Global Stock Market BLOG - Mike Burnick

Is This the Beginning of the End in China... or Just the End of a Great Beginning?

In a blog posted yesterday (The Global Market That’s Moved From “First to Worst”), I detailed how China, recently one of investor’s favorite markets to own, has sunk to the bottom of the barrel. In fact, according to a recent Citigroup report, China has become the most “underweight” market in Asia for the first time ever.

How did the most popular and best-performing market over the past few years go from first-to-worst so quickly? Well, a 30% decline in domestic Chinese shares from last year’s high has a lot to do with it. After more than doubling in value in each of the last two years, the CSI 300 Index of mainland Chinese stocks tumbled sharply since peaking last October.

So is this the end of the beginning for China’s global dominance – or the beginning of the end. Judging from the speed with which so many China bulls have so swiftly turned bearish, I would have to say that the contrarian “sentiment” indicators are in China’s favor.

China: the New Engine of Growth... and Investment Wealth

What I believe investors are missing amid the global credit-crunch selling panic is the fact that China is a great long-term investment that's just beginning. The world’s fastest growing economy is now the second-largest in the world on a purchasing power parity basis. There are dynamic changes taking place in China, and gigantic opportunities to profit from it.

Last year, for the first time in history, China and other emerging markets contributed more than half of the world’s total economic expansion. China alone accounted for 35% of global growth last year, while the vaunted U.S. economy kicked in just 7%!

What we are witnessing here is a “radical realignment in the global economy,” in the words of George Soros. China, India, and other nations in the emerging world are ascendant – while the U.S. and other developed markets are in decline. This dynamic applies not only to the economies of markets like China, but also to investment opportunities in these markets.

Bull in China Sees Buying Opportunity Soon

Globe-trotting investor Jim Rogers (Soros’ partner in the wildly successful Quantum hedge fund) correctly predicted the beginning of a mega-bull-market in commodities near the end of the last century.

At the time, foolish retail investors were chasing dot.com stocks to an irrational “bubble” peak. Rogers correctly spotted that bubble in tech and steered clear; plowing his money instead into commodities that were dirt-cheap in 1999 and 2000.

Rogers of course was right on the money then, and retail investors were dead-wrong. Now, Rogers is also bullish on China in a very big way. So what does he think of the recent steep correction in Chinese share prices?

“I'm delighted to see what's happening in Shanghai and Hong Kong,” he said, referencing the sharp correction in share prices during a Fortune magazine interview. Rogers went on to explain that “if things hadn’t cooled off, the Chinese market was in danger of turning into a bubble.”

Far from seeing a "bubble" in China that's now in the process of popping, Rogers clearly sees the recent bear market decline in China as a way to curb speculation, and let some steam out of an economy that’s growing 11% annually, with inflation running at over 7%.

In other words, he sees a healthy correction that should soon lead to great upside profit potential in China.

Thinking About Buying in China, But NOT in America

The real question is: can the authorities in Beijing successfully engineer what has been so elusive for the U.S. Federal Reserve – an economic “soft landing” – or will China inevitably face a crash landing.

While that debate continues to rage, Jim Rogers seems unfazed and is looking forward to the next opportunity to buy into China on the cheap.

“I would suspect the correction isn't quite over in China. But I'm gearing up,” to buy shares, says Rogers. “I'm starting to prepare my list of things to buy in China. Whether I buy this week or this month or this quarter, who knows. But I'm starting to think about buying new shares in China for the first time in a while. And I'm not thinking about buying in America.”

Note to China bears everywhere: Jim Rogers’ bullish bets on China – not to mention his exceptional track record of success over three-plus decades of investment – is a very good reason to take a second look at investing in China right now.

Rogers sees buying opportunities in this dynamic emerging market, while others are selling out. To paraphrase Warren Buffett: Rogers is attempting to be “greedy” while retail investors are “fearful.” I know which side I’m lining up on.

The Global Market That’s Moved From “First to Worst”

My colleague Eric Roseman, the Sovereign Society’s investment director, recently posted a blog article about a reliable contrarian indicator that’s a favorite of mine.

Eric is correct in pointing out that “individual investors are “usually the worst market-timers.” In fact, it’s been shown again and again that individual retail investors constantly stampede into – or out of – stocks at precisely the wrong time.

Think about all the high-tech and internet stocks that went public in 1999 and early 2000. These IPOs were many-times oversubscribed driving prices into the stratosphere. Individual investors unfortunately loaded up on many dot.com stocks at just the wrong time.

The same dynamic works in reverse too. Many retail investors finally threw in the towel on stocks in 2002 – as the war in Iraq was about to start – the Nasdaq has just about doubled since then.

Global Retail Investors are Bailing Out of Stocks

Eric points out that according to “data from the Investment Company Institute in the United States, mutual fund investors redeemed $32.9 billion dollars’ worth of stock funds last month – the highest liquidation figure since July 2002 – just three months prior to the bottom of that bear market.”

The same pattern is true in Canada, Italy and France – with retail investors dumping their stock funds and running toward cash. But perhaps nowhere on the planet has any market experienced a bigger reversal of fortune than in China. In fact, China has gone from first to worst in record time!

A recent article in Bloomberg news details just how unloved China has suddenly become among retail investors. “China, home to the world's best- performing stock market last year, is now the least favored in Asia,” according to the story.

China Swings From Most Favored to Most Hated

Citigroup analysts found that “China has become the most 'underweight' market in Asia for the first time ever. Funds dedicated to investing in China saw net redemptions of $1.1 billion for the week ended Jan. 23, the most in Asia.”

At least China can take some comfort in the fact that investors aren’t discriminating against it alone. In fact, India country funds had outflows of $848 million recently, while Asian funds in general suffered nearly $5 billion worth of redemptions during the same period.

So the obvious question is: could this be a contrarian BUY signal on China now that retail investors have fallen out-of-love? I strongly suspect my colleague Eric Roseman would say NO, but I’m not so sure.

In my blog tomorrow, I’ll discuss another prominent investor’s views on China. Stay tuned!

In the Eye of the Credit Crunch Storm

Last week at the Sovereign Society Emergency Money Summit in St. Kitts, I spoke extensively about the ongoing subprime credit crunch market shock. Several thousand miles away on Wall Street, respected analyst Meredith Whitney was sounding the alarm too. Make no mistake, more financial sector losses are on the way.

As I wrapped up an hour-long presentation on Saturday in St. Kitts, one of the conference attendees pointed out that he had seen total financial sector loss estimates over one-trillion! I have seen those numbers too.

This estimate seems to me on the high side. But when you include all the collateral damage done by this credit crunch including: prime loan defaults, auto and credit card delinquencies, and growing write-offs in commercial real estate – $1 trillion doesn’t sound like such a long shot.

Direct and Indirect Losses Due to Credit Crunch Market Shock

Most of the well-reasoned estimates I have seen, based on independent research from multiple sources, seem to indicate about $500 billion as the right number. These are the direct losses of one sort or another that Wall Street will be taking for years (NOT months) to come.

Of course the overall damage to the economy could be quite higher. There is after all an “opportunity cost” at work here too. The biggest investment and commercial banks have already tightened lending standards significantly in the wake of the credit crunch.

Commercial real estate deals aren’t getting funded. Standard business loans to small, mid-size, and even large firms are getting much harder to qualify for.

Even hedge funds are feeling the pinch, since Wall Street is running short of cash to finance their leveraged bets. These represent indirect losses from the credit crunch – but they’re nevertheless real.

As the big financial firms cobble together a rescue plan for bond-insurer Ambac, the biggest bank of all, Citigroup, is said to be facing more steep losses of its own this quarter. Oppenheimer analyst Meredith Whitney, who correctly forecast Citigroup’s massive fourth-quarter losses and dividend-cut, is now predicting more of the same.

Big Banks Face the Biggest Risks

According to a story in Bloomberg, Whitney believes that Citigroup faces additional write-downs this quarter, including “losses on more than $43 billion of junk or ‘leveraged’ loans.” Oh, and Citi also faces potential charge-offs on more than $50 billion of residential mortgages too. Yikes!

Citigroup may also be forced to “sell $100 billion of assets” at distressed prices just to free up capital for business operations. I wouldn’t be surprised to see more massive dilution of shareholder value, as Citi desperately raises additional capital. Forecasts like this only reinforce my belief that it’s Citigroup, and the other major investment and commercial banks, that face the most risk of loss going forward.

The firms at the center of the securitization process are now at the eye of the credit-crunch storm. We may see a brief period of calm weather, but watch out for the back-side of this market shock maelstrom as it blows through Wall Street!

At this rate, the Citigroup board may soon be considering second citizenship in St. Kitts as an alternative to facing angry stock holders at the next shareholder’s meeting!

Postcards from St. Kitts: Can Decoupling and Globalization Coexist?

Over the past few days I have been enjoying the collective investment wisdom from dozens of expert speakers here at the Sovereign Society Emergency Money Summit on beautiful St. Kitts. These guys are sharp as tacks: investment and asset protection experts from countries around the world.

I don’t agree with everything I have heard of course. After all, that’s what makes it a “horse race” – but more on that in a minute or so.

I have heard a number of intriguing ideas that reinforce my own views on where in the world to find great investment opportunities right now. So first, I'd like to share a few of these highlights with you, since I believe they're right on the money...

Go Green for Big Gains

Thomas Fischer of Denmark- based Jyske Bank pointed out the huge profit potential in “green investing”. This is a great long-term theme that I believe in big time. In fact, I devoted an entire investment report to green energy investments.

It was Thomas who brought Vestas Wind Systems to the attention of Sovereign Society members. This leading windmill maker doubled in price both in 2006 and again last year!

After the recent correction, many alternative energy stocks look attractive again. With oil above $100 a barrel, there’s sure to be lots of money flowing into this sector. This is one area to keep a sharp eye on.

Long Term Bets on Health Care and Infrastructure

Daniel Zurbruegg of Swiss-based Alpine Atlantic Asset Management focused on two investment themes I believe have lots of long-term potential. He pointed out that global health care spending is set to triple through 2008, due to an aging world population.

Also, infrastructure investment is another hot topic. Spending on the bricks & mortar and the nuts and bolts of modern society is expected to double in the next decade according to Daniel. That’s another great investment theme I plan to explore much further this year.

Back to the subject of “decoupling”: one speaker claims that there’s no way you can have decoupling AND increased globalization both at the same time. Now that's a subject I'm well versed in -- and I totally disagree – here’s why…

Decoupling is About Long-Term Fundamentals Not Short-Term Market Fluctuations

Emerging stock markets declined late last year and in January 2008 right along with the U.S., Europe and Japan... so much for “decoupling” say the critics.

But decoupling was never a term meant to describe short-term investment returns. We all know that in the short-run, manic-depressive investor psychology and sentiment always rule over long-term fundamentals.

Instead, the proper definition of decoupling is the idea that emerging markets have grown up, and are now capable of standing (and running) on their own economically – even without the support of the American consumer.

Last year for the first time in history, the BRIC countries (Brazil, Russia, India and China) collectively accounted for more than half of total global economic output growth... now THAT is decoupling at work!

Of course the emerging world will slow down too if the U.S. or Europe heads into recession. But it won't be anything like the magnitude of the slump we're seeing at home. I believe the long-term fundamentals driving BRIC performance remain intact, in spite of short-term market volatility.

As you can see in the chart, aside from China’s sharp correction (after doubling last year) the other BRIC countries are all performing very well since October – during the worst of the global sell-off in stocks.

These economies will continue to grow and expand supported by much stronger long-term fundamentals. The investment opportunities in the developing world are simply much greater than you’ll find in the U.S. To find out more about where in the world I'm finding particularly good investments these days, Click here to sign up for a risk-free trial to Global Market Investor so you can get a peak at my recent picks.

Energy Sector Susceptible to Slow-Growth Selloff

You would think the U.S. energy sector is the place to be right now, with oil prices peaking over $100 a barrel. The truth however, is that the major integrated oil companies here in the U.S. are struggling with declining production and profits.

Costs are rising sharply for the majors including: Exxon, Chevron and Conoco Phillips. These companies are spending a record $369 billion on energy projects this year, up 11% from 2007.

Exploration and production (E&P) just ain’t what it used to be.

Big Oil Getting Squeezed by Foreign Nationals

The major producers face challenges to reverse declining production rates. These firms are struggling just to get access to new oil fields. Old energy industry stalwarts including Exxon, Texaco, Royal Dutch Shell and BP have been squeezed out by state-owned oil operators, who now control over 90% or the world’s oil resources.

The new industry giants are national oil companies including Russia’s Gazprom, Saudi Aramco in the Middle East, Brazil’s Petrobras, and Venezuela’s PDVSA. Collectively, these firms have either cut off access to promising new oil fields, or demand sky-high royalty payments from the major western oil companies.

The result is increased spending by the majors on offshore deep-sea drilling projects. That’s great news for the oil service stocks that perform this contract drilling work, but results in spiraling costs for the major producers.

US Energy Sector Profits at Risk

This is biting into profitablility big time. In fact, Exxon’s profits are expected to rise just 3% this year. Royal Dutch Shell’s earnings are forecast to fall 8%. And these Wall Street estimates are almost certainly too rosy to begin with, and may need to be slashed.

The Select Sector Energy ETF (XLE) – top heavy with old-line E&P firms like Exxon Mobile and Chevron – has fallen just 6.4% since October. Meanwhile the S&P 500 Index fell about 13%. I expect energy sector profits to be called into question amid slowing growth.

When this happens, the energy sector may soon catch up with the overall market’s decline on the downside.

Time to Buy On-Shore Bank Bargains... Buffett Thinks So

Yesterday, I arrived in the beautiful island nation of St. Kitts for the Sovereign Society’s 2008 Emergency Money Summit. I must say, I am quite impressed with this island. The scenic beauty is stunning. Volcanic mountain peaks remind me of the Hawaiian Islands. As we descended for landing the size of St. Kitts as seen from the air surprised me.

St. Kitts is of course known as an offshore banking and asset protection haven, but it is the beaten-down U.S. banks that are most on my mind at this conference.

Berkshire Hathaway disclosed last week that Warren Buffett & Co. has been busy adding to its already sizeable stake in Wells Fargo.

In fact, the big west-coast bank is Berkshire’s second largest holding. Buffett now owns 289 million shares of Wells valued at $8.6 billion. That’s nearly 9% of Wells Fargo’s outstanding shares.

Buffett Likes Bargains, and Banks Certainly Qualify

Buffett is of course well-known for being a shrewd buyer of bargain stocks. The U.S. banking sector certainly qualifies. And Wells Fargo in particular is the right kind of stock to own. Wells is the nation’s second-largest home mortgage lender, so it has certainly been impacted by the housing recession and subprime credit crunch. However, Wells Fargo has terrific management and is a very well-run company.

A quick look at its financial performance tells you that. Citigroup has reported over $20 billion in subprime losses. Others including Bank of America and Switzerland’s UBS aren’t far behind. But regional banks like Wells Fargo, US Bancorp (another Buffett holding) and other lenders outside of Wall Street have fared much better.

The regional banks haven’t suffered nearly the magnitude of subprime losses that are hitting the big money center institutions. That’s because most regional banks stick to their knitting, the simple business of borrowing short and lending long. They never got wrapped up in collateralized debt obligations and other exotic derivatives.

Regional Banks Haven’t Been Sucked into Subprime Trap

Banks like Wells Fargo, US Bancorp and other regional banks aren’t Wall Street wheeler-dealers, and that’s a GOOD thing. These firms have strong non-interest income from services like asset management. This has largely insulated them from the subprime trap that has tripped up big Wall Street banks.

Still, the share prices of regional banks have (unfairly) been knocked down 30% to 40% since October, which I believe is way overdone. There are many “fundamental” reasons to like the regional banks right now too.

They are trading at the lowest price-to-book value ratios in nearly 20 years, and offer investors rich dividend yields. In many cases these dividend payments are much higher than yields on 10-year U.S. Treasury bonds.

That’s an attractive value proposition that tells me it’s time to start buying selectively in the banking sector. Warren Buffett thinks so too, and Wells Fargo looks like a pretty good place to start.

Amid Global Credit Crunch, It’s “Business as Usual” in Brazil

The U.S. credit crunch is far from over as sharks, and Warren Buffett, now circle the troubled monoline insurers such as Ambac and MBIA, that latest victims of the “repricing of risk” as the Oracle of Omaha calls it.

However several thousand miles, and worlds away from Wall Street, the credit crunch appears to be having little spillover impact on South America’s biggest economy. “Brazil’s credit markets are shrugging off the effects of the US subprime mortgage debacle and maintaining business largely as usual,” according to a story in yesterday’s Financial Times.

This is a significant statement considering how much of a fiscal basket-case this country has been in the past. Brazil was once the poster-boy for financial miss-management. Spiraling inflation, massive debts and a chronic history of currency devaluation was what Brazil was known for in the 1970s and 1980s.

Today however, Brazil looks like a paragon of fiscal virtue compared to the U.S. Brazil has paid down its foreign debts significantly in recent years. Inflation is low and has been falling, while interest rates are steadily coming down.

Even the Brazilian real is one of the world’s strongest currencies, appreciating about 8% against the greenback over the past year. That’s quite a reversal of fortune for Brazil.

Business conditions in Brazil have slowed somewhat this year, as is the case around the world. However “overall credit markets are calm.” For one thing, bank lending in Brazil continues at a steady pace, even as big banks in the U.S. and Europe are fearful to lend.

Brazil’s total “stock of credit” stands at just 35% of GDP, meaning Brazil is much less leveraged than many other financial markets. Brazilian firms carry much lower debt loads than many foreign competitors too.

The reason Brazil appears relatively insulated from the Wall Street credit crunch offers more evidence of financial “decoupling” at work, as is also the case in Asia. The main source of Brazilian credit has been a steady advance in the domestic savings rate, driven by “investments in fixed income securities that are, in effect closed to foreigners,” due to taxation issues.

Brazil’s fast growing economy may slow somewhat this year, in the face of a global downshift. “But many companies are betting on the domestic market to make up the difference. For them, investment capital is still available.”

Perhaps the Brazilians would be willing to bail out MBIA...

Turning a Profit Double-Play With Offshore ETFs

In yesterday's blog, I mentioned the growing number of ETFs available on overseas stock exchanges. I keep close tabs on new offshore ETF listings, because certain of these funds can lead to double-play profits in global markets. These gains can't always be matched with domestic ETFs. Let me give you a recent example.

Last year in my investment research letter Global Market Investor, I recommended subscribers diversify into commodity ETFs. – one of 2007’s best performing asset classed.

Finding a Commodity ETF that's Just Right

Now there are several commodity-backed ETFs listed here in the U.S. from which to choose, but I was especially attracted to one listed on the Deutsche Bourse in Frankfurt, Germany.

I told my subscribers to BUY the Market Access Jim Rogers International Commodity ETF. Now a big part of my reason for selecting this ETF is the superior characteristics of the index it tracks. Hedge fund legend and global investment guru Jim Rogers created this index himself in 1998.

In Rogers’ view, most of the popular commodity indexes are flawed, because they are too heavily weighted toward just a few resources, like crude oil and precious metals. That’s how the Rogers International Commodity Index was born.

Rogers started his own well-balanced and broadly diversified index that includes 36 different commodity futures. The commodities in Rogers’ index are weighted based on global consumption, and no single commodity has a disproportionate influence on the overall index.

This approach makes a lot of sense to me: so I bought it.

This is itself an important lesson to keep in mind when it comes to ETF investing: Remember that all ETFs are not created equal. It’s not enough to buy the name alone.

Make certain before you buy, to check under the hood: examine the ETF allocation and portfolio holdings carefully to make sure you’re getting what’s advertised.

How Global Market Investor Turned a Profit Double-Play in Commodities

So the number one factor in recommending this ETF was the quality of the index itself, but a close second was a currency related concern.

As I said, the Market Access Jim Rogers ETF is listed in Frankfurt and denominated in euro, not in U.S. dollars. The dollar was still in a free-fall against the euro last year when I picked this fund. I the euro exposure of this ETF would be a great way for investors to get a currency hedge, in addition to great upside potential from booming commodity markets, all in the same trade.

I’m delighted to say that’s exactly the way things worked out. The Market Access Jim Rogers International Commodity ETF jumped a bit more than 12% in 2007, after I recommended it to subscribers in June. That’s 12% in local (euro) currency terms.

Even better for U.S. investors, the dollar continued to slide through most of last year – handing investors a 23.8% total return in this Frankfort-listed, euro-denominated ETF.

In other words, you just about doubled your total return by investing in this overseas-listed ETF, rather than one of the U.S. listed commodity ETF equivalents.

That’s a profit double-play I’ll take any day!

P.S. for more information on my service, including a full track record of past and current picks, Click here to sign up now for a risk-free trial to Global Market Investor so you can get a peak at my most recent picks - completely risk-free.

ETF Industry is Growing Globally

The Exchange Traded Fund universe continues to expand globally. For U.S. based investors who are serious about diversifying outside domestic markets – and away from the sickly U.S. dollar – that’s a very good thing indeed.

The European ETF industry in particular is on fire with new fund listings. Last year, the number of ETFs listed on European exchanges reached 412 total fund offerings, “with plans afoot to launch a further 59,” according to the Financial Times.

It’s Easier the Ever to Access Offshore ETFs

There were 119 new ETFs listed in Europe last year alone. Total ETF assets under management in Europe exceeded the €400 billion (about US$580 billion) mark for the first time in 2007. The big four ETF issuers in Europe: Barclays Global Investors, Lyxor, Deutsche Bank, and Easy ETFs, account for nearly 75% of the total market, but there are over 20 smaller players introducing new funds too.

Also, the Stock Exchange of Hong Kong recently announced plans to begin rolling out more ETF offerings in Asia. Hong Kong’s main bourse is also exploring plans to cross-list existing ETFs on other Asian exchanges including perhaps Taiwan, and Korea.

Many U.S. online and discount brokers allow access to overseas exchanges, which includes the ability to buy ETFs listed in foreign markets. This provides even greater ETF investment choices for U.S. investors than ever before. EverTrade (a division of EverBank), Interactive Brokers, and E*Trade are just a few of the many brokers who can access these overseas listed ETFs for you.

But why would you to buy ETFs listed in London, Frankfurt, Tokyo, or Hong Kong when there are so many hundreds of ETFs to choose from right here at home? There are several very good reasons that I’d like to point out.

Offshore ETFs Can Give You Instant Diversification Out of the Dollar

First, like it or not, many U.S.-based investors recognize the bulk of their total wealth is tied up in U.S. dollars. I’m not just talking about stocks and bonds either. Many other assets including your business, residential or commercial real estate investments, even your pension or retirement funds, are probably denominated in dollars.

As we are all painfully aware, the U.S. Dollar Index lost more than one-third of its value just since 2001 – highlighting the danger of being too heavily dependent on dollar-denominated assets.

For this reason, many smart investors have opened offshore investment accounts where stocks and other investments can be bought and sold in a variety of foreign currencies. The rise in offshore-listed ETFs makes it even easier for you to execute a low-cost and well diversified investment strategy in your offshore investment account.

Even for U.S. based investors, buying ETFs listed on overseas exchanges makes a lot of sense. That’s because foreign ETFs can offer you a profit double-play: you can profit as the ETF itself moves higher (in local currency terms), plus earn additional bonus gains on the currency appreciation too.

Tune in to my blog again tomorrow, and I'll give you a real-world example of this profit double-play in action.

Will Productivity be the BRIC's Saving Grace?

Who remembers the glory days of U.S. productivity growth? Former Fed Chief, turned author Alan Greenspan was found of pointing to the virtue of steady gains in U.S. productivity growth during his tenure at the Federal Reserve.

Healthy rates of growth in per capita economic output, or output per man hour (aka productivity), was seen as a recipe for steady, non-inflationary economic growth. Greenspan pointed to strong productivity growth in the U.S. as a main reason why employment remained strong (at least while he ran the show) without pushing up wage-cost inflation. This in turn kept interest rates low, which helped spur more business investment in, you guessed it, productivity-enhancing technologies.

It was a nice virtuous circle, while it lasted in the 1990’s and on into the early years of this decade. But last year U.S. productivity growth slumped to an anemic 1%. Now however it appears the epicenter for productivity growth – as is the case for overall global growth – has moved to emerging markets.

U.S. Productivity “Dismal”; Other Developed Nations Aren’t Much Better

A recent article in the Financial Times points out that major, developed nations have witnessed “sluggish growth” in productivity in recent years. Meanwhile, emerging markets are now carrying on the Greenspan legacy with faster rates of productivity growth than ever before.

“In 2007, the US experienced another dismal year of productivity growth,” says the article, with productivity (defined here as gross domestic product per hour worked) rising just 1.1%. That’s down sharply from average U.S. productivity growth of 2.1% between 1995 and 2007.  The European Union scored only slightly better, with 1.3% productivity gains last year. Japan was similar.

But productivity hasn’t vanished entirely, like some endangered economic species. No, it has simply moved on – like so many other economic advantages – to emerging markets. The article points out that “many emerging economies now seem able to sustain much faster increases in economic efficiency.”

BRIC Productivity “Accelerating”, But So is Inflation

While U.S. productivity gains have been cut in half, the phenomenon appears to really be catching on big-time in the BRICs.

China’s productivity growth, like its economy, has been accelerating for years, and (get this) exceeded 10% in 2007! India and Russia are posting productivity growth rates close to 7% over the last two years.

That’s up from an average of just 4% for both nations in the 1995 to 2007 period. Brazil is lagging in the productivity party, but is catching up fast, with growth of nearly 2% last year. That’s far better than the U.S., and up substantially over Brazil's average gains during the 1990’s.

Overall, the four BRIC economies averaged productivity growth of more than 8% last year, compared to just 1.2% for the G7 nations!

In the Greenspan era, high and sustained rates of productivity gains were believed capable of keeping a lid on inflation. Considering elevated readings on inflation in Russia (+12%), China (+7%), and India (+5.5%) recently, the BRICs are certainly hoping that Greenspan was right and productivity will come to the rescue. Stay tuned!

Editors Note: In yesterday's post I mentioned how insider buying by corporate executives has been soaring of late. In fact, insiders are buying more of their companies' shares than they're selling -- for the first time in 13 years!

But I forgot to mention the most important part. Historically, high levels of insider buying have led to strong performance for the stock market, which makes sense.

In fact, "the last seven times insiders bought more than they sold, between 1988 and 1995, the Standard & Poor's 500 Index rallied an average 21% over the following 12 months," according to Bloomberg. The last time insider buying was as strong as today was in 1995 -- and the S&P 500 climbed 33.5% that year! Stay tuned...

If Things Are So Bad, Why Are Insiders Buying Aggressively?

Several market “sentiment” indicators have recently pointed to a bearish extreme in this equity sell-off. Taken as a “contrary” indicator of excessive pessimism, such readings have often signaled important market bottoms in the past.

The VIX index measures the increase in volatility on put and call options for the S&P 500 Index. Higher premiums paid for options means investors are fearful and seeking protection.

It is literally a “fear gauge” for the markets. The VIX recently spiked to its highest levels since 2003 as you can see in this chart. That was in the final stage of the last bear market, as it was ending and a new bull was born.

Also the ratio of trading volume in puts versus calls is a handy sentiment indicator to follow. Again, recently the volume in protective put option purchases – essentially bearish bets – has soared relative to call options buys. Call options of course are bullish bets that stocks should move higher. Few investors are betting that way right now. Instead, the bearish side of the boat is getting mighty crowded.

Insiders Back Up the Truck

To these “bullish” sentiment readings add one other: share purchases by corporate insiders have also spiked higher recently. Another sign of a potential market bottom in the making?

“Chief executive officers, directors and other senior officials in corporate America are buying more of their companies' shares than they're selling for the first time since 1995,” according to a story in Bloomberg. This just adds to the notion that the worst of the selling may be behind us.

Corporate executives have billions of reasons to sell, literally. Pay packages these days are heavily skewed toward “stock grants” and lavish stock options programs that reward executives with millions of shares of freshly minted stock each year. Not surprisingly, insider sales by these execs typically eclipses insider buying – and by a very wide margin.

U.S., European Executives Snap Up Shares

So it’s a significant event when the tide of insider buying shifts this dramatically. After all, there’s really only one reason to open your wallet and buy stock... you think it’s cheap and likely headed much higher in price.

Total share purchases by corporate insiders totaled a whopping $683 million in January. Shares were purchased by insiders at over 1,900 public companies listed on the NYSE – and total buys exceeded insiders sells by 1.44 times – the highest ratio in 13 years! The same dynamic is taking place in global markets too, as 522 European firms were net buyers of shares in January to the tune of about $145 million in total insider purchases.

This is another small, but hopeful sign that the recent sell-off in stocks may have gotten over done. Perhaps the loss in share values around the world is out of proportion with economic reality. After all, insiders are the people in the best position to know how well the business is performing. Stay tuned!

Going Global by Investing… in Erie?

In another example of going global by investing local, blue-chip icon General Electric (GE) recently reported solid profits for all of 2007 – mainly due to their surging international sales – especially in emerging markets.

Total sales for GE last year jumped nearly 18% to $48.6 billion. More than half of total revenues came from outside the U.S. for the first time in the company’s history. Amid a sharp U.S. slowdown – and probably recession – GE still sees robust business activity in the Middle East, Asia, Latin America and Eastern Europe.

Commenting on the company’s results, GE chief financial officer Keith Sherin said "Not everything is gloom and doom. There is a big global economy out there, and there is an awful lot of economic action." This “action” is coming mainly from emerging markets where infrastructure build-out continues at a fast pace.

Erie's Trade Surplus

In fact, GE’s infrastructure businesses posted 26% profit growth last year. This division makes high-end industrial equipment ranging from jet-aircraft engines to power turbines, even railroad locomotives. GE’s transportation business in particular has performed very well.

Erie Pennsylvania is a town that American industry has largely left behind, and moved out.

Erie however is home to GE’s transportation equipment division – and business is booming. Here, GE builds mainly rail products – including state of the art 150-ton diesel-electric locomotives – that sell for a cool $4 million apiece.

In 2007, GE sold about 200 of these marvels to China, making Erie one of the few areas in the U.S. to run a trade surplus with that country. In 2008, GE expects to sell about 900 locomotives worldwide. In addition to China, GE is getting orders from Brazil and even Kazakhstan, among other emerging nations.

GE: A Play on Globalization

In fact, the company commands about 45% share of the global market for diesel-electric locomotives. Improvements in productivity and manufacturing output at the Erie plant are big reasons why GE should stay on top too. The company is rolling new locomotives off the Erie assembly line at a rate of one every 22 days, but GE aims to cut production time in-half to just 10 days.

Think of how the dawn of the industrial age changed the landscape of America. Railroad tracks were laid coast-to-coast as freight shipments boomed. The emerging world is just now catching up, with vast expanses of the planet being drawn closer together, much of it by rail. GE is in the right place at the right time to cash in on the booming business of rail transport.

The president of GE’s Erie plant says: “Because of the growth in shipments of goods around the world, rail has a more import role in the international economy.”

“What we are doing in Erie is really a play on globalization.”