Spicer Matthews'  Instablog

A revolution is unfolding in the world's emerging markets.  Looking for better returns, investors are searching far and wide for the world's best investments.  While the giants face financial stagnation, emerging countries are taking the spotlight for the best equity returns.

India's Coming Back

India's economic outlook looks far better than it did even one year ago.  The country is now on track to shed a quarter of its foreign trade deficit, which is a benefit for any emerging market.  Couple the economic fundamentals with a new leader ready to pass economic reform measures in India, the country could emerge as the “least emerging” of all the markets.

The Economy is Growing Up Quickly

India's economy is growing rapidly, employing more people and making use of its most valuable asset: labor.  As India booms both in manufacturing and outsourced projects from the most established economies, it’s also becoming a huge presence online.  With more than 1 billion people living in the nation, the country is set to become a true economic power as India moves its economy to profit on globalization.

A Stable Currency Is a Good Place for Business

Emerging markets are notorious for record inflation rates and huge trade imbalances.  This is not necessarily the case for India, whose currency has risen nearly 10% against the dollar in less than three months.   Since falling through the 200 day moving average, the USD/INR pair is tumbling quickly, increasing the buying capacity of Indian consumers.

A Consumer Economy

The next wave in India's growth will surely come from the purchasing power maintained within its own borders.  Investors are already seeing this shift in China where in just one decade; Chinese consumers have caught up with the rest of the world in technology and personal transportation.  All of those products are, of course, made in China, helping to spread the wealth within borders, not outside of them.

ETFs Profit from Emerging Growth 

The best opportunity investors enjoy to profit from Indian stocks is through exchange-traded funds.  One such fund, WisdomTree India Earnings Fund (EPI), has soared more than 50% since the beginning of 2009.  That may just be the beginning for a country well on its way to a developed economy.

Author owns no India stocks 

Junk bonds live at the bottom of the barrel below investment grade, and many times they are debt instruments sold by companies that have a poor track record of paying debt back.  Many other times, however, bonds are labeled as junk solely because the rating agency fears that the issuing company will not pay them back.  However, these fears are not always in line with reality.  

Junk is Oversold

Junk bonds, unlike other bonds, often trade very much like stocks.  Investors view junk bonds and stocks virtually in the same manner; individually they're risky, and when diversified, they're rewarding.  

There is one exchange-traded fund that is performing quite well with its junk bond endeavors: SPDR Barclay's Hybrid ETF (JNK).  At present, the fund yields tremendously at 13.6% and has fared well even as the market has dropped; the fund is only down 6% year to date.

Playing it Safe

There are a few strategies to tackling the benefits of junk bonds while avoiding the negative sides.  With the SPDR Barclay's Hybrid ETF, investors could long the stock while protecting themselves with relatively inexpensive put options to cover the chance of a falling stock price.   At a price of $1.50 for December $30 strike price puts, investors can protect themselves while enjoying the robust 13.6% dividend yield.    Should the ETF tank, investors would be protected nearly dollar for dollar on the fall and make up any difference with the dividend.  And if the ETF were to soar on better economic outlook, only a small price would be paid for insurance to the downside. 

Diversification is the Key

For any instrument speculative in nature, diversification is an extremely important element to making money. Granted, some of the bonds held in the ETF may not be worth a dime a year from now.  Others might be worth twice what they are now.  Holding a variety of junk bonds, rather than just one or two, ensures investors that even if a few bonds fail to deliver, a variety of others will pick up the tab with their high yields.  There couldn't be a better time to diversify into junk debt; treasuries yield virtually nothing and all other forms of fixed income barely beat inflation.  Junk is the way to go.

I Own no Junk Bonds, or stocks that track them.

The first Friday of every month is certain to be a volatile ride.  As investors attempt to “pre-game” the employment report and others jump on board the second the report hits the feeds, volatility in the market is certain, at least for one day.  However, the impacts of unemployment are long lasting and will hurt generations to come as the eventual recovery seems to be farther in the distance.  

Employment Isn't About the Here and Now

When the numbers record even one job loss, it’s not just one job lost for one day.  It could be months or years before that one previously productive member of the workforce re-enters back into the job market.  As the number of employed people continues to soar, regardless of the pace, the fundamentals of the economy continue to sour.

The Rate Matters – Not the Numbers

 April's unemployment report showed that 8.9% of the present workforce is currently unemployed.  Many more are working slack labor or part-time to make up some of the full-time shortfall.  

For the macro economy, however, the picture is much bigger.  An unemployment rate of 8.9% means that 8.9% of people won't be able to pay their bills, make mortgage payments, or purchase the products they may need or want.

 Banking Needs a Band-Aid

 Each month of negative growth in the job market is one more month that banks will not receive their monthly mortgage payments, which results in a number of new foreclosures.  Many loans made during the real estate boom have not yet recovered enough in monthly payments that the principle has been recovered.  Even with extensive bailout cash, the banks simply can't withstand continuous job losses.

 Don't Get Fooled

 When the reports surface, don't be fooled into the one-time trading possibilities.  The job market is a very important part of the economy because the reports practically show how productive the nation as a whole truly is.  Even if we're losing fewer jobs, there are still more individuals lining up at the unemployment counter.