Are Global Stocks Headed for a Bear Market?

Today's comment is by Mike Burnick, Senior Editor, Global Markets Analyst.

Dear A-Letter Reader,

Well it's official. One of the world's largest stock markets has now "officially" entered bear-market territory.

Last week, Japan became the first of the world's 10 biggest stock markets to enter a bear market," according to Bloomberg.

Japan's benchmark Topix index, which is a broad gauge of stock prices in the land of the rising sun, has now fallen 21% from its highs reached early this year. That was before the U.S. credit-crunch began to shock financial markets around the world.

The commonly used rule-of-thumb for gauging bear markets is a decline of 20% or more from a previous peak. It's officially a stock market "correction" once an index has declined over 10%. Japan's other major benchmark, the Nikkei 225 Index, is closing in on "bear market" territory with a decline of 18.3% from its 2007 peak.

Japan Bear Market vs. a U.S. Correction

Japan has Lagged for Years as
Attractive Values Get Cheaper Still

Of course, Japan has been a troubled market for years - decades in fact. The nation has been plagued by uneven economic growth. Japan has struggled with the aftershocks of a deflationary spiral that lasted throughout the 1990's.

It hasn't been all downhill since. The Topix Index actually enjoyed a nice bull run from 2003 to early 2006, more than doubling in value over that stretch.

However, the bull market rally seemed to lose its steam that year. Japan finished up 2006 with very little change. The Topix then topped-out just above the 1,800 level in February of this year. A fund manager quoted by Bloomberg put it this way; "Japan hasn't been an area of stellar growth for 10 years."

However, Japan is an area of compelling value at this point. The world's worst performing major index is now trading at just 17.5 times earnings. That's just HALF of its average value over the past four years. The index is even cheaper than the S&P 500, which is valued at about 17.7 times earnings.

Japan's Topix Index is home to many of the world's most undervalued banks too, including Mitsubishi UFJ and Mizuho. Both banks have warned of profit declines this year due to shrinking loan demand and fallout from the U.S. sub-prime market shock.

There are certainly some bargains on sale in the land of the rising sun. Unfortunately for early investors (including yours truly), stocks that already appeared undervalued earlier this year have gotten even cheaper since then.

Global Markets in "Correction Mode"

But it's not just Japan's equity markets that have been suffering declines lately. In fact, the month of November, which has historically been kind to stock market investors, has instead been a particularly cruel month this year. Most global markets have fallen this month. In the U.S., the S&P 500 Index just fell into official "correction" territory yesterday, having now fallen more than 10% from its recent high.

The blue-chip U.S. index has given up all its early year gains. It's now about flat on a year-to-date basis, after suffering its worst monthly decline in November, since September 2002.

The selling hasn't been confined to the U.S. and Japan however. The MSCI World Index of developed global stock markets has also fallen about 10% from its record high reached on Halloween. Meanwhile, the MSCI Emerging Market index has declined 12% from its October peak.

Global stock markets are in the midst of an across the board "correction." Only time will tell if other major indexes go the way of the Topix, entering bear-market territory next year.

Right now, I'm betting on just a "correction" which should result in some attractive buying opportunities for global investors - especially in Japan.

MIKE BURNICK, Senior Editor & Global Markets Analyst

EDITOR'S NOTE: As global markets sink into correction mode, select sectors in the U.S. also continue to hemorrhage. Specifically, the financial sector has been a bloodbath lately. But Mike has been earning triple-digit profits for his subscribers as financial shares plunge over the last several weeks. Click here to learn how he did it.

Panama: Investment Grade in 2009?

I was in Panama last month, so I can personally attest to the country's phenomenal growth in many sectors, not just the real estate boom in Panama City.

For too many years, Panama was saddled with a precarious national economy, reckless government spending and debt and a stark disparity between the wealthy and the poor. But now, the Republic of Panama's economy is finally moving toward general prosperity for all the 3.2 million people in this famous crossroads of the world.

Citigroup, which has long had a financial presence in Panama, has just issued a very positive current assessment of the nation's economy.

The Citigroup experts expect the country to attain an "investment grade" rating in the second half of 2009. Investment grade is the credit rating that rating services like Moody's and Standard and Poor's give a bond when it's likely to meet payment obligations. Once a bond is "investment grade," banks are allowed to invest in it.

This will be a first for Panama. It comes at a time when Panama has major construction projects in progress. It's more than just the US$6 billion Panama Canal expansion. Panama City also has major building and development projects underway. They're also building whole new cities and making badly needed infrastructure improvements.

Citigroup's optimistic outlook is based on the turnaround under President Martin Torrijos leadership. It's also based on Panama government's fiscal accounts and on the country's unique growth story. The Panama Canal expansion and fast capital accumulation should deliver the highest growth rates in the country's recent history.

The prediction is for a 9.2% growth rate in 2007 and at least 9% in 2008. These impressive growth rates are likely to be the main driver behind the sharp decline in debt-to-GDP ratios that make investment bankers happy to lend. Citigroup also likes the credit for long-term investments. They expect the entire Panamanian society to experience meaningful economic, social and political changes during this stage of high growth.

BOB BAUMAN, Legal Counsel

P.S. Have you been thinking about building a second home or just strengthening your portfolio with Panamanian real estate? Click here to learn how you can make this happen.

Currencies

Why a New Prime Minister May
be Bullish for the Aussie

The Australian elections are over and we have a clear winner. The good news for those down under is it seems that Australia's monetary policy won't be disturbed. That's very bullish for the Aussie dollar.

Kevin Rudd won the election over the current Prime Minister John Howard. So now that it's behind us, it looks like smoother sailing for the Aussie dollar. Until these elections, traders were waiting and watching to see what would happen. Traders don't like political uncertainty, so they tend to send their money towards the stable markets.

But now that Australians have a confirmed new prime minister, traders can focus once again on the rising inflation in the area - which is another bullish sign for the Aussie dollar. As inflation rises, look for more interest rate hikes to come in the future in Aussie land.

Next year, the U.S. will either hold rates or continue reducing rates. I'm betting they reduce rates. And if they do, then buying the Aussie dollar against the greenback will be a smart play. In fact the AUD/USD trade is looking better all the time.

SEAN HYMAN, Currency Director

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