In January, I visited a few villages in India partly to understand how global markets are affecting them. After spending a week in Europe and a few weeks Indian cities, the villages marked a refreshing contrast. As I walked in the fields, I saw that the villagers were happy, gave me free juicy sugarcane, and they were more upbeat about the economy than anybody else. As we will see, if India were to consume as much oil per-capita as a relatively poorer Eastern European nation like Slovenia, it alone needs 30 million barrels/day (mbpd) more (40% of world consumption), apart from another 35 mbpd from China. If they both want to consume as much as US, India needs about 60 million addition barrels apart from 70 mbpd for China (current world production is of the order of 85 mbpd).

These villages might never get to the economic level of an average American or European countryside, their per-capita income might never get closer to that of an average American, but the changes going on in these nameless places will have a profound impact on world’s commodity, tech and consumer markets. And this could change the wage-commodity price relationship substantially.

Executive Summary

The gold market is undergoing radical change with investments in Europe and US taking a lead over the traditional market – Jewelry in India. While Indian Jewelry is still the world’s biggest consumer, the market seems more diverse now. The Gold ETF (GLD) has become the biggest market mover and there has been heavy demand for coins and bars. If this fundamental change in consumer/investor choices continues, Gold could see a significant upward movement in price in the short to medium term, and even a $1200/ounce is likely. It remains to be seen how this change in behavior would continue after the end of this crisis (in 3-5 years). If it is a permanent change, it is good for the gold industry as it gives a far wider/diverse base and removes the quirkiness associated with Indian marriage seasons and domestic economy.

Indian consumption is the only bright aspect in the Jewelry scene, as Jewelry consumption of rest of the world has gone down the toilet. This is most likely due to the fact that the world recession has not come to India so far. However, Jewelry consumption could significantly tank once the reality sinks in and Indian market goes faces economic winds.

The Dow at 1600 seems a little too scary. Can we really get that bad and fall 3/4 from this point? Hopefully we won’t. But economic theories don’t preclude that possibility. This is because of the fundamental relationship between the stock market and the economy.

Businesses produce profits and the profits impact both the GDP and stock values. You can have the profits go closer to zero and the GDP still at non-zero due to the other components in the GDP, but you cannot have the GDP going to a toilet while profits keep going up indefinitely. Thus, GDP forms an upper bound for corporate profits. Generally, the market capitalization of the entire economy is a product of GDP, corporate profits as a percentage of GDP and what investors think the future will be (Price to Earnings ratio).

Until this point government stuck to preferred stocks instead of common stocks traded in the market. Preferred stocks are not exactly ownership, as there are no voting rights, and this arrangement between government and the banks is deliberate.

Preferreds are closer to debt than to equity. With yesterday’s announcement, that might change with the government trying to convert its preferred holdings into common stocks. When it holds a majority of common stocks, it would then be defacto nationalization.

Oil prices are going down and it should be bad for all petroleum related companies, right? Well, have you guys looked at the pump prices for gasoline over the last 2 months? I took a month vacation in December and when I returned I was shocked to see the price in my gas station rocketed from 1.58 to 2.18 (a shocking 60% up), while the world oil prices are still going down. And in fact, the trend is seen nationally. The gasoline prices have gone up more than 25% since Christmas. So, who is benefiting from this? The answer is – refiners. Their gross margins have gone up from about 10% in December to as high as 50% in January.

Oil Vs. Gasoline prices

A recession or a depression is not uniformly bad to everyone. There are a lot of companies that can benefit from the current market condition if their business models are good and have enough cash to not rely on the debt markets. There are certain industries that will be created or be greatly benefited as consumers shift their choices and lifestyles. During the Great Depression, for example, the nascent movie industry greatly benefited as more unemployed folks paid a nickel to watch a movie and spend 3 hours of their time. Then there are strong companies in weak markets where the recession helps in killing the weaker competitors and giving the strong ones a greater share of the market pie. They can also afford to give their employees lesser salary and bargain hard with their suppliers. Then there are companies that offer an inferior good (in an economic sense) that can be substituted for a superior good. Those who would normally buy at Nordstrom (JWN) or Macy's (M) might move to Wal-Mart (WMT) or Amazon.com (AMZN), for example.

In looking at the prospective companies, we should not just see market share, but also look at their profitability and balance sheets, because even increasing revenues cannot help if the companies run operating losses or are way deep in debt. Electronic Arts (ERTS) is an example where increasing revenues and users have not brought profits. Here we look at companies that might benefit from the depression/deep recession ahead of us and also have sufficiently comfortable financial position to carry them through.

If you have taken a flight these days, you will not be surprised with the amount of fees they add to your ticket. Most airlines even charge for the first bag you check-in. Here is the list of all charges in various airlines. Now, the positive is that many airlines are returning to profitability.

Yesterday’s WSJ writes:

Have you ever wondered why tuition and medical costs keep going up far more than other costs? Here is the research I made on the inflation in tuition, medical services compared with other items in the data from Bureau of Labor Statistics. In this article we will analyze the issue, the causes and give the performance of related indices.

Suppose you believe that the market is going to go down, what would you do? The normal answer is sell what you have and get out. However, what if you have nothing to sell? Until a couple of years ago, the answer would have been "Stay on the sidelines" for simple investors. The sophisticated investors always had plenty of avenues - shorting the stock, buying puts, selling naked calls, etc.

However, the gap was narrowed with the arrival of Inverse ETFs that allow even novice investors to short the market in a less risky way (you cannot lose more than what you put in the ETF, while in shorts your loss is theoretically unlimited and this can be psychologically unsettling for some). However, the power and pitfalls of these instruments are poorly understood by many, particularly by the long term investors. The power is obvious - you can go 1/X or 2/X of the market pretty easily, leaving all the pesky details of achieving them to the ETF managers. Here are the pitfalls.

The last couple of weeks we are seeing a thawing of global credit markets. The credit crisis caused lenders to be extremely cautious and tighten standards in September. Loans to individuals and corporations with poor credit shrank substantially and banks started hoarding cash. The interest rate spreads between less risky and more risky loans widened substantially.

However, recently things are seemingly coming back to normal and most people in the market believe that credit is getting available once again. CalculatedRisk blog writes about some of the progress made in the credit markets recently. Stock markets saw the progress and are having a rally the past 7 days. So, is it time to get back into the markets and start investing again? Should you consider buying more Financial sector ETFs like [[XLF]] and [[UYG]]? Well, not so fast.

Gold had the biggest monthly drop since 1983, last month. It dropped 18% in that month to about $700/ounce (1 troy ounce approximately equals 31 grams). It seems counterintuitive given the fact that crisis generally increases the price of gold, and October is the month of peak credit crisis.

One of the biggest factors causing this is the fading of inflation fears from the mind of investors. Inflation always pushes people to look for hard assets and after a year of inflation worries, the central banks are breathing easy that the oil drop has taken at least one of the worries from their backs. 

Oil prices have been steadily declining over the last couple of months and some are wondering how long this will last. The price of oil is around $67/barrel (1 barrel of oil approximately equals 42 US gallons or 159 liters) for December 2008 delivery, less than half of what we saw this past summer.

However, the prices of future deliveries have not fallen that low. The prices for December 2013 contracts (to take oil delivery 5 years from now) are about $90, which indicates that at least a few traders believe that the price of the oil will go back up at some point. Let’s analyze what is happening and see how we can take constructive action to protect us from a future rise in oil prices. We suggest two ETFs that might help you make constructive investment decisions based on this.