With a rate cut from the U.S. Federal Reserve seen as highly likely, world markets gained across the board today (Tuesday), reversing most of yesterday’s losses. The U.S. markets were up at midday.

At noon today, all three major U.S. indices had posted gains.  The blue-chip Dow Jones Industrial Average Index rose 77.72 points (0.63%), to trade at 12,461.61.  The tech-laden Nasdaq Composite Index was up 3.18 (0.14%), reaching 2,354.44. And the broader Standard & Poor’s 500 Index gained 6.77 (0.50%) to trade at 1,360.77.

In the U.S. markets, the Basic Materials, Capital Goods and Transportation sectors all posted strong gains.

In overseas trading early today, Japan’s Nikkei index gained 390.95 points, a 2.99% gain.  Hong Kong’s Hang Seng index was up 238.19, a 0.99% increase. 

That was a sharp reversal from yesterday (Monday), when Asian markets endured steep losses across the board on spiraling fears of a U.S. recession and how that downturn might affect Asian exports into the U.S. market. On Monday, the Tokyo-based Nikkei stock average was down 3.97%, while Hong Kong’s Hang Seng index lost 4.25%. 

But a weak housing report from the U.S. Department of Commerce yesterday – stating that sales of new U.S. single-family homes plummeted a record 26% in 2007 [which caused builders to slash prices by the most since 1970] – only fueled optimism that the policymaking Federal Open Market Committee (FOMC) would move to cut short-term interest rates tomorrow (Wednesday), after the conclusion of its two-day meeting.

A week ago today – in a surprise move made before the U.S. markets opened – the U.S. central bank slashed its benchmark interest rate by three quarters of a percentage point, its single-biggest reduction in nearly 25 years.

Anticipation that U.S. Federal Reserve Chairman Ben S. Bernanke will again move to cut the benchmark Federal Funds Rate – this time by as much as half a percentage point – drove U.S. stock prices higher yesterday (Monday). And that bullishness spilled over into the Asian and European markets today, and the carried over into U.S. trading.

On the strength of better-than-anticipated durable goods orders, Boeing Co. (BA) and Caterpillar Inc. (CAT) both climbed in morning trading.  The Dow Chemical Co. (DOW), American Electric Power Co. Inc. (AEP) and Valero Energy Corp. (VLO) gained after releasing well-received earnings reports.

"When you see a durable goods number like this and then earnings outside of the financial sector doing quite well, people are beginning to realize that perhaps the contagion effect may be somewhat limited," Damon Barglow, of Boston-based Eastern Investment Advisors, said in an interview with Bloomberg Radio. "[The market] is realizing that there is a lower probability of a recession," he added.

The FOMC is meeting today and tomorrow, and these positive developments could serve to complicate their decision-making. With investors anticipating a rate cut of 0.50%, anything less could be seen as a disappointment and could cause stock prices to plummet.

Trading was light as the markets wait to see which way the Fed will move.

News and Related Story Links:

• Bloomberg:
  U.S. Stocks Rise After Earnings, Durable Goods Top Forecasts.

• Money Morning:
  Fed Fans Optimism and Fears With Surprise Rate Cut.

U.S. markets advanced yesterday (Monday), erasing most of Friday’s losses, as hopes of another Federal Reserve rate cut buoyed investor optimism and kept the U.S. indices from following the Asian and European markets’ lead.

Friday saw all three major U.S. indices in the red.  The blue-chip Dow Jones Industrial Average Index sunk 1.50%.  The tech-laden Nasdaq Composite Index was down over 3.19%. And the broader S&P 500 Index dropped 1.97%.

In response to Friday’s U.S. losses, Asian and European indices took a tumble yesterday. 

Asian markets saw losses across the board as continued fears of a U.S. recession and the eventual effect on export trade got priced into the market again.  The Tokyo-based Nikkei stock average was down 3.97%, while China’s Hang Seng index lost 4.25%. 

Europe’s markets faired slightly better, as London’s FTSE 100 slumped 1.36%, Frankfurt’s DAX stayed flat with a scant 0.03% gain, and Paris’s CAC 40 was down 0.61%.

It looked like U.S. markets were likely to follow, but instead reversed the trend as investors hoped an additional Federal Reserve rate cut would come out of the Federal Open Market Committee meeting being held today and tomorrow. 

Anticipating the boon lower rates would mean to both financial firms and homebuilders, investors snapped up shares of Bank of America Corp. (BAC) [up 4.36%], Citigroup, Inc. (C) [up 3.79%], and Pulte Homes, Inc. (PHM) [up 5.19%].

A Paradigm Shift

The old economic adage is that if the U.S. sneezes the rest of the world catches a cold, but that may not necessarily be true anymore. What can be said is that if the U.S. catches pneumonia the rest of the world better stock up on penicillin. And the temperature in the United States has been rising for a while now.

The meltdown of the U.S. subprime-mortgage market has pushed up credit costs worldwide and forced European and Asian banks to write down billions of dollars in holdings. Less equity and credit has resulted in less spending by American consumers and companies, reducing demand for imported goods. Now as fears of a recession hits home, tumbling U.S. stock prices are dragging down markets elsewhere.

"What’s worrying us is the specter of a recession," Emmanuel Soupre of Paris-based Neuflize Gestion told Bloomberg News. "A few weeks ago, no one was capable of determining whether we were facing a slowdown or a recession. The more time passes, the more the ghost of a recession appears. We’re convinced stocks can fall farther."

Some analysts see global growth decelerating from a 4.7% rate in 2007, to a 3% pace, indicative of a worldwide recession.

U.S. Gains on Fed Hopes

Meanwhile, all three major U.S.-indices had gains for the day, as the Dow Jones rose 1.45%, the NASDAQ climbed 1.02%, and the S&P 500 was up 1.75%.

Rather than causing markets to stagger, a weak-housing report for December released by the Commerce Department yesterday, only increased speculation that Bernanke will act again.  The Fed futures market is pricing in an 88% probability of a 50-basis point rate cut, which would bring the key interest rate down to 3.0%. 

"There’s hope that Ben Bernanke will do more on Wednesday," Alan Lancz, president of Alan B. Lancz & Associates Inc., Toledo-based investment advisory firm, told Reuters. "Last week’s 75 basis-points cut was a nice turnaround, and some kind of follow-through will be good, too." 

As Bernanke continues on his rate-slashing torrent, it becomes increasingly likely that central banks abroad will follow suit, even though their main concern seems to be inflation for the time being.

"From a European and a U.K. perspective, the Fed cut adds to the risk of more and quicker rate cuts," Amit Kara, an economist with UBS AG (UBS) in London, told Bloomberg News.

Kara – a former economist at the Bank of England – is predicting four cuts from the British central bank this year, and two from the European Central Bank.
Only the Bank of Canada responded to the U.S. emergency rate reduction last week, cutting its rate by a quarter point, as it braced for a U.S. slowdown. But if the Fed gets back to the business of cutting rates tomorrow, other central banks may not be left with much of a choice.

"The odds are shifting toward a more significant global monetary easing," Richard Berner, co-head of global economics for Morgan Stanley in New York, told Bloomberg News.

News and Related Story Links:

• Bloomberg:
   U.S. Stocks Gain on Rate-Cut Speculation; Financial Shares Rise

• MarketWatch:
   U.S. stocks close higher as investors bet on rate cut

• 
  The Associated Press:
   Stocks Rise on Rate Cut Hopes

• Reuters:
   Wall Street rallies on hope for Fed rate cut

• Bloomberg:
   Stocks Fall in Europe, Asia, U.S. Futures Drop; Total Declines

• Money Morning:
   Fed Rate Cuts May Bode Well for the Greenback

Here’s a deeper look:

Markets across the Asia-Pacific region plummeted for the second straight day. The Nikkei 225 saw its worst two-day decline in nearly 20 years, and sank below the 13,000 mark for the first time since September 2005.

Australia’s S&P/ASX 200 experienced its biggest drop since the index was launched in 2000, falling 7.1%. 

Hong Kong’s Hang Seng index fell 8.7%. It has dropped 31% since its peak of 31,638.22, hit back in October.

Indian shares plunged 11% within minutes of the opening bell, resulting in a one-hour freeze in trading. When trading resumed, stocks slid another 2% before rebounding.

Trading yesterday in Europe and Asia was brutal. While the U.S. markets were closed in observance of Martin Luther King Day, global indices took tremendous one-day hits that plunged some past the 20% bear market indictor.

After the markets closed, U.S. futures contracts were pricing in a major decline for today and trading is likely to be harsh, with the possibility of a 500-point drop for the Dow Jones Industrial Average Index.

The blue-chip Dow, long seen as an indicator of the overall health of the financial markets, is already well past a 10% correction and sliding lower. On Friday, the Dow hit a new intraday low of 11,953.71, a 15.8% decline from its intraday peak of 14,198.83 on Oct. 9. A decline of 20% from a 12-month high indicates a bear market.

And yesterday’s overseas turmoil might just be the last push the Dow needs to sink below that all-important 20% waterline.

Based on a combination of lackluster market performance last week, continued financial market troubles and skepticism over the Bush administration’s proposed economic stimulus package, world markets dropped across the board. 

In Europe, Britain’s benchmark FTSE-100 lost 5.5% to a 5,578.20 close; France’s CAC-40 Index shed 6.8% to close at 4,744.15; and Germany’s blue-chip DAX 30 plummeted 7.2% to a 6,790.19 close. Russia’s Micex Index was down 7.5%, its largest decline since June 2006. Europe’s Dow Jones Stoxx 600 Index dropped 4.1 percent, extending its loss from its June 1 peak to a bear market at 22%.

Asia fared much the same as India’s benchmark stock index lost 7.4%, while Hong Kong’s blue-chip Hang Seng Index dived 5.5% to 23,818.86, its biggest one-day percentage drop since the 9/11 attacks. Japan’s benchmark Nikkei 225 index slumped 3.9% to a 13,325.94 close, its lowest level in two years. China’s Shanghai Composite Index was down 5.1%, fueled by concerns about Chinese banks’ exposure to U.S. subprime mortgage investments.

Even with the U.S. markets closed, the Americas did not escape the worldwide market rout as Canada’s Toronto Stock Exchange-listed S&P/TSX composite index fell 4% while Mexico’s benchmark IPC stock index declined 4.6%.  In South America’s largest market, Sao Paulo, Brazil’s Bovespa index slipped 6.9%.

The MSCI World Index slipped 3%, extending its decline from its Oct. 31 peak to 17%, while the MSCI Emerging Markets Index flirted with bear territory as it lost 5.4%, extending its loss from its October peak to 19.7%.

Continued Financial Market Woes

Once again, financial stocks lead the decline as beleaguered banks reported even more mortgage-backed security related write-downs were in the making.  

DJIA component, Citigroup Inc. (C) fell to its lowest level since 1998 on Friday. Shares fell $0.51 (2.04%) to close at $24.45. The cash-poor bank also sold $3.25 billion in preferred shares, Reuters reported.

French banks were hard hit after comments from Christian Noyer, governor of the Bank of France, appeared in the International Herald Tribune.

"I’m reasonably confident that French banks will weather this turmoil without major trouble even though they are clearly, like all banks, in the world still in the process of marking down assets," he said, signaling that despite billions of dollars in write-downs so far, more were still to come.

In Asia, investors worried over a potential $8 billion write-down of U.S. mortgage securities by Bank of China Ltd., The Wall Street Journal reported.

Equally troubling, top bond-insurers Ambac Financial Group Inc. (ABK) and MBIA Inc. (MBI) are in jeopardy of losing their AAA-ratings, which in effect would downgrade the ratings of the $2.4 trillion in securities they insure. The rating downgrade could result in forced sales by institutional investors who are restricted to holding only the highest-rated assets.

"The major risk for credit markets remains forced selling on the back of downgrades of the insurers," Jochen Felsenheimer, the Munich-based head of credit derivatives research at UniCredit SpA, Italy’s biggest bank, told Bloomberg News. "The problem right now is there seems no way out."

Fitch Ratings downgraded Ambac to two levels to AA on Jan. 18, which in turn increased the scrutiny of Ambac, as well as other bond insurers, by other ratings firms including Moody’s Investors Service and Standard and Poor’s.

"The destruction of the bond insurers would likely bring write-downs at major banks and financial institutions that would put current write-downs to shame," MarketWatch reported Tamara Kravec, an analyst at Banc of America Securities, wrote in a note Friday.

Don’t Panic!

Today could be one of the most brutal trading sessions the U.S. markets have ever seen. It could be bigger than 1987’s Black Monday and proportionally it could even touch the levels [over several days] we saw after the 9/11 terror attacks.

But Money Morning Investment Director Keith Fitz-Gerald advises caution. 

"I want you to understand that if you run for the hills now, chances are you’ll regret it for years to come," he said.

Fitz-Gerald went on to outline the following crucial points:

1. Many global markets are actually poised for double-digit growth in 2008, even if the U.S. economy slows down. This is particularly true for those international markets that are less dependent on the United States than ever before. The process is called "decoupling" and you can see it in the data, particularly when it comes to the Pacific Rim. For instance, excluding Japan [which is still early in this process], 43% of Asia’s exports go to other nations in the region up from 37% in 1995. Abandon ship now, and chances are you’ll miss the boat when it sails.

2. From chaos, comes opportunity, especially when it concerns those companies we refer to as the "global titans." Yes, these companies will drop along with the market, but with many of them paying a healthy dividend with a balanced international revenue stream, they’re trading at levels not seen in years – levels that will look cheap in hindsight in the months to come.

3. A falling dollar combined with rising energy costs and the Fed’s "attention to deficits disorder" will make U.S. exporters more appealing in international markets. This appeal will add much needed stability in the face of uncertain market conditions.

Fitz-Gerald knows his advice will be tough to stomach, especially if tomorrow’s markets are even half as rough as we think they could be, but history shows that investors who stay calm and add to key positions during a downturn – particularly when it comes to the "global titans" and high income plays – will be handsomely rewarded in the months ahead.

Many of these companies continue to demonstrate growing earnings and accelerating profits even under difficult market conditions. These firms will only do better when the economic environment improves.

News and Related Story Links:

• Bloomberg:
  Stocks Plummet in Germany, Hong Kong and India in Global Rout

• MarketWatch:
  Bond-insurer woes may trigger more write-downs

• Reuters:
  Recession fears could end bull market

• ABC News:
  
  Politics, Not Economics, Demands Stimulus

The United States regained the top spot as the world’s most competitive economy, moving from sixth place to oust Switzerland, according to an extensive and influential survey by the World Economic Forum.

Rounding out the top ten: Switzerland took second, followed by Denmark, Sweden, Germany, Finland, Singapore, Japan, United Kingdom and the Netherlands. Last place out of the 131 countries went to Chad. 

Also worth mentioning: China moved from 54th to 34th place. Korea moved from
24th to 11th. Malaysia moved from 26th to 21st.

The rankings are calculated from public data and the Executive Opinion Survey, a comprehensive annual survey conducted by the World Economic Forum. The survey polled 11,000 business leaders in 131 countries. This year’s list was expanded to include Puerto Rico, Libya, Oman, Saudi Arabia, Senegal, Syria and Uzbekistan.

Michael E. Porter, one of the report’s authors and Harvard business professor, said the report is both a measure and catalyst of global competition. More specifically, its broad swath of global business leaders unearths infrastructure specifics – education, health care, labor market efficiency, technological readiness, etc. – that allow researchers to pinpoint what countries are doing to help and hurt themselves. 

"You can’t just measure one thing because many aspects of an economy – the government system, political system – determine or impact competitiveness," Porter said an interview on the World Economic Forum’s official YouTube site. "The report is first of all, an important process of really learning about the fundamental drivers of prosperity. It’s a way of revealing what really matters."

Why the U.S. is Best

Xavier Sala-i-Martin, professor of economics at Columbia University and co-editor of the report, said the United States regularly tops the list for several reasons: it is the world’s largest economy; it is highly competitive with itself, leading to higher innovation and creativity; and its universities collaborate with the business sector, emboldening the capacity to create new technology.

"However, some weaknesses, particularly related to macroeconomic imbalances, continue to present a risk to the country’s overall competitiveness potential, and to the global economy as a whole," Sala-i-Martin said. "This danger has most recently been demonstrated by the fallout and contagion caused by the country’s sub-prime mortgage crisis and the ensuing global credit crunch."

Jennifer Blanke, a senior economist at the World Economic Forum, said Europe’s scattered performance tells a mixed story. She credited the high marks of Denmark, Sweden and Finland to their efficient governments and education systems. And though Eastern European countries rank 23rd and below, they are seen as heat seekers on the list because they are latching to the technology sector, Blanke said. However, Italy, one of the European Union’s founding members, ranked 46th because of poor management of public finances and weak justice systems.

The bottom of the list is overwhelmingly comprised of sub-Saharan African countries.

Though the full report goes for 65 pounds (about $134), the World Economic Forum provides this year’s full list and those from previous years. Also, its web site is chock full of YouTube interviews with authors of the report. Videos are in English, French and Spanish.

News and Related Story Links:

• Money Morning:
  Does Malaysia Pay Its Executives More than the United States?

• World Economic Forum:
  Global Competitiveness Report

• YouTube:
  World Economic Forum’s Official YouTube site

• Industrial and Commercial Bank of China (IDCBF), China’s largest bank, is buying 20% of The Standard Bank Group Ltd. (SBGOF), South Africa’s largest bank, in a deal valued at $5.56 billion, the Business Report of South Africa reported. Under the terms of the deal announced Wednesday, Industrial and Commercial will buy about 11% of the stock from existing shareholders and the remaining 10% from newly issued shares. Standard Bank plans to use the cash infusion to finance expansion. The company currently has branches in 18 African nations and a presence in 21 countries outside of Africa, including Brazil, Hong Kong and Russia.
• Petro-Canada (PCZ), an integrated oil-and-gas company based in Calgary, reported that third-quarter profits rose 14%. The Canadian company cited strong contributions from its North Sea and Canadian oil sands operations as the chief reasons for the increase. Earnings from continuing operations totaled $802.5 million for the quarter, up from earnings from continuing operations of $701.1 million for the same quarter a year ago. Petro-Canada shares rose 41 cents each, or 0.75%, to close at $54.76.
• On Monday, Umbro Plc. (UMBOF), the world’s largest supplier of soccer clothing announced it had accepted a takeover offer from U.S. shoe and fitness apparel giant Nike (NKE).  Nike will pay $582.2 million, or $3.94 a share – 61.0% higher than the closing price on Wednesday.  Shares of Umbro soared 15.3%, or 52 cents, to $3.89.  Nike gained 95 cents, or 1.5%, to $64.12, indicating investor approval of the deal.  With sluggish growth in demand for its products in the United States, Nike’s acquisition of Umbro will give it firm footing in the global athletics market where soccer reigns supreme. 
• PetroChina Co. Ltd. (PTR), China’s largest oil producer, could raise as much as $8.9 billion (66.8 billion yuan) from the sale of as many as 4 billion of its Class A shares in an initial public offering (IPO) that will be priced on Tuesday. The shares will start trading Nov. 5, according to The Wall Street Journal. The indicated price range is $2 to $2.23 per share. The range is well below the price of its Class H shares traded in Hong Kong, which closed at $2.50 yesterday. The mainland China government has encouraged a number of companies to make large-scale offerings on the domestic exchanges to meet strong demand from local investors. If the shares are sold at the top end of the price range and the company sells the maximum number of shares it plans, the IPO would be the largest on the domestic exchanges to date. Last month, China Shenhua Energy raised just about $8.9 billion (66.58 billion yuan) in its A-share IPO, making it the largest mainland offering so far.

Vietnamese stocks have rocketed over the past few weeks, gaining 25% since early August. The recent rush into emerging markets has boosted near-term investor sentiment, while the long-term story remains compelling. Vietnam has posted gross domestic product (GDP) growth of more 7% a year for four straight years, and should grow by about 8.5% this year.

This is no surprise to those who follow Vietnam’s growth. Many analysts predict Vietnam will be the country that emerges after the current wave of emerging economies mature and their growth rates slow down. A big factor in Vietnam’s favor is that its economy is growing soundly, instead of at rates that border on out of control.

Deregulation and privatization, along with booming commodities markets and steadily increasing foreign direct investment (FDI) have buttressed the nation’s economic growth. Higher real incomes are fueling consumption. Car ownership, for example, is now up to 5% of the population.

The boom is evident from the growth rates at Sacombank, Vietnam’s biggest private-sector bank, notes Christopher Wood of CLSA, a provider of brokerage and investment-banking services in the Asia-Pacific market. The brokerage firm expects loans and pre-tax profits to grow by 90% and 130% respectively this year. And Vietnam’s population of 85 million still only has six million bank accounts.

Property ownership is on a roll. And the privatization of major state-owned firms is becoming an important factor in the market’s recent upswing, Wood says. Between 20 and 30 banks – including the four major state-owned banks, telecom firms and some infrastructure companies – are expected to hit the market over the next three years.

All this activity should give Vietnam’s tiny stock market a big boost in value and raise the profile of this "truly exciting market," Wood and other experts say. The leading stocks, as a group, are trading at about 25 times earnings, but this multiple is matched by projected profit growth, making Vietnam appear reasonably valued on a "PEG ratio" (price/earnings to growth rate) basis, Wood says.

Unfortunately, in spite of this financial allure, U.S. investors will for now have to take a rain check on Vietnam, as the country doesn’t have many companies that have registered their shares with the U.S. Securities and Exchange Commission. Nor is a Vietnam exchange-traded fund (ETF) currently available in the U.S. market.

Indeed, until a direct profit pathway is paved, investors may have to take the road less traveled, tapping into the many big-name foreign players plunking down major money on Vietnam projects. Key among them:

• U.S. chip giant Intel Corp. (INTC) committed $605 million for a test-and-assembly factory in February 2006, and has boosted its total Vietnam commitment to $1 billion.
• Korean steelmaker POSCO Ltd. (PKX) plans to invest $1.13 billion in new steel plants.
• Athletic-shoe innovator Nike Inc. (NKE) is responsible for more than 130,000 Vietnamese jobs.

In total, foreign investment in Vietnam jumped by 49% in 2006. And much more is expected, due to Vietnam’s brimming potential. Consider these alluring statistics:

• More than half its population is under 25 years old.
• At 2%, its unemployment rate is among the world’s lowest, trailing only Azerbaijan, Cuba, Iceland, Andorra and Liechtenstein.
• Its labor and production costs are roughly one-third that of China’s, making Vietnam a worthy rival in the contest for new production sites.
• It shrugged off the 1997 "Asian Contagion" financial crisis and averaged 5.5% growth for each of the next two years – while other nations in the region saw their own economies shrink.
• And it became a member of the World Trade Organization late last year.

The next step is for Vietnam to open its stock market to U.S. investors. And that may happen sooner than many experts expect.
Money Morning Associate Editor Mike Caggeso contributed to this report.

News and Related Story Links:

• China Post:
  Vietnam’s Economy Grows 8.16%.

• Money Morning Investment Analysis:
  The Market that will Emerge After the Emerging Markets.

• Money Morning Investment Analysis:
  The World’s Leading Electronics Manufacturer Makes Its Move In Vietnam.

• China View:
  Vietnam to Make Bigger Online Game Revenues.

• Wikipedia:
  The Economy of Vietnam.

• Money Morning Special Research Report:
  Global Investing: Has Wall Street Rigged the Game?

• Money Morning Special Research Report:
  International Investing: Why U.S. Investors are "Boxed Out" of Big Global Profits.

• Intel.com:
  Vietnam Properties.

• CBRonline:
  Intel to Spent $1 Billion to Build New Vietnam Factory.

[Editors Note: The Second of Two Parts. To Read Part I of this story, please click here].

If you were a gold investor back in the good old days of 1895, life was pretty easy. You’d spend the day in a huge leather armchair at your London club, sipping fine brandy. Periodically, a servant would telegraph buy-and-sell orders to your broker as you played the "Kaffir" gold-share-boom of that year.

You would avoid political risk by investing only in gold mines located in British colonies. And you wouldn’t worry about the price of gold, either – it was 3 pounds 17 shillings and 10 pence an ounce – and had been since Britain went back on the Gold Standard in 1819.

Back then, you had but two worries. First, did the mine contain any gold (engineers’ reports were crucially important)? Second, was the mine developer such an out-and-out crook that none of the profits would reach you?

It was a very simple business model. The price of gold was the price of gold, the mining cost was the mining cost, and if the difference between the two was positive, profits would flow into your pocket.

Today, of course, it’s quite a bit different. Modern finance has intervened with long-term futures and options contracts.

As a result, we still know the market price of gold, but we don’t know the price at which gold mining companies are selling their gold!

For example, gold miner AngloGold Ashanti Ltd. (AU) has recently "sold forward" three years of its gold mine output for a set price of $600 an ounce, regardless that the market price is now ranging upwards of  $750.

This process is known as "hedging." And I understand why gold miners do this. The executives want to make sure their jobs, and the jobs of its miners, are secure – even during a gold-market downturn.

However, investors don’t care much about preserving the jobs of gold miners, let alone those of mining company executives. We want to know what we’re getting in the form of earnings and dividends – and we want to benefit from a rise in gold prices.

The bottom line is that to invest in gold mines today, one must read a lot of boring and incomprehensible accounting footnotes – and must hope that the mining company isn’t in a jurisdiction where they don’t need to disclose the facts those footnotes usually contain. We’re also fortunate that hedging – very fashionable a few years ago – has decreased in use as gold prices have soared.

And gold prices are projected to keep rising. So let’s take a look at the world’s largest gold mining outfits that U.S. investors can easily buy into, either directly, or through American Depository Receipts (ADRs).

Of course, for the highly risk-averse investor who still wants to invest in gold, the simplest strategy is to buy an exchange-traded fund, or ETF. The StreetTracks Gold Shares Trust ETF (GLD) invests in gold directly and is a good bet.

But for Money Morning readers looking for higher potential returns, here’s a look at the major players, along with my five "best bet" recommendations:

• Barrick Gold Corp. (ABX) is a Canadian company with mostly North American production. It has some operations in South America and Africa, and mines copper and zinc, as well as gold. It has a $36 billion market cap, so there’s plenty of liquidity. The shares are trading at a trailing P/E of 34 (on the last 12 months’ earnings), but a forward P/E (on next 12 months’ profits) of 20. The company has eliminated its forward hedging program. By gold mining standards, this company is substantial in both size and scope, is reasonably valued, and features very little political risk.

• Agnico-Eagle Mines Ltd. (AEM) operates a gold mine in Northeastern Quebec, so there’s no political risk – unless Quebec separatism worries you. $7 billion market capitalization. Trailing P/E 46, forward P/E 44. You can pay too much for a nice location.

• AngloGold Ashanti Ltd (AU) is a South African company with operations in Argentina, Australia, Brazil, South Africa and West Africa. It has a market cap of $12 billion, a trailing P/E of 34, and a forward P/E of only 17. The good news: I like the diversification. And with its medium political risk, it’s reasonably priced based on next year’s projected earnings. The bad news: It has sold forward three years worth of production at a contract price of $600 an ounce. These contracts already have a value of minus $2 billion, and that negative value will increase as the price of gold rises. Stupid people, but bear in mind that this company’s earnings will jump if they ever manage to get rid of the hedges.

• Yamana Gold Inc. (AUY) is a Canadian company with operations in Brazil, Argentina, Chile, Honduras and Nicaragua. It is spending the equivalent of $3.8 billion in cash and stock to take over Meridien Gold Inc. (MDG), which has operations in Chile, Mexico and the United States. Yamana’s market cap is $5 billion, and its shares trade at a trailing P/E of 64, but a forward P/E of only 13. There’s a middling political risk, and a bit of an added business risk, due to the Meridien takeover. Investors can look forward to production doubling to 2.2 million ounces per year by 2012, primarily in Brazil and Argentina. I like this one, too, though the added risk of the Meridien acquisition should be kept in mind.

• Gold Fields Ltd. (GFI) is a South African company with mining operations in South Africa, Ghana, Australia and Venezuela (of which they just sold control to a local company). The company has a market cap of $12 billion, a trailing P/E 31, and a forward P/E 20. Upper-medium political risk, depending on what you think of South Africa. My view is that South Africa is acceptable currently, but there’s a good chance of Jacob Zuma winning the Presidency in April 2009, and he’s a nasty anti-Western leftist with a criminal record. On the other hand, that’s 18 months away, and the gold surge will probably have played out by then. GFI doesn’t hedge the gold price, which is a plus.

• RandGold Resources Ltd. (GOLD) is an offshore British company that mines in Africa (but not South Africa). The political risk is medium-high. With a market cap of $2.4 billion, a trailing P/E of 62 and a forward P/E of 31, this stock is expensive, especially given the elevated political risk.

• Harmony Gold Mining Co. Ltd. (HMY) is a South African company, with gold, copper and uranium mines, and operations in South Africa, Australia and Papua New Guinea. There’s only a medium-level political risk here. The company has a market cap of $3.8 billion, and the shares feature a trailing P/E of 79 and a forward P/E of only 17. The company does not appear to hedge, but that’s not a statement I can make with certainty. This miner has made some losses in recent quarters (theoretically, very tough to do at current gold prices). Given the losses, I’d have to regard this one as overpriced.

• IAMGOLD Corp. (IAG) is a Canadian company that mines primarily in Canada, Surinam, Ghana and Mali. Despite some of those exotic-sounding locales, the political risk is low-to-medium. The company has a market cap of about $2.4 billion. Though the shares trade at a forward P/E of about 22, the company has a trailing loss. Given that loss, the shares should be considered expensive.

• Kinross Gold Corp. (KGC) is a Canadian gold-and-silver miner, with primary operations company in Canada, the United States, Brazil, Chile and Russia. Kinross issued shares to buy a large Brazilian/Russian company in February. The market cap is big at $10 billion, the political risk is low to medium and the company doesn’t appear to hedge. However, with a trailing P/E of 35 and a forward P/E of 24, the shares appear a bit on the expensive side.
• Lihir Gold Ltd. (LIHR), a Papua New Guinea-based company, operates in PNG and explores in Australia. Given that some PNG miners have had some problems, there’s a mid-level political risk here. And with a market cap of $7 billion, a trailing loss, and a forward P/E of 29, this stock looks overpriced, too.
• Newmont Mining (NEM) is one of the better-known miners, based in the United States and operating in the U.S., Australia, Peru, Indonesia, Ghana, Canada, Bolivia, New Zealand, and Mexico markets. The political risk is low. It has a market cap of $21 billion, a trailing loss and a forward P/E of 26. Newmont used to hedge, selling gold at $384 an ounce, but closed out its positions, took the loss (from the contracts as well as losses related to a fatal accident at its Midas mine in Nevada) and now operates un-hedged. Not a bad value, but Barrack looks better.

Royal Gold Inc. (RGLD) is a U.S.-based company, with operations in Nevada, Mexico and Argentina. The political risk is low. But with a market capitalization of $930 million, a trailing P/E of 41, and a forward P/E 35, this stock looks expensive.

Having taken this tour of the global gold-mining industry, and having evaluated the key players, the best values appear to be:

#1: Barrick (ABX).
 
#2: Yamana (AUY).

#3: AngloGold (AU) (an attractive play if you don’t mind its excessive hedging and South African political risk).

#4: Newmont (NEM).

#5:  Kinross (KGC) would be my final choice.

And, of course, don’t forget the bonus: the Gold Shares ETF (GLD).

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India, no doubt, has corned the global market in the service sector. Think of it as the call center to the world. But China has established itself as the world’s factory floor, making everything from Barbie dolls to match sticks.

Yet while the growth in India has been impressive (its economy grew by 9.4% last year), it’s lackluster numbers on the manufacturing side have Indian entrepreneurs and policymaker disappointed and frustrated.

India’s service sector now accounts for more than half of the nation’s GDP. And that’s where its greatest growth has been, rising from 37% in 1990.

The only problem is that manufacturing has hit a wall, growing only by 2% of GDP from 1990 to 2005.  And many Indian entrepreneurs and policymakers fear India is losing out to China in a big way.

In China, manufacturing now accounts for 35% of GDP, according to the Boston Consulting Group. Compare that to 6% in India. Same goes for global trade. China clocks in at 7%. India a meager 1%.

"In our manufacturing potential, we are fast losing the race with China," J.J. Irani the director of Tata Sons said in an interview with BusinessWeek. Tata Sons is the parent company of the Indian conglomerate Tata Group, which is comprised of 98 companies that span across seven business sectors.

"China is more organized and faster than India," Irani went on to say, "The gap is widening."

Easing Up On Government Regulation May Help

Over the past two decades, India has been loosening its former dirigiste model, with strong government influence, in favor of a market-based economy. Direct taxes were reduced, government licensing of industrial activity was dissolved, and large companies were given more avenues for investment.

But some outmoded laws and restrictions still remain in effect, weighing heavily on manufacturing, curtailing Indian exports, and stifling the nation’s economic growth.

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Labor laws are notoriously strict in India, and the manufacturing sector has been bound in a cocoon of red tape. For example, in the manufacturing industry, a company that employs more than 100 people must notify the government of any plans to layoff or fire a single worker. However, that law does not apply to the service sector.

"We are overpoliticized and all of our problems have a political solution," Irani said.  "Economic problems need economic solutions. Religious problems need religious solutions. Social problems need social solutions. But everything here is an industrial solution, a political solution."

The Paris-based Organization for Economic Cooperation and Development agrees. Last week it released a report that stated: "The government’s target of reaching GDP growth of 10% in 2011 is achievable if reforms continue."

The report also concluded that: "In service sectors, where government regulation has been eased significantly or is less burdensome, output has grown rapidly, with exports of information technology-enabled services particularly strong."

The OECD is clear on its position that the country still has to loosen "restrictive" labor laws and the "inefficient" regulation of product markets if it wants to reach its goal. Additionally, policymakers must simplify the tax codes and encourage privatization.

Building From the Ground Up

Another key focus for India to gain competitiveness is infrastructure.

Expensive and unreliable electricity make blackouts all too common. Insufficient roadwork has left streets riddled with potholes and jammed with traffic.  Rolling blackouts force some factories to maintain costly back up generators.

India’s transport network is so inefficient it’s estimated that up to 40% of the country’s farm produce ends up rotting in fields or spoiling en route to customers. The price of food staples rises as a result, and that drives inflation.

BusinessWeek pointed out that the India of today bears a striking resemblance to the China of a decade ago.  Ten years ago China’s economy was getting ready to takeoff, but the infrastructure wasn’t there. So Beijing launched a massive modernization initiative, building 25,000 miles of expressway.  But India still has just 3,700 miles. That’s because only 4% of India’s GDP gets reinvested into infrastructure development. In China that number is more than double that, closer to 9%. 

Plans for improvement are ambitious, and India is taking the matter seriously. But putting the plans into action will be costly and time consuming.  New airports are currently under construction in Bangalore and Hyderabad. Nearly 3,750 miles of highways were built between 1999 and 2005 at a cost of about $7 billion.

And a little more than $12 billion went into the Golden Quadrilateral highway, which links India’s four biggest cities of Delhi, Mumbai, Chennai and Kolkata.

But right now, only 760 of the planned 4,500 miles of highway running north to south, and east to west, across the country, have been actually been completed. 

The heavy price tag that has come with progress has forced India to operate with a very high margin of debt. They country’s debt equates to 75% of its GDP (down from 82% in 2004), one of the worst ratios in the world. So, what’s an emerging country to do?

The Struggle to Attract Foreign Investment

If India wants to keep moving forward, it’s going to have to count on some big time contributions.  The Indian government estimates (or at least hopes) that public and private organizations will contribute between $330 billion and $500 billion to the nation’s development over the next five years.

That may very well be the case, but India is also going to need some help from abroad.  Inflows of foreign direct investment increased to 2% of India’s GDP from less than 0.1% in 1990. And the country only attracted $8 billion in foreign direct investment last year. China attracted $63 billion. 

Last year, Intel (NASDAQ:INTC) passed over India and chose Vietnam as the site of a new chip assembly plant. Intel made no secret of the fact that it looked to India as a home for the project first, and the snub baffled the country’s business community. Intel never offered a public explanation. Industry insiders have said it was the lack of reliable water and electricity that turned off the software giant.

The estimated cost of that plant was $605 million, and now Intel is ready to spend $1 billion on a semiconductor test and assembly plant in Vietnam.  This is just a fraction of the foreign investment that has retreated to other Asian interests in light of India’s shortcomings. 

Still, with many improvements underway and others on the docket, India isn’t out of the race.  Ford, Hyundai and Suzuki all export a significant number of cars from India. LG, Motorola, and Nokia all turn to India for to produce hardware for their respective phone services. And Honeywell, Siemens, and Schneider have all built factories for a variety of electronic products. Also, India has close to 60 manufacturing plants that adhere to the requirements of the U.S. Food and Drug Administration, the largest number outside of the United States.

Investing in India

India is losing the race with China but it has made a very strong impression in the service sector. If government reforms, infrastructure development, and foreign investment continue to increase then it may be able to make up some ground, but it’s going to be a tough road ahead literally and figuratively.

There aren’t many places to look if you’re interested in getting in on India’s developmental push.  A good place to start however would be Sterlite Industries India Ltd. (SLT). The company’s primary business is the production of copper in India. Sterlite’s copper cathodes and cast copper rods can be put to use in housing wires, electrical cables, and telecom cables. The company also mines bauxite and zinc ore, and produces aluminum conductors and other aluminum products.

A more diverse play might be the India Fund Inc. (IFN). The India Fund is a non-diversified, closed-end management investment company that invests in Indian equity securities.  At least 80% of the Fund’s total assets are invested in equity securities of Indian companies. Its portfolio includes common stocks, warrants and short-term investments.

News and Related Story Links:

• Money Morning Investment Analysis:
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• Money Morning Investment Analysis:
  India’s Richest Realtor Lobbies For a Rate Decrease Despite Strong Growth

• Organization for Economic Cooperation and Development:
  India needs more economic reforms to widen benefits from growth, says OECD report

• BusinessWeek:
  ‘We Are Fast Losing the Race With China’

• BusinessWeek:
  The Trouble With India

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• Merrill Lynch & Co. Inc. (MER) yesterday (Wednesday) took $7.9 billion in mortgage-related writedowns  – $3.5 billion more than the company predicted only two weeks ago – for the third quarter, spawning fears that the global credit crisis might be entering a new leg. The writedowns, the biggest reported by any bank during the credit squeeze, raised serious questions about the leadership of Merrill Lynch Chief Executive Officer Stan O’Neal, the Financial Times reported. Overall, Merrill reported a $2.3bn loss for the third quarter after writedowns of $8.4bn, including losses on leveraged loans.  Merrill Lynch shares fell $3.90 each, or 5.81%, to close at $63.22.

• Shares of STMicroelectronics NV (STM) – Europe’s largest maker of semiconductors – jumped nearly 6% yesterday after the quarterly earnings beat analyst estimates, and the company said revenue will increase during the current quarter. STM’s ADRs rose 5.67%, or 93 cents each, to close at $17.34 in regular trading, and rose just under 1% more in after-hours trading. The company reported third-quarter net income of $187 million, a decline of almost 10% from the same quarter a year ago, but well ahead of the $156 million that analysts were expecting. STM, which makes chips for cell phones, also predicted that sales for the fourth quarter will increase between 4% and 9%. Worldwide chip sales will advance at a 2% clip for the fourth quarter, and STM will grow faster than the market, the company said.

• Shares of the China-based Longtop Financial Technologies Ltd. (LFT) soared more than 85% in its U.S. stock market debut yesterday, the latest in a series of China-based initial public stock offerings (IPOs) that have posted huge gains on their first day of trading.  The Xiamen, China-based Longtop provides information-technology services to that country’s financial-services sector – yet another white-hot business segment, as middle-class workers start to amass wealth. Services include bank-transaction execution, payroll and risk management for customers, and other services. For the quarter that ended June 30, Longtop said revenue rose a blistering 47%, rising to $16.1 million this year from $10.9 million a year ago. Net income, however, dipped slightly, to $4.9 million this year to $5.1 million last year.

• GlaxoSmithKline PLC (GSK) will cut jobs and look to shave $3.1 billion in costs after reporting that profits dropped nearly 6% in the third quarter, the company announced yesterday (Wednesday). Glaxo posted a net profit of  $2.68 billion for the quarter ended Sept. 30, down from $2.85 billion during the same quarter a year ago. Revenue rose only 2% to $11.02 billion, the chief culprit being a 7% decline in U.S. revenue. Factors hampering U.S. sales included stiffer generic competition, and a 38% plunge in sales of its Avendia family of drugs that followed an earlier FDA announcement that the drug increased heart-attack risks.

• The European Court of Justice has struck down a German law that was preventing Porsche AG from purchasing the 69% of Volkswagen AG that it does not already own, the New York Times reported yesterday. In its decision, the court said that the law illegally restricted the free flow of capital within the European Union (EU). Porsche will be taking the matter under consideration at its supervisory board meeting currently scheduled for Nov. 12 of this year. Porsche has previously said that owning a majority of the shares would allow it to extract the maximum value from its investment in its fellow German auto giant.