Avoid China and Emerging Markets in 2010

Includes: EEM, FXI
by: Richard Suttmeier

The Case-Shiller 20-City Home Price Index - The 20-City Index improved month over month in October extending the streak that began with the bottom set in April 2009. It was a close call on prices month over month as gains were seen in just seven of the twenty cities. The October reading was still down 7.3% year over year.

From its June 2006 peak to the April 2009 low the 20-City Index fell 32.6%. The rebound has the index around 150 with 100 being the starting point at the end of 1999. Thus home prices are up 50% in the first decade of the new millennium. My conclusion is that there’s additional downside to home prices given increasing defaults, and the fact that the home buyer incentives end on June 30, 2010.

ValuEngine’s List of Problem Banks Predicted 35 of the 55 Deadbeat Banks - Twelve of the 22 new Deadbeat Banks were on the ValuEngine List of Problem Banks. As TARP money was given to banks overexposed to C&D and CRE loans I predicted that such a policy was a huge mistake. Odds are banks with overexposures are vulnerable to fail even after getting a taxpayer bailout.

I call Deadbeat Banks those who reneged on making Dividend Payments to the US Treasury, which is required for banks that received TARP bucks. Twenty of the 55 banks to renege in November were private banks, which should never get tax payer money. Thirty-five of the 55 were publicly-traded banks are on the ValuEngine List of Problem Banks. So far three TARP recipients have failed.

More TARP failures will occur as the US Treasury continues to give TARP money to private banks and small publicly traded banks ignoring the overexposures to C&D and CRE loans. Why doesn’t anyone in Washington care about these grievous mistakes?

Emerging Markets Including China are not prudent investments at this time - Investors are betting on emerging markets based upon an improved outlook for developing nations’ exports. The Emerging Markets stock funds saw a inflow of $80.3 billion in 2009 following an outflow of $48 billion in 2008.

My focus is the China 25 Fund (NYSEARCA:FXI), which is up 44.5% in 2009, but is 10% off its November 16th high of $46.66. FXI is still 42.6% below its all time high set at $73.18 in November 2007. Note the negative weekly chart, which stays negative on a close this week below $42.87. The 200-week is $38.30.

In Hong Kong officials voice concerns about a double dip in 2010 because of the real estate market, as two major waterfront sites have seen weak sales raising concern about a bubble ready to pop.

In Beijing, Daniel Rosen of the Rhodium Group says that 2010 could be an even tougher economic year for China. He says,

To climb out of the global contraction, Beijing has engineered a property bubble characterized by oversupply in commercial real estate and unsustainable price gains for residential property. The consequences of this will bite in the New Year.

According to Rosen, China is trying to stoke consumption by accelerating the urbanization trend. In 2008, 43% of China’s population was considered urban, versus 79% for Latin America, 73% in Euro-land and 82% in the United States. The problem with accelerated urbanization is that factories are already at overcapacity. This risks a glut of Chinese goods on the world markets when global demand is struggling.

Disclosure: No Positions