Blowing Bubbles

Central banks are blowing another asset bubble. Both the technology and real estate bubbles were spawned by cheap credit.
Put simply, when you factor future earnings growth and an expansion in valuations, the developing markets are prime candidates for the next asset bubble.
In our opinion, the next bear-market will only occur when the Federal Reserve is done raising its benchmark rate for this cycle. So, in the next bear-market, instead of financial institutions going bust, entire nations are likely to default.

If our assessment is correct, towards the end of this bull-market, we are likely to see the following red flags:

• Rising interest-rates
• Surging inflationary-expectations
• Deterioration in the market's breadth
• Diminishing new highs and expanding new lows
• Increasing credit spreads
• Credit concerns
• Spike in the price of crude oil
• Inverted yield-curve
• Extreme investor optimism

However, this bull-market should continue for the next 2-3 years and as long as the primary trend is up, we will remain fully invested in our preferred growth-producing assets. (http://dailyreckoning.com/blowing-bubbles-2/)

The Euro is Dead (?)

Among the others comments this is important to remember: “China won’t revalue the yuan at this time because as the dollar is rising, so, too, is the yuan. This hurts Chinese exports to Europe – its largest market. Ergo, there is no way China would allow further strengthening of the yuan to the euro by strengthening the yuan relative to the dollar!!! (If you don’t understand this one, please re-read until you do. It is the single most important dynamic right now in the global recovery besides the euro collapse itself.)” (http://www.peternavarro.com/dailyblog.html, Saturday, May 15, 2010)

MGI says India’s urban population could balloon to 590 million

MGI says the Indian economy is expected to be five times greater by 2030, with urban centers being the key driver of this growth. It projects India’s labor force to increase by 270 million—70 percent of that coming from urban jobs. This mass of people will likely demand better housing, better roads, better goods— in all, a higher quality of life than what’s been available to them in the past. The resulting pressure this could have on commodity demand is the X-factor that we believe makes this cycle different than anything we’ve experienced in the past. You can download the full report at McKinsey’s Web site.
(http://dailyreckoning.com/india%e2%80%99s-urban-future/)

Where to invest in China

I don’t think I’d want to be involved in the frothy property market of the big cities. I wouldn’t want to invest in its opaque and undercapitalized banks. On the other hand, I would invest in ideas that link to the agricultural scene. There is clear demand and growth and constraints – in water and arable land – that one can deal with in only so many ways. I would invest in uranium, which ties back, in part, to China’s aggressive nuclear build-out. Robeco is forecasting a second-half rebound. JPMorgan Chase expects Chinese stocks to rally more than 40% this year.
(http://dailyreckoning.com/china-boom-or-bust-does-it-even-matter/)

Buy Japan

Two fund recommendations to take advantage of the world’s most-hated asset class.

First is the iShares MSCI Japan Index Fund (NYSE:EWJ). It mirrors the performance of the MSCI Japan Index, a very broad swath of Japan’s largest companies. And it gives you a good shot at outperforming the benchmark Nikkei 225 Index. On both a one-year and a five-year basis, EWJ has beaten the Nikkei.

But don’t limit yourself to the blue chips. In almost every market turnaround, small-cap companies lead the way. So pick up the Fidelity Japan Smaller Companies Fund (FJSCX) as a supplement. This fund outperformed the MSCI Japan Index during the post-rebound in 2009. And it might do so again when Japan really starts to rebuild. Plus, you’ll gain exposure to many companies in this fund that you won’t find in EWJ.

Remember, this is the Trade of the Decade. Not the Trade of the Week (http://dailyreckoning.com/buy-japan/)

An Even Better Trade of the Decade

Sell Japanese government bonds. Japanese bonds are probably even more over-valued than US bonds. And with the Japanese borrowing more than ever...while the Japanese savings rate declines...it seems a fair bet that Japanese government debt will go down at least as much as US debt. Maybe more… (http://dailyreckoning.com/an-even-better-trade-of-the-decade/)

The Best Natural Gas Stock

Oil has been a far more consistent performer in the energy sector than natural gas. While crude oil has more than doubled off its post-credit- crisis lows, natural gas prices remain depressed. Despite their recovery off ultra-low levels last summer, natural gas prices are still more than 70% below their record highs. The company I'm talking about is Canada's EnCana Corporation (NYSE:ECA). Another bullish indicator is Exxon-Mobil's (NYSE:XOM) recent takeover of natural gas producer, XTO Energy (NYSE:XTO) for $41 billion dollars (http://dailyreckoning.com/the-best-natural-gas-stock/)

Bet on VIX spike

Conveniently, Wall Street has made fear a tradable commodity. One way to play it is through the iPath S&P 500 VIX Short-Term Futures fund (NYSE:VXX). Though a mouthful, it simply aims to mimic the VIX. It started trading only this year. It’s done horribly, as you would expect given the fall in the VIX.

Stocks and rate hikes

“Stock markets usually react negative to rate increase news because it means less corporate profits, because cost of borrowing will higher. Also keep in mind even though this principle is the same at the beginning of a rate hike cycle (like now) stocks may take it much harder than at the end of a rate hike cycle when it is over a period of time priced in and expected.  Later on the dynamic change a bit and stocks might actually go up on rate hike news because business is good.” (DrFX Daily Briefing April 29)