On December 29, 2009 The Wall Street Journal carried an article titled "Brazilian Airline TAM Banks on Growth From New Fliers” that discussed the growth potential of TAM (TAM) and the airline industry in Brazil.

TAM SA, the leading Brazilian airline, expects the domestic market to grow by 12% next year due to the continued growth of the Brazilian economy. The airline is implementing an innovative solution to attract first time-fliers by partnering with banks where customers can put down a low down payment and buy a ticket. The balance of the ticket cost is to be paid in monthly installments at the bank. This strategy of convenient payment option for purchasing tickets was originally developed by TAM’s competitor GOL (GOL) four years ago. Since the majority of Brazilians still travel long distances by bus, TAM’s latest strategy may increase its market share and earnings in the coming years. Gol’s easy payment option has so far attracted some 1.8 million members.

The complete list of Chinese ADRs traded on U.S. organized exchanges is listed below:

There has been some buzz about Air China (AIRYY.PK) spending US$812.8 million to buy an additional 12.5% stake in Cathay Pacific Airways, Ltd. (CPCAY) from CITIC Pacific, another state-owned enterprise. That's a lot of greenbacks to lay down at a time when the world economy, rising fuel prices, and the spectre of an influenza pandemic hover over the airline business.

Of course, as both a government-owned business and the national flag carrier, Air China doesn't need to worry as much about empty coffers as, say, EasyJet (EJETF.PK) or Southwest Airlines (LUV). So the cash issue is a bit of a red herring.

As of July 31, 2009, the S&P 500 Index and the Dow Jones Composite Index are up 10.97% and 2.47% respectively. But many of the ADR indices have gone up much higher. The Year-To-Date (YTD) performance of some of ADR indices are as follows:

• BNY Mellon ADR Index: 21.44%
• BNY Mellon Asia ADR Index: 27.54%
• BNY Mellon Dev Mkts ADR Index: 16.65%
• BNY Mellon Emg Mkts ADR Index: 43.22%
• BNY Mellon Europe ADR Index: 15.59%
• BNY Mellon Lat. Amer. ADR Index: 53.96%

So far this year, the developed markets are lagging the performance of emerging markets.

I'm a big fan of emerging market equities. Naturally, I have studied China because China puts the “C” in BRIC.

What's Not to Like About China?

I noticed the following headline last week:

“Virgin Atlantic boss warns no airlines will make money this year.”

The Geneva, Switzerland-based International Air Transport Association (IATA) announced a revised outlook for the airline industry in 2009. Due to the worsening economic conditions worldwide, IATA increased the global loss outlook from $2.5B in December 2008 to an expected $4.7B loss in FY2009.

Some of the key points from the news release are:

Why wouldn’t you want to own shares in the Industrial and Commercial Bank of China (HKG 1398 SHA 601398), the world’s biggest bank? The world’s largest telecom operator is China Mobile (CHL), in one of the world’s fastest growing market. Who would not want the safety of a telephone company in a dynamic market? The combination of oil and China seems irresistible, especially for an investor in PetroChina (PTR), a company that is only slightly smaller in size than ExxonMobil (XOM). There is no life insurer anywhere larger than China Life. The Chinese economy has been growing at over 10 % for years, as have the profits of these companies. It appears to be a no-brainer.

Tom Lydon of ETF Trends reported yesterday that Claymore is expected to launch the first Airline ETF in early 2009, which will contain 26 passenger airlines with a mix of 70% domestic and 30% global companies. It remains to be seen if the Airline ETF will experience a similar fate as recently launched, narrow-focused transport funds, including the Claymore/Delta Global Shipping Index (SEA) and PowerShares Global Progressive Transport Portfolio (PTRP) – which were launched this past fall and have attracted $9.6M and $1.8M in net assets, respectively, versus nearly $500M in net assets for the iShares Dow Transports (IYT).

Many foreign stocks that trade as ADRs in the US have fallen heavily in-line with their home country’s market performance. In order to identify the ADRs that are down more than 80% year-to-date, I ran the screener and ended up with the 38 stocks listed below.

Foreign ADR Stocks Down > 80%

Airline companies have taken flight recently in spite of the October stock market sell-off, tremendous volatility, and global economic slowdown, as crashing crude oil prices lower the cost of jet fuel for the industry.

July was a volatile month for the U.S. markets. The Dow Jones Industrial Average started the month with some big losses, even closing below 11,000 for the first time in two years on July 15th. But since then, the index has reclaimed some of the losses after a pair of strong rallies, fueled by declining oil price. For the month, the Dow rose a meager 0.25%, the NASDAQ rose 1.42% and the broader S&P 500 index declined just about 1%.

During the month, the Shanghai Composite Index (^SSEC) showed some signs of life, briefly going over the 2,900-point mark early in the month before settling at 2,775.72. That’s a gain of 1.45%. The Hang Seng Index (^HSI) also recovered from the deep drop in June, gaining 2.84% in July.

Despite minimal impact on our business so far, we are concerned about the impact of energy prices on our customers, and we do expect that we could have more deferrals and some cancellations as our customers continue to wrestle with the new energy reality. In light of that, it is important to explain how we manage our commercial delivery schedules for Sky Line. Deferrals and cancellations are a normal part of the airplane manufacturing business. In our production and delivery planning, we assume we'll see a certain amount of both based on historical data and our judgment about each of the customers in our backlog and the potential impact of things like today's energy prices. We use these factors to determine our production rate in a disciplined manner and to balance our sales plan with delivery position availability.

1. Impact of higher fuel prices

Comparing to what happened to Chinese stocks listed on U. S. stock exchanges, the drop in major U. S. equity indexes is minor, though the Dow Jones Industrial Average did lose more than 10% in just one month (10.19%). During the same time period, the NASDAQ dropped 9.12% and the S&P declined 8.57% as jitters in the financial sector continued and there was no sign that the housing market has bottomed. In fact, the loss in June was the severest monthly loss since the Great Depression.

However,  if you are investing heavily in Chinese ADRs (like me), then I am sure you feel even more depressed when looking at your stocks’ performances last month. Of the 82 Chinese ADRs I track regularly, only 6 of them ended the month in the positive territory. All other 76 stocks dropped, and they dropped like a rock: 30 stocks lost more than 20% and 10 more than 30%.

After rebounding sharply in April, major U.S. stock indices ended May mixed. The Dow lost 181.81 points, or 1.42%, the NASDAQ rose 109.86 points, or 4.55%, and the broader S&P 500 added 14.79 points, about 1.07%.

Chinese stocks listed on U.S. exchanges also had a mixed month. Among the 82 stocks that make up the Chinese ADRs, 32 issues declined for the month, while the other 50 advanced.  Biggest winners of May are alternative energy companies such as Solarfun Power (SOLF) which jumped nearly 70% and LDK Solar (LDK) which gained almost 63%. Other gainers include China Architectural Engineering (RCH) and Renesola (SOL). At the other end of the spectrum, XinHua Finance Media (XFML) led the decliners with a drop of 28.67%, followed by ChinaEdu (CEDU) -21.29% and China Mobile (CHL) -14.52%.

As a counter-intuitive investment opportunity given current economic uncertainties and recession fears in the US, I am offering the global passenger airline industry. Despite a less-than-stellar history of losses and bankruptcies, industry analysts and experts are predicting a wave of consolidation in both the domestic and global passenger airline markets aimed at reducing excess capacity, improved pricing power, and increasing market share. The largest player in the domestic market is AMR Corp. (AMR) with less than a 20% market share, leaving plenty of room for M&A activity in an industry which had two major companies emerge from Chapter 11 last year – Delta (DAL) and Northwest (NWA) –allowing for the elimination of many legacy costs and obligations in the process.

The former Chairman and CEO of Continental (CAL) who is now a consultant for Pardus Capital Management, Gordon Bethune, recently appeared on CNBC to discuss the airline industry – stating that consolidation is necessary for US airlines to compete internationally. He also stated that Delta has reportedly received authorization from its Board to enter merger talks with both Northwest and United Airlines (UAUA), with the latter combination most likely to win the approval of labor unions. Finally, he mentioned that foreign carriers such as Air France KLM (Paris: AIRF), Lufthansa (Germany: LHAG), and Singapore Airlines (Singapore: SIAL) may also play a role in domestic airline consolidation.

Dig into JP Morgan's ADR website, and you can find some unexpected trends dominating the most popular ADRs. For all the focus on emerging markets, the most widely held companies by dollar value and number of investors are some of the largest and best known foreign companies in the world. And almost all are located in developed markets. Another surprise: the lists are also dominated by three sectors: telecommunications, natural resources, and pharmaceuticals.

I. Most widely held Depository Receipts By Dollar Value