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 that stocks are a good play right now, however, this time they could be different for few reasons:

Watching financial television yesterday was the equivalent of taking a long trip with kids who 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.

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.

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.

Two indices followed by most 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.

Since September, Japan has been seen as one of the few bastions of relative stability in the global economic climate. Its stock market “only” fell approximately 30% during the September crash, compared to the approx. 40-60% declines in the US and China markets respectively.

Japan 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 (click on charts to enlarge):

In the midst of the global economic crisis, four major international firms had their stock fall sharply after they announced their quarterly reports. ArcelorMittal (MT), the world’s largest steel producer based in Luxembourg, banking giant UBS (UBS) based in Switzerland, and Credit Suisse Group (CS), also based in Switzerland all fell sharply after their quarterly announcements. In addition, drug maker Sanofi-Aventis (SNY) based in France, 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: (click to enlarge)

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.

The burning topic in the media, on Wall Street, Capitol Hill, and for Emerginvest & international markets this week has been the shaping of the US stimulus package. In some of the first political moves of his presidency, Obama made headlines with an unusual visit to Capitol Hill asking for bipartisan support for the US stimulus package. The first version of the bill passed in the House with a 244-188 spread, with not a single Republican vote (11 Democrats voted “no” as well), and looks like the final bill will pass somewhere in the $900B range (some argue over $1 trillion).

The need for government support is unquestionable, evidenced yesterday with a maelstrom of negative economic news announcements including in such areas as housing starts, unemployment, and business purchases, which wiped out the entire stock market’s gains from the last week in a few hours of trading.

There has been a lot said in the past few months about the direction of the US dollar and its inevitable demise against world currencies. Given the trillions in new debt and the seemingly endless growth of the Federal Reserve’s balance sheet, it’s easy to see where these predictions are coming from. More dollars created usually means each dollar becomes worth less – basic supply and demand.

However, the dollar has been acting surprisingly strong versus most currencies bucking conventional wisdom. Europe is seen to have worse problems than the US and resource heavy countries like Australia are still contending with falling commodity prices. Whether this trend continues is a topic for another day. The Japanese yen, however, is one currency that has been rising strongly against the dollar.

The current global financial collapse has been heralded as the worst since the Great Depression. It has wiped out 40% or more of many investor's entire portfolios since September. Major banks which have stood the test of time have collapsed. Consumer confidence and housing starts are at all time lows while the unemployment rate continually creeps towards 10%. The complexities of the crisis include everything from frozen credit markets, remaining problems with credit-swaps & mortgage-backed securities, still severe levels of toxic debt, a meltdown in housing, rising unemployment, and entrenched consumers. Predictions place the end of the recession anywhere from the third quarter of 2009 until early 2011.

Unfortunately for most frustrated investors, a new wave of negative information in housing and unemployment pushed stocks lower today (the Dow fell 105.3 points, or 1.3 percent today), and extends recession predictions. In addition, Microsoft (MSFT) announced its first large-scale layoff in history, with 5,000 total individuals out of their 94,000.

by Chris Harne

Welcome back to part 2 of 'How to Trade in 2009'. After discussing some macro economic scenarios in part 1, it’s time to look at how to take advantage of those trends.

It has been around for decades, and has been ignored by many for just as long. However, the US national debt stands to finally be thrown into the forefront of political discussion as the record for a single-year deficit looks to be beaten – by threefold.

According to the government-run TreasuryDirect.gov, US national debt is the largest it has been in history at $10.6 trillion, or $10,638,425,746,293.80. This is at a time when the US is facing the worst economic crisis since the Great Depression, which requires record-shattering government spending to stabilize the faltering economy. In addition, global demand for US national debt is waning as countries world-wide are implementing their own financial stimulus packages. Yet economists are virtually unanimously advocating for radical government spending to stabilize the economy, which leaves future generations of Americans holding extremely large amounts of national debt.

Aides to the President-elect revealed further details of the economy recovery bill yesterday as his inauguration approaches. Of the total $675B-$775B package, aides indicated that approximately $300B of the program would be used for tax cuts. Of the $300B – approximately ½ would be used for individual tax breaks, while $100B of which would be set aside for businesses to encourage hiring. The individual tax cuts would equate to approximately $500 for individuals, or $1,000 per family.

While it seems as if the package is likely to pass, there is some strong opposition from Republicans in Congress. In fact, the newest details of the plan were announced after a growing sentiment of concern of too much spending, with too little disclosure of the details of the plan, by the Federal government. A New York Times article published yesterday entitled: “Obama Plan Includes $300 Billion in Tax Cuts,” quoted republican Senator Mitch McConnell: “Nobody thinks we ought to be spending this money on things like mob museums and waterslides… and if the money were lent rather than just granted, states would I think spend it wisely, and the states that didn’t need it at all wouldn’t take any.”

The iShares FTSE/Xinhua China 25 Index (FXI), which tracks a basket of Chinese companies, has recently broken out of a consolidation pattern and appears to be headed higher over the coming days/weeks. The Chinese market has been a relative outperformer compared to US markets holding its October lows even as the S&P fell to new depths back in November.

Going back to the short term high made on November 4th, the FXI has repeatedly made an assault on the $28 level. However, after each failed attempt, a higher low was made forming a bullish pennant. On December 8th, it broke through the resistance at 28 on heavy volume which supports a continuation higher. You’ll also notice that the recent run from the $22 level has seen increasing volume which is also bullish (click on chart to enlarge).

I hoped I would go my lifetime without ever seeing the S&P 500 be down 40% in a year, but the reality is slowly settling in, especially seeing the Emerginvest global heat map for the last quarter on a daily basis:

Continuing Emerginvest’s weekly highlight of booming economies despite the global financial shockwaves, this week’s highlight focuses on Indonesia.

Last Friday, the president of Ecuador announced that the country would be defaulting on some of its foreign debt – specifically on its December 15th payment.

A MarketWatch article entitled, “Ecuador Defaults on its Foreign Debt,” states that:

We have all seen the horrific global turmoil in the last few months. In a Forbes article entitled: “Emerging Markets: What to Buy,” Josephine Jimenez, founder and CIO of Victoria 1522 investments described today’s market conditions as: “The performance of markets around the world this year can be best described as a “sea of red”–with all markets down.” Hearing the percentages that markets and funds have fallen in the last year is extremely frightening – according to the Emerginvest World Stock Markets Page, the UK down 33.27%, Sweden down 39.39%, Germany down 40.51%, China down 60.49%, and Russia down an astonishing 72.46% for the year. Unfortunately, those fear-invoking, year-long statistics seem to dominate any reference to emerging or frontier markets.

However, while the US’s outlook of a prolonged recession looms tall in investor’s minds, what is going unnoticed is that plenty of emerging and frontier markets are posting significant growth figures. Yes, there is still a tremendous amount of volatility in the world, however if you can stomach it, there are hundreds of strong, growth buys to be had.

After the initial shockwaves of the banking collapse and credit crunch occurred in September, many experts predicted that the ensuing recession would be relatively shallow. Unfortunately, the massive stock market declines look like they were just the tip of the iceberg, instead of an acceleration of the painful recession. The past week revealed a series of gruesome reports which indicate the recession will result in additional job losses in the millions over a protracted 8-14 month period.

For the Emerginvest perspective, global markets, especially the US and Europe, have been reeling with each new shock like a boxer in the ring for two rounds too many. There are a few promising markets – this last week the Middle East has proven to be an especially attractive area. According to the Emerginvest Middle East Stock Markets page: Qatar is up 5.69%, Saudi Arabia 5.21%, Jordan 5.19%, and Palestine 4.02% all in the last week alone. However as a whole, the Emerginvest Emerging Markets Heat Map (click to enlarge) paints a gruesome picture of blood-red for the performance of world markets during the last quarter:

Early Tuesday morning, the federal government announced a new, massive $800B program to buy up bad debt and pump money into the sagging credit markets. According to a NYTimes article entitled: “U.S. Unveils New Programs to Ease Credit,” the program would be structured as follows:

The Federal Reserve said that it would buy up to $600 billion in mortgage-backed assets from the government-sponsored mortgage finance giants Fannie Mae (FNM) and Freddie Mac (FRE). The agency would also buy up to $100 billion in debt directly from the companies and up to $500 billion in mortgage-backed securities.