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BRIC Roundup


Emerging markets to experience growing pains.

Yesterday was a tough session, which must have made investors feel like they were trapped in a foxhole.

The only spaces that shone were energy-related including stocks featured in my market commentary off late: First Solar (FSLR), Transocean (RIG) and Weatherford (WFT). The Dow was only off fractionally but the fact is the market was ugly. Okay, yesterday's session wasn't as ugly as the most recent winner of the world's ugliest dog, Gus. But for the entire year the broad equity market has given the Chinese Crested pooch a run for the top ugly prize (which isn't hard since Gus only has three legs).

On the topic of ugly, that earnings warning from United Parcel (UPS) was a bombshell even if it shouldn't have been surprising. Calling the US economy "anemic", UPS lowered its second quarter earnings guidance to a range of $0.83 to $0.87 and full year earnings to a range of $3.90 to $4.20 from $0.97-$1.04 and $4.30-$4.50 previously. Management also pointed to higher oil prices as a culprit for the lowered outlook. These companies often trade in sympathy with the airlines and tomorrow UPS will resemble some of the action seen in its sky-sharing brethren.

Speaking of the (not so) friendly skies, yesterday was a horrendous session for airlines even during spots when crude oil was lower. United Airlines (UAUA) will lay off 950 pilots and that news sent the shares into a tailspin. United was down 15% yesterday as talk late last week of possible consolidation and wide open collusion didn't reverberate at all. By the way, the head of Northwest Airline (NWA) commented that each increase of $10 in crude increases the company's cost by $420 million.

And then there are the financials. Talk about a collective moan. Regional banks and investment banks sunk yesterday, too. Goldman Sachs (GS) has begun jettisoning folks in investment banking and mergers and acquisitions and Citigroup (C) has also begun to cut jobs, too. All banks were hit yesterday, some hard like Huntington Bancshares (HBAN) which enjoyed a great session on Friday. Just like the airlines, which caught a break on scuttlebutt of potential takeovers, so too the regional banks had a brief reprieve. Unfortunately a very brief reprieve and now it's back to reality. With the Fed meeting today that will yield nothing there's still angst the language will make it clear that interest rates are moving higher.

A lot of sectors have had trouble but the airlines and financials are disasters that have little hope of getting better. In fact in addition to an unfriendly Fed, the financials are going to have to deal with the magic act of bringing toxic waste back onto their balance sheets at some point. For now they must grin and bare it.

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Yesterday in Brazil soccer legend Pele was mugged while in his limo even as he yelled to the gang of 10 marauders that it was him, the kid from the streets that put the nation on the map when every other country thought it was just a backwoods place to go frolic in the sun, if one had the guts. I know, Brazil has come a long way economically, but the nation has a long way to go with respect to safety (last year a prison inmate in solitary confinement ordered the country to shut down and launched attacks that saw scores of police personnel murdered throughout the country). Brazil, Russia, India and China have been super hot economies but they're going to experience growing pains which include distribution of wealth and opportunities. These so-called BRIC nations have seen their markets come under pressure of late.

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China is getting hammered the most, which is crazy when one considers all the hype and recent success of its equity markets. Then there is the breakneck development associated with the Olympic Games and other mega-projects. I must say that even though China has corrected significantly there's still tremendous belief this is the best bet. I too like China but for the most part have focused on a handful of names that have worked and come back from pullbacks as if on cue. In the meantime China steel company Baosteel Group agreed to pay Rio Tinto (RTP) $144.60 a dry metric ton for Pilbara blend steel. That is an 80% increase from a year ago. China's demand for steel is expected to increase by 14% this year.

In India the rupee continues to get hammered and yesterday Oil & Natural Gas Corp announced it's abandoning a $5.1 billion refinery plan that would have seen two projects in the southern part of the country funded by overseas investors. In addition Tata Power, the largest private power company in India, says it will double its coal imports to meet insatiable demand that has increased power shortages by 15% year over year. The country is in a typical quandary, trying to moderate a hot economy but at the same time rein in inflation which is running at 11.5% the highest level since 1995.

Russia is simply a reflection off crude oil but the country has demons that have not only anchored what should be an even greater move higher but could rear its ugly head at any time. Embedded corruption, cronyism and greed are always a threat to the Russian economy and stock market. I must say, however, that over the last few years the country has gotten its act together. The Russian ETF (RSX) has been making a series of higher lows and higher highs, but the ETF has struggled just a little since peaking in May. I think Russia has some of the best individual investments but it comes with volatility and a puppet government that does get it for now. At the end of the day Russia, like so many hot economies, is tied into the fortunes of higher crude prices and even an oil correction would leave the price at levels well above yesteryear, which was two years ago.

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All these hot emerging markets are going to face the music at some point. Like any bigtime shindig, it's a lot of fun on the way up but getting drunk on success means an eventual sobering period. Plop, plop, fizz, fizz. Stick with selected stocks in these hot countries for now.
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