Stock Market

On Friday the U.S. Federal Reserve cut a half a point off its loan rate to banks, going from 6.25% to 5.75% and the markets responded in a huge way, with the Dow spiking up to more than 300 points after the opening bell.  It closed the day over 200.  The rate cut was something that Wall Street had been clamoring for for days, and Friday they got their wish.  The lowered rate is aimed at helping businesses, banks, and lenders, but won’t have much of an effect on consumer spending.

Bank stocks and other financials certainly met the move with approval, and their share prices showed.  India’s ICICI Bank (IBN)’s shares shot up nearly 13% on the NYSE on Friday.  Argentina’s Banco Frances (BFR)’s shares were up over 10%, after dropping significantly during the week.  U.S. financials also posted impressive gains, with Lehman Bros. (LEH), Goldman Sachs (GS), Mastercard (MA), and Bear Stearns (BSC) all ending in the green.

Although the bleeding has stopped for the time being, and the rate discount was a much needed boost, the crisis still may not be over.  The rate cut dropped the dollar against most of the world’s major currencies, and a weak dollar means trouble for everyone.  With less buying power, U.S. consumers have a harder time buying imported goods, and Asian markets could still be jittery come Monday.

One real problem of this credit crisis is that it is very difficult to tell who is involved in the subprime crisis and how deeply.  Companies such as Countrywide (CFC) still face a very real chance of going bankrupt.  If that happens, the action of this week could just be the start of a longer sell-off, as the banks and other lenders that are tied in with CFC are affected as well.

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The U.S. credit crisis has sent the world’s markets into a drastic downturn. U.S. credit, lending, banks, and mortgage houses have been particularly slammed. Countrywide Financial, a California-based mortgage investment company and the largest in the country, has gone from $29 per share to $19 per share in a week, and has tapped into its emergency credit line of $11.5 billion. Bear Stearns, the investment brokerage house, saw roughly 30% of its value lost. It did make a nice recovery on Thursday jumping up about 10% just before the market closed. Mastercard has lost $40 per share in just over a month.

The Asian markets have been feeling the brunt of the decline even more than their U.S. counterparts. In Thursday’s trading, the U.S. was headed for another 2-300 point drop in the Dow, but a late rally managed to lessen the blow to just a few points. However, when the Asian markets opened a few hours later, the sell-off continued. Japan’s central bank injected $10.5 billion (the third injection this week) into money markets to try to stem the tide, but the Tokyo exchange still was down over 5%. Shanghai, Taiwan, and Jakarta all had major dips.

The crisis does not seem to be working itself out, and it’s anyone’s guess when it will end. Much of the selling is indeed panic selling, so many of these stocks would seem to be undervalued at the moment. The Bear Stearns buyback at the end of Tuesday could be an example. It is certainly an uncertain time, but fearless buyers will be looking to take advantage while the prices are low. Hopefully, cooler heads will prevail soon, and the volatility will even out.

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China’s incredible growth will take another step forward when its largest oil company, PetroChina (PTR) starts selling shares to mainland Chinese investors for the first time. The company will offer 4 billion shares at prices that should allow investors of all sizes to get in. PetroChina shares have been available in New York and Hong Kong for some time, but never in Shanghai. Many experts believe that the shares could double immediately, and if so, this would make the market value of PTR more than Exxon Mobil, which is currently the most valuable company in the world.

PTR’s growth in the last five years has allowed it to overtake BP, Shell, and Gazprom to quickly become the second largest oil company in the world. PTR also has plans to increase its spending this year from about $18 billion to $24 billion. The discovery of the Jidong Nanpu oilfield, the largest oil discovery in China in 50 years, may be one reason for the desire to raise capital, but according to an article in Reuters, the move is more about backing the Shanghai market and meeting the Chinese demand for shares.

It just seems a matter of time until the world’s largest country is home to the world’s largest company.

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Keeping with the topic of China and India, and having looked at some general reasons why the future looks good for these two rising superpowers, now let’s look at how to take advantage of their growth. Buying individual stocks is one way–companies like China Mobil Limited (CHL), the largest cellular provider in China, PetroChina (PTR)–the Chinese oil company, and Baidu.com (BIDU) the Chinese internet search engine are multi-billion dollar companies that have seen large returns in the past few years, and are three of the touchstone stocks in the Chinese market.

Of course, buying individual stocks can be risky and costly, especially for smart investors looking to diversify across many industries. The newest set of products that allow investors to comfortaby get into China, India, and all the other emerging markets (as well as almost any other industry) are Exchange Traded Funds, or ETFs. These products function in much the same was as mutual funds, arranging a basket of stocks in one package. What makes them better than mutual funds, is the fact that there are almost no fees. ETFs are not actively managed by a fund manager, rather they simply track the index that they are set to follow. Without active management, and with such incidental fees, ETFs can be traded like any stock throughout the trading day.

ishares FTSE/Xinhua China 25 Index, or FXI, is one such ETF that follows 25 of China’s top stocks. Buy buying FXI, an investor is diversified across the board in China, and basically owns several Chinese bank stocks, energy, telecommunications, and industrial materials companies. Another Chinese ETF is PowerShares Golden Dragon, PGJ. PGJ is a bit more diversified, with holdings in more areas than FXI, including media, software, healthcare, and hardware. While owning pure shares in individual companies can lead to bigger returns, these shares can also lead to bigger losses. These ETFs are giving incredible returns, but are more insulated against the bigger losses than individual stocks, due to their diversification.

Here is a two year chart showing FXI and PGJ against the S&P.

China and India are undergoing a full-on industrial revolution, and will be for some time. China is host to the 2008 Olympics, and businesses are falling over themselves to do business there. For people looking to get a foot in the door of China, these two ETFs are a good place to start.

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The talk of emerging markets has been on everyone’s lips for the last few years, and the talk should keep becoming louder and louder in the future–especially where China and India are concerned. These two countries undoubtedly represent the future for emerging markets, and their respective stock markets have, over the past couple years, shown the growth that has been underway. When we talk about these two countries, we are talking about two countries that represent roughly 40% of the world’s population. Think of it this way: the population of either of these countries is roughly the same as all the Americas and Europe combined. It’s no wonder that Wall Street and investors are so bullish on these two. Based on population alone, it seems like a no-brainer. When 40% of the world comes online everyone wants in. Mix in a wealth of natural resources, strong national identities, and a workforce that is growing in professionalism, size, modernity, and resources and you really see why so many people are jumping on the bandwagon.

If recent history is any indication, huge gains could continue to be seen. Let’s look at the past two years of the indices of China and India–the Shanghai Composite (SSE), and the SENSEX in Bombay. In September of 2005, the SSE was at 1200; today it stands at 4627 points, just under 4X in two years. The SENSEX, in September 2005, was just under 8000. Just a couple of weeks ago, the index was just a few points away from hitting 16,000. The recent pull back has left it at 14,900, but the point is that the Indian index has almost doubled in the same time. Unbelievable returns! Oh and the DOW and S&P? They too have had good returns over the same period, around 25% or so. Here is a graph showing the comparison.
Sure the U.S. indices are doing well–most people would settle year-in, year-out for 13% on their money–it now appears that while the U.S. is old reliable, China and India are the young blood, and the movers and shakers. They are certainly where the action is!

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