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I am probably not the first, and definitely not the last, to write about the recent surge in stock markets worldwide. It has been so long since investors have had a strong rally like that to play with. Now that markets have rallied almost 10% worldwide in one week; one question remains: Is it safe to invest in stocks again?

For many months now, investors have been trapped in a fake bear market rally that proved to be short lived. Markets worldwide have continued to hit long-time lows in February and March ’09. The strong rebound this past week has surprised quite a few people and it was clear that short sellers had to cover their positions after Tuesday’s rally. Many are still skeptical stocks are a good play right now, however, this time they could be different for few reasons:

• Banks sent positive signals with Citigroup, JP Morgan and Bank of America announcing that they all made  a profit  in January and February. It is definitely a sign of relief for investors as rumors of bankruptcy and nationalization have persisted in markets recently.
  
• Economic indicators are turning positive for the first time in many months (see graph from the WSJ below). Previously, a market rebound typically occurred while economic data was still in a free fall. The recent turn around in economic data could indicate support for a strong stock market rally.
  
• Many indices are hitting important long term support level which could also bring more buyers in the market (CAC40 is right on its 2003 support level …)

There is exceptionally strong evidence that the recent announcement by three of the biggest banks in the US (that all three made profits in January and February), at a time when almost everyone gave up on them, was the trigger for the rally. It is still unclear and too soon to really say that the worst is over for these banks, but we can now admit that the FED actions the past few months have been a success and that it clears the sky a bit.

Both the CAC and the Dow rebounded on strong support levels and are expected to continue their rally for couple more weeks (weekly charts). On the other hand, the Nikkei 225 is still below a long term support level of 2003 but rebounded strongly when the index retested its last October low. However, recently the correlation between the Dow and the Nikkei225 has been 0.98, which makes me believe that any rebound in the US stock market will also be felt in Japan.

I have a feeling we are going to enjoy watching CNBC or Bloomberg TV over the next couple weeks and it will certainly be an enjoyable change of pace to actually look forward to reading the Wall Street Journal or the Financial Times.

Disclosure: Emerginvest is an international finance portal, providing analysis and data on 120+ world markets to help individuals find investments from around the world. The author, Chris Harne, does not intend this to be actionable investment advice.

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Watching financial television today is the equivalent of taking a long trip with kids that are constantly asking that very question. At some point, you get the urge to yell “yes” just so they will shut up. Unfortunately, the current situation actually demands all of our attention so it’s fair to ask – have we seen the bottom?

Aside from day/swing traders, this not the question most should be asking. Trying to pick a bottom is no different than playing numbers on roulette. It’s a random event that no one can predict. The better question might be – in the next 6 months, is the market more likely to be down 20% or up 20%. With this question, you can eliminate the noise and focus on probabilities to see if they are in your favor. Trading is actually a lot like poker – if you play the odds, you will win the in the long run. But you can’t win every hand.

So, are the markets more likely to be up 20% or down 20% 6 months from now?

Let’s look at the facts-

The world is experiencing a massive unwind of debt caused by years of easy credit and backed by insufficient savings. This is a secular trend that will take years to play out. Consumers will save more and borrow less. Companies will use resources to pay down debt instead of seeking new opportunities which will limit growth and new jobs. The government will implement new policies that are less market friendly. New regulations on banking and other industries will be reactive and overly burdensome. The long term picture is not conducive for a rising stock market and the market is clearly shouting this fact.

The arrival of this unwind has also led to a cyclical retrenchment. Consumers dramatically lowered their spending and companies have lowered production in kind. Lower production means fewer jobs which goes full circle to reducing consumer spending further.

Is it any surprise the market is down 60% from its highs? Probably not, but do the markets fully reflect this information? There’s no way to know for sure. It’s probably safe to say, however, that the markets are closer to the point of recognition than even just a month ago. But even if the markets fully reflect all the negative news, there must be catalysts for stocks to go up.

The secular trend is negative and stocks probably aren’t going to return their historical average any time soon. But it doesn’t mean the economy will retrench the entire time and stocks will never rally. The economy works in cycles and it’s quite possible it is nearing an intermediate trough. Economic activity has fallen off dramatically, but there is still business being conducted. People still need to replace a dishwasher if their old one goes bad. People still need clothes as their old ones wear. There are only so many purchases that can be put off and eventually consumer spending will see a bounce. Since businesses are operating with lower inventories, they will begin to ramp up production and hire new workers. Is it possible that the rise in commodities like oil and copper are showing these signs of stabilization? With stocks off 60% in just over a year, do they reflect any chance of a recovery in the second half of 2009?

The point of this article is not to give direct answers, but rather put everything into context. There is no doubt things are bad and quite possibly getting worse. But just as there is irrationality at the top of markets, the same thing can happen at bottoms. The key to profitability is to see beyond what everyone else is looking at. An example – no one believes the stimulus package has any chance of working. Without endorsing or condemning, it’s a *$787 Billion* package! Some of that money will make it through the economy. To put it in perspective, the $185 billion tax rebate led to a 3% rise in GDP in the early stages of this recession. That growth happened despite the fact that a lot of that money was saved rather than spent. Is it possible we could see that at a minimum? And if so, do stocks reflect anything more than flat lining for the foreseeable future?

So, let’s ask again – are stocks more likely to be 20% higher or lower in 6 months?

Disclosure: Emerginvest is an international finance portal, providing analysis and data on 120+ world markets to help individuals find investments from around the world. The author, Chris Harne, does not intend this to be actionable investment advice.

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What investor is not frustrated by today’s stock market? The Dow Jones index is back to its 1997 level and it seems that things will never quite return to the way they were. Some investors believe that today only emerging markets in Asia or South America can provide real growth opportunities in the long run. They cannot be more wrong. One great example is France. Although the country is best known for its high tax level and its lack of labour flexibility, it is also a global leader in renewable and fossil energies.

France has hit the headlines more often since Nicolas Sarkozy was elected President in 2007. Sarkozy’s main goal during his presidency is to restore France’s power on the international scene. His strategy is very simple: to be a powerful country, France needs to have a strong military and/or global leading companies established worldwide. Obviously France is not going to catch up with Russia, China and the US in term of military power and as a result Sarkozy has focused on developing and selling France’s best assets: its businesses. Subsequently, that translates into important growth opportunities for investors.

In 2007, Sarkozy had one bastion of economic clout; France was a global leader in nuclear technology at a time when global warming and high oil prices started to be a real concern. France is viewed as an excellent example of an energy independent state, with more than 70% of its energy consumption coming from nuclear energy. Sarkozy was quick to realize the importance of nuclear technology in an environment of high commodity prices and he capitalized on it. Early in his presidency, he met with CEOs of Areva, Total, Alstom, EDF, GDF, Suez and Bouygues. It is hard to know exactly what was discussed, however given that Bouygues took a 21% stake in Alstom and GDF merged with Suez within a relatively short time span after the meetings, it could be assumed Sarkozy wanted to mold the corporations into global leaders in nuclear energy.

Sarkozy has never hidden his admiration for the US and UK capitalistic system, and even though the recent financial crisis forced him to back up on its very aggressive reforms agenda, the French President is continuing to implement its strategy. Recently the French Government lent $3bn to French Banks to make sure Airbus customers will be able to get the financing needed to buy Airbus plane in 2009. He is also expected to land one of his closest men as CEO of EDF in 2011 to better control the decision making in the company. In the mean time, he continues to sell France’s technologies and already has signed contracts to build power plants in China, Brazil, Qatar, Libya and the UAE.

President Sarkozy’s strategy is clearly targeting the following companies:

· Areva: A global leader in nuclear energy. The company is building the 3^rd generation nuclear plant in Finland and has many more projects already signed in China, Middle East and the US.

· EADS (Airbus): the company struck out with its new plane A380. In 2008, Airbus has signed more contracts than Boeing and seems to be less affected by the crisis.

· Alstom: Has developed some of the world’s best technologies for high speed train (TGV), steam turbines, and gas turbines. The company is viewed as the best candidate to buy the 34% stake in Areva NP that Siemens gave up recently.

· Total: One of the biggest oil companies in the world. The company has just signed a $5bn contract in Iran last week and is expected to sign future contracts in Iraq. The company is also entering the nuclear energy business as it announced last year it would develop a nuclear plant in the United Arabs Emirates along with Areva and GDF-Suez. Additionally, Total has 1% stake in Areva.

· Bouygues: A domestic industrial group. The company is best known for the building of the Stade de France, the Pont de Normandie or the Grande Arche at La Defense. Bouygues just bought 21% of Alstom from the French government.

· Electricite de France: One of the biggest global players in the electricity industry worldwide. The company agreed recently to buy US based Constellation Energy to grow its market share in the North American region.

· Suez-Gas De France: GDF and Suez merged in 2008 to form one of the biggest global players in the gas industry (GDF) as well as the renewable energy industry (Suez).

Today some of these stocks have tumbled to very attractive levels if you are a long term investor. EDF is back to its 2004 IPO entry price, Total is trading at 37€ far from its high of 63€ of 2007 or Areva down more than 60% from its 2008 high. Don’t be fooled by the market and if you want to benefit from once in a lifetime opportunities, France offers many of them right now.

Disclosure: Emerginvest is an international finance portal, providing analysis and data on 120+ world markets to help individuals find investments from around the world. The author, Olivier Levant, does not hold positions in the equities listed in this article.

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Investors are continuously searching for a leading indicator that would give good entry and exit signals and prevent investors from losing money. Today, it would be foolish for someone to claim that a reliable indicator exists. Even the famous Merton and Scholes, after the collapse of LTCM, agreed that there is no such crystal ball, especially given the current market. However, investors can rely on few financial indicators to measure the state of the global economy the same way lights at the cross road gives you the signal to stop or keep on driving. Today, two of the most used indices followed by investors are the London Inter Bank Offered Rate (LIBOR) and the Baltic Dry Index (BDY). This article will take a look at the Baltic Dry Index since it is a bit more straightforward and easily digestible.

What is the Baltic Dry Index and what does it measure?

The Baltic Dry Index is a daily average of prices to ship raw materials using Dry Bulk Carrier. It represents the cost paid by an end customer to have a shipping company transport raw materials across seas on the Baltic Exchange, the global marketplace for brokering shipping contracts. The Baltic Exchange is similar to the Chicago Mercantile Exchange in that it is a medium for buyers and sellers of contracts and forward agreements (futures) for delivery of dry bulk cargo. The Baltic is owned and operated by the member buyers and sellers. It is an index free of speculation as only members of the exchange can trade the index.

What does it really mean and how can investors take advantage of the shifts in the Index?

The level of the index represents the price industrial companies are willing to pay to ship raw materials across the world. It is, therefore, a good indicator of the supply and demand for raw material across the world. The higher the index the stronger the demand for iron ore, coal or cement. And inversely, the lower the level, the weaker the world demand for raw materials. Since raw materials demand is directly linked to economic growth around the world, the BDY is often used as a leading economic indicator by economists. However, it is an imperfect indicator as prices are driven by few others forces than just the supply and demand of raw materials:

• Fleet Supply: the higher the number of ships the lower the premium paid by buyers.
• Weather: during the winter in the Northern hemisphere, price tends to be higher due to increase in demand for coal or other commodities used in the heating process.
• Bunker Price: bunker oil represents about 1/4 of the vessel operating cost. So when oil prices increase around the world like in 2007 and 2008, it tends to distort the BDY from reality.
• Port Congestion: ports’ infrastructures around the world are obsolete and need to be improved. As a result ships are stuck in traffic at the entrance of ports, which tends to put upward pressure on price during a period of strong global economic growth like in 2007 and 2008.

How can investors play a rebound of the Index like the one observed since December 2008 (the index increased from 600 to 2000)?

An increase in the BDY expresses a stronger demand for commodities, and therefore one could argue that it would be a good time to buy stocks in the automobile or construction sectors. However, an increase in the BDY typically indicates that there is an expectation for an increase in demand for finish goods 6 to 12 months from now. Therefore, it might be best to hold off on buying automobile/construction stocks until that 6-12 month timeframe, and instead invest in the shipping companies as they are the ones impacted directly by the increase in the BDY in the short term.

In the chart below, you can see the correlation between the share price of the three biggest Japanese shipping companies and the BDY since 2000. Japan has historically always been a leader in maritime transport, which would suggest companies like Mitsui OSK Line or Kawasaki Kisen when playing a rebound in the BDY. However, you can invest in other companies like: China Ocean Shipping Company (COSCO), China Shipping, Frontline or BW Gas.

The recent rebound in the BDY has been as rapid and violent as the crash of the index from 12000 to 600 in 2008. The reason for the sharp increase in the BDY since December seems to be caused by the need for Chinese manufacturers to rebuild their inventories to more sustainable levels. It is doubtful that the index will continue to increase given the global recession, and it is probably too late now to invest in shipping companiesm as most of them already had a 40% rebound since December. However, it is advisable to keep an eye on the BDY over the next few weeks to have an idea on the direction the global economy is taking.

Disclosure: Emerginvest is an international finance portal, providing analysis and data on 120+ world markets to help individuals find investments from around the world. The author, Olivier Levant, does not hold positions in the equities listed in this article.

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Japan has been seen since September as one of the few bastions of relative stability in the global economic climate. It “only” fell approximately 30% during the September crash, compared to the approx. 40-60% of the US and China respectively, and has weathered the global economic storm much better than most. This is evidenced by the following Emerginvest performance charts of Japan, China, and the US – note the relatively shallow decline in September for Japan compared to its counterparts:

Japan’s Market Performance over the last year.

China’s 12-Month Market Performance

And the US’s 12-Month Market Performance.

To date, the extremely high savings rate of Japan has helped bring a measure of relative stability to their market, and has prompted such articles as this Washington Post article from November, 2008 entitled: “Individual Japanese Investors Rush Into Stocks.” It stated that because of the high savings rate, retail investors were “armed with $7 trillion in bank deposits,” and how some of the lowest stock market valuations of the last 20 years induced a rush into the stock market from retail investors. That high savings rate, the comparative stability of the Tokyo Stock exchange to date, and the relative solvency of the Japanese banking system, has granted Japan an investor’s “safe-haven” status since September – especially when compared to the volatility of most other markets around the world.

However, that image has come crashing down as the Japanese government has announced that the fourth quarter of 2008 was the fastest contracting period for the economy (in terms of GDP) in 35 years. A NYTimes article entitled: “Japan’s Economy Plunges at Fastest Pace Since ’74,” describes how the Japanese economy, which is heavily reliant on exports, is suffering heavily now that the effects of plummeting global demand are taking hold. In response the article states that:

“’There’s no question that this is the worst recession in the postwar period,’ Japan’s economic minister, Kaoru Yosano, said after the results were released.

The dismal figures also place Japan firmly among the worst-hit in the global crisis, dwarfing economic declines in the United States and Europe.”

Suffering from a strong yen which makes Japanese exports more costly, and the lagging global demand across nearly the entire spectrum of goods, but especially electronics, has suddenly thrown Japan into the financial maelstrom with full force.

Unfortunately, the contraction is just the first of a series of effects, with unemployment following shortly thereafter. So far, Japan’s unemployment has remained relatively low: rising to 4.4% in December. , which is still quite mild compared to Germany’s current unemployment of 7.8% to the US’s unemployment of 7.6%. Given that the economy contracted so significantly in such a short amount of time, companies are inexorably going to be cutting jobs – in large quantities and quickly, just as Sony Corporation recently had. Of course, this will be reflected back into the stock market.

In no way does this mean that Japan is down and out for the count – it has simply taken longer to fall from grace than most other world markets, and subsequently is losing its special “safe-haven” status for many investors.

Disclosure: Emerginvest is an international finance portal, providing analysis and data on 120+ world markets to help individuals find investments from around the world. The author, Jonathan O’Shaughnessy, does not have any holdings in Japan or in Sony Corporation.

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In the midst of the global economic crisis, four major international firms had their stock fall sharply after they announced their quarterly reports. ArcelorMittal, the world’s largest steel producer based in Luxembourg, Banking giant UBS based in Switzerland, and Credit Suisse Group, also based in Switzerland all fell sharply after their quarterly announcements. In addition, drug maker Sanofi-Aventis based in France, all fell 76% as it announced it was curtailing production of two cancer drugs.

According to a NYTimes article entitled: “Credit Suisse Posts a Record Loss,” Credit Suisse posted a record “net loss of 6 billion Swiss francs ($5.2 billion), taking its biggest-ever annual loss, due to poor trading and restructuring charges.” According to Emerginvest, Credit Suisse has fallen nearly 50% in the last year, culminating in an additional 5.5% drop after their newest announcement:

According to the article, “Credit Suisse had already warned in December that it made a net loss of about 3 billion francs in October and November and would take restructuring charges of about 900 million in the quarter as it moves to cut 5,300 jobs, or 11 percent of the workforce.

Analysts were also anticipating the 538 million franc loss it booked in the quarter for selling part of its fund management arm to Aberdeen Asset Management, but said they were surprised by the extent of trading losses in December.

Credit Suisse said its investment bank made significant losses in December due to standard hedges becoming ineffective due to market turmoil and as credit spreads widened.”

How much of the toxic assets remains on Credit Suisse’s books is uncertain, however it might be possible that the worst of the write-downs are over for Credit Suisse.

Credit Suisse’s rival, UBS also announced a massive quarterly loss – actually, the largest ever in Swiss history: $6.9 billion. According to another NYTimes article: “UBS Posts $6.9 Billion Quarterly Loss,” the bank is continuing to cut jobs and drastically shrink its investment banking business: “UBS said on Monday that it planned to reduce the number of jobs in the investment banking business to 15,000 by the end of this year, from 17,000 last year. UBS already cut 9,000 jobs globally in the 15 months through last December.” Marcel Rohner, UBS’s CEO announced that the company had a good start to the year as some new inflows of money countered rumors a mass exodus of fleeing clients. UBS was the recipient of a massive $59 billion bailout from the Swiss government and some experts agree that this might be one of the most drastic belt-tightening periods for the shell-shocked company. According to Emerginvest, stocks actually rose on Wednesday approximately 5% as investors believed it might be the bottom of the trough for the embattled financial firm:

Lastly, Arcelor Mittal, the world’s largest steel producer, which is based in Luxembourg, reported a $2.63 billion loss due to inventory write-downs and dwindling contracts worldwide. According to another NYTimes article: “ArcelorMittal Reports Loss on Soft Sales,”

“ArcelorMittal faces softening demand as construction, auto and machinery activity slows in the West and in China and India.

Lakshmi N. Mittal, chairman and chief executive, said: ‘ArcelorMittal’s generally excellent performance in 2008 was overshadowed by the considerable slowdown in the world economy.’

Still, investors took heart from some comments about the outlook in China and a suggestion that there would be no further substantial write-downs.

‘The first positive signs are coming out of China,’ Aditya Mittal, the chief financial officer, said during a conference call. ‘Demand and prices are improving.’”

As negative as some of these reports are, market reaction indicates an ironically positive sign as the stock price was buoyed by the idea that the worst of the write downs were over, in the case of UBS. It will be interesting to see how this sampling of negative economic reports contrasts with the Q1 2009 reports, to track whether the crisis is worsening for major international firms such as UBS, Arcelor, and Credit-Suisse.

Disclosure: Emerginvest is an international finance portal, providing analysis and data on 120+ world markets to help individuals find investments from around the world. The author, Jonathan O’Shaughnessy, does not have any holdings in the companies listed.

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Five months after the global economic meltdown, world markets are still unstable as a seemingly continuous stream of negative economic data continues to emerge. Even after September when most world markets lost 40-60% of their value, developed markets have continued to struggle as future economic predictions remain bleak in the face of worldwide recession. According to Emerginvest, the US is down -4.87% in the last quarter, even after the September plunge.

Yet surprisingly, some of the leading emerging markets have rebounded quite well in the last quarter. After the stock market plunge in September, an exorbitant amount of investors from developed markets liquidated their “risky” assets – which included the perceived risk-heavy equities of emerging markets. The panic-selloff in emerging markets from foreign investors contributed to plunging many stocks below what would normally be acceptable valuations. Frontier markets which are exceptionally dependent on foreign investment have little to no means of propping themselves up with falling commodity prices, have subsequently continued to struggle. According to Emerginvest, countries like Pakistan, Kenya, Egypt, Nigeria, Peru, and Zambia are all down 20-40% in the last quarter alone.

However, a contingent of the leading emerging markets have significant domestic markets, and started rebounding in November when investors realized many of their equities were significantly undervalued. Since then, they have continued to post significant growth. Specifically, (according to Emerginvest) Chile and Argentina are up 5.0%, and 5.3% in the last quarter respectively, South Africa is up 7.9%, Colombia 14.2%, and Turkey 4.4%. However the two poster-children of the emerging markets from the last quarter are Brazil and China, posting 13.0% and 21.8% respective returns in just the last quarter.

Here is Emerginvest’s World Heat Map to give some context to the discussion:

While China’s stock market plummeted approximately 60% in September, it has rebounded quite well in the last three months.

Since yesterday, it has jumped 1.81%, culminating in an astounding 9.9% return in the last week alone. That brings the monthly return to 18.9%, and the quarterly return to 21.75% respectively:

It is uncertain how long the phenomenal growth will continue for countries like China and Brazil. However, many economic experts agree that developed markets will produce little to no growth in the next year, and possibly even two or three years. With that assertion, it appears that leading emerging markets such as China, India, and Brazil seem like good investment decisions in the short term, even if their exorbitant growth is not prolonged.

Disclosure: Emerginvest is an international finance portal, providing analysis and data on 120+ world markets to help individuals find investments from around the world. The author, Jonathan O’Shaughnessy, does not have any Chinese or Brazilian index ETF holdings.

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