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If you drive on U.S. roads, you probably don’t need to be told – the country’s infrastructure is in pretty bad shape.

As a nation, Americans like to look forward. We prefer to spend our money building new things (rather than fixing up old things). Issues like repair and maintenance are back-burnered for other priorities in state and federal budgets. Over time, the cost of neglect rises.

In 2007 we were hit with a long overdue wake-up call: a Minneapolis bridge collapsed. Thirteen drivers were killed.

A Serious Problem

I don’t know about you, but I routinely drive over bridges and interpasses without worry (just as 200 million other U.S. drivers do). The bridge collapse was seen as a freak occurrence, a one-off… but imagine if that changed. The climate of fear could cripple our roadways, and that would be disastrous.

Dale Reiss, vice chairman of the Urban Land Institute in Washington, believes that “at some point, the system could grind to a halt” if we don’t do something about the crumbling state of our highways, roads and bridges.

In Atlanta, Ga., for example – the city where your humble editor went to high school – rush-hour trips are projected to take 75% longer by the year 2030. (If you’ve ever braved Atlanta traffic, you know that’s no joke.)

The estimated repair bill is staggering. A report titled “Infrastructure 2007: A Global Perspective” argues that the U.S. faces a $1.6 trillion deficit for repair and maintenance through the year 2010.

It may not seem like it these days, but $1.6 trillion is still a serious chunk of change. (Unless your name is Hank Paulson or Ben Bernanke, that is.)

Keep in mind, too, that the $1.6 trillion repair bill estimate is only through 2010. When you look at the long-term estimates for needed infrastructure and repair costs – stretching out into decades – you get a repair bill in the tens of trillions.

Keynes to the Rescue!

So, given the above news, the logical John Q. Taxpayer reaction would be something like, “Holy smokes, that’s a lot of dough to spend on repairs.

But in Washington, D.C. – where everybody and their brother is a John Maynard Keynes fan – the reaction is “Hooray! Something huge to throw money at!”

Deflation fears are all the rage now as you know… the Fed just cut rates to zero… Chrysler is hurting so bad it’s shutting down operations for a month… and President-elect Obama is getting ready to swoop in with the mother of all stimulus plans. Money needs to be spent… and by gum, we’re gonna spend it on infrastructure.

The total amount of “Obama stimulus” seems to yo-yo up and down, like a mood ring attuned to the general anxieties of U.S. taxpayers. The initial amount being bandied about was $600 billion. In recent days the whispers have expanded it to a cool trillion – the big T word – or maybe even more.

On Dec. 6, President-elect Obama put some flesh on the bones of his stimulus plan, pledging “the largest new investment in roads and bridges since President Dwight D. Eisenhower built the interstate system in the 1950s” (according to the Wall Street Journal).

President-elect Obama also promised, in his own words, to “launch the most sweeping effort to modernize and upgrade school buildings that this country has ever seen.”

(Side note: why do most public schools look like prisons? Have you ever noticed that? I don’t get it.)

“Use It or Lose It”

When Obama unveiled his five-point plan earlier this month – encompassing energy, roads and bridges, schools, broadband and electronic medical records – the thing that really made my ears perk up was the “use it or lose it” provision.

Here is the President-elect, again in his own words:

We’ll invest your precious tax dollars in new and smarter ways, and we’ll set a simple rule – use it or lose it. If a state doesn’t act quickly to invest in roads and bridges in their communities, they’ll lose the money.

Have you ever seen the movie Brewster’s Millions? It’s a classic 80s comedy in which Richard Pryor, a minor league baseball player, has to blow 30 million dollars in thirty days – without telling anyone why – in order to inherit $300 million more from an eccentric relative.

The use-it-or-lose-it provision made me think of Brewster’s Millions… perhaps updated here as Obama’s Trillions. In order to meet the stimulus-driven desires of Washington, the states are going to have to shovel this road-and-bridge cash out the door, pronto.

You can almost hear the CEOs of the big construction companies doing a Homer Simpson: Woo-Hoo!

How to Play It?

So we know that the state of America’s infrastructure is a real and serious problem – one that will take years, if not decades, to fully put right.

We also know that Washington is bound and determined to drop a money bomb on that problem, in order to stimulate our sagging economy and create millions of new jobs.

So the obvious question is, how to play it?

Here’s a quick look at some of the major players that could benefit (all traded on the New York Stock Exchange).

Name Symbol (all NYSE) P/E Ratio Market Cap
Fluor Corporation FLR 11.52 8.98B
Jacobs Engineering Corp. JEC 14.35 5.98B
Caterpillar Inc. CAT 7.16 26.16B
The Shaw Group Inc. SGR 12.47 1.74B
Chicago Bridge & Iron CBI n/a 1.13B
URS Corporation URS 16.03 3.34B
McDermott International MDR 4.20 2.27B
Perini Corporation PCR 6.10 1.16B

If you pull up charts for the above names, you’ll see that every single one is in some form of uptrend – as is wholly to be expected, given the Obama news and the longer-term prospects for fattened construction company coffers.

Which of them to buy, though? Another option is just to go with an ETF, like the PowerShares Dynamic Building & Construction ETF (PKB:NYSE).

PKB (PS Dyn Bldg&Constr.) NYSE

As you can see, PKB is headed in the right direction. The ETF saw a surge in volume on the “Obama breakout” when the stimulus plans were announced, and the price action is strong.

But PKB has a few problems that make it a less than ideal choice.

For one, PKB’s average volume isn’t so hot at less than 100K shares per day. The volume is doable from a trading standpoint, but getting down to where lack of liquidity starts to be a concern.

Even more of a concern, from our perspective, is the fact that PKB’s top 10 holdings include Home Depot (HD:NYSE) and Lowe’s (LOW:NYSE). We’re not interested in DIY (do-it-yourself) retail or anything aimed at the consumer here, so that’s a real drawback.

Here’s where I turned to the man with the micro plan, Zach Scheidt (a.k.a Cash McDash), to get his take on how to play the Obama infrastructure boom.

Smaller Is Better

The first thing Zach pointed out to me is that, in terms of getting the most bang for one’s trading and investing buck, smaller is better as a rule of thumb.

Here’s what he means…

The major go-to names (the ones in the list noted above) should do well as a result of Obama’s big plans. In fact, they could very well offer double-digit returns in the coming years – nothing to sneeze at.

But, in Zach’s view, most of those multi-billion-dollar market cap names are too big to see the needle really move as a result of this road-and-bridge cash flood… the way it could with some of the smaller, less well-known infrastructure names.

“Think of an 18-wheeler semi-tractor trailer versus a sports car,” Zach told me.

“You can certainly cover ground in a big rig… but you just can’t get up to speed all that fast. So just as a fully loaded 18-wheeler can’t accelerate all that quickly (even on a brand new Obama highway), the big, well-known infrastructure names aren’t set to deliver the velocity of returns that some of the smaller names can.”

“Think of a Porsche,” Zach continued, “or maybe a Corvette, out of respect for the ailing Big Three. An infrastructure play with a market cap of just a few hundred million – as opposed to billions – is like the Corvette. The Obama plan’s impact on revenues will be that much greater for these smaller players… and in terms of shareholder return, the Corvette should leave the 18-wheeler in the dust.”

I asked Zach if he had any names in mind. He responded as if I had just insulted his honor. Of course he had some names on his roster – what self-respecting trader wouldn’t want a piece of this trend?

“In particular, I’m looking at one company that has a market cap of less than $300 million,” Zach said. “I haven’t pulled the trigger on it for Taipan subscribers yet, but my preliminary research suggests it could be a double or a triple within the next 12 to 18 months.”

Lawyers and Bulldozers

I then asked Zach what readers should look for as they scout for these infrastructure “Corvettes” themselves.

His response: “One thing that’s really important is to look at the lines of business. In particular, I like names that have the ability to make money on the construction side and the consulting side.”

“You can think of the two lines – construction and consulting – as the ‘bulldozer team’ and the ‘lawyer team.’ Before a structure can be upgraded or a new bridge can be built, a number of assessments have to be made. Sometimes there’s a lot of red tape – especially when NIMBY interests (the ‘Not In My Back Yard’ people) get involved.”

“So the smaller infrastructure names with dual lines of business – like the one I’m zeroing in on for Taipan subscribers – can make money on both sides of the coin. During the assessment period, while the project is being held up by red tape, they send in the lawyers and the guys with the clipboards. This allows them to make fat profit margins on their consulting fees.”

“Then, when the project actually gets underway, the ‘lawyer team’ packs up and the ‘bulldozer team’ rolls in… allowing the company to make another big chunk of profits on the construction side. Nobody likes red tape, but it’s a beautiful racket – a way to make money coming and going.”

So there you have it… happy hunting.

 

Best Wishes;

 

Bridges to Hope Foundation Newsletter and Blog

www.BTHF.org

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Because of its rapid economic growth over the last 30 years, it’s easy to forget that China is a communist country. The Chinese, like everybody else, love money. But the Communist party is clearly in control.

One of the areas controlled with an iron communist fist is China’s media. The main TV station, China Central Television or CCTV, is owned, operated, and controlled by the government.

And unlike the U.S., Chinese government officials can’t spout off their own opinion. Instead, they must speak the ‘company line’ of the ruling Communist Party and carefully choose their words.

Chinese officials must speak the voice of the Communist Party. And last week, they had a lot to say.
Chinese officials must speak the voice of the Communist Party. And last week, they had a lot to say.

Frankly, I don’t pay too much attention to any government official, Asian or not, when they boast about how wonderful everything is. I do, however, pay very careful attention when they start talking about trouble.

You see, glowing words be can true or a complete lie. But whenever the talk turns negative, you can take those warnings to the bank. And the ‘talk’ coming out of China has turned very, very negative.

Just last week, five very knowledgeable insiders had some not-so-pretty things to say about the Chinese economy.

Negative Talk #1: Li Yizhong, head of the Ministry of Information and Technology, said this:

“The international financial crisis is having a severe domestic impact.

“We don’t think we’ve bottomed yet.

“Just about every industry has overcapacity.”

Negative Talk #2: China’s economic and social goals are based upon a series of Five Year Plans. The head of that planning body, Zhang Ping, described the economic outlook from his office’s perspective:

“The global crisis has not bottomed out yet. The impact is spreading globally and deepening in China.

“Some domestic economic indicators point to an accelerated slowdown this month.

“Excessive bankruptcies and production cuts will bring massive unemployment, stirring social unrest. Owing to dramatic changes in the international economic and financial environment, the Chinese economy faces growing downside pressure.”

Negative Talk #3: The Minister of Human Resources and Social Security, Yin Weimin, echoed the same warning:

“The current situation is grim, and the impact is still unfolding.”

China's premier, Wen Jiabao, did not offer an optimistic outlook.
China’s premier, Wen Jiabao, did not offer an optimistic outlook.

Negative Talk #4: The biggest cheese of all, Chinese Premier Wen Jiabao, said a mouthful last week, too:

“We must be crystal clear that without a certain pace of economic growth, there will be difficulties with employment, fiscal revenues and social development.

“In this coming period, we will starkly confront the effects of the sustained deepening of the international financial crisis and pressure as global economic growth clearly slows.”

Negative Talk #5: This last comment wasn’t from a Chinese official. It was, however, from someone who should be on top of things since his country is one of the key suppliers of natural resources to China. I’m talking about Glenn Stevens, head of the Australian central bank, who said:

“The most striking real economic fact of the past several months is not continued U.S. economic weakness, but that China’s economy has slowed much more quickly than anyone had forecast.

“There is every chance that the rate of growth of China’s (gross domestic product) is currently noticeably below the 8 per cent pace that is embodied in various forecasts for 2009.”

Those five insiders have good reason to talk cautiously because the Chinese economy, while still growing at a healthy pace, is getting pulled down by our economy.

Consider these three pieces of economic news from last week …

  1. Chinese exports fell by 2.2% in November, the first time in seven years …

  2. Imports fell by eight times as much, dropping 17.9% in November, and …

  3. Manufacturing output shrunk by a record amount

All those negative comments and sluggish numbers do mean that investors need to be very careful.

But …

Don’t think for a second that there isn’t opportunity in Asia and in China in particular.

China's infrastructure construction business is booming.
China’s infrastructure construction business is booming.

For example, one part of the Chinese economy that’s still rocking is the infrastructure construction business. China’s $586 billion stimulus plan includes a couple hundred BILLION earmarked for roads, ports, railroads, airports, utilities, and other public works.

And here are three companies that I expect will capture a big, big chunk of that multi-billion construction boom:

Construction boom opportunity #1 —
China Communications Construction
(1800.HK) is one of the largest port, highway, bridge, and dam construction companies in China. Plus, the Chinese government is the largest shareholder. Think that gives them a leg up on the lucrative government contracts? I sure do.

Construction boom opportunity #2 —
Anhui Conch Cement
(AHCHF.PK) is the largest cement producer in China and will certainly provide thousands upon thousands of tons of cement for the infrastructure program. It is available on the over-the-counter bulletin board (also known as Pink Sheets) market.

Construction boom opportunity #3 —
China Railway Construction
(CWYCF.PK) is the largest construction company in China and specializes in railroads. China has unbelievably ambitious plans to expand its national railroad network. And CRC should get most of the building contracts.

I am not suggesting that you rush out and buy any of these stocks today.

But being cautious doesn’t mean you have to sit on your hands. In fact, buying on dips and selling on rallies is the very best strategy to follow during these turbulent times.

Best wishes,

 

Bridges to Hope Foundation Newsletter and Blog

www.BTHF.org

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The deflation we’ve been warning you about is here, and it’s striking hard.

Last week, the Fed released a report that sent chills down the spine of economists all over the world, revealing a sweeping destruction of wealth in America.

Just in the third quarter alone, U.S. households lost $647 billion in real estate; $922 billion in stocks; $523 billion in mutual funds; $653 billion in life insurance and pension fund reserves; plus $128 billion in private business interests.

Total destruction of household wealth in the third quarter: $2.8 trillion, the worst in recorded history. That’s four times more than the government’s entire $700 billion bailout package (TARP).

Total destruction of household wealth in the last year: $7.2 trillion or over TEN times more than the $700 billion TARP package.

Meanwhile, the Treasury reports that only $330 billion of the TARP funds have been committed so far. Worse, most of the funds that have reached the banks are sitting idle in their coffers. If as much as $30 billion has trickled down to households, I’d consider it a minor miracle.

See the contrast? The destruction of wealth is large and swift; the government rescues, relatively small and slow.

Yes, the White House may decide to shift some of the TARP money to cover General Motors and Chrysler’s cash needs for the next few weeks; they don’t want the auto giants going down on their watch.

But even if they can somehow save GM and Chrysler for now, they cannot save the countless smaller and medium-sized companies that are going bankrupt. They cannot save the thousands of municipalities and states that are running out of money. They certainly cannot make whole the millions of households that have gotten smacked with the $7.2 trillion in losses.

More evidence of deflation:

  1. U.S. consumer prices falling at an annual rate of 12%!

  2. U.S. producer prices falling at an annual rate of 26.4%!

  3. Commodity prices slammed by as much as 70% from their peak!

My friend, these are not numbers that denote less inflation. They are hard evidence of deflation!

Your Next Steps

The critical question of our time: Will this deflation be less severe, equally severe or more severe than the 1929-1932 deflation?

If I were you, and you’ve got your portfolio or your 401k in stocks or stock mutual funds, I wouldn’t stick around for the answer.

Yet that’s what most Wall Street experts are telling you to do. Two full years after the first obvious signs of a housing industry collapse, most people who give advice about investing are still in denial.

Wall Street cheerleaders refuse to admit that an obviously massive deflation can lead to an equally massive collapse in the nation’s economy.

They’ve repeatedly sworn on a stack of Bibles that the deflation in housing would “soon end,” the crisis would be “contained” and everything would be “just fine.” They’ve tried to persuade nearly every investor to stay the course, keep their money in the stock market, or even buy more.

But as 2008 comes to a close, no one can possibly deny that the U.S. economy is in deep trouble. Anyone can see the evidence — the sharpest declines in the economy since the 1970s, the worst debt crisis in a lifetime, the largest financial failures and bailouts in history.

Everyone can also agree on the likely causes — the economic blunders of Washington, the financial greed of Wall Street, the big debts and bets by almost everyone. And no one could dispute the probable consequences — surging unemployment and potentially years of hardship for millions of Americans.

Yet despite this widespread agreement, nearly every authority still tries to persuade you to keep your money in the stock market.

Financial experts on NBC Nightly News tell millions of viewers that, as long as they’ve got plenty of years to live and recoup losses, they should continue investing most of their 401k or IRA in stocks.

Suze Orman on Oprah advises millions more to continue socking away their retirement money in stocks regardless of any market decline.

In Time Magazine, the New York Times, the Wall Street Journal and virtually every newspaper in the country, similar advice is liberally dispensed.

Their unwavering message: Don’t sell. Stick with it. Buy more.

It’s not a symptom of conspiracy and, in most cases, it’s not a sign of intellectual dishonesty. The majority of pundits sincerely believe in what they are advising you, and many follow the same strategy with their own money. But that does not make it good advice.

Consider the tale of the average investor’s woes in America’s First Great Depression, and you’ll understand what I mean:

“I was a young broker in 1930, and the advice my senior colleagues gave out used to make me cry inside. ‘Just hang on to your stocks for the long term and ride out the storm,’ they said.

“The results were devastating for their clients.

“If you bought the average stock in 1929 and held on until 1932, you wound up with about 10 cents on the dollar. And that’s if you bought the good stocks — the ones that survived. If you bought the bad stocks — in bankrupt companies — you’d be left with nothing, a big fat zero.

“Then, even if all of your companies survived, it wasn’t until 1954 — 25 years later — that you could finally recoup your original investment, provided you could stick it out that long.

“Unfortunately, most people couldn’t. They lost their jobs. They risked losing their house. So they were forced to cash in their stocks with huge losses. For them, the idea of ‘holding on for the long term’ was a joke, an insult, or both. They didn’t have that choice. Later, when the market eventually recovered, they never got the chance to recoup their losses.”

Even if you don’t believe that the late 2000s was comparable to the early 1930s, there is ample reason to exit the stock market. Just consider these facts and connect the dots:

Fact #1. Between 1965 and 1980, America suffered through a long dead zone punctuated by periodic debt troubles, credit crunches, financial failures, housing market declines, recessions and bear markets. For a decade and a half, most investors lost money in the stock market.

Fact #2. The financial crisis that has struck America in 2008 is evidently far worse than anything we experienced during that 1965-1980 dead zone. The debt problems are far bigger. The bankruptcies make earlier episodes look small by comparison. And the nationwide bust in housing is much deeper than anything experienced in history. So it’s reasonable to assume that the experience of investors could be at least as bad as, and possibly worse than, that experienced in the 1960s and 1970s.

Fact #3. A decline in the second largest economy of the modern world, Japan, began in 1990; has lasted for 18 long years; has taken the Nikkei Average down 82%; and, as of this writing, is still not over. Now consider this: The crisis that struck Japan in the early 1990s was ALSO less severe than the global crisis striking us right now.

What About This Time?

No one knows how far stocks will fall, how long they will stay down, or how soon they will recover.

No one knows how many banks, insurance companies, brokerage firms, or manufacturing corporations will go bankrupt.

No one can say if the government bailouts will make things better, just keep things from getting worse, or cause even more serious troubles.

All we do know with relative certainty is this: As long we have a financial crisis, recession or depression, the risk of loss is greater than the opportunity for profit — especially in the stock market!

If you’re a gambler, if you don’t mind betting against the odds, and if you have plenty of extra cash to play with, that may be a risk-reward you can overcome with trading acumen and good luck. But if you want to build a nest egg for your retirement or your kids’ education, if you want to sleep nights during topsy-turvy stock market gyrations, if your net worth has been diminished by real estate losses, if you’re worried about losing some or all of your income in a recession or depression, then staying invested in the stock market during a financial crisis is absolutely, positively nuts!

We are obviously living in risky times. So why would you want to double the whammy by putting your money in obviously risky investments? Yes, I know. Your broker, your financial planner — even some of your best friends — are cajoling you to stay in the market.

My view: If they fooled you once, shame on them. If they fool you again, shame on you!

Certainly, you are well aware of the catastrophic events that have already happened. You must realize that these events are likely to lead to further economic declines. And if the economy falls, it should be clear that nearly all of us, yourself included, will be affected in some way.

You also must know by now that the same old assurances from Washington and Wall Street — that “all is fine,” that they will soon “lick the problem,” that the latest, biggest bailout is “finally working” — have been proven wrong over and over again. You must be able to conclude, without my help or anyone else’s, that if ever there was a time when stock market investing is too risky, this is it.

If your goal is to save money for the future purchase of a home, retire in dignity, give you children and grandchildren educational opportunities or have enough money to cover your long-term care, and you still own stocks or stock market mutual funds, then get your money out of danger before it’s too late! Start selling!

Naturally, precisely when and how much you should sell will depend on actual market conditions. But as a rule of thumb …

  • If the stock market is rallying and up significantly, sell everything. Just call your broker and say: “Sell all my stocks at the market.”

  • If the stock market is falling and already down sharply, tell your broker to sell half as soon as possible. Then sell the balance on any rally.

  • If the market is in a panicked frenzy, overrun by an uncontrollable crowd of sellers and virtually devoid of all buyers, wait. Don’t sell immediately. As soon as the panic subsides, then sell half. And as soon as there’s a decent rally, then sell the balance.

  • If you own stocks you are unable or unwilling to sell, as an alternative, consider buying hedges, such as inverse ETFs, that can help offset your losses. And …

  • If you work with a money manager, ask him about investment programs designed specifically for bear markets, along with their performance track record during both up and down markets. If it’s solid, you can use a bear market program as a vehicle for either protection or profit.

No matter what approach you use, this is no time for complacency. Act boldly but prudently. Then get your money to safety.

Good luck and God bless!

 

Bridges to Hope Foundation Newsletter and Blog

www.BTHF.org

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The deadly terrorist attacks in Mumbai, India dominated the global headlines last week. What didn’t get a lot of attention, though, was the reason behind the attacks.

The terrorists attacked the commercial heart of India — Mumbai’s financial district. And I believe their purpose was to destabilize India’s democracy and capitalist economy.

Yet …

India’s Economy was Struggling
Before Those Attacks!

The Indian economy expanded by 7.6% in the third quarter. And while that may sound impressive, it’s the slowest pace in four years and well below the 9% growth it had averaged for the last three years.

The terrorists attacked Mumbai's financial district, the commercial heart of India.
The terrorists attacked Mumbai’s financial district, the commercial heart of India.

India’s exports contributed to that decline: down in October for the first time in seven years.

The International Monetary Fund (IMF) expects the Indian economy to continually slow down. And it recently reduced its growth forecast to 8% for 2008 and 6% next year.

In response, the Reserve Bank of India has been aggressively cutting interest rates in hopes of keeping its economy on track. In fact, it has cut interest rates three times since October for a total reduction of one full percentage point.

And much like our politicians, India’s government is embarking on a stimulus-seeking spending spree. The dollar amount — $4 billion — is a far cry from the $7 TRILLION we’re throwing into the U.S. economy. But it nonetheless shows that India shares our same slowdown worries.

Indian IT Companies Are Going
Through a Downturn of Their Own

Mumbai may be India’s financial center, but the lucrative high technology center is in Bangalore.

Bangalore, the Silicon Valley of India, has become the world's back office.
Bangalore, the Silicon Valley of India, has become the world’s back office.

Bangalore has become the Silicon Valley of India. It is the back office of the world, handling customer service calls, process payments, and writing the code that runs much of corporate America’s software. And its high-technology companies and outsourcing firms are going through a downturn of their own.

The global slowdown is forcing them to reduce hiring, freeze salaries, postpone new investments and lay off thousands of software programmers and call center operators.

Three examples of Indian companies in trouble …

  • Infosys: India’s second-largest software services exporter gets two-thirds of its business from the United States. One-half of that is from financial companies, like Citigroup and Bank of America.

  • This could explain why Infosys recently scaled back its earnings projections for the year, telling investors that it expects revenue to expand 13% to 15% instead of the 19% to 21% it had previously forecast. That’s way below the 30% growth of recent years.

  • Satyam Computer: India’s fourth largest exporter, cut its 2009 recruitment plans from 15,000 to 10,000 and has suspended travel for all but the most critical needs.

  • Wipro: Fifty percent of this giant Indian technology outsourcer’s customers are from the U.S. And many are postponing or downsizing contracts. Consequently, Wipro recently laid off 2.5% of its work force.

The Trends for Arranged Marriages
Are Extremely Telling …

You may be surprised that most marriages in India are still arranged by parents. And parents of daughters are very interested in making sure their future son-in-laws have good jobs and can support their families.

So young men working in the technology sector have been among the most desirable marriage partners.

But that is drastically changing …

Jagadeesh Angadi, a matchmaker in Bangalore, said, “‘Because there are no job guarantees for IT people, for the last six months brides’ families have not been accepting grooms from this background.”‘

What Does This Mean For Investors?

First of all, I’d steer very clear of Indian stocks for right now.

I love the Indian people and admire the heck out of their intelligence and work ethic. But the combination of their slowing economy and horribly deficient infrastructure — highways, power plants, airports, water plants, shipping ports — makes it very unlikely that the Indian economy will rebound right away.

Don’t forget, however, that stock markets usually bottom 6-12 months before the underlying economies do. And the bottom of the bear market for Indian stocks may be closer than you think.

Here’s a short list of Indian stocks to watch. They’re all listed on the Nasdaq or New York Stock Exchange so you can buy their shares just as easily as you can Microsoft or Wal-Mart.

 
Dr. Reddy’s Laboratories (RDY) Satyam Computer Services (SAY)
HDFC Bank (HDB) Sify Technologies (SIFY)
ICICI Bank (IBN) Tata Communications (TCL)
Infosys (INFY) Tate Motors (TTM)
Mahanagar Telephone (MTE) Wipro (WIT)
Patni Computer Systems (PIT) WNS Holdings (WNS)
Rediff.com (REDF)  

Second, make the most of market rallies to raise cash. Put that money into short-term Treasuries or Treasury-only money market funds.

After all, a bargain isn’t a bargain unless you have money to take advantage of it. And when the time is right, you’ll be able to buy India’s best companies for dimes on the dollar.

Best wishes,

Bridges to Hope Foundation Newsletter and Blog

www.BTHF.org

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If you’ve had your eyes open the last two years, you know that real estate is in a brutal bear market.

Just in October, new home sales dropped 5.3%.

Existing home sales fell 3.1%, according to the National Association of Realtors.

And the latest S&P/Case-Shiller report shows home prices dropped 17.4%. That’s bad enough but in some areas it was much, much worse — housing prices dropped 31.9% in Phoenix, 31.3% in Las Vegas, and 29.5% in San Francisco. Ouch!

The carnage is spreading to commercial real estate, too. The tenants at glitzy retail and office buildings around the country are heading for the exits — leaving landlords holding the bag.

Worse, thousands of new projects are still under construction. With little hope of attracting occupants, they’re doomed to sit vacant for years.

It’s happened before — here in Austin back in the late 1980s, I called them “see-through buildings” because you could see right through the unfinished interiors and out the other side.

During real estate busts, 'see-through buildings' are a  common sight.
During real estate busts, “see-through buildings” are a common sight.

The funny part is that those very same buildings filled up quickly when the technology boom hit our city full-force just a few years later.

What does this tell us? Simple:
Real estate is a cyclical market!

Property values go up, then they go down. It’s like watching the ocean tide wash in and out at your favorite beach — though the real estate tide moves a lot slower.

People who observe this tide carefully, and buy and sell real estate at the right time, can make big profits. Some of the wealthiest people in the world made their fortunes in real estate.

But until recently, it was hard for the average investor to get involved in real estate. Sure, you could buy a house or two and rent them out, but that still left you dangerously undiversified.

Worse yet, and as many real estate investors are finding out first hand, buying and selling individual properties isn’t always easy. The market is far from liquid!

But with the advent of real-estate focused exchange-traded funds (ETFs), you are now able to play real estate with far greater diversification and far better liquidity.

In fact …

For most investors, ETFs are by far the best way to buy and sell real estate!

ETFs are nothing more than mutual funds that trade on an exchange, just like shares of stock.

Inside real estate ETFs, you’ll find shares of Real Estate Investment Trusts (REITs) — properties that are packaged together and sold to institutional investors.

Here’s a critical point: Each REIT is already diversified, and with an ETF you get a whole bundle of REITs. In other words, you’ll own a tiny slice of thousands of different properties!

That makes you far more diversified than you could ever get on your own.

You can also get real estate ETFs that specialize in particular areas: commercial, residential, industrial, retail/office, Europe, Asia, China, Japan, global, and more.

Five Well-Known Real Estate ETFs
Name
Ticker
iShares Dow Jones U.S. Real Estate
IYR
iShares Cohen & Steers Realty Majors
ICF
SPDR DJ Wilshire REIT
RWR
Vanguard REIT Index
VNQ
SPDR DJ Wilshire International
RWX

Real Estate ETFs give you more than just diversification and liquidity, too. Here are four more advantages:

Advantage #1: Transparency Unlike conventional mutual funds, ETFs have to disclose all their holdings every business day.So if you see something suspicious — like those risky derivatives that have been blowing up left and right lately — you can avoid that ETF.

Advantage #2: Clear pricing — You’ll know every day how your ETF is doing: just look up the ticker symbol wherever you get your stock quotes. If it starts heading downhill, you can get out without even hanging up a “For Sale” sign.

Advantage #3: Simplicity You won’t have a lot of tax headaches like you get from owning property directly. Everything you need to know will be reported to you at year-end by your brokerage firm.

Advantage #4: Low costs Trading commissions are miniscule compared to the 6% commissions and closing costs of regular real estate.

“Wait a second, ” you may be saying. “This is all great, but you just said yourself that real estate is in a bear market. Why should I buy real estate ETFs now?”

My answer: You probably shouldn’t. Most real estate ETFs have plunged this year, and I don’t think they’ve finished falling yet.

But that brings me to one final point …

There Are Even Real Estate ETFs that Help
You Profit from the Downside!

If you’re bearish on real estate, there’s a nifty inverse ETF you should know about. It’s called ProShares UltraShort Real Estate and the ticker symbol is SRS.

The SRS is designed to move in the opposite direction of the Dow Jones U.S. Real Estate Index. So when the index goes down, SRS goes up … TWICE AS MUCH.

That leverage makes SRS extremely volatile. Just in the last few weeks, the shares have traded as high as $295 and as low as $108.

In other words, timing is critical. If you buy SRS, watch it like a hawk, and don’t get greedy. Grab your profits before they slip away.

But the bottom line is that with good timing and the right ETFs, you can make money in real estate in both directions. The tools are there — it’s up to you to use them.

Best wishes,

Bridges to Hope Foundation Newsletter and Blog

www.BTHF.org

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I was doing some research earlier in the week, and I came across a blog I’d never heard of written by a guy I’d never heard of on a topic that we’ve all most certainly heard of … the U.S. dollar.

It was the same old story that’s been beaten into the ground:

The U.S. dollar is doomed … the U.S. economy can’t sustain its current account deficit … a U.S. economy on the brink of recession is terrible for the buck … blah, blah, blah.

Over the last several months, I’ve explained why the U.S. dollar is NOT DOOMED despite what have been, and will continue to be, some rotten tasting fundamentals in the United States.

However, here’s a different, more academic approach that builds an even stronger case for the U.S. dollar.

The first thing you need to know is this …

Markets Often Become Feedback Loops

Markets are driven by human nature and are not rational. If they were, there would be no uncertainty, no guesswork, and no market.

Because markets are driven by human perceptions and feelings, markets are completely irrational at times — sometimes longer than you may think. As John Maynard Keynes quipped, “Markets can stay irrational longer than you can stay solvent.”

Most people think trends are driven by events, the changing fundamentals. But they’re not. It’s the perception of these events by market participants that counts.

And depending on the time frame and market environment, investors will perceive things any number of ways. This quote sums it up …

“But what actually registers in the stock market’s fluctuations, are not the events themselves, but the human reactions to these events. In short, how millions of individual men and women feel these happenings may affect their future.” — Bernard Baruch

With that in mind, here’s an important point that most investors have never considered:

While the fundamentals appear to drive prices, often times it’s the prices that drive the fundamentals.

Think feedback loop here.
Let me walk you through the process …

Step #1. The price of an asset falls. The reason may be triggered by the market realizing that key economic fundamentals are deteriorating, e.g. a decline in GDP or a larger-than-expected unemployment report.

Step #2. As prices fall, collateral values fall. Banks and others who lent based upon the value of collateral then must call in loans or require more collateral. This reduces available credit.

Step #3. This decline of credit adds to the deteriorating fundamentals.

Step #4. Declining fundamentals lead to more price declines.

What we’re left with is a self-reinforcing process where lower prices lead to falling collateral values, further weakening the fundamentals.

This feedback loop has played out right in front of our eyes in the current crisis …

The swift decline in prices, in the credit market primarily, has drained global liquidity.

The credit market problems forced institutions to sell other “good” assets in order to generate cash.

These other “good” assets were stocks.

This in turn has triggered more selling, and so on and so forth.

And this is why, when it comes to the currency market …

The Gates to Dollar Heaven
Are Guarded by Dollar Skeptics

Maybe you’ve heard of Ralph Nelson Elliott and his Elliott Wave Theory. Basically, this theory is a way of examining how markets move up and down in basic wave-like motions.

According to Elliott, there are five major waves of any up or down move. On a basic chart, it looks like this …

Five-Wave Uptrend

Let me show you how this theory relates to the U.S. dollar right now.

Right now, the first wave of that five-wave uptrend pattern is where I think we are with the U.S. dollar …

Wave #1 of an uptrend follows the end of a five-wave downtrend. Naturally, there are plenty of skeptics of such a reversal move.

These skeptics are still stuck on the same old story, refusing to accept the potential for a major trend change.

The evidence is there — the U.S. dollar can rally. It’s done so over the last several months. Take a look …

The skeptics hold on to the same old argument about why the U.S. dollar is destined to become a banana republic currency, but you may want to reconsider the premises.

U.S. Dollar Index Weekly

The argument of the skeptics goes something like this: The rally in the “doomed dollar” is only because of the fear in the market. Once this fear period passes, the dollar will tumble once again.

Here is my counter to that argument:

The U.S. economy is still the most efficient and flexible economy in the world. Just look at how often the U.S. government has been turning on a dime to find a solution to its economic problems.

Skeptics say this is a sure sign of weakness in U.S. financial leadership. But overall I see this as a sign of the STRENGTH of the U.S. system. And a huge reason why the U.S. will eventually emerge from this morass faster and stronger than the other leading developed nations the dollar competes against.

And guess what happens if this proves true?

It will lead to a strong self-feeding flow of international capital into … you guessed it … the U.S. dollar. Why?

First, the Fed will be expected to be the first to hike rates since the U.S. economy will recover first. That will be a big catalyst for money to flow into the buck. And …

As foreign investors head to the U.S., they'll need stacks of dollars to buy U.S. assets—another big kicker for the lowly buck.
As foreign investors head to the U.S., they’ll need stacks of dollars to buy U.S. assets — another big kicker for the lowly buck.

Second, long-term capital will be excited to see a major economy poised for real growth potential — that will lead to a lot of foreign direct investment into the U.S. And that effectively means buying the dollar to buy U.S. assets — another big kicker for the lowly buck.

Look, the beginning of any new trend is loaded with skeptics. But keep in mind, at a certain point prices begin to influence the fundamentals.

As momentum builds based from a self-reinforcing feedback loop between prices and fundamentals, greater momentum will build behind the U.S. dollar.

That will eventually lead to capitulation — the point when more and more skeptics become believers.

And that inflection point marks the beginning of a multi-year dollar bull market.

The most powerful leg up is when the market catches on to the underlying fundamentals that were not quite visible to those stuck on their dollar bear story. And I think that next leg is dead ahead.

Best wishes,

Bridges to Hope Foundation Newsletter and Blog

www.BTHF.org

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It’s a beautiful, long holiday weekend. I’ve been celebrating Thanksgiving with my family, and I’m sure many of you are also busy with relatives and friends. So I’m going to keep this week’s column short.

Specifically, I’m going to highlight three big questions we should all be thinking about — and offer up my best answers. I feel these are the most important three questions to ask right now because the answers will determine the next big moves in the market and the U.S. economy.

 

First, is the Citigroup rescue the end of the financial crisis?

We gained 494 points in the Dow Jones Industrials a week ago and another 397 points on Monday. The dollar also gave back some of its recent gains, and the large rally in Treasury bonds petered out. Clearly, Wall Street greeted the bailout of Citigroup with a big sigh of relief.

Will the rally stick? I hate to sound jaded. But haven’t we heard after EVERY SINGLE ONE of these bailouts: “This is it. This will put the floor under the financials. Now is the time to buy, buy, buy?”

We heard it after Bear Stearns was rescued.

We heard it after Fannie Mae and Freddie Mac were taken under the government’s wing.

We heard it after AIG was bailed out.

And we heard it when the TARP plan was originally rolled out. In fact, this rally so far looks A LOT like the one we got on September 18 and September 19. The Dow surged 410 points on the eighteenth and another 369 points on the nineteenth after news of the government’s TARP plan first leaked.

But just like every other short-term rally before it, that rally quickly failed — and the market soon set new lows. So forgive me if I sound skeptical about this being the “end” of the financial crisis. It’s more likely just another way station on the road to lower stock prices.

Second, will an economic stimulus plan work?

President-Elect Barack Obama’s revised stimulus plan looks a lot more aggressive than what had been talked about previously. It’s also much larger than the tax refund plan that was put into place in the spring. So it’s definitely worth paying attention to exactly how the plan — and the prospects for its passage — evolves.

But is the stimulus plan a reason in and of itself to get bullish on the market? I don’t think so.

Several hundred billion dollars is a lot of money. But the economic challenges we face as a country are extremely large. And the losses our financial institutions are piling up — both here and abroad — are much larger.

This plan could buy the economy some time, keeping it stronger than it would otherwise be. Still, if the underlying economy can’t heal … if the credit market problems don’t get better … then we’ll be right back to square one when the impact of the stimulus wears off.

Indeed, the very real risk is that NO amount of stimulus can prevent the de-leveraging process from running its course.

Japan’s experience in the 1990s is instructive. The government there passed repeated “bridge to nowhere”-type infrastructure plans, and the central bank slashed interest rates to zero in an attempt to help the economy recover from twin busts in the stock and real estate markets.

End result: The economy struggled through a “Lost Decade” anyway.

Third, how in the holy heck are we going to pay for it all?

My daughters are three and six. They wouldn’t know Treasury Secretary Henry Paulson or Fed Chairman Ben Bernanke if they ran into them at the grocery store.

But the decisions that Paulson and Bernanke are making today are going to bury them … and maybe even THEIR children … under a mountain of debt the likes of which the world has never seen.

Do you know how much we have committed as a country to rescue the financial system and credit markets? How does the number $7.8 TRILLION … half the country’s GDP … sound to you? That’s the price tag The New York Times put on all the bailouts and credit plans recently.

Included in its tally:

  • The Fed’s $2.4 billion program to buy commercial paper, 

  • The $1.4 trillion commitment from the FDIC to backstop interbank lending, 

  • The $29 billion bailout of Bear Stearns, 

  • The $306 billion in guarantees of Citigroup assets, 

  • The Term Auction Facility, 

  • The Money Market Investor Funding Facility, and 

  • All the other programs the Fed and Treasury have implemented.

It also includes yet another pair of programs just announced this week. The Fed has agreed to buy up to $800 billion in Fannie Mae and Freddie Mac bonds, mortgage-backed securities and securities backed by credit cards, auto loans, and small business debt.

I simply cannot figure out how we’re going to pay for it all without borrowing an astronomical amount of money — and sticking future generations of American citizens with the bill.

For now, flight to safety buying is bolstering Treasury bond prices. But that effect will fade at some point. And when it does, you will likely see the price of Treasuries tank — and interest rates surge — due to the nation’s profligacy.

So be sure to keep your head when investors around you are losing theirs. I do NOT think the answers to these key questions are as clear-cut as the bulls would have you believe. And I DO think focusing on safety remains the best course of action.

Until next time,

Bridges to Hope Foundation Newsletter and Blog

www.BTHF.org

 

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