After watching their portfolios take devastating blows in 2008, many investors hoped that a new year would bring a reversal of fortune and a recovery of lost assets.

After the first two months of the year tested resolve, things finally took a turn for the better in March, and a long climb upwards began. Most equity ETFs experienced solid gains in 2009, adding more than 20% on the year. But as always, some fared better than others, with several funds outpacing broad-based benchmarks by a considerable margin. And then there are the handful of ETFs highlighted below that delivered enormous gains.

These funds have each gained at least 85% this year, putting them in the top two percent of all equity ETFs in our ETF Screener. It should be noted that only funds operating for all of 2009 have been included in this list (although we did bend this rule a bit for one fund with particularly stellar results).

10. SPDR S&P Emerging Markets Small Cap ETF (EWX)

Most investors choose to achieve emerging markets exposure through funds that invest primarily in mega cap companies (such as VWO and EEM). But EWX, which is based on an index that has a median market capitalization of under $300 million, has outperformed these more popular ETFs by a wide margin in 2009, gaining 83% (EEM is up about 62% year-to-date).

9. iShares MSCI Turkey Investable Market Index Fund (TUR)

When looking for international equity exposure, most investors likely don’t turn to Turkey, the Eurasian nation with one of the world’s youngest populations and a strategic location between Europe and the Middle East. TUR has gained almost 90% so far in 2009, thanks in large part to a booming financial sector that accounts for about half of the fund’s assets.

Turkey now finds itself in an interesting position caught both geographically and economically between the developed economies of Western Europe and the less stable Middle East.

8. Claymore/AlphaShares China Small Cap Index ETF (HAO)

With much of the developed economy contracting through the first half of 2009, China is expected to account for a significant portion of global GDP growth, and has cemented its status as the leader of the worldwide recovery efforts. The Chinese economy is firing on all cylinders — energy, technology, industrials, and consumer products are booming — and investors in China ETFs have watched their assets surge this year. The small-cap focused HAO has led the way, posting gains of 91%. The much larger iShares FTSE/Xinhua China 25 Index Fund (FXI) has gained about 43% on the year – an impressive tally, but less than half the return of HAO.

7. SPDR S&P Emerging Latin America ETF (GML)

Beyond Brazil (we’re getting to that ETF), the Latin American economies of Mexico, Chile, and Peru have also delivered big returns in 2009. GML has exposure to all of these countries, and is up about 93% year-to-date. Latin American economies suffered in 2008 as demand for many commodities dried up in connection with a pronounced downturn in the global manufacturing sector. But factories are now coming back online, and demand for raw materials has surged, particularly in the emerging markets of China and India.

GML isn’t the only Latin American fund to post big gains so far this year: the iShares Latin America 40 Index (ILF) is up 83% on the year while the Global X/InterBolsa FTSE Colombia 20 ETF (GXG) has gained 96% since its launch in February.

6. iPath MSCI India ETN (INP)

This Year, not to be outdone by fellow BRIC economies, India turned in an impressive 2009 that saw INP gain 94%. This ETN’s big jump came in May, when the election of the pro-business Indian Natural Congress sent equity markets up 25% in a single session. But Indian equity markets surged throughout the rest of the year as well as the economy resumed its impressive expansion following the global downturn.

The WisdomTree India Earnings Fund (EPI) and PowerShares India Portfolio (PIN) have also surged this year, gaining 86% and 72%, respectively.

5. Market Vectors Steel Index ETF (SLX)

When the recent recession hit, need for industrial and building materials sunk, and steel prices sunk along with other industrial metals. Facing weakening demand, many steel mills slashed operations and began incurring big losses.

But as the economy has rebounded, prices have recovered and mills have seen a big uptick in orders for all types of steel products. SLX has gained about 104% this year, and is up almost 150% from the bear market lows in March.

4. iShares MSCI Brazil Index Fund (EWZ)

The highlight of 2009 for many Brazilians was likely the naming of Rio de Janeiro as the host of the 2016 Olympic Games, but the year was full of memorable highs for investors in Brazilian equities. “The impact of the global economic slowdown on Brazil’s economy was shorter and less severe than in many other parts of the world,” writes Alastair Stewart, noting that consumer demand is now driving the economy forward.

EWZ has added about 111% so far in 2009, making it one of the top performing emerging market funds. Another Brazil ETF, the Market Vectors Brazil Small-Cap ETF (BRF) also performed well, gaining almost 90% since its inception in May.

3. Market Vectors Coal ETF (KOL)

Because coal is used heavily in power generation and steel production, need for this resource plummeted in 2008 as manufacturing activity and raw material demand sunk. But as shifts came back online and orders from emerging markets surged, coal prices recovered and the stocks of companies engaged in the mining and production of the energy source soared. KOL has gained more than 130% in 2009, handsomely rewarding investors who were fortunate enough to get in at the true market bottom.

Also delivering impressive results in 2009 was the PowerShares Global Coal Portfolio (PKOL), which is up a whopping 122% for the year.

2. Market Vectors Russia ETF (RSX)

Given its dependence on the energy sector, an investment in the Russian equities can be extremely risky. But this emerging economy surged in 2009 as a recovery in prices boosted government revenues. Significant obstacles remain on the road to recovery, but Russia is expected to show further expansion in the fourth quarter and deliver modest growth in 2010.

Russia’s stellar performance means that all four BRIC economies found a place among the best performers of 2009, highlighting the importance of an allocation to this bloc of emerging markets. In addition to country-specific exposure, there are several ETFs offering diversified exposure to these four countries.

1. Market Vectors Indonesia Index ETF (IDX)

The year’s best performer has been the Market Vectors Indonesia Index ETF (IDX), which has gained almost 160% since its launch in mid-January (technically, IDX hasn’t been trading for all of 2009). One of the lesser-known emerging markets, Indonesia is now home to one of the world’s fastest-growing economies. Indonesia is a commodity-rich nation, home to ten highly-prized commodities such as coffee, palm oil, rubber, and rice.

IDX is diversified across all sectors of the economy, including exposure to financials, materials, and energy companies.

Themes Emerging

Looking through the funds above, a few trends begin to emerge. Many of the industries that were hit the hardest on the way down (e.g., coal, steel, semiconductors) are now leading the way higher. The losers of 2008 have become the winners of 2009. It’s also interesting to note that four of the top five performers are Van Eck ETFs.

It’s also interesting to note that most of the year’s biggest gainers have limited exposure to U.S. markets, with several emerging economies making the list. U.S. markets bounced back in 2009 after a horrendous performance in 2008, but it has become clear that the emerging economies will take the lead in the current recovery effort, and developed world powers will follow behind. With unemployment above 10% and the challenge of winding down a massive stimulus package still ahead, slow but positive economic growth would be a great success for the U.S. economy. But the U.S. is hardly alone, and is actually in far better shape than many developed European and Asian economies.

Eight of the year’s ten best performers are emerging markets, highlighting a shift in the strategies of many investors away from domestic equities and towards more diversified international exposure.

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Earlier this month, China’s Economic Information Daily published remarks by a senior Chinese official indicating that Dubai’s debt crisis could be a good opportunity for China to purchase gold and oil assets.

Ji Xiaonan (Chairman of the Supervisory Committee overseeing large state-owned enterprises) was quoted as saying that the Dubai debt crisis “could give China an opportunity to put some of its foreign exchange reserves into gold or oil.”

China is relatively well insulated from the Dubai crisis, as there are no reports of Chinese banks with debt exposure to Dubai. And while there are a few Chinese real estate and construction firms with limited exposure to projects in the Emirates, nothing seems to be grave. Yet Dubai’s issues portend the perception of a looming dollar crisis in the West.

What used to be less than US$ 2 trillion in Fx reserves (above) is now US$2.27 trillion. Much of this is parked in U.S. treasuries. Over the past year, Chinese officials have been pressing to move more of the country’s reserves into hard assets and commodities such as gold and oil.

Yesterday, we picked up the China Youth Daily newspaper in which Ji Xiaonan claimed that “China should increase the amount of gold it holds in reserves to reduce potential losses from a depreciating dollar. We recommend China increase its gold reserves to 6,000 metric tons within three-to-five years and possibly to 10,000 tons in eight to 10 years.”

For those readers that are unfamiliar with the gold market, it bears mentioning that China is the world’s largest gold producer. And according to the China Gold Association, the country may soon break records in supply and demand for gold. In 2007, China overtook South Africa to become the world’s largest producer. And this past July, the World Gold Council said China could surpass India as the world’s largest consumer as well.

Although China recently raised its national gold holdings, it has done so by buying domestically mined gold. China has not shown any interest (yet) in buying from international gold markets. Perhaps as a result of this, shares of Chinese gold mining companies have rocketed this year. Shanghai and Hong Kong-listed shares of companies like Zijin, Shandong Gold and others are up 3x-4x this year alone. But the main factor at play is fear of a U.S. dollar devaluation.

What are the major take-aways?

* People in China are seriously starting to take notice of the fragility of the U.S. dollar and are loading up on commodities.
* Chinese retail investors are also starting to take notice. As an example, there are “gold retail stores” popping up throughout major cities where individuals can buy mini gold bullion. There’s even a China Gold Store located in Beijing Airport’s new Terminal 3.
* Another example is that while it was illegal to buy gold two years ago, Chinese citizens can now go to the bank and purchase “paper gold” certificates. Paper gold is basically the Chinese equivalent of an ETF and is supposedly backed by bullion held at the banks.
* Chinese gold mining stocks are red hot and up 2-4x since last year.
* China has US$2 trillion and is going to start deploying it in overseas mining assets.

For investors, what is the play? Among others, we think there are good opportunities in Toronto listed mining companies, especially those with assets in Latin America (Peru, Chile, Mexico, etc). Why Latin America? Because since last November when the Chinese Central Government put out a Latin America Policy Paper, Chinese firms are tacitly encouraged to go to Latin America. Countries like Peru, Chile and Mexico have stable governments, ample supplies of gold, and favorable mining laws. And a good number of firms with assets in these countries trade in Toronto. We see many of them getting acquired by Chinese mining companies.

As ETFs have grown from a closet industry to a mainstream investing option, funds offering exposure to nearly every corner of the globe have popped up.

But the exposure offered by international ETFs has historically been very broad in nature. Whereas U.S. investors have long had access to funds targeting various sectors (and even subsectors) of the U.S. economy, international funds have generally offered “all or nothing” exposure – the only options own the entire economy. For many investors seeking well-diversified exposure, this approach has been acceptable, and funds have flowed into international ETFs at an incredible pace.

But as the “home country” begins to fade, U.S. investors are looking to allocate larger portions of their portfolios to international equities, and seeking out ways to gain both more broad-based exposure and target specific parts of the economy. In response to this demand, some innovative ETF issuers have launched funds offering more targeted exposure to non-U.S. economies.

Emerging markets have been one of the hot investment trends of the year, due in part to expectations for material growth in coming years, particularly relative to the developed world.

Despite its major allocation to quasi-developed economies (see an explanation of that issue here), the MSCI Emerging Markets Index has become one of the most popular ways to gain exposure to emerging markets. While the broad-based exposure offered by funds tracking this benchmark may be desirable to some investors, others may wish to gain more targeted exposure to certain sectors within emerging markets economies. In addition to a composite ETF, Emerging Global Advisors offer three ETF that do just that – provide sector-specific exposure to the energy, financials, and metals and mining industries in emerging market economies.

Energy Sector

Dow Jones Emerging Markets Energy Titans Index Fund (EEO).

Exposure To: Oil and gas producers and oil equipment and services providers in BRIC economies (about 80% of the ETF) as well as several other emerging markets.

Why This Sector Is Important: Many emerging market economies are expanding at impressive rates (China is expected to grow by more than 8% in 2010 while India will expand by more than 6%), and will have significant raw material needs going forward. Moreover, given the current political environment in the U.S., the potential for a windfall profits tax on domestic oil companies has perhaps weakened the relationship between oil prices and energy stocks. For investors anticipating a rise in crude prices, EEO may be one of the best ways to play this trend.

Financial Sector

Dow Jones Emerging Markets Financials Titans Index Fund (EFN).

Exposure To: Banks, insurance companies (both life and non-life), real estate investments and services, and other financial services companies.

Why This Sector Is Important: Ten years ago, none of the world’s ten largest banks were headquartered in emerging markets. Today, as a result of both massive writeoffs at U.S.-based banks and a surge in the importance of emerging markets to the global economy, the world’s three largest financial institutions (and four of the top ten) are headquartered in China. Unlike their counterparts in developed nations, Chinese banks have no shortage of new customers, as continued urbanization continues to push city populations higher and grow the all-important middle class. In 1990, 26% of China lived in cities. By 2008, that number had increased to 46%, and is expected to grow to 70% over the next 20 years. In a nation of more than 1.3 billion people, that translates into a massive new potential customer base.
Metals & Mining Sector

Dow Jones Emerging Markets Metals & Mining Titans Index Fund (EMT).

Exposure To: Industrial and precious metals exploration, extraction, and production companies.

Why This Sector Is Important: Emerging markets have been established as the leaders of the global recovery, rebounding from the recent recession much more quickly and effectively than most developed economies (many of which are still contracting). As emerging economies continue to develop and expand, appetite for almost every type of raw material will be insatiable. As per capital income in these countries rises, so too will spending on automobiles, homes, and other consumer products that require significant raw material inputs.

Gold fell for the first time during last week, off 4% on Friday to $1,162.40 an ounce, the biggest drop since Dec. 1, 2008 after the new U.S. jobs data showed unexpected strength.

The Dollar rallied against rival currencies while traders reversed the “Sell Dollar/Buy Gold” strategy. (Fig. 1, click to enlarge)

The Dollar’s decline has been a key factor in the record rising gold price this year by boosting the metal’s appeal as an alternative investment along with other commodities and high-yielding currencies.

Though gold briefly touched a low of $1,136.80 during the Thanksgiving week on fears of a possible debt default in Dubai, the precious metal had otherwise continued its vertical ascent into uncharted territory advancing in 21 of the past 23 sessions.

While gold has some underlying support from central banks and investment funds, there are some indications suggesting gold is moving mostly on momentum, and that a deeper correction may be due.

India Leading the Gold Rush

Gold’s rally in the past couple weeks was largely on speculation that India’s central bank may buy more gold from the IMF adding to the 200 ton purchase it made last month.

This second purchase by India would be the fourth central bank sale this quarter of IMF bullion. The three prior sales were Sri Lanka’s $375 million purchase of 10 metric tons; India’s initial $6.7 billion purchase 200 metric tons, and Mauritius bought 2 tons for $71.7 million.

The three sales so far leave about 190 tons up for grabs from the 403.3 tons the IMF announced Sept. 18 it would divest to shore up its finances.

China, The New King of Gold

Private Chinese gold buying, for both jewelry and investment, will overtake Indian demand this year, predicts metals consultancy Gold Fields Mineral Services (GFMS). China is now the world’s No.1 gold mining nation. The People’s Bank is widely thought to have grown its gold reserves by buying domestic production direct.

In addition, China has cut the import tax on jewelry and allowed select commercial banks to sell gold bars, and gold is now traded freely on the Shanghai Gold Exchange.

Russia & Vietnam Not Far Behind

On Nov. 23, Russia’s central bank announced it had bought 15.6 metric tons of gold in October and has said it aims to increase gold’s share in its reserves this year to keep its investments diverse. The Russian central bank had been steadily building its gold stocks this year, which has been up 17% since Jan. 1 to 606.5 tons.

The Vietnamese central bank has also granted quotas to import 10 tons of gold for use by its banking system and gold traders.

Low Interest Rate with Worthless Paper

Some analysts attribute the most recent rally to the reversal of a decades-long selling of gold by developed economy central banks to net buying by emerging market authorities.

Gold accounts for 9% of reserves held by central banks (valued at market prices). Therefore, it is logical for central banks stocking up on gold as it does bring the much needed diversity due to gold’s low correlation with key currencies and its strong inverse correlation with the US Dollar.

However, diversifying reserves primarily via gold rather than other currencies partly suggests the expectation of interest rates around the world to stay low for a long time. Moreover, it reflects central bankers’ growing distrust of all paper currencies, not just the Dollar.

Surging Derivative Trading

Some of the world’s most successful traders, including John Paulson, David Einhorn, and Paul Tudor Jones, have positions in gold or gold related investments. Pension funds allocate about 5% as protection against the weakening Dollar. Hedge funds and traders are piling into gold futures markets around the world, lured by the record-high prices in the precious metal.

Based on the Commitment of Trader (COT) report as of November 24 by the U.S. Commodity Futures Trading Commission (CFTC), the number of long positions in gold was around 370,000, up about 5,000 from just a week ago, mostly from non-commercial short-term speculative investors.

It is also interesting to note CFTC Nov. 2009 monthly report shows that while commercial participants held net short positions; non-commercial and other participants, who accounted for 51.4% of open interest, held net long positions,. Some traders already indicated there has been some good upside buying in March and April in the $1,300s and even $1,400s.

Overall, NYMEX Gold futures open interest increased 4.8% in November with longs outnumbering the shorts by 71% to 12%. This would have been the highest number of long speculators in the history of the New York gold market since 1975, except for last year when the gold hit $1,030. (Fig. 2, click to enlarge).

High number of speculative positions is the driving force of the commodities rally in general, but that also makes gold vulnerable to further corrections as well as high volatility.

Diminishing Physical Demand

Regardless of the gold fever this year, according to the third quarter 2009 Gold Demand Trends Report from the World Gold Council, demand reached 800.3 tons, representing a drop of 34% year-over-year. The report also found that average gold prices for the quarter were 10% higher than in the same quarter last year.

Diminishing physical demand coupled with higher price suggests it has been mostly speculators that are driving up the price. In addition to central banks using gold to rid Dollar dependency, fund managers and speculators also have been driving up the price of gold, partly seeking protection from potential inflation in a low interest rate environment.

Fear Factor

Gold is a commodity that perception plays a more significant role than other market factors. Almost all other commodities such as crude oil, natural gas, copper, prices often fluctuate on indications of inventory, supply, and demand; whereas gold moves primarily with investor’s fear or perception of inflation, U.S. Dollar and the economy.

But just as fast as the market perception can drive prices straight up, it could tank an asset class in a matter of minutes. As discussed here, investment/speculator demand is clearly a major factor in the current gold price rally, a decline could potentially take the gold price down quite significantly on indications such as rising interest rate, or the U. S. Dollar starts to strengthen.

If history is any indication, after gold rose sharply in 1979-1980 to $850, it was followed by a drop to near $500 in less than 2 months. It is conceivable that gold could take a similar loss in a short time.

Short-term Outlook

The general expectation is that the Federal Reserve will not act in favor of the Dollar until later next year. Gold and Dollar correlation is still highly negative, but one should expect a fair amount of volatility given the uncertainty of global economic direction intensified by the Dubai crisis. In that sense, gold could certainly challenge the $1,225 levels again, with $1080, $1050 and $1025 each represents significant support level.

Technically Overbought

Friday’s pullback has moved gold’s MACD to the downside and the 14-day Relative Strength Index (RSI) back in the neutral territory (Fig. 1), which could spur more selling if Dollar retains its strength.

Though gold’s longest rally (nine days) since 1982 ended last Wednesday, the precious metal is racking up a near 35% gain on the year, and moved up almost 17% this month alone, heading for the sharpest annual increase in two decades.

So, at this level, gold has also run into profit-taking, as well as year-end fund manager’s portfolio repositioning. Closes below the 20-day moving average crossing would likely confirm that a short-term top has been posted.

Long Term Bullish Intact

Sporadic green shoots of economic data could obscure the harsh reality, and lead to gold weakness in the short term. Nevertheless, there’s enough momentum around for gold to make new highs as long as the Dollar stays weak spurring further safe haven demand on concerns about a double dip recession.

Therefore, the potential exists for a large rise in the longer term. However, if this rally extends into uncharted water on momentum without a healthy enough correction, upside targets will be hard to project with the eventual correction equally difficult to predict, just as they say, “The higher you climb, the harder you fall.”

2010 is fast approaching. I have had conversations with colleagues..and the issue that was brought up so many times was 2007-2009 just a fluke or the beginning of something more serious.

As usual… I told them to their discern I do not know the future. However in all reality… if we ran our personal households how the central banks and banks ran their portfolios we would be living on the street and I feel there will be a price to pay. The real problem throughout the world is debt, both Govt debt and personal debt. The reality is both the borrowers and the lenders have a serious problem. The borrowers can be wiped out… but what will the lenders do with anything from worthless debt or run down real estate?

More so the fact,there are starting to be shortages of basic foodstuffs could make for scary headlines. The fact is India has imported rice for the first time in I do not know how long. There are droughts stretching the globe. This is a fact.. not a headline. Argentina is not exporting soybeans. What does all of this mean?

I believe we are in a period… not to see how much we can make… but rather how much we can protect! Not a return on investment…but rather a return of investment. I am not implying to freeze and do nothing. Even leaving your money in the bank you can lose money due to inflation…. Even thinking about putting all your assets in gold you can lose money. Anything can happen. Gold can go to $4,000 an ounce or $400. One must really believe anything can happen…

So how should you invest in 2010? I think the word is cautiously and with a plan. This is how I explain to potential clients. Everyone wants to find someone who has the answer…That is why they watch CNBC or Bloomberg thinking some expert will tell them something that is a secret. Well in reality that will not happen. The key this year as well as all other years is to diversify …be cautious…be realistic…and have a plan.

In my personal opinion…I feel the safest place for my money is in trend following strategies over a large basket of interest rates, currencies, commodities, stock indexes, energies etc. Further more I spread out my assets with NEVER more than 5% in any idea ( even the trading programs I do in our commodity pools and trading accounts). I believe in allocating to other commodity trading advisors who understand risk…have a plan…that are disciplined…and patient..In this manner I am not predicting anything rather attempting to make myself available for any outcomes.

What is the best aspect of commodity trading and trend following is the liquidity…( I can liquidate my whole portfolio with in a minute or so) as well as liquidate my managed accounts very quickly…transparency as well as the regulatory that Hedge funds do not have.
The problem is people think commodity trading is risky. More so I have seen this all too many times..They allocate to a commodity trading advisor when they have a good run…and then leave when there is a draw down. This is completely the wrong idea if someone wants to compound their money or use their money as inventory to make more money.

So how should you invest in 2010? Ask yourself really what changed…
Did the banks write down all their losses..NO!
How is the rate of employment? I do not need to answer!
Have foreclosures stopped?

2010 should be time of being aware of the risks that can plague you! Consider allocating some of your portfolio in trend following and managed futures. Learn about managed futures and trend following.

Most markets moved higher in the last week but still lost some upward momentum. The big news, of course, was the request by state-owned Dubai World to renegotiate some of its debt payments.

Coming as it did during a thin holiday market – which may not have been a coincidence – the story sparked a brief sell-off in emerging markets equity and debt. Losses were reversed once traders decided this was not the beginning of yet another credit crisis. Anyone who has seen the glittering new construction in Dubai knows it must be highly leveraged, so we are not convinced the story will end happily. For now, however, the worst-case scenarios seem to have been avoided.

The S&P 500 Index continues to flirt with both sides of the 1100 level. The Dow Jones Industrial Average has held above 10,000 for about four weeks now, but there is no guarantee it won’t dip below again. In fact, there is a high probability it will drop back into four-digit territory at some point. As noted above, momentum is slipping in the major benchmarks. Year-end window dressing is well underway for many portfolio managers. Those fortunate enough to be ahead of their benchmarks are not eager to let that edge slip away. For “absolute return” managers this means raising cash, for “relative return” managers it means making your portfolio look more like the S&P 500. We suspect another big move is coming after some consolidation, but we could see more weakness first.

Economic reports still mostly fall into the “not as bad as it was” category. The Federal Reserve’s beige book, released today, suggests the economy is stabilizing and may be improving slightly by some measures. Of course this is the same Fed that created the housing bubble and then failed to see the recession coming, so we are not sure why anyone pays attention to what they think. Reports from the Black Friday/Cyber Monday retail sales frenzy were generally less than impressive. Consumers snapped up the deeply-discounted promotional items but were not enticed into buying higher-margin goods. More ominously, the proportion of sales paid by credit card fell sharply from prior years. Frugality appears to be foremost on consumer minds this year, and that’s not good news for retailers.

The Dubai scare, brief though it was, caused a pop in the U.S. dollar and a dip in Treasury yields, along with a spike in equity volatility. Interest rates headed back up as the new week opened, with the ten-year Treasury ending today just above its 200-day moving average at 3.323%. Banks and institutions that want to go into year-end with “safe” assets on their books are probably behind some of the Treasury purchases. A similar pattern was seen at the end of 2008 but is not quite as pronounced this year. Spot gold prices crossed above $1,200 this week to yet another all-time high. There is no doubt the gold market is frothy, but as yet there is no sign of a breakdown.

Sectors

Materials kept the top sector spot but lost some of its bullish momentum. Health Care moved up to #2, not because of a strong improvement but because other sectors pulled back. Technology slipped from second place to fifth but still looks quite healthy. Energy slid further down the list while Financials displaced Utilities on the bottom

Styles

Our relative Style rankings were mostly unchanged in the last week. A bias toward Large Cap remains in effect, with Mid Cap in the middle of the curve and Small Cap toward the bottom. Micro Caps, still in last place, slipped back into a negative intermediate-term trend.

International

Japan had a huge week, gaining +5.1%, mostly due to a surging Yen. The Yen exchange rate climbed 2.6% in the last five days and has gained more than 6% against the dollar in the last five weeks. Japan has been lagging badly for most of the year but seems to be resuscitating itself lately. Time will tell if the surge is sustainable. On an intermediate-term basis, Latin America is still the strongest region and Japan is still in last place. The U.K. dropped from #2 to #4. Canada made a strong move back into the top half of the chart and could move higher soon.

Note:

The charts above depict both the relative strength and absolute strength of various market sectors, styles, and geographic locations on an intermediate-term basis. Each grouping is sorted (top to bottom) by relative strength. The magnitude of the displayed RSM value is a measure of absolute strength, which is our proprietary method of measuring and reporting the intermediate-term strength as an annualized value.

Back in the heady days of 2006 some 30,000 cranes, roughly a quarter of total global capacity, were busy whirring away in Dubai.

Today most of these devices have either left to find service in other parts of the globe, or lie silent, unused and unloved. In what is only the latest sign of the ongoing property snarl-up affecting the emirate Nakheel, Dubai World’s property developer subsidiary, asked on Wednesday for a delay in their next debt payment. The move was widely seen by investors as a technical default, raising concerns about investment in risky assets right across the globe.

So while their company slogan may well be that the sun never sets over Dubai World, the fact is that Dubai World’s sun not only no longer shines, it is suffering from something more like a total eclipse.

According to the last reckoning, government owned Dubai World has some $59 billion in outstanding liabilities, making the company responsible for the lion’s share of the total $80-100 billion in estimated Dubai state debt. Up to now all maturing government-linked debt has been paid off in full, with government funds making up any shortfall in private funds. But the latest announcement suggests that weaknesses in the global property sector and vulnerability of the emirate’s economic model is leading the government to have second thoughts, and the clear impression is that Nakheel could be a very different story given the government’s expressed intention of supporting only viable companies.

More than the scale of the issue, the problem this week in Dubai has been the uncertainty created, the underlying lack of transparency about the state of corporate and national finances and about exactly which debt will be honored, and above all about whether or not other countries – both within and outside the region – will be affected via the process known to financial analysts as contagion.

The consequences of the present payment standstill are wide ranging, as would be the impact of any eventual default. The repayment of Dubai World’s $4 billion Nakheel bond was seen by investors as a key test for the emirate’s ability to deal with the rest of the $80 billion or so owed by the government and its state-controlled companies. Dubai’s ability and willingness to do just this is what is now in doubt, and the way the process has been handled so far is leading to all manner of investor speculation.

The blow caused by the announcement was initially softened by news earlier the same day that the government had raised $5 billion from Abu Dhabi banks, but this optimism was soon dented as it sank in that the figure was considerably less than what the emirate had been hoping to attract from external investors and the sequencing of the two announcements is interpreted as suggesting that the Abu Dhabi money will not be spent on companies like Nakheel and Dubai World.

Indeed Dubai’s growing problems had been evident for some time, with the credit rating agencies sharply downgrading Dubai government-owned corporations over the last year as expectations for the extent of likely government support have declined. Earlier this month Moody’s cut the ratings on Dubai Ports World, and Dubai Electricity and Water to Baa2 (junk status) from A3 and downgraded 4 other government linked companies, with the agency noting in its press release that the debt restructuring plan “highlights the government’s intention to strictly adhere to its stated policy of supporting only those companies with viable long-term business prospects”

Aside from the Dubai issue itelf the big worry now is possible contagion to other markets, with Central and Eastern Europe in the forefront of everyone’s mind, given the overlap in bank exposure. The announcement also lead to a sharp a drop in the value of the UK pound on the fear that the Dubai government could be forced into a rapid sale of its international real estate, and since the emirate has extensive UK property holdings which might go under the hammer any such move would clearly have implications for the UK property market, and the banks that have exposure to it.

In total European banks are estimated to have some $40 billion of exposure to Dubai with Standard Chartered leading the group according to research from Credit Suisse. HSBC Holdings, Barclays, Royal Bank of Scotland Group and Lloyds Banking Group also have some, significantly lower, exposure.

Since the decision to halt payments has raised fears of the largest sovereign default since Argentina 2001, most of the attention has been focused on sovereign debt issues, and these, of course, extend far beyond the Middle East itself. In particular European bond market worries grew over the ability of riskier government borrowers from Russia to Greece and Italy to pay back their debts in the longer run. And it is just here that one of the long term consequences of what happened this week in Dubai can be found, since with government after government pressing the accelerator pedal hard to the floor on the stimulus front, and digging ever deeper into the public purse to plug gaps in the bank balance sheets, the perception that paying back all the accumulated debt may be harder than expected, especially with ageing population problems to think about, is now gaining traction among investors. And once sovereign debt default fears really come up over the investor radar, it is going to be very hard work to remove them.

Greek sovereign debt in particular is attracting a great deal of attention, and this week one historic milestone has been passed, since the cost of insuring Greek debt for the first time equalled that of insuring equivalent Turkish debt. At first sight this is very shocking news, since as recently as 2007, the Turkish CDS spread was trading at about 500 basis points on perceived fiscal risks. The Greek spread, by contrast, was nearer 15bp. The country is, after all, a member of the European Monetary Union, and its euro-denominated bonds were considered effectively protected by other euro states. But over the past year the fiscal position of many emerging markets nations, Turkey among them, has become more favourable, while that of some Eurozone countries, including Ireland and Spain as well as Greece, has steadily deteriorated.

Evidently such comparisons constitute a fairly bitter blow to Greek pride, but there is a much bigger issue here, one which goes straight to the heart of the Dubai saga. Two years ago, global investors generally did not spend much time worrying about the risk that seemingly remote, nasty events might occur. But the financial crisis has changed this perception. Having had their fingers badly burned once, investors are eager not to have it happen a second time, which is why what is happening in Dubai now makes them nervous, and why Europe’s governments would do well to think more about the future, and especially about ensuring that we don’t see Dubai like events starting to happen much nearer to home.

Today financial markets all over the world dropped by 2-3 percent. That is quite a big, taking into account that major financial and economic news during the past few weeks has been quite good. All major investors, economists and decision takers seemed to agree that we were leaving the recession caused by the Global Credit Crisis behind us.

But just as much as the Global Crisis was according to us at LMG a nice example of Overreaction, we’re seeing a new example here! People will never learn! Time after time behavioral tendencies seem to lead markets into some kind of overreaction. Or like that famous German saying: ”Zum Himmelhoch Jauchzend, zum Tode getruebt” (free after Goethe).

Financial journalists explained the 2-3 percent losses in all major Asian and European markets (the US couldn’t give guidance due to the fact that it was also Thanksgiving) by the news that Dubai World had announced that it was incapable of paying off its debts of USD 60 billion. After some quick calculations analysts found out that European banks were holding some USD 40 billion of this debt. But in and of itself it was not ‘new’ news that Dubai was struggling.

A couple of weeks ago it already became clear that new loans from Abu Dhabi were actually necessary to help Dubai pay off older debt and interest. This is such a different story when comparing it with the fantastic news stories seen a couple of years ago in all major magazines and news papers about a new world miracle taking place in the Arab desert. Dubai was a modern Babylon and the construction of the Burj Dubai tower, the highest building in the world, added to this.

The idea that Dubai would be capable in a few years to establish itself as the next major financial center in the world, doing in a few years what had cost countries like Hong Kong and Singapore decades, was the beginning of the overreaction (i.e. the positive side of it). Loads of investors, banks, governments etcetera seemed to forget that trees don’t grow into heaven without paying some kind of price and/or without doing the necessary preparatory work. Trendy Europeans, Americans, movie stars, sports heros all of them tried to get a place under the sun (literally in this case) by buying one of the islands in the extravagant off-coast Palm Island project.

But this type of overreaction was oh so similar to what already had been described by scientists Werner De Bondt and Richard Thaler back in 1985. Exaggeration leads people to pay too much to be part of an allegedly ‘hot market’. That hot market in what in and of itself is a fantastic region in the world – the Middle East – was then caught by the Global Crisis and panicky investors. Property prices in Dubai dropped as much as 60 percent. The city, in the meantime transformed into a mega construction site, switched from being one of the world’s busiest and most entrepreneurial places to one characterized by paralysis. New projects were cancelled and work on existing ones was stopped and postponed.

But OK, this was all already taking place. So let us now – after a good period for Emerging Markets since March of this year – analyze what was going on today. The total debt of Dubai World is $ 60 billion. World markets (ex USA) dropped 2-3 percent. Let’s say 2.5 percent on average. That 2.5 percent is about the size of a market like the Netherlands or Switzerland when looking at global market sizes.

In other words: if Dubai World would go bankrupt completely without its government helping it out one way or another (directly or indirectly through the support of other United Arab Emirate partners like Abu Dhabi, Bahrein, Qatar etc) and this 2.5 percent drop would be ‘correct’ it would have to be similar in size to loosing markets of the size of the Netherlands or Switzerland. However, both are far bigger than the $ 60 billion that is at stake. True, Western banks that are just about to recover from the Global Crisis (helped by their governments) will have to face a new big problem and that could have far-reaching consequences.

But the bottom-line is that the sizes of the Dutch and Swiss economies are about 10-15 times larger than what is at stake here in Dubai. Therefore, by all means markets are overreacting once again.

And don’t forget: the US markets were closed due to Thanksgiving. When observing how European markets move before mid-afternoon vis-a-vis the end of the day we all know that when the US markets don’t provide investors across the globe with their guidance, paralysis and fear are more likely to strike.

Cleantech Financier calls current carbon treaty system “aparthied” from Ann Danylkiw on Vimeo.

The MSCI Emerging Markets Index has notched up a massive 72.3% gain for the year to date, and an even more impressive 101.4% since the March 9th  lows.

Although emerging markets were the clear leaders during the initial months of the recovery, the MSCI World Index has subsequently done some catching up but still lags with gains of 26.7% and 69.3% for the two measurement periods.

The chart below shows the performance of the MSCI Emerging Markets Index relative to the Dow Jones World Index. Needless to say, an upwardly sloping line means outperformance by developing stock markets.

Should emerging markets be renamed “emerged” markets? Let’s consider two graphs to gain a better understanding of one of the key drivers of emerging stock markets.

As shown below, the Emerging Markets Index is primarily driven by commodity prices and in particular by metal prices as measured by the Economist Metals Price Index. Considering the historical relationship, emerging-market equities seem to be fairly priced given the level of metal prices.

All other things being equal, the outlook for emerging markets, or at least the resource-related ones, appears positive given the favorable prospects for metal prices on the back of improving global industrial production and stronger global economic growth.

What is important is that the ratio of the Emerging Markets Index and World Index is also driven by commodity prices and specifically metal prices. As shown below, the relative risk of investing in emerging-market equities has increased as the ratio has outrun metal prices.

Longer term I have little doubt that emerging markets will outperform their mature peers. However, over the next few months metal prices would need to rise quite substantially to ensure further outperformance by the Emerging Markets Index. At best, I would expect emerging markets to maintain the current relative levels against the MSCI Global Index should metal prices move sideways.