffered the worst beating during the recession – rally first and the most. True to form, financials led the way off the March 9 bottom, rallying an average of 130%.

Eventually, though, investors wise up. And when they get back to putting a premium on fundamentals, they rotate into higher-quality companies (i.e. – value stocks) that got left behind.

Here’s the good news: We can pinpoint the timing of this rotation. Based on research from RBC Capital Markets, it typically occurs about 10 months after the market hits bottom. That’s this month!

So if we want to ride the small-cap rally for maximum gains, we should rotate into small-cap value stocks. Thankfully, it’s an easy transition to make…

It’s Prime Time for This Small-Cap All-Star Fund

In August of 2009 last year, I told you about David Dreman. Nobody is better at discovering small-cap value investments than him.

In fact, over the past five years, he’s beaten the small-cap value index by an average of 7% per year. He’s outperformed the index over the past decade, too.

And since I first mentioned his fund – the Dreman Contrarian Small Cap Value Fund (DRSVX) – it’s up a tidy 18%, outperforming the S&P 500 over the same period.

But Dreman is just getting started. Thanks to a top-notch and stringent stock-filtering process, he consistently unearths the most undervalued, highest quality small-cap companies.

And right now, his portfolio is filled with 98 compelling opportunities, trading for an average price-to-earnings ratio of 11. That’s a whopping 81% discount to the average stock in the S&P 500.

Clearly, as the small-cap rally continues and these stocks catch up with valuations, we’ve got plenty of upside. So what are you waiting for?

Good investing,

Louis Basenese

View original at: Investment U

(IWM) Why You Should Expect Small-Caps to Shine (Again) in 2010

It’s a new year, even if Wall Street doesn’t seem to recognize it.

They still seem stuck on years gone by, when the west held all the power and didn’t have quite so much to worry about in the form of debts and deficits.

In Wall Street’s defense, the U.S. especially has kept its bonds temptingly liquid, advertising them as having practically risk-free rates: A dangerous illusion, considering how very unsafe they really are in countries like the U.S. and UK, where government debt has soared to unprecedented levels.

With fiscal deficits swelling in the west, major industrialized countries have no choice but to sell more than $12 trillion worth of government bonds through 2011 to fund the fiscal holes they dug themselves.

And despite how much politicians like to talk about financial reform, most of them actually prefer to keep things as-is, merely giving lip service to the concept of change.

Fortunately, savvy investors have a way out…

Emerging Markets Do It Better

Traditional financial hotspots failed investors in 2008 and 2009, and nowhere more than in the U.S., where the deficit reached 10% of GDP in the last fiscal year… the largest amount since World War II’s aftermath.

Meanwhile, net external debt nearly tripled to $3.5 trillion, with a projected increase of $1 trillion over the next decade… per year!

Add to that bankrupt states and the unfunded benefits the government owes to baby boomers, and the country faces one major problem with only one solution: Raise taxes substantially and slash spending at the same time… not a likely scenario in this very partisan political atmosphere.

Instead, the U.S. will doubtlessly continue eroding the value of its bonds, debasing the dollar and stoking inflation by printing more and more money… servicing its debt in increasingly cheaper dollars in a slow motion default that leaves US Treasury bonds worth a whole lot less in just a few years’ time.

Even as industrialized countries mortgaged themselves to the hilt to escape the financial crisis, blatantly ignoring that they have to pay off those debts somehow, someway in the future, many emerging markets handled the situation with low debt levels and prudent economic management.

As a result, while the U.S. debt-to-GDP level is fast-approaching 100%, China’s should soon stabilize at 46% and Brazil at 65%.

Though investors may not have known the exact figures, many of them still recognized the changing trends after Dubai’s recent debacle.

As the smoke screen of wealth and glamour dissipated to reveal painful levels of debt, emerging market bonds from China and Brazil benefited as investors recognized them as real safe havens.

Emerging Market ETFs

Though dozens of exchange-traded funds (ETFs) give easy access into the emerging markets, two especially target those countries’ sovereign debt:

• PowerShares Emerging Market Sovereign Debt Portfolio (NYSE: PCY), which makes a monthly distribution (profits from an investment trust that is then doled out to investors like a stock dividend) and has a near 6.5% yield
• JPMorgan USD Emerging Markets Bond Fund (NYSE: EMB), which also offers a monthly distribution and a 5.5% yield
• Or look into Templeton Emerging Markets Income Fund (NYSE: TEI), which also presents an easy in to take advantage of current trends.

Trading at about a 2% discount to its net asset value, it makes quarterly distributions that just sweeten the deal even more.

And considering that emerging markets are set to grow at rates the west can only dream about, investors should introduce a taste of less familiar lands into their portfolios.

Good investing,

Tony Daltorio

View original at: Investment U

(PCY) Why Even Debt Looks Better In Emerging Markets

I’ve got good news and bad news…

• The good news: Consumer confidence is rising sharply.
• The bad news: Those consumers live in Asia.

According to the Nielsen research group, developing countries are seeing renewed interest in purchasing products.

Meanwhile, the Western world isn’t looking nearly as enthusiastic, and consumer confidence levels in particularly the United States have dropped below the global average.

While Asian nations such as the Philippines, Indonesia and India have perked up significantly, China in particular has benefited from a rebound in consumer consumption. Purchases of groceries, clothing and home entertainment have all headed higher amid optimism over the job market and as the number of middle class citizens rises.

The latter point is noted by Chris Morley, managing director of Nielsen China. With more Chinese citizens crossing the line from poverty into more comfortable living, they have money to buy bigger-ticket items for the first time. And that increased spending activity has factored heavily into China’s current impressive growth.

And although the country has experienced manufacturing declines in its largest cities, taking its toll on consumer confidence in those areas, Morley reports that, “hundreds of millions of consumers are seemingly unaffected by the downturn, highlighting the depth of China’s economic growth.”

This increased consumer spending and economic growth benefits more than just China. It’s filtering down to its Asian neighbors, too…

When China Spends, Asia Benefits

Countries like Japan, Hong Kong, Taiwan and Thailand exited their recessions in the second quarter of 2009. And Singapore’s economy expanded at its fastest rate in almost six years.

Not far behind, South Korea’s economy grew 2.9% during the third quarter of 2009, its fastest rate in seven years, thanks in large part to increasing Chinese demand.

Already Asia’s fifth largest economy, South Korea should see further growth, due to rising consumer demand from China. That kind of growth led to strong earnings at large Korean companies such as Hyundai and Samsung.

Asia’s continuing recovery underlines the trend of how both demand and production from Asian countries has assumed an increasing role in global growth over the past few months.

For example, China, South Korea and Japan alone account for 16% of the world’s GDP – a figure that keeps growing.

So forget Wall Street’s blathering about how Asia is dependent on demand from the Western world. The region is growing nicely on the back of inter-Asian trade alone, and is actively leading the world out of the economic downturn.

Four Ways to Invest In Asian Growth

One of the best ways to play this Asian growth is through exchange-traded funds (ETFs). They save time, effort, and money, while offering excellent diversification and minimizing risk. And there are usually several to choose from.

• For example, you can gain broad exposure to the Asian region with the iShares S&P Asia 50 Index ETF (NYSE: AIA) – a large-cap Asian ETF devoted to South Korea, Hong Kong, Taiwan, China and Singapore.
• If you’re looking for more individual options, such as China, you can go for the iShares FTSE/Xinhua China 25 Index (NYSE: FXI), which invests in China’s 25 most popular and liquid stocks.
• Alternatively, you can take advantage of an index created by renowned investor and Princeton University economist, Burton Malkiel. He’s an expert on China and his Claymore/AlphaShares China All-Cap Index (NYSE: YAO) fund offers a broad range of stocks of all market capitalizations and exposure to a variety of sectors.
• And in South Korea, you can gain quick, easy access to the country’s large-cap companies (mainly in the technology and industrial sectors) with iShares MSCI South Korea (NYSE: EWY).

All four of these funds aim to capitalize on what is the bottom line here: Asia is going places.

Good investing,

Tony Daltorio

View original at: Investment U

(AIA) Let Asian Growth Propel Your Portfolio Higher

Some of the best investment opportunities can happen simply by ignoring the Wall Street herd and venturing onto the road less traveled.

Take traditional “breakfast club” commodities like sugar, cocoa, coffee and orange juice; all of which enjoyed a great year, despite bearish forecasts of doom and gloom. Sugar and cocoa even traded at multi-decade highs.

Similarly, cotton got a bad rap going into 2009, though it finished on Friday with a tidy profit, rising on the standard laws of supply and demand.

That supply comes from subtropical regions around the world, with China ranking first in cotton production – though it also imports the most – followed by India and the United States.

Meanwhile, the U.S. exports the largest amount, followed by India and Brazil.

The soft commodity serves as a necessary ingredient in traditional wardrobe materials such as denim, corduroy and terrycloth, but also for coffee filters, tents, fishnets and gunpowder.

With that said, cotton prices still largely rely on clothing and textile production levels. So the recent uptick in global economic activity naturally sparked a cotton craze that should last at least this year, especially with the weaker U.S. dollar making it relatively cheaper.

But the most compelling reason for prices to rise in 2010 is supply, pure and simple…

A Supply-Side Story

The low price for cotton over the past several years has made it a very unprofitable crop for farmers everywhere, leading them to focus on other crops and only devoting small amounts of acreage to the fabric base.

That shows too, since global production levels haven’t been this low since 1986. And in the U.S., it’s even worse; American farmers haven’t planted less since 1983.

In addition, rain played havoc with crops this year, affecting yields in the U.S., where shipments could decline as much as 21%. And China suffered as well.

Taking all that into consideration, the U.S. Department of Agriculture (USDA) projected that global production would fall 4% to 102.7 million bales in the 2009 – 2010 growing season.

Yet it also expects demand to rise 3% to 114.5 million bales on strong demand from China…

Simple arithmetic shows a significant imbalance between the two.

In fact, that 12 million-bale difference is the largest, annual global decline for cotton in seven years. And analysts expect the 2009 world cotton inventory-to-use ratio to fall below 50% for the first time in five years.

Moreover, a return of global growth and a rise in Chinese clothing exports will likely shrink inventories even further.

ETNs To Cash in on Cotton Trends

Traditional investors don’t have to worry about trading futures in order to gain exposure to cotton… not with two exchange-traded notes (ETNs) on the market:

1. iPath Dow Jones-UBS Cotton Subindex Total Return ETN (NYSE: BAL): Already up about 28% year-to-date, it links to an index that focuses on single futures cotton contracts.
2. iPath Dow Jones-UBS Softs Subindex Total Return ETN (NYSE: JJS): Up about 33% year-to-date, this one devotes 27% of its portfolio to cotton, 29% to coffee and 44% to sugar.

Until farmers start planting more or people stop needing less, smart investors should pick cotton… The potential profits could easily pay for a whole new wardrobe.

Good investing,

Tony Daltorio

View original at: Investment U

(BAL) Two Cotton Investments Bound To Benefit from the Laws Of Supply and Demand

The list of Intel’s misdemeanors included an attempt to cut off its rivals’ access to the microprocessor market; an attempt to monopolize the graphics processor market; and an attempt to smother competition, thereby slowing down the pace of innovation and reducing customer choices.

In the core microprocessor market, Intel was charged with purposefully redesigning key software (called compiler) that would not work well with CPUs from competitors, and then misrepresenting the reason for the poorer performance. According to the FTC, this encouraged users to stay away from competing products.

The company also is accused of making arrangements with key hardware makers, such as Hewlett Packard Company (HPQ), Dell Inc. (DELL), International Business Machines (IBM) and Seagate (STX), among others, and paid billions of dollars to these companies to make them stay away from Advanced Micro Devices (AMD) processors.

The emerging graphics processor market has so far been largely dependent on interoperability, since the central processing unit (CPU) and graphics processing unit (GPU) have been developed by different companies. Intel has allegedly started developing products that are creating interoperability problems, thus discouraging users from buying competing products. According to the FTC, Intel has also made a concerted effort to thwart the development of general purpose graphics chips (GPGPUs), which are very likely to eat into its CPU market share.

The FTC has also alleged that Intel’s new Atom processors that bundle a graphics chipset are a further underhanded tactic. Intel has supposedly priced the bundled product in a way that makes it uneconomic to purchase a separate GPU from NVIDIA Corporation (NVDA). OEMs that bought the bundled product, removed Intel’s graphics chipset and replaced it with a superior quality NVDA graphics chipset have allegedly been penalized with significantly higher prices.

It is the FTC’s contention that even Intel’s current position in the CPU market was not built alone. Therefore, it should be forced to continue sharing its technology the way it has been sharing others’. This would be protection for competing products that are of superior quality and/or sold at lower prices.

The FTC intends to bring an order that would prevent Intel from threatening, bundling its products, offering exclusive deals, hindering competition in any way, or manipulating prices with respect to its CPU or GPU offerings. The hearing will be held in Sept. 2010.

Intel has stated that the FTC’s allegations were misguided, not properly investigated and not based on existing law. Moreover, it described its pricing tactics as lawful and stated that the inability to protect its intellectual property rights would make it impossible for Intel to conduct business.

We currently have a Neutral rating on the stock. We expect the shares to be range-bound in 2010, given the negative overhang related to these issues.

Zacks Investment Research

(FTC) Intel Sued by Federal Trade Commission for Anti-Competitive Practices

Some day in the future, human beings will likely colonize Mars. But if I suggested you invest in its colonization now, you’d rightly think I was a few cards short of a full deck.

The same is true of much-ballyhooed “alternative energy.”

Someday, nano-engineered solar panels and wind turbines may power the nation and the rest of the world. But it won’t be anytime soon. Today, wind and solar combined make up just one-sixth of 1% of American energy consumption.

As for the Cassandras who insist we simply don’t have any choice but to look elsewhere and that our planet is running out of oil and natural gas… well, take it with a whole shaker full of salt.

Here’s why – and how we can play the current oil and natural gas investment situation…

How to “Run Out of Oil” Multiple Times

Consider this from Pulitzer Prize-winning columnist, George Will:

“In 1914, the Bureau of Mines said U.S. oil reserves would be exhausted by 1924. In 1939, the Interior Department said the world had 13 years worth of petroleum reserves.

In 1970, the world’s proven oil reserves were an estimated 612 billion barrels. By 2006, more than 767 billion barrels had been pumped and proven reserves were 1.2 trillion barrels. In 1977, Scold-in-Chief Jimmy Carter predicted that mankind ‘could use up all the proven reserves of oil in the entire world by the end of the next decade.’ Since then, the world has consumed three times more oil than was then in the world’s proven reserves.”

The world’s population is rapidly rising, of course. And so is discretionary income. Nearly 2 billion of the world’s 6.2 billion population don’t have electricity and have never flipped a light switch.

So surely that means nuclear power is likely to play a major role in meeting future energy demand?

Nope.

Forget Nuclear… Oil and Natural Gas Will Still Rule the Energy World

By 2050, there will be more than 10 billion energy consumers. If nuclear power is to supply even 10% of our carbon-free energy, the world would have to build more than 50 large nuclear power plants a year. Currently, five a year are being built.

Our primary energy source for the rest of our lifetimes will be the same one that has dominated for the past 150 years: oil and gas.

Despite all the naysayers and finger-waggers, that’s not an insurmountable problem. The world’s deep-water oil and natural gas reserves are significantly larger than was thought just a decade ago. And higher oil prices have spurred the development of technologies for extracting them.

That means the cost of developing Canada’s oil sands, for example, are quickly declining. Projects that weren’t viable last year now are, with oil at $77 a barrel.

As for natural gas, U.S. known reserves – including the Marcellus Shale, – which contains more natural gas than the North Field in Qatar, the largest field ever discovered – exceed 100 years of supply at the current rate of consumption. And those reserves are sure to become larger.

Two Huge Commodities… And One Investment That Capitalizes on Both

Let other speculators chase the high-risk venture capital investments in alternative energy sources. Oil and gas are here to stay. Bank on it.

Or better yet, pick up a few shares of iShares Dow Jones US Oil & Gas Exploration Index (NYSE: IEO). Here are three reasons why you should…

• It’s well-diversified, holding Anadarko Petroleum (NYSE: APC), Apache (NYSE: APA), Chesapeake Energy (NYSE: CHK), Devon Energy (NYSE: DVN), Noble (NYSE: NE), Occidental Petroleum (NYSE: OXY), Valero (NYSE: VLO) and many others.
• It’s liquid.
• Costs are low – annual expenses are less than half of one percent.

Good investing,

Alexander Green

View original at: Investment U

(IEO) Oil and Natural Gas Investments: Why You Should Buy Black Gold Now

You don’t have to look too far these days without hearing someone talk about how high gold prices could go. The topic is fiercely debated in the mainstream financial media at the moment – especially for investors who are late to the party.

But are they really late, or is the “party” just getting started? Yes, investors who bought the gold ETF, SPDR Gold Trust (NYSE: GLD), or gold miners like Newmont Mining (NYSE: NEM), or Yamana Gold (NYSE: AUY) a year ago have seen their investments soar by 54%, 83% and 184% respectively.

But gold continues to soar. And large open market purchases from central banks in China, India and Russia are only helping the price surge more. (Just one year ago, some of these same central banks were actually selling gold in an attempt to fill an annual 10,000-ton supply gap.)

When gold rallies, it often drags other precious metals along for the ride. Chief among them is silver. But according to one closely watched indicator, silver has lagged a bit. And that opens the door to an opportunity that well-respected commodities experts, like Jim Rogers, say could be at hand…

Silver: The “Other” Gold

Gold and silver are like blood brothers – generally in sync with each other and tending to move in the same direction.

The relationship is such that there’s even an indicator that measures it – the gold/silver ratio. Many investors use the ratio to spot extremes in the pricing of either precious metal, and to spot trends, whether up or down.

With gold at $1,191 and silver at $18.63, the ratio currently sits at 64:1 – well above its one-year low from September. But in 2008, the ratio hit 84:1 before retreating.

With individual investors and central banks still buying gold, its meteoric rise shows few signs of stopping… at least for now. As a result, the gold/silver ratio suggests that silver has some catching up to do.

But silver has one advantage that gold doesn’t…

The Supply-Demand Equation Bodes Well for Rising Silver Prices

Unlike gold, silver is used in more commercial and industrial applications. The list is extensive – electrical contacts, mirrors, jewelry, currency coins, photographic films and as a catalyst in many chemical reactions.

However, silver production is dropping. Much of it comes as a by-product of other mining and refining, primarily lead and zinc. But due to plummeting prices created by over-supply, many lead and zinc mines were mothballed back in 2008.

As a result, silver production stalled with lead and zinc – and inventories are now at historic lows.

That’s the supply side of the equation. But what about industrial demand?

In short, it continues to rise. So with silver supplies lagging, silver prices are likely to head in one direction: up.

There’s another big difference between gold and silver…

Don’t Ignore Silver… Take the Rogers Route

Most fund managers won’t touch silver with a 10-foot pole. The reason? At around $9 billion, the size and liquidity of the silver market is roughly 20 times smaller than the gold market.

However, it might be a mistake to ignore silver. With supplies continuing to fall and demand continuing to rise, the metal could very well make a very dramatic move to the upside over the next three to six months – even if gold prices fall.

Then there’s Jim Rogers…

As recently as October, Rogers, founder of the Quantum Fund, suggested that the U.S. dollar will continue its decline and that hard assets like gold, silver and agricultural products represented good value in the upcoming inflationary environment.

So if you want to gain some exposure to the silver market, you could consider a few shares of the ETFS Silver Trust (NYSE: SIVR), or silver miner Silver Wheaton (NYSE: SLW).

A deteriorating U.S. dollar suggests that while gold’s meteoric rise still has room to run, silver’s run is yet to get started.

Good investing,

Dave Fessler

View original at: Investment U

(GLD) Why It’s Time to Invest in Silver: This Precious Metal’s Rally is Just Getting Started

Personal consumption expenditures rose by 0.7%, reversing a 0.6% decline in September. The September decline was largely a hangover from the end of the Cash for Clunkers program. In August, at the height of the program, personal spending surged 1.3%.

The bigger increase in spending than in disposable income means that the savings rate went down, falling to 4.4% from 4.6% in September. As the graph below (from http://www.calculatedriskblog.com/) shows, savings rates have risen dramatically during this recession, but it started at such a low level that it is still far below where it has been for most of our post-war history.  Recently, though, savings rates started to head back down.

Declining savings rates will help economic growth in the short term, but in the long-term it is disastrous to have low savings rates. It is sort of like having a Thanksgiving feast, but doing so using your seed corn. You are full and bloated now, but will be starving in the future. In absolute numbers, personal savings rate were annualized at $490.3 billion, down from 510.4 billion in September.

Thus the best position to be in is to have high but falling savings rates. Unfortunately, the laws of mathematics tell you that such a situation cannot continue indefinitely, but as long as savings rates are going down, the economy gets an artificial boost. If you start with high enough initial savings rates, the process can continue for a long time.

A very good argument could be made that a big part of our economic growth, not just for the last decade, but for the last three decades, has been due to a secular decline in savings rates. The long decline in savings rates has corresponded with an increase in the consumer as a percentage of GDP to an all-time record of 71.08% in the third quarter.

Back when savings rates peaked in the third quarter of 1981, the consumer represented only 61.82% of the economy. If we cannot generate enough savings domestically to fund investment, we have to import the savings. This is the flip side of the trade deficit.

Over that same time period, net exports as a percentage of GDP moved from -0.24% to -2.82% in the third quarter. The low point for net exports was the fourth quarter of 2005 when it hit -6.13%. The decline in savings rates since May seems to be playing a role in the recent economic rebound.

Normally savings rates will rise during a recession and then fall as the economy recovers. However we are exiting this recession with the need to still further increase savings rates. This will be one of the key reasons why this economic rebound will be far more muted than previous recoveries, particularly recoveries from previous deep recessions.

Instead, worldwide growth is likely to be led by countries that have room to reduce their savings rates. Chief among those is China, where personal savings rates are north of 40%. Over time, Chinese consumption will grow, and U.S. consumption will remain stagnant or even decline, even as U.S. income recovers as we try to rebuild our savings.

Investments that benefit from the rise of the Chinese consumer are going to be very big long-term winners. Unfortunately, most of the big Chinese ADR’s are not particularly consumer focused. One good way of playing this trend, though, is through the Claymore China Small Cap ETF (HAO), which has the highest exposure to the consumer sectors of any Chinese ETF. Wal-Mart (WMT) also has a growing presence in China, but is far from a pure play there.  While in the short term, U.S. based retailers have pared inventory to very low levels and might do OK this Holiday season, in the long term, the need to increase savings rates will act as a brake on their growth.

The destruction of housing equity has put even more pressure on individuals to boost their savings rates, although the rebound in the stock market since March has eased the pressure somewhat. Still, people save because they want to be able to consume in the future, and those needs such as retirement or a child’s education have not gone away — just the money people thought they had to fund those needs have.

For too long, people substituted asset appreciation for actual savings (spending less than you earn). When assets started to depreciate instead of appreciate they were left without the funds to meet those future needs. People would consume first, and then pay later — in other words, consumer-based on debt.

Now consumer credit is contracting, and the credit card companies like Capital One (COF) and American Express (AXP) face mounting delinquencies. The asset appreciation also funded outright consumption rather than just being a substitute for putting money in the bank. Houses were treated like they came equipped with an ATM as the newest kitchen appliance. During the housing boom, mortgage equity withdrawal regularly exceeded 6% of disposable personal income. That game is over and it is not likely to come back.

Dirk van Dijk, CFA is the Chief Equity Strategist for Zacks.com. With more than 25 years investment experience he has become a popular commentator appearing in the Wall Street Journal and on CNBC.

Zacks Investment Research

(HAO) Spending Up, Savings Rates Down

Any growth rate that is positive will lead to a doubling in size eventually — the higher the growth rate, the quicker the doubling. A quick “back of the envelope” method of figuring it out is known as the rule of 70. If you divide a growth rate into 70, it will roughly give you the time for something to double. Thus if something is growing at 2% a year, then it will double in about 35 years, at 5% only 14 years, etc. If you want to be more precise, you can always use your Y^x button on your calculator, but the rule of 70 will do for this discussion.

Clearly, exponential growth is what we are looking for when we invest — better known as compound interest — and it is vital to anyone’s financial health that they stay on the right side of it. People who get on the wrong side — for example, by carrying a credit card balance — are eventually headed towards financial oblivion. If that is you, then your best investment is probably not one of the stocks or ETFs that I recommend, it is paying down you damm Visa bill.

It is also why I try to watch the downside when I make investment decisions. It is far more important to avoid 50% losses than it is to have a 50% gain. After all, if you had a 50% gain in one year, but in the next year you suffered a 50% loss, at the end of two years  that dollar would have turned into just $0.75 — a 25% loss.

However, far more important to the world is the dark side of exponential growth. Let’s start with the obvious one: population growth. The table below comes from Wikipedia, but is based on UN data. Note that from 1750 to 1800, the world population grew from 791 million to 978 million — an increase of 187 million, or 0.4% per year. From 1850 to 1900, it grew from 1.262 billion to 1.650 billion — an increase of 388 million or at 0.53% per year.

Thus, even very small growth rates can result in some very large increases extended long enough, and as the base grows, the absolute increase gets larger each year even if the rate of increase stays the same. Now look at what has happened more recently. From 1950 to 1999, world population increased by 3.457 billion, more than doubling from 2.521 billion, an increase of 1.78% per year. Lately we have seen a slowdown in the growth rate; from 1999 to 2008 it was just 1.29% per year, but that has meant an increase of 729 million in just nine years, or 92% of the entire world population in 1750.

Looking forward, the U.N does see a further reduction in the rate of growth, to just 0.68% per year, or almost back down to the growth rate in the very earliest days of the Industrial Revolution. But the base is so much larger, the absolute increase is 2.2 billion, or almost the world population of 1950. The effect is that a long-term graph of world population looks like a picture of a rocket launch. And unless you believe in the Mayan calendar or the equally silly “end times” nonsense, this is going to cause some very big problems (not that the end of the world in 2012 wouldn’t be a very big problem on its own).

Now look at where the growth is coming from. The combined populations of North America (Mexico is included in the Latin American numbers, so basically the US and Canada) and Europe are actually expected to fall from the current 1.069 billion to 1.020 billion. All of the growth is coming from Asia, Africa and Latin America.

The only thing that can keep up with exponential growth is something that itself grows exponentially. Fortunately, the one thing that grows exponentially at a very fast rate is computing power, which in turn allows for technological advances. So far, technology has managed to hold off the worst of the problems that one might expect. After all, this analysis is not exactly original. It was first made by Thomas Malthus back before world population hit the 1 billion mark.

However, you can eat potato chips, not computer chips. One of the things that technology has done is level the playing field, so that people in Asia and eventually Africa will have the same shot at success as people in the U.S. and Europe. They can see how we live, and surprise, surprise — they would prefer to live the way we do, and are increasingly able to do so. As they do, the economic growth opportunities will be huge.

That is why I like the emerging markets story so much. However, given the challenges of trying to research foreign firms who might be best positioned to take advantage of these trends, it probably makes sense to use ETFs such as the I-shares MSCI Emerging Market Fund (EEM) or more country-specific variants like the Claymore China Small Cap ETF (HAO) or the Wisdom Tree India Earnings ETF (EPI).

One of the things that has been absolutely key to our ability to have so much higher living standards today than back in, say, 1850 is that we use a lot more energy.

So let’s take a look at energy consumption per capita (the data I’m using comes from here if you want to investigate further). In 2005, people in North America used the equivalent of 8157.9 kilograms of oil per year (kgoe/y) per person, up from 7942.9 kgoe/y in 2000. Thus while our rate of increase in energy consumption was just 0.54% per year, it was on a high base so the absolute increase was 215 kgoe/y over that time.

Now look at Asia (excluding the Middle East). In 2000, they were using 865.2 kgoe/y, and by 2005 it was up to 1051.5 per year. That is an increase of 3.98% per year, or to go back to the rule of 70, it means that if it keeps up Asia’s energy consumption per capita will double by 2022. Combine that with a population that is expected to grow at 0.6% per year, and Houston, we have a problem.

However, note that the absolute increase in energy use per capita in Asia was just 186 kgoe/y, or just 86.5% of the increase in North America, despite the far higher growth rate. However, if the relative growth rates continue, that will not last. If we extrapolate out the growth rates of 2000 to 2005 then by 2015, Asia’s per capita consumption will grow to 1,553.0 kgoe/y, an increase of 501.5, while the absolute increase in North America will be “only” 451.4 kgoe/y.

Put another way, right now we use 7.76x as much energy per person as in Asia (keep in mind these figures include relatively rich countries like Japan and South Korea, as well as basket-cases like Burma and Bangladesh), and by 2015 that ratio will fall all the way down to 5.54x as much.

Now, the peak year for actual oil discovery in the world was in 1964, and as you pump oil out of the ground it is gone. Once you reach the point where you have pumped half the original oil in a field, it is basically impossible to increase the annual output from that field without causing serious damage that eventually results in that oil being trapped forever. Most of the currently producing fields are past their peak. As the International Energy Agency (IEA) found last year:

“Output from the world’s oilfields is declining faster than previously thought, the IEA said in its annual report. Without extra investment to raise production, the natural annual global crude oil depletion rate is 9.1%. The findings suggest the world will struggle to produce enough oil to make up for steep declines in existing fields, such as in the North Sea, Russia and Alaska. The effort will become even more acute as prices fall and investment decisions are delayed. Even with investment, the annual rate of output decline is 6.4.” (See here for full story.)

Now the situation is better for natural gas (NG) than it is for oil, but eventually that will run out as well. However, we have much more time thanks to the new shale plays here in the U.S. We need to shift to more usage of NG as a bridge towards the eventual goal of producing most of our energy from renewable sources like wind and solar. But given the tiny fraction of the world’s energy they now represent, we will need many years of very fast growth in them to make a substantial dent in world energy needs.

Natural gas also has the benefit of being located here in North America, rather than in rather unstable and hostile areas of the world, the way oil is.

The U.S. cannot continue to run massive trade deficits with the rest of the world. The trade deficit is the source of our external debt, not the fiscal deficit. Our external debt is now (as of 6/30/09)  at $13.454 trillion — up from just $7.744 trillion five years ago. That is a growth rate of 11.7% per year, and is clearly not sustainable (that might be overstating it since it is a gross number; we do hold some debts of other countries that offsets it in part). Still, even if the net growth rate is half that amount, it is clearly unsustainable, and is one of the reasons the dollar is going to be under long-term pressure.

Putting this all together it seems clear to me that the price of energy must continue to rise over the long term. Companies that are going to be able to increase their production of oil, such as Petrobras (PBR) are going to be exceptionally well positioned.

While natural gas should see a big growth in demand, it is not a perfect substitute for oil. Still, big gas producers like EnCana (ECA) have a very bright long-term future. I would also note that what I am saying about oil also holds true for other commodities. Energy and commodities are going to be the real stores of value and of wealth over the next few decades.

Zacks Investment Research

(EEM) Exponential Growth – Finite World

As the old saying goes, “You’re either a contrarian, or a victim.”

It just so happens that one of the savviest contrarians I know is my colleague, Louis Basenese.

And nobody takes that to heart more than Lou does. I’ve scratched my head in bewilderment on many occasions after reading one of Lou’s bold predictions – only to see his intuition prove uncanny time after time.

So today I’m stealing a page from the “Basenese Playbook” and taking a look at the severely battered transportation sector, one that pretty much everybody hates. However, I think, it’s not only about to come off life support, but perhaps become one of the hottest investments in 2010.

The Transportation Sector: The Market’s Most Important Domain

Airlines, railways, package carriers, even oil and gas pipelines are all industries that make up the transportation sector.

But why should you care about it?

Because transportation is actually the most important sector – and for good reason: growth or contraction here serves as a proxy for both U.S. and global economic growth.

It stands to reason that if more “stuff” is being shipped, it means companies are producing more goods to satisfy business and consumer demand. In turn, this is a good indication that the U.S. economy – and that of the rest of the globe – is in decent shape.

Right now, however, there’s a big change underway in U.S. freight transportation. Thing is though, it’s hardly received any attention. So let’s take a closer look…

And the World’s Most Efficient Transportation System Is…

Let me toss a few statistics your way…

• Every day of the week, nearly 43 million tons of goods are hauled around the United States.
• The price tag of those goods is around $29 billion.
• This 12 billion ton-mile (one ton of freight moved one mile) occurs on the nation’s 4,016,741 miles of highways and roads, 94,942 miles of railroads and 26,000 miles of waterways.
• The process also includes thousands of miles of air routes and over 1.7 million miles of oil and gas pipelines.
• It accounts for nearly $400 billion – nearly 3% of total GDP.

When you think about it, the U.S. transportation and shipping system is highly efficient – and routine to the point of being almost boring!

But not from an investment standpoint.

An Impressive Nine Months for the Transport ETF… But the Rails Are Dragging

When the stock market hit bottom in March, so too did the transportation sector, as measured by the iShares Dow Jones Transportation Average (NYSE: IYT).

The ETF is a good proxy for the sector, as it tracks the Dow Jones Transportation Index and contains 20 companies that represent a diverse cross-section of the transportation area.

Year-to-date, IYT is only up by 11.4%. But since the fund hit its low of $38.28 on March 9, it’s blasted higher by 84.4%. That compares to a 57.7% gain for the Diamonds Trust (NYSE: DIA), its equivalent ETF that represents the Dow Jones Industrial Average.

That said, some less than impressive third quarter earnings have prevented IYT from forging any higher. Notably, the rail firms have disappointed the most…

• Burlington Northern Santa Fe (NYSE: BNI): As I reported here a couple of weeks ago, BNI is soon to be part of Warren Buffett’s Berkshire Hathaway (NYSE: BRKA) empire. But the firm announced a 30% drop in third quarter profit and doesn’t expect much improvement in the fourth quarter.
• Union Pacific (NYSE: UNP): The company reported a drop in freight volumes and a subsequent 26% fall in third quarter earnings.
• CSX (NYSE: CSX): fared the best of all with a 23% loss, beating Wall Street’s expectations.

The Intermodal Method: A More Strategic Way of Shipping

Fuel. A short word… but a big problem when it comes to freight transportation. It’s the biggest cost associated with the shipment of goods and is the bane of the trucking industry. When diesel prices hit $4-plus a gallon last year, for example, many smaller trucking companies simply vanished.

But the companies that remained – especially the larger ones – began looking for novel ways to reduce their fuel costs. And one of them includes intermodal shipping.

Intermodal freight – a shipping method that combines both highway and rail movement – is down over 17% from this time last year.

On the surface, this reflects the continued struggles for the U.S. economy and many others around the world, caused by declining demand from businesses and consumers. But there are a couple of rays of hope…

• Intermodal freight volumes have either been flat, or on the increase since June.
• Domestic container volumes have risen recently, too, albeit slightly (up 1.3% during the third quarter).

One reason that intermodal shipping is seeing an increase is the continued gloomy state of the trucking industry amid rising gasoline prices.

However, uncertainty remains. For example, there is still excess capacity and pricing is extremely competitive. As a result, trucking looks increasingly less attractive than intermodal – both as a means of freight shipment and, more importantly, as an investment.

America’s Green Twist on Efficient Freight Transportation

Other reasons why intermodal shipping is gaining traction include the fact that the method is more cost-effective and greener. For example, it uses 33% less fuel than shipping by truck alone. And most rail trains can move a ton of freight about 400 miles on a gallon of diesel.

In fact, increased savings was one of the major reasons that J.B. Hunt Transportation Services’ (Nasdaq: JBHT) CEO, Kirk Thompson, decided to ink a new intermodal deal with Norfolk Southern Corp. (NYSE: NSC).

“The conversion of highway freight to the more efficient, cost-effective, safer and more environmentally friendly services that we jointly provide, will not only benefit shippers and the general public, but our shareholders alike,” said Thompson.

The idea behind the deal is to accelerate the switch from truck traffic to truck-rail intermodal transportation for freight shippers.

Dave Yeager, CEO of The Hub Group (Nasdaq: HUBG), a freight company specializing in intermodal services and logistics, agrees: “We believe that business conditions are better and have become more stable. The future remains bright for intermodal due to the excellent service, a cost advantage over trucks, and the environmental benefits.”

We agree, too. And if you want to use this trend to play an economic recovery, consider picking up a few shares of J.B. Hunt, Norfolk Southern, or The Hub Group. They all stand to benefit as the economy continues to slowly recover.

Good investing,

David Fessler

View original at: Investment U

(IYT) The Transportation Sector: Here Are Three Investments in a Sector That’s Ready to Soar

GM, which began operations as a new company on July 10, 2009, has revealed a net loss of $1.2 billion for the quarter, significantly less than $6 billion it lost in the first quarter. The company’s earnings before interest and taxes (EBIT) before special items for the period were negative at $261 million. GM’s North American market showed a loss of $651 million while GM International Operations recorded a profit of $238 million.

The improvement was attributed to incentive programs including “Cash for Clunkers” and stability in the international market, especially China, Brazil, India and Russia (BRIC). In particular, the China market has been a significant contributor to the company’s results by maintaining a leading market share position.

GM and its joint venture partners in China continue to see an upward trend. They sold more than 478,000 vehicles in the quarter, up from approximately 364,000 and 451,000 units in the first and second quarters, respectively.

The company generated revenue of $28 billion — up from the revenue recognized by “Old GM” in the prior quarter by $4.9 billion. The improvement in revenue was mainly caused by the Clunkers program and a higher global seasonally adjusted annual rate (SAAR) of 67.8 million units compared to 62.7 million units in the previous quarter, besides GM’s stabilizing global share.

GM’s global share went up 0.3 percentage points to 11.9% in the quarter from the first half of the year. The U.S. market share was flat at 19.5% compared to the first half of the year. In BRIC, the company had 13% of the combined market share, up 0.2 percentage points from the prior quarter.

GM’s dealer inventories decreased 158,000 units to 424,000 vehicles in the U.S. at the end of reported quarter from the end of the prior quarter. Some of the brands that delivered strong retail performance in the U.S. include Chevrolet Camaro and GMC Terrain Chevrolet Equinox, Buick LaCrosse and Cadillac SRX. In the international market, brands that gained attention are Holden, Chevrolet Cruze, Daewoo Matiz Creative, Opel Astra and Chevrolet Agile.

GM’s structural cost has been significantly reduced by restructuring including salaried and hourly headcount reductions, engineering savings and volume related savings. In the first nine months of the year, structural cost declined by $6.7 million to $31.1 million compared to the year-ago period.

Financial Position and Loan Repayment

GM had positive operating cash flow, before special items, of $3.3 billion in the quarter. This reflected a favorable working capital impact from production start-up, timing of supplier payments and lower capital spending. As of Sep 30, 2009, cash and marketable securities grossed $42.6 billion.

GM has announced its plan to accelerate repayment of its outstanding $6.7 billion (13% of the $52 billion that U.S. taxpayers have invested in the company, mainly for a 61% ownership stake) in U.S. Treasury (UST) loans as well as the C$1.5 billion ($1.4 billion) in Export Development Canada (EDC) loans, ahead of the scheduled maturity date of July 2015. Improving global economic situation, stabilizing industry sales and healthier cash position are the underlying factors behind GM’s decision.

GM plans to repay the loans in quarterly installments from escrowed funds, beginning next month with an initial $1.2 billion payment to be made in December ($1 billion to the UST and $192 million to the EDC), followed by quarterly payments. Any escrowed funds available as of Jun 30, 2010, would be used to repay the UST and EDC loans unless the escrowed funds were extended one year by the UST. Any balance of funds would be released to the company after the repayment of the UST and EDC loans.

In addition, GM has begun to repay the German government loans that had been extended to support Opel. As of Sep 30, 2009, the company had a balance of €900 million ($1.3 billion), of which €500 million ($700 million) has been repaid in November. The outstanding amount of €400 million ($600 million) will be repaid at the end of the month.

Road Ahead

For the fourth quarter, GM has projected the industry SAAR volume in the U.S. to be 10.7 million units in the upcoming quarter, down from 11.7 million units in the reported quarter. Globally, the estimated figure is 65.4 million units. For 2010, GM has forecasted total industry volumes to be 62 – 65 million units globally and 11 – 12 million units in the U.S.

GM expects to have negative net cash flows in the fourth quarter due to several factors including cash outflows related to the Delphi settlement and payments for U.S., Canada, Ontario and German government loans. Consequently, cash balances at the end of the year are expected to be materially lower than third quarter levels of $42.6 billion.

Zacks Investment Research

General Motors’ Loss Subsides

The continually weak U.S. dollar is a constant source of debate among economists and the media.

And most of the chatter is decidedly negative. But there are a few benefits, including the effect it has on the bloated U.S. trade deficit. Both economists and the U.S. government are hoping that such dollar weakness will help reduce the nation’s trade deficit, one of the most criticized aspects of the U.S. economy.

Sure enough, during the recession, America’s trade deficit with many other countries has shrunk. It’s already seeing increased exports of locally produced goods with falling demand for imports of highly priced foreign goods.

But then there’s China – one of the largest exporters to the United States…

By pegging the yuan to the U.S. dollar, American imports of Chinese goods are artificially cheaper and give American companies opening factories in China a contrived subsidy. This explains the soaring trade imbalance with China, which holds 83% of American’s non-oil trade deficit.

Consequently, the Obama administration has implemented additional tariffs on imports of both steel and tires from China. And unsurprisingly, China has criticized these actions as “trade protectionism,” expressing fear that the United States is more concerned with propelling itself out of recession, rather than aiding China’s economic interests.

No surprise there either!

China Faces Obstacles With Ties to the Weak U.S. Dollar

That said, China also faces obstacles, due to its close ties with the weak U.S dollar.

Liu Mingkang, Chairman of the China Banking Regulatory Commission, says the weak dollar and low interest rates have created “unavoidable risks for the recovery of the global economy, especially emerging economies.”

Without a doubt, this has forced China to pay close attention.

In its third-quarter monetary policy report, the People’s Bank of China suggested that it might consider using a basket of other major currencies – not just the dollar – to guide the exchange rate.

In light of this, China has been diversifying its foreign exchange reserves (which top $2 trillion) in order to move away from the dollar into other major currencies and to hedge against the U.S. dollar’s fall. This gradual diversification will help avoid bid market fluctuations, while allowing the yuan to appreciate for the first time in 18 months.

Moreover, choosing to strengthen the yuan would represent a major policy shift and could alleviate problems between the weak U.S. dollar and the yuan. That’s because U.S. and European manufacturers would benefit from cheaper exports in China, in addition to decreasing America’s trade deficit with China.

On the other hand, costlier Chinese goods could create other problems, such as pushing up U.S. inflation and potentially causing the Fed to hike interest rates.

The easiest way to play this situation without having to directly dive headlong into the world of currencies is to consider an ETF like the WisdomTree Dreyfus Chinese Yuan Fund (NYSE: CYB). The fund’s goal is to reflect money market moves in China and changes in the yuan against the dollar. This could be a wise move for investors as China looks at strengthening its domestic currency.

Good investing,

Sheena Martin

View original at: Investment U

(CYB) The Biggest Threat to America’s Relationship With China

To put it bluntly, some people are just downright afraid of the options market.

It’s too bad. Most believe the popular misconceptions and myths about options – among them, that they’re too complex, too confusing and too risky – or are just reluctant to the leave the relative comfort zone of stock investing.

It’s also a mistake. Many investors are missing out on some huge gains when all it really takes is a better understanding about the options landscape.

And that’s what I’m here for. Because while options terminology is different, it’s not really that complicated. So let’s run down a few of the basics…

Options Terminology 101

When it comes to option trading, you’ll find that there are two basic varieties – calls and puts.

• Calls: A call option is the right, but not the obligation, to buy a stock at a certain price. This is called the strike price. It’s the right, but not the obligation, because you’re only on the hook for the amount of money that you paid for the option. So right off the bat, you know you can never lose more than what you paid. The extra bonus is that the upside is unlimited. If you want to bet on a higher share price, you buy a call option.
• Puts: A put option works in the opposite way to a call. It’s the right, but not the obligation, to sell a stock at a certain price. So if you’re betting that IBM (NYSE: IBM) will decline, you’d buy a put option. And again, the strike price that you choose is the level at which you have the right to sell IBM. However, you’re not obligated to do so.

Now let’s break it down a bit more by detailing the kind of options that you can buy and sell…

Three Terms You Need to Know When Trading Options

When we’re talking about options strike prices, there are three distinct terms you need to know, so that trades make sense.

• In-The-Money (ITM): This refers to options whose strike prices are below the current share price if you’re buying calls and above the share price if you’re buying puts.

For example, if IBM is trading at $120, you can buy a call option if you think it’s going higher, or a put option if you think it’s going lower.

If you bought an in-the-money put option, you’d choose a strike price above the current price. So an in-the-money put on IBM would be the $125 strike, giving you the right to sell at that price.

The reason for wanting to buy in-the-money options is simple: you’ll pay less net premium. This simply refers to the amount over and above what we call an option’s intrinsic value. In the examples above, the intrinsic value in each case is $5 ($120 minus $115 for the call, and $125 minus $120 for the put). The net premium would be any amount over the $5 intrinsic value.

• Out-Of-The-Money (OTM): This refers to options whose strike prices are above the current share price if you’re buying calls and below the current share price if you’re buying puts.

For example, if IBM is trading at $120, an out-of-the-money call option would be the $125 strike, while an out-of-the-money put option would be $115. You’d only make this OTM trade, though, if you think IBM is going to go well above or below your strike prices. The premium paid for both of these OTM options would have no intrinsic value at all, just value for time and risk.

• At-The-Money (ATM): This refers to options where the strike price is within a few cents of the current share price. So if IBM is trading at $120, an ATM call and an ATM put would have a strike price of $120.

Again, the amount of money you pay for each option (the premium) wouldn’t have any intrinsic value, but would be purely made up of risk and time premium instead. In addition, an at-the-money option would move dollar-for-dollar with the share price over time, but the premium you paid for time and risk would erode as time passed.

That wraps up this session. And as you can see, options terminology, while different, isn’t all that complex. Essentially, it’s largely based on how time and risk are priced. But the bottom line is that if you’re trading options – the fastest-growing area of investor interest today – you must know the lingo.

Good investing,

Karim Rahemtulla

View original at: Investment U

($IBM) Options Terminology: The Differences Between In, At and Out-of-the-Money

by Lee Lowell, Stock and Commodity Option Specialist
Monday, November 9, 2009: Issue #1133

No matter what the stock market is doing, this is one of the best strategies you can use.

It not only allows you to buy stocks for the price you want (at big discounts), but pays you for it, too.

I’m talking about put-selling – a strategy I discussed a few weeks ago, when I showed you how to buy gold.

When executing a put-sell trade, you should try to find a stock that you want to buy at a certain price and then sell the corresponding put options as your trade. You’ll receive cash upfront from the put-option buyer as a payment for your potential obligation to buy the shares at the price you choose. It’s a way of taking a neutral-bullish stance by way of the options market.

Here’s how our gold trade is working out, plus a new one on silver…

Shooting for a Discount On Gold

In our hypothetical put-selling gold trade, we used the SPDR Gold Shares (NYSE: GLD):

• We sold the December 2009 $91 put option (GLD-XM) for $1.40 per contract.
• This immediately deposited $140 per contract into our trading account.
• For every put-option contract you sell, you’re obligated to potentially buy 100 shares of GLD at the $91 strike price.
• So if you sold 10 put-option contracts, you’d receive $1,400 and you’d then be obligated to potentially buy 1,000 shares.

In our GLD trade, we came to the conclusion that we’d be happy to buy the stock, but only at $91 per share. This was roughly $6 cheaper than where GLD was trading at the time, and it also corresponded to the 200-day moving average support area.

Three Put-Sell Trade Scenarios

With gold rising recently, the corresponding GLD shares (GLD tracks the price movement of gold futures) have moved from $97 to $107. And when the stock moves up, the put-option prices get cheaper.

We have three put-sell trade choices at this point:

1. Buy back the options for cheaper than what we originally sold them for, hence locking in a profit. Currently, the December 2009 GLD $91 puts are worth $0.15 per contract. So we could buy the option back for $0.15 and close out the trade completely. This would lock in a profit of $1.25 per option, which translates into a dollar gain of $125 per option. If you sold 10 contracts, that would give you a gain of $1,250… free and clear.
2. Continue to wait until options expiration to see if the options will expire completely worthless.
3. If GLD actually finishes below $91 per share by expiration, we’ll be obligated to buy GLD at the price we want – $91. But the chances of that happening are slim.

Okay, so with that ongoing, let’s hit the silver market and see if we can turn a profit with the put selling strategy too…

A Put-Sell Trade On Silver

Since silver prices move in tandem with gold, it’s also trekking higher. The main exchange-traded fund that tracks silver futures is the iShares Silver Trust (NYSE: SLV).

If you think silver will continue to move higher, but want to get long at cheaper levels, you can adopt the same approach here as with gold: sell an SLV put option at a level where you want to buy the stock.

With silver futures currently near $17.40 per ounce, SLV is trading about $17.10 per share. SLV’s value is roughly the same as silver futures, whereas GLD’s value is roughly one-tenth the size of the gold futures price.

Regardless of the ratios, you can still sell put options to meet your needs. So let’s say we feel silver would be a good potential buy near $15 and take a look at a hypothetical put-sell trade.

• The April 2010 $15 put option (SLV-PO) is currently worth about $0.70 per contract. So for every option you sell, you’ll receive $70. If you sell 10 options, you’ll receive $700.
• With SLV trading at $17.10 per share, you’d then be obligated to buy SLV shares at $15 if it trades down to $15 at option expiration. If SLV stays above $15 over the course of the trade, then the options will expire worthless.

The Put-Sell Trade Bottom Line

When it comes to put option selling, as long as you’re comfortable with the potential buy area that you choose, it’s a great trade to execute. Not only do you get immediate cash when you execute the trade, you also lay the foundation to buy a stock you want at the price level you desire and lower your cost, too.

Good trading,

Lee Lowell

View original at: Investment U

(GLD) The Put-Sell Trade: How to Buy Gold and Silver for a 16% Discount

Despite the world’s economic growth woes this year and consequent decreased energy demand in the U.S., the price of oil has held up pretty well this year ($77 as of November 3) when you’d actually think that it would be lower.

What gives?

Fundamentalists will point to two factors…

• Continued strong demand for oil from emerging markets.
• Decreasing oil output from non-OPEC producing nations such as Russia and Mexico.

Conspiracy theorists on the other hand, scoff at that notion. They blame it on the huge quantities that greedy oil companies hold offshore for no better reason than to increase their profits.

While I largely consider myself a fundamentalist, I decided to check it out, just in case there were any facts to support the complaints. And it first means asking a simple question…

Why would anyone want to store oil in tankers instead of selling it? After all, it costs money to charter those ships.

Oil’s Favorite Dance: The Contango

The only time it makes sense is in the case of a contango – a situation where you have a large difference between the current price of oil and what it costs one year from now. In this case, oil owners could hold onto it and sell it at a higher, more profitable price later.

In January 2009, we saw an example of a significant oil market contango, with the commodity at an incredible $23.70 a barrel! That goes a long way to explain why just three months later, a total of 56 supertankers held 100-120 million barrels in floating storage.

Conspiracy theorists will be quick to say, “I told you so” about that information, but a closer examination of the situation proves quite the opposite…

Four Ways to Profit From Oil’s Rise

Paul Tossetti, the Dallas-based director of oil markets at PFC Energy, estimates that it costs 50-60 cents each month ($6-$7.20 per year) to store each barrel of oil on a supertanker. While that adds up quickly, as long as the contango stays above $7 per barrel, it makes economic sense to let the oil sit tight.

That’s all changing though…

During the summer, the oil market contango fell to just $4 and $6 per barrel, as U.S. demand began rising, effectively eliminating any incentive to store oil in supertankers.

By the end of August, only 29 supertankers stored only 50-60 million barrels of oil away from the market. And according to Frontline, the world’s largest operator of supertankers, that number has dwindled further since then.

Mark Jenkins, a shipping analyst at SSY in London, said that floating storage deals would continue to decline back towards the historical level of five to seven tankers next year: “We do not anticipate a significant amount of floating storage as we move into 2010.”

Don’t expect that to placate the conspiracy theorists though. All that oil sitting on the sidelines actually held prices back, since traders feared the consequences of large amounts of oil hitting the market at the same time.

And with that fear gone, greed will likely take over, taking oil higher with it. And if you get in early, you can ride that sentiment for all its worth on ETFs and ETNs like:

• iPath S&P GSCI Crude Oil Total Return (NYSE: OIL)
• PowerShares DB Oil Fund (NYSE: DBO)
• ProShares Ultra DJ-UBS Crude Oil (NYSE: UCO)
• United States Oil Fund LP (NYSE: USO)

Investing in these broad-based funds can give your portfolio quick and easy exposure to the oil market without searching for individual investments, or spending a fortune doing it.

Good investing,

Tony Daltorio

View original at: Investment U

(OIL) How To Play the Oil Conspiracy Theories

Some people just don’t know when to quit.

A friend of mine is a professional boxer. But he’s 41-years old and his best days are behind him. Nevertheless, he continues to fight. Recently, he was knocked out and I was afraid he got really hurt. Luckily, he was fine, but I sincerely hope he retires, so he can enjoy his family in good health.

Then there’s my five-year-old daughter. Whenever she gets in trouble, she’ll stubbornly argue about her punishment, despite repeated warnings that her “take five” (five minutes in her room with the door closed) is about to increase. “Take fives” routinely become take fifteens and thirties.

Sometimes, investors don’t know when to let it go either. And right now, I’m concerned that many investors might be about to face the same outcome as my friend or my daughter – unnecessary punishment – when it comes to dealing with the stock market’s red flags.

Here’s why…

Technical Trouble

Take a look at the technicals…

• The S&P 500 climbed by 48% from its low to the recent high of 1,101.
• A retracement of 50% is very common in bear markets – and typically, if stocks can bust through the 50% level, they continue higher.
• But very often, 50% is a ceiling and once stocks approach that level, they head back south again.

For example, here’s a chart of Dow Jones Industrials at the beginning of the bear market that began in 1929, courtesy of Distressed Volatility. Notice the 48% retracement before the market fell again.

To see the chart in its original size, click here.

There are plenty of other technical warning signs, too…

In mid-October, the Dow Jones Transportation Index (^DJT) set a double top. When a chart puts in two peaks at equal heights in succession, it’s a strong sign that a top is in place. This is important because Dow Theory, says the Transports must move in the same direction as the Dow Jones Industrials in order to confirm that the move in the Industrials is real.

Giddy Investors and GDP

If it’s fundamentals you’re after, I’ve got those too.

Investors have fallen in love with the stock market’s strong rally off the March lows. And with news last week that the economy is improving, it appears their level of fear has fallen dramatically.

For example, individual investors’ cash levels have fallen to their lowest level since July 2007, according to the American Association of Individual Investors. In July 2007, the S&P 500 was just 21 points away from its eventual top, which was reached just 3 months later.

The bulls and the media gleefully point to the 3.5% rise in third-quarter GDP as a signal that the recession is over. However, while the definition of a recession is two consecutive quarters of negative GDP growth, plenty of recessions have had a quarter or more of positive growth. During the 2000-2001 recession, GDP oscillated between positive and negative for four consecutive quarters.

This gives more support to the theory that the stock market is a forward-looking mechanism. One could argue that the rally over the past eight months was in anticipation of the impressive GDP number that was just posted.

So the big question is, what do you do about it?

Four Ways to Protect Yourself From Downside – And Profit From It

There are a few approaches you can take…

• Put Options: In yesterday’s column, Karim Rahemtulla gave an example of how to hedge against a stock’s downside by buying put options on your existing stock positions through the married put option strategy. It’s an excellent way to hang on to stocks that you like, while protecting yourself from downside.
• Stop-Losses: We also strongly advocate that you set stop-losses on your positions. This is where you enter an order to sell a stock if it reaches a certain price. Sometimes those stops are a percentage beneath the entry, current or high price. Other times the stop is below key support on a chart. But I’ll usually put one in place so the emotion is taken out of my decision making process.
• Inverse Index ETFs: Over the past several years, ETFs have exploded in popularity and you can now buy ones that increase in value if the indexes they represent head go lower. For example, you can  short  Dow Industrials by buying the Short Dow Pro Shares (AMEX: DOG) or the Nasdaq 100 with the Short QQQ Pro Shares (Nasdaq: PSQ). Keep in mind… you’re not shorting the ETFs; you’re buying them. If the Dow or Nasdaq 100 decline by 2%, your position should rise by 2%.
• Inverse Sector ETFs: You can also buy inverse ETFs of specific industries. If you want to play the financial sector downside, you could buy the Short Financials Pro Shares (AMEX: SEF).

Lastly, you want to adhere to this cardinal rule…

Don’t Be Stubborn

Make sure any short-term trade doesn’t become an investment.

What I mean is that if you’re wrong about a stock, cut it loose and take the small loss before it becomes a big one.

The lesson is this: It’s okay to be wrong in predicting the direction of a stock. Just don’t be more wrong than you have to be. So next time a position goes against you, think of my daughter getting sent to her room for a “take five.” Don’t let your trade become a “take fifteen.”

Hoping your longs go up and your shorts go down,

Marc Lichtenfeld

View original at: Investment U

(DOG) The Stock Market’s Red Flags: Four Ways to Handle Potential Market Turmoil

A vast amount of natural resources. A love of hockey. A penchant for bacon. And liberal use of the word “eh.”

All are associated with Canada, of course. But America’s neighbor to the north boasts another fine trait: an efficiently run economy.

You see, although Canada borders the United States, it takes a completely different approach towards economic policy.

That showed strongly just recently when America stoked protectionist fears by slapping stiff duties on tire imports from China. Yet days later, Canada unveiled plans for a significant move in the opposite direction. Canada aims to abolish all remaining tariffs on imported machinery and equipment used by domestic manufacturers, saving Canadian manufacturers C$250-300 million a year.

And while the United States dithers over future trade agreements, Canada has signed eight bilateral deals over the past three years and has plans to start trade talks with the European Union as part of a drive to lower Canadian exporters’ dependence on its old trading partner: none other than the U.S.

Here’s another example…

Canada Loves China’s Money

The Canadian government recognizes the value of money – no matter where it originates.

It’s already profiting from China, as the Asian nation is a key supplier of badly needed capital for many of its mining and energy projects. Such investments by state-owned Chinese companies – even in the sensitive energy sector – have created little fuss north of the border, whereas they seem to cause nothing but chaos and Congressional investigation in D.C.

The U.S. could profit from such deals, too… if it would just get its act together.

The Case For Canada

Thanks to its open economic policy and an abundance of natural resources, Canada – rather like Australia – seems to be emerging better from the global downturn. For example…

• Employment and wages rose in both August and September, with the manufacturing and construction sectors leading the way.
• Unemployment, although high at 8.4%, sits notably lower than in the U.S.
• Through a series of tax breaks over the next three years, Canada will achieve the lowest corporate tax rate among leading industrial countries.
• The Central Bank of Canada could raise interest rates from 0.25% without fear of hurting the nation’s banks.

In fact, Canadian financial institutions have survived the credit crisis without any infusion of government money, putting them in much better shape than nearly all their American counterparts. Benefiting from their vast and stable domestic retail base, they have limited their exposure to more volatile money markets and securitized funding.

If anything, the biggest problem that five biggest Canadian banks have is what to do with their billions of dollars in excess capital. Built up over the past 18 months, their capital cushion has left them with some of the strongest balance sheets in the world, giving them the opportunity to increase lending and grow their asset base.

So let’s look at a couple ways to profit from Canada’s success…

Two Ways to Profit From America’s Northern Neighbor

There are numerous Canadian stocks that trade on the American exchanges from a wide variety of sectors.

But if you don’t want to figure out which individual stocks, you can spray your money around in a more diversified way with an investment in the broad-based iShares MSCI Canada Index (NYSE: EWC). This ETF tracks the price and performance of Canadian shares and is heavily weighted toward three strong Canadian sectors: Financials (36%); Energy (21%); and Materials (21%).

Or if you want to take advantage of the Canadian dollar, which has surged recently, you can go for the ETF here, too – the CurrencyShares Canadian Dollar Trust (NYSE: FXC). With Canada’s rich natural resources and its economy having created important separation from the U.S., the Canadian dollar should strengthen further against the U.S. dollar in the years ahead.

Good investing,

Tony Daltorio

View original at: Investment U

(EWC) The Best Two Ways to Play Canada’s Economy, Currency And Natural Resources

When it comes to the energy sector, this market is the undoubted leader of the pack in terms of making large intraday moves and the effect it has on the broader economy and other markets.

And right now, it’s moving like a wildfire.

I’m talking about the oil market, of course.

Back in my August 25 column, I forecast that speculators would drive oil to $80 in the near-term, with $90 probably right behind.

Sure enough, December 2009 crude oil futures (the front-month contract right now) has just tagged the $82 per barrel level. What’s more, it came after hitting a recent low of $65.55. Even for the oil market, a two-week, $16.50 non-stop run is an impressive move.

So what’s coming next for this highly influential commodity?

Two Ways to Take Advantage of Oil’s Continued Rise

With the perception that the U.S. economy is finally moving out of the doldrums, all the hedge fund and speculative money that has sat on the sidelines for months is finding a home in the oil market. Depending on which report you read, world demand for oil is expected to pick back up, and this is adding fuel to the fire.

Since hitting its lows in March, you can see the unabated move higher. Oil is trading above all three popular moving average levels, which just adds to the bullish momentum.

Once oil moved above $76 per barrel, it was off to the races. But we should see a touch of consolidation here, as all markets need to take a breather after such a strong move.

After that, we don’t see any reason why oil shouldn’t continue to keep moving higher. The $90 level is next in line and we could even see $100 again by the end of the year.

To play the move, you could do the following…

• Buy shares or options of exchange-traded fund [ETF] like United States Oil (NYSE: USO). It tracks the movements of the crude oil market, but allows you to trade it directly from your stock brokerage account.
• Go directly to the source – the trading pits of the New York Mercantile Exchange (NYMEX). This is where a majority of the trading volume still takes place and it offers a safe forum for buying and selling futures and futures options contracts. Although you’d need to conduct a trade through a commodity broker, you can access these markets electronically. Stick with limited-risk option strategies.

Four Reasons Why Natural Gas Has Set a Low… and is Ready to Rise

Having hit major new highs in the summer of 2008, it has been a long ride down for natural gas.

Simply put, that’s because natural gas supplies are reaching maximum capacity. With the Energy Administration Information’s announcement last week that supplies reached a record 3.734 trillion cubic feet, there’s not much room left to hold all the supplies, which are reaching full U.S. storage capacity.

Naturally, traders have jumped on this huge supply as a “no-brainer” shorting opportunity. But as we’ve seen over the last few weeks, natural gas prices have only gone up. This leads to a few conclusions:

1. Shorting the natural gas market was a great strategy for a year, but it’s finally reached an end.
2. No matter how bad the fundamentals may be, all the news finally gets factored into prices.
3. Winter is approaching and colder weather could draw down supplies.
4. Those who were too late to short to the market are being forced to buy back their positions.

At this point, I believe this market has finally put in a solid bottom and should see higher moves going forward. It looks like the technical side of the market is the driving force right now and with the price holding above key moving averages, we should continue to see it move upward.

There are two ways to play the natural gas market…

• The United States Natural Gas (NYSE: UNG) ETF. Like USO, you can play UNG directly via regular shares, or options contracts through your stock brokerage account. Be warned though: UNG is undergoing potential changes to its holdings profile, as the Commodity Futures Trading Commission (CTFC) is discussing possible regulatory legislation that would curtail futures contracts purchases by large speculators and impose caps on the number of futures contracts they can hold.
• Futures and futures options contracts in the commodity trading pits at the NYMEX. Once again, we recommend sticking with limited-risk option purchases or option spread purchases.

These Two Grains Are Making Gains

Like natural gas, corn and wheat have remained stuck in the doldrums since hitting highs in the summer of 2008.

However, over the past month, both have tacked on impressive gains. I profiled both markets on August 25 and October 13 and noted how higher prices could ensue, given that crop sizes could be lower this year.

In addition to the fact that it’s tough for corn and wheat to move much lower, we’ve got cold, wet weather starting to hamper prime growing areas in the Midwest. This coaxed bullish speculators into the market and the upward moves began.

Corn: We pegged $3.90 per bushel for the December 2009 corn futures as a first upside resistance point, as that coincides with the 200-day moving average. Not only has corn hit that mark, it has powered through it, hitting $4.05 late last week.

Although there is no quality exchange-traded fund for the corn market, you can still participate through the use of futures options contracts that trade on the floor of the CBOT (Chicago Board of Trade). The March 2010 and May 2010 options contracts are the best choices.

Wheat: We’ve seen an equally impressive move in the wheat market. It has tacked on a solid $1.10 per bushel move ($5,500 per contract) and looks set to continue its trek higher.

Based on the December 2009 futures contract (the most active contract), we could see wheat move up to $5.70 before it tackles the next psychologically important level of $6.00. We could easily see this occur, especially if the weather continues to hamper the harvest.

Like corn, wheat futures and options trade on the CBOT. Again, focus on the March 2010 and May 2010 expiration periods. Grain options are worth $50 per cent, so if you bought an option for 10 cents, it would cost you $500 per option. That’s a small investment for a potentially unlimited upside.

Good trading,

Lee Lowell

View original at: Investment U

(USO) Oil Prices Are Headed to $90 – How to Profit From the Move

Anyone can buy a stock. But not everyone knows how to buy stocks at the prices they want and get paid instant cash for doing so.

But that’s exactly the strategy I showed you how to execute in my last column about the world’s commodities – one of the best ways to go long on stocks. It’s called put-option selling, where you receive money upfront in return for obligating yourself to buy shares of the underlying asset at the price you want.

In my example, I examined a hypothetical trade that involved a bullish play on gold – specifically, on the SPDR Gold Shares (NYSE: GLD) – an ETF that tracks the price of gold. I wanted to buy around $91, so I sold the December 2009 $91 put option (GLD-XM) for a limit sell price of $1.40 per contract.

At the time, GLD was trading around $97 per share. While regular stock buyers would wait for a pullback to the $91 area (which may or may not occur) before buying shares, smarter investors know they can sell the $91 put options and collect instant cash.

And it’s paid off…

The Profitable Put-Selling Advantage

Since then, GLD has risen to $103 on the back of record highs for gold prices. When stock prices go up, put-option prices go down, so the price of the December $91 put option has moved to $0.40 per contract, giving our hypothetical trade a paper profit of $100 per contract (or $1,000 if trading 10 contracts).

Here’s where selling put options comes in handy…

When you sell put-option contracts, you can look to buy them back cheaper as a form of turning a profit. This is something that a straight stock buyer cannot do, since they haven’t been able to enter the market at all. Chalk up one for the option trader!

So since GLD has gone up in price, we could either take profits now, or continue to wait until options expiration to see if the options will expire worthless. If that happens, we’d make the maximum profit on the options.

Now onto the current state of play in the commodities world…

Gold $2,000?

When I last profiled gold and silver on September 7, I noted how they were both poised to break through their yearly highs after a brief pullback.

They certainly haven’t disappointed.

Gold has regained the elusive $1,000 per ounce area and has motored to all-time highs of over $1,060 per ounce. With rumors swirling about the eventual demise of the U.S. dollar (due to the increasing debt load), gold could become the currency of choice. In fact, some analysts say it could shoot to $2,000 per ounce.

Silver Set to Follow Gold to All-Time Highs

Meantime, silver has rallied back to the $18 per ounce area – a new high for the year, but still $4 per ounce below its all-time high of $22 from February 2008. However, the way these markets are trading now, it’s probably only a matter of time before silver gets back up to those all-time highs.

For now, both gold and silver look very strong.

Let’s take a quick look at few other commodities making large moves lately…

Corn Bottoms Out and is Ready for a Weather-Induced Run

The corn market has finally come off the lows that it’s carved out since the highs of 2008. Prices bottomed out a few weeks ago just above the $3 per bushel level and have since moved up near $3.73 per ounce.

With colder, wetter weather sweeping through the corn belts of the Midwest and hampering the harvest, the focus has shifted to whether the crop size will be as large as predicted. Look for December 2009 corn futures to rally up to $3.90 per bushel as the next move.

A Tug-Of-War in the Natural Gas Market

Despite its continued spell in the doldrums, I’ve held a bullish outlook on natural gas for quite some time – and it could finally be coming to fruition.

With the large storage of underground supplies still swamping the market, it seems that all the fundamental news has now been priced in and traders are focusing on the cold winter ahead.

This has provided the impetus for natural gas to finally move off the lows it has logged since the highs of 2008. After bottoming near $3.500 per MMB/tu just a few weeks ago, natural gas has tacked on an impressive 1,500 points ($1.500) to rally back up to levels last seen in early August.

With short-term resistance just ahead (at the $5.000 per MMB/tu mark), we could see either a slight pullback, or a neutral move over the next few weeks.

The bulls and bears are currently waging a tug-of-war, with bears still citing the large supplies for a fall in price, while bulls believe winter could deplete the reserves.

Lastly, we move to the sugar market…

Sugar Set to Drop – and Drop Big

I profiled sugar as a potential shorting opportunity back in late August. At the time, it had carved out highs not seen in over 28 years, due to supply concerns in two of the world’s biggest sugar-producing nations – Brazil and India.

As with any market making new highs or lows, there comes a point where all the fundamental data gets factored into the market. It’s then a question of how long can those prices hold. For sugar, I believe the time has certainly come for the market to drop – and drop big.

In fact, the March 2010 sugar futures – the most actively traded contract – have already started to crack. If you want to play the downside, you could buy limited-risk put-option contracts for the March 2010 or May 2010 expiration periods. These contracts trade on the floor of the NYBOT/ICE exchange in New York City.

Good trading,

Lee Lowell

View original at: Investment U

(GLD) Five Commodities Are Poised For Big Moves – Are You Ready For Them?