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Commodity Investing Shell Shocked
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Transition Time?
New York: August 31, 2009
By John Stephenson

So far, the rally in the stock market has been impressive. For the doomsayers, the last five months of steady gains in the market have been nothing more than a bear market rally. Nouriel Roubini, a professor at the Stern School of Business at NYU, is one famous Cassandra who has been dubbed “Dr. Doom.” In his most recent pronouncement in the Financial Times , Roubini suggests that America could face the prospect of a double-dip recession as oil and food prices “are rising faster than economic fundamentals warrant.”

But, in spite of this dire outlook, the stock market appears to be shrugging off the possibility of a double dip recession and marching steadily higher. What has confounded many of the experts has been the fact that the recovery has occurred without the consumer taking part in any meaningful way. How is it really possible to recover when the customers are sitting on their wallets refusing to spend? U.S. consumers alone account for 27% of global GDP and they are shell-shocked, dazed and in no mood to spend.

American real wage growth has been non-existent for the last ten years and making matters worse, the pink slips keep on piling up. Car sales are finally up, but only because of a massive government bailout cleverly disguised as a Cash for Clunkers car-buying incentive scheme. House prices look to be hitting bottom after years of decline, but that's hardly a cause for celebration.

America may be wallowing in problems, but the rest of the world seems to be in far better shape and that's helping to lift the fortunes of stock markets around the globe. Nowhere are the good times more evident than in Brazil , Russia , India and China —the so-called BRIC countries. The four BRIC countries have ten times the population of the U.S. , yet only three percent of the population own cars—a staggering potential growth market for automobile companies.

Figure 1: Emerging Economies Are on the Move

Source:IMF World Economic Outlook 2009

And that potential growth is translating into surging stock markets as investors start to bid up stock prices in anticipation of future healthy corporate earnings growth. Nowhere is this more evident than in China , where the Shanghai stock market has been on fire recently. China 's stock market capitalization is now larger than that of Japan , the second largest economy in the world. It was only three years ago in 2006, that China 's market capitalization was just fifty percent of Japan 's. Many forecasters are even predicting that China will surpass Japan in 2010 to become the world's second largest economy.

China 's economic rise may be meteoric, but the growth rate of other emerging economies has been pretty impressive as well. Seven of the top twenty economies are those of emerging market countries and by far and away these seven economies are growing far faster than average. In this new and very global world, the emerging market economies have tremendous comparative advantages—namely an abundance of low cost labor and extremely low levels of consumer debt.

For now, most emerging market economies have relied on strong export-led growth to maintain the health of their economies. With world trade suffering in the aftermath of the financial crisis, emerging market countries will need to spur domestic consumption to keep their economies moving forward. According to research by investment bank Credit Suisse, China already is the second largest contributor to global consumption and by 2020, China and India are anticipated to be the first and fourth largest contributors.

With emerging market countries increasingly becoming the locomotive of global economic growth, investment portfolios should transition from where the world has been, to where the world is going. Savvy investors should look to increase their exposure to emerging market economies through exchange traded funds and commodities which will be in short supply as the global economy begins to grow again.

StephensonFiles is a division of Stephenson & Company Inc. an investment research and asset management firm which publishes research reports and commentary from time to time on securities and trends in the marketplace. The opinions and information contained herein are based upon sources which we believe to be reliable, but Stephenson & Company makes no representation as to their timeliness, accuracy or completeness. Mr. Stephenson writes a regular commentary on the markets and individual securities and the opinions expressed in this commentary are his own. This report is not an offer to sell or a solicitation of an offer to buy any security. Nothing in this article constitutes individual investment, legal or tax advice. Investments involve risk and an investor may incur profits and losses. We, our affiliates, and any officer, director or stockholder or any member of their families may have a position in and may from time to time purchase or sell any securities discussed in our articles. At the time of writing this article, Mr. Stephenson may or may not have had an investment position in the securities mentioned in this article
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