The global initial public offering (IPO) market is the hottest it’s been in two years, underscored by a pair of IPOs that this week alone raised nearly $10 billion.

In the United States, insurance risk manager Verisk Analytics Inc. pocketed $1.88 billion in its Tuesday IPO – the largest IPO take by a U.S. company since Visa Inc. (NYSE: V) took its business public in March 2008.

Shares for Verisk were sold by the company’s existing shareholders and fetched for $22 apiece, higher than the expected $19 to $21 price range.

The second major IPO came from Banco Santander SA’s (NYSE ADR: STD) Brazil unit, which yesterday (Wednesday) raised more than $8 billion (14.1 billion reais) in the country’s largest IPO ever and the biggest of the year so far.

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Verisk and Santander’s offerings follow an unexpected one-week spree IPOs in September that raised $3.5 billion.

And more IPOs are scheduled in the near future.

One is Hyatt Hotels Corp., the major hotel and resorts operator and owner. Its 413 properties in 45 countries all bear a name that travelers have known since the 1960s. Despite the woes of the travel and hospitality industries, the Hyatt IPO is likely to draw strong interest from investors. Hyatt plans to raise about $1.15 billion.

Dole Food Co. Inc., taken private six years ago, will bring one of the world’s most recognized food brands back to public hands. With more than 150 years of marketing insight and a major international presence, the Dole name is a strong draw.

On the retail front, Dollar General Corp., an operator of discount department stores, also filed for an IPO. Tennessee-based Dollar General is a staple of small towns across the nation. Dollar General’s sales were up 13% in the second quarter, despite the recession’s impact on consumer spending. And it hopes to raise about $750 million in its IPO.

Meanwhile, Poland’s largest power utility company, state-owned PGE SA, is planning to raise $1.8 billion in an IPO next month, which would make it the Poland’s biggest in five years.

In the M&A market, the elephant in the room is Kraft Foods Inc.’s (NYSE: KFT) unsolicited $16.7 billion takeover bid for Cadbury PLC (NYSE ADR: CBY). For Kraft, Cadbury’s allure is its stable of established brand names – and a strong local identity in each of the markets it sells to.

A handful of M&A and major financing deals totaling $14 billion were also inked in September – namely Xerox Corp.’s (NYSE: XRX) plans to pay $6.4 billion for outsourcing specialist Affiliated Computer Services Inc. (NYSE: ACS).

Some of the same factors that jump-started the M&A market are now also helping to drive new IPOs, said Louis Basenese, an IPO and M&A specialist who’s also editor of The Takeover Trader investing service.

“The best cure for an IPO lull is a bull market,” Basenese told Money Morning. “Companies want to tap into the enthusiasm. And a 50% rebound [in U.S. stocks] certainly qualifies. So it’s no wonder we’re witnessing an uptick in recent weeks.”

All this boils down to one thing: Large-scale economic activity is coming back online, and it is driving stock markets higher and increasing investor appetite for risk.

The initial public offerings may be steroids for stock market, but their broad implications are equally huge as the global economy crawls out of financial crisis.

Verisk first wanted to go public last year, the IPO market’s worst year in three decades. Not only that, but its original IPO was planned a month before the collapse of Lehman Brothers Holdings Inc. (OTC: LEHMQ), which triggered a wave in losses for insurance companies.

The wait proved wise for two other reasons.

First, Verisk was able to improve its revenue and net income by 15% and 12%, respectively, in the first six months of 2009 compared to the same period a year earlier.

And second, its IPO occurred during a market with upward momentum and with higher-than-anticipated investor interest. Had Verisk went public last year, the pool of investors would have been shallower, and appetite for risk much lower. And then there would likely have been a considerable selloff when Lehman had gone under.

“The market is starting to open up,” John Fitzgibbon of IPOScoop.com told The Associated Press. Verisk’s performance “is a normal expectation when the IPO market arises from its ashes. It’s the phoenix.”

As far as Santander’s IPO goes, it’s just the first step in expanding its business from Spain – currently in its worst recession in 60 years – into Brazil, where the economy is expected to grow by 4.5% in 2010.

What’s more, Brazil economic foundation is built on commodities – including agriculture, metals, and oil – that are expected to be in big demand over the next decade.

Santander has more than 2,000 branches in Brazil and hopes to open 600 more by 2013. And it plans on using 70% of the proceeds from the IPO to do so. Santander’s expansion gives it more and better access to business and personal lending in red-hot Brazil.

In fact, by 2011, Santander may earn more money in Brazil (an estimated 4 billion euros) than its estimated profits in its homeland retail business (3.2 billion euros), according to Evolution Securities Ltd.

And its shareholders no doubt like the fact that Santander’s IPO is on the Bovespa stock index, which has rocketed 67% this year.

“Santander is giving investors something they want, which is exposure to Brazil, a play on growth through demand for commodities and also the development of China,” Inigo Lecubarri, a manager at Abaco Financials Fund in London, told Bloomberg News. “There’s an element of Brazil being in fashion.”

Most importantly, both of these IPOs are in the financial-services sector, which was considered poison less than a year ago. And if investors are willing to place $10 billion bets on the sector largely blamed for the global financial crisis, it’s hard not to feel optimistic about how they’ll respond to IPOs in hot sectors such as tech, biotech and commodities.

News and Related Story Links:

• Reuters:
  Verisk IPO prices above range, raises $1.88 bln

• Bloomberg:
  Santander’s Brazil Unit Raising $8 Billion in IPO

• Money Morning:
  Trusted Brand Names Will Point the Way to the Top IPO and M&A Profit Plays

• Money Morning:
  How to Find the Best Potential Profit Plays in the Resurgent M&A and IPO Markets

• CNBC:
  IPOs Are Returning – And So Is Confidence in the Stock Market

• Bloomberg:
  PGE Seeks $1.8 Billion in Poland’s Second-Biggest IPO

• The Wall Street Journal:
  Hyatt Registers Share Sale of Up to $1.15 Billion in IPO

• The Associated Press:
  Verisk Analytics IPO soars in trading debut

• Money Morning:
  Kraft’s Bid for Cadbury Not Sweet Enough

Mounting job losses have pushed mortgage delinquencies and foreclosures to new records in the first quarter.

According to the Mortgage Bankers Association (MBA), the U.S. delinquency rate increased to a seasonally adjusted 9.12%. Meanwhile, the share of loans entering foreclosure rose to 1.37%. Both are the highest figures on record going back to 1972, Bloomberg reported.

The numbers are especially grim when taking account the U.S. Federal Reserve’s gradual and extraordinary measures to prop up the housing market. Since September 2007, Fed policymakers have cut the benchmark Fed Funds target rate 10 times – taking it from its starting point at 5.25% to the current rate range of 0.00% to 0.25%, hoping to encourage bank-to-bank lending, as well as bank-to-consumer lending.

But low interest rates won’t help as long as job losses mount and consumers stay out of the housing market. According to government figures, the unemployment rate rose to 8.1% in the first quarter, the highest level in 26 years.

“If people don’t have a paycheck they can’t support a mortgage,” Jay Brinkmann, the MBA’s chief economist, told Bloomberg. “The longer the recession lasts, the more people run through their savings reserves, leading to higher delinquencies and higher foreclosures.”

Also alarming, the biggest share of new foreclosures came from fixed-rate mortgages, which are given to the most credit-worthy borrowers. Fixed-rate mortgages accounted for 29% of new foreclosures, as opposed to adjustable-rate mortgages, given to people of poorer credit, which accounted for 24% of new foreclosures.

A National Association for Business Economics (NABE) survey released Wednesday)  showed the recession will likely end in the third quarter, but the rebound associated with the turnaround will be a tempered one. The report also downgraded growth forecast for the next few quarters – with the second quarter contracting 1.8%, followed by a meager 1.2% growth in the second half. The end result will be an overall 1.2% contraction for 2009.

April Home Sales

One glimmer of hope for the housing and mortgage market lay in April home sales figures.

New home sales rose 0.3% and prices rose 3.7% in April. The modest gains are far outweighed by the 34% sales decline from last year, but have been cautiously cheered by economists nonetheless.

“The one good piece of news is that the average sales pace for the past five months is just about where the April number came in.  That tells me that demand, while still bouncing around, has pretty much hit bottom,” Joel Naroff, president of Naroff Economic Advisors, wrote in a note to clients.

But the housing market will rebound from the bottom up, with first-time homebuyers scooping discounted homes from those looking for new or bigger houses. That means April’s new home sales, while positive, won’t bulldoze forward until demand for them picks up significantly.

“With confidence rising, mortgage rates low and affordability high, I expect to see that happening over the next few months.  Even so, don’t expect any major jump in construction soon,” Naroff said. “Of course, given how much the residential sector has subtracted from (gross domestic product) over the past year, I will take stability.”

News and Related Story Links:

• Bloomberg:
  Mortgage Delinquencies, Foreclosures, 30-Year Rates Increase

• Money Morning:
  Business Economists Predict Recession Will End in Third Quarter

A detailed report from the National Association of Business Economics (NABE) says the U.S. economy will recover in the third quarter after a continued contraction in the second.

NABE said the near-term setback will be a result of a “sharp retrenchment” in business investment, but the billions in government efforts to invigorate the economy will soon offset that.

“While the overall tone remains soft, there are emerging signs that the economy is stabilizing,” said NABE president, Chris Varvares, who is also president of Macroeconomic Advisers. “The survey found that business economists look for the recession to end soon, but that the economic recovery is likely to be considerably more moderate than those typically experienced following steep declines.”

NABE also downgraded its growth forecast for the next few quarters – with the second quarter contracting 1.8%, followed by a meager 1.2% growth in the second half. The end result will be an overall 1.2% contraction for 2009.

However, NABE believes a trio of key factors scaring consumers – job losses, tight credit conditions and declines in home values – are here to stay.

In fact, unemployment will likely reach as high as 9.8% by the end of the year while inflation moderates and oil prices remain “relatively depressed.”

NABE’s outlook is the consensus of a 45-person panel of economists.

Mixed Forecasts

NABE’s report joins a chorus of national and international institutions (both government and private) that have issued their own predictions of when the clouds will part over the global economy.

Earlier this month, U.S. Federal Reserve Chairman Ben Bernanke testified to the congressional Joint Economic Committee that the U.S. economy will begin to “turn up later this year,” Reuters reported.

But such recovery is contingent upon the financial sector’s continued improvement, Bernanke said.

“We continue to expect economic activity to bottom out, then to turn up later this year,” Bernanke told the committee. “An important caveat is that our forecast assumes continuing gradual repair of the financial system; a relapse in financial conditions would be a significant drag on economic activity and could cause the incipient recovery to stall.”

Though Bernanke’s general timeframe for recovery is similar to NABE’s, there are a few differences in their outlooks. Bernanke said the housing market may be bottoming out and pointed to improving consumer spending, two areas NABE said will continue to remain depressed. 

More broadly, the International Monetary Fund (IMF) recently slashed the growth forecast for every major country and urged more recovery actions. In its latest global outlook, the IMF said the global economy will likely contract 1.3% this year and post a 1.9% gain next year, Reuters reported. 

And while the World Bank sees the global contraction easing and expects a recovery in late 2009, its report, “Swimming Against the Tide: How Developing Countries are Coping with the Global Crisis,” warns that 94 out of 116 developing countries have experienced a slowdown in economic growth. Of those, 43 have high levels of poverty.

Moreover, only one quarter of the most vulnerable countries have the resources to prevent a rise in poverty, the World Bank said.

“We need investments in safety nets, infrastructure, and small and medium size companies to create jobs and to avoid social and political unrest,” World Bank President Robert Zoellick said in the report.

News and Related Story Links:

• National Association of Business Economics:
  NABE Outlook: Recession End in Sight, but Subpar Recovery to Follow June 2009

• Reuters:
  Bernanke says U.S. recovery ahead, housing near bottom

• Reuters:
  World economy in severe recession, IMF says

• World Bank:
  Swimming Against the Tide: How Developing Countries are Coping with the Global Crisis

Home prices continued their two-year decline in March, with prices down 18.7% for the month compared to last year, and a record 19.1% decline for the first quarter compared with the first quarter last year.

All 20 metro areas measured by the S&P/Case-Shiller Home Price Index showed annual declines. Seventeen of them posted record monthly declines. Nine of them posted record annual declines.

“On a positive note, nine (metro areas) are reporting a relative improvement in year-over-year returns and nine of the 20 metro areas saw an improvement in their monthly returns compared to February. Furthermore, this is the second month since October 2007 where the 10- and 20-City Composites did not post a record annual decline,” David M. Blitzer, Chairman of the Index Committee at Standard & Poor’s, said in a statement. “Based on the March data, however, we see no evidence that that a recovery in home prices has begun.”

The combined 20-city index fell 2.2% in March from February. Minneapolis led all areas with a 6.1% monthly decline in March, its steepest monthly drop ever and nearly double its 3.2% decline from January to February.

Detroit and New York also reported record monthly declines of 4.9% and 2.5%, respectively. S&P says these cities represent of the extremes of the national housing boom and bust.

Since January 2000, home prices in New York are still up 73.4%. In that span, however, prices in Detroit are down 29.0%. In fact, Detroit home prices are back to their mid-1995 levels.

The biggest annual drops came in Phoenix (-36.0%), Las Vegas (-31.2%) and San Francisco (-30.1%). Denver, Dallas and Boston saw their home prices fall the least in the past year, -5.5%, -5.6% and -8.0%.

Economists blame the continued price declines on tighter lending standards, the glut of unsold homes and record foreclosures.

And many of those with enough money to buy a new or used house are staying on the sidelines waiting for prices to bottom and a clearer idea of an overall economic recovery.

“The housing market still has somewhat of a ways to go before it completely bottoms,” Celia Chen, an economist at Moody’s Corp. (NYSE: MCO) Economy.com, told Bloomberg. “Prices I think still will fall a little bit further.”

News and Related Story Links:

• Standard & Poor’s:
  Nationally, Home Prices Began 2009 with Record Declines According to the S&P/Case-Shiller Home Price Indices

• Bloomberg:
  Home Prices in 20 U.S. Cities Fall More Than Forecast

India’s annual inflation clocked in at a shockingly low 0.61% in the week ended May 9, and 0.48% the week prior, opening a window for policymakers to resuscitate the economy without worrying about consumer unrest.

Inflation in India – a rampant problem for years – is hovering near a 30-year low. In fact, it’s stayed below 1.0% for the past two months. This after reaching a 16-year high of 12.91% last August, Bloomberg reported.

And the timing couldn’t be more perfect.

Many economists and world leaders believe the worst of the global financial crisis has passed. Most of the world’s largest economies are showing signs of improvement after trillions spent in stimulus measures.

More specific to India, the country is coming off a landslide election that reseated Prime Minister Manmohan Singh’s Congress Party and a host of new policymakers eager to make their mark on the second most powerful emerging market in the world.

Immediately after the election, India’s benchmark stock index launched a record 17% in one day. Those gains leapfrogged India’s Sensitive Index (or Sensex) past all other world indices – except Peru’s – in year-to-date gains.

But such a remarkable one-day run only puts more pressure on reelected and newly elected officials to keep momentum going.

Since October, the Reserve Bank of India has lowered the primary interest rate six times, from 9.0% to 3.25%. The last was a quarter-point reduction on April 21.

India has already passed two stimulus packages, and Singh said that the new government’s top priority is to earmark 1.5% of the country’s GDP for a third.

“Inflation is not a primary concern at this point of time and that gives policymakers leeway to focus on policies that will help stimulate slowing demand,” Sonal Varma, a Mumbai-based economist with Nomura Securities Co., told Bloomberg. “While inflation can post negative readings, this cannot be characterized as deflation.”

Singh will begin forming India’s government this week. But despite the wave of popularity Singh is riding right now, Money Morning’s Martin Hutchinson is skeptical his Congress Party will deliver the economic reform the economy needs.

In fact, it’s “likely that the Indian government will continue as an ever-increasing drag on the economy, with a funding crisis possible if public spending increases too much,” Hutchinson wrote early this week.

The result could spell a 4% to 5% growth average over the next five years, with “possibly with an acute foreign exchange crisis at some point,” Hutchinson said.

These problems are short-term, however, Hutchinson said, as not even the strongest chains could keep India’s economy from growing over the long-term.

“Indian shares will once again be worth looking at, if only because of the country’s immense long-term-growth potential – an upside great enough to overcome even the immense drag of most of its governmental shortcomings,” Hutchinson said.

News and Related Story Links:

• Bloomberg:
  India’s 0.61% Inflation Gives Singh Room for Stimulus

• Commodity Online:
  ‘Earmark 1.5% of GDP for stimulus package’

• Money Morning:
  With India, Long-Term Profit Potential Trumps Near-Term Concerns

The U.S. Treasury Department’s is pressing the go button on its Public-Private Investment Program and re-expanding the $1 trillion Term Asset-Backed Securities Loan Facility (TALF). 

Treasury Secretary Timothy Geithner said to the Senate Banking Committee that he expects the programs to start by early July, Bloomberg reported.

“Working with the Federal Reserve and the FDIC, we expect these programs to begin operating over the next six weeks,” Geithner said in prepared testimony.

The Public-Private Investment Program is a coordinated effort with the Federal Reserve and Federal Deposit Insurance Corp. (FDIC) to help banks sell as much as $1 trillion in distressed mortgages and other assets.

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Announced in March, the Public-Private Investment Program will be funded with $75 billion to $100 billion of U.S. Federal Reserve and Federal Deposit Insurance Corp. (FDIC) debt guarantees, as well as the funds remaining in the U.S. Treasury Department’s Troubled Asset Relief Program (TARP).

Geithner is betting this plan will finally establish market values for the toxic debt left over from the U.S. housing bust, and that getting the private market involved will minimize the risk that taxpayers will overpay for assets.

“Leverage has declined, the most vulnerable parts of the non-bank financial system no longer pose the same risk, and banks are funding themselves more conservatively,” he said.

TALF Expanded, TARP Reserves Revised 

Earlier this week, the Federal Reserve announced it would add older real estate to TALF. And Geither reiterated that the Treasury and Fed intend to expand programs to help asset-backed securities markets, such as TALF, Bloomberg reported.

“The Treasury and the Federal Reserve will continue to monitor and enhance the ABS programs to bring in new, more niche asset classes and make sure that the number of eligible borrowers and issuers continues to increase,” Geithner said.

In late March, the Federal Reserve kicked up TALF’s capacity from $200 billion to $1 trillion and began accepting mortgage-related securities as loan collateral.

Geithner also said the Treasury has about $124 billion of the $700 billion Troubled Asset Relief Program (TARP) left, $11 billion less than his previous estimate in March. He also said he expects about $25 billion to be repaid over the next year.

News and Related Story Links:

• Bloomberg:
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• Money Morning:
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• Reuters:
  Geithner says making headway in battling crisis

Like most investors, Harvard University’s billion-dollar endowment fund took a beating during the global financial crisis. Many investors cashed out, opting for the safety of the sidelines.

But Harvard called a new play.

During the first quarter, Harvard engineered a dramatic shift in its endowment-fund investment strategy – boosting its stakes in some of the most prominent emerging market exchange traded funds (ETFs). Indeed, its largest first-quarter investments included:

• $50.9 million in Vanguard Emerging Markets ETF (NYSE: VWO)
• $1.5 million more iShares MSCI Brazil Index ETF (NYSE: EWZ)
• $1.1 million more into in iShares FTSE/Xinhua China 25 Index ETF (NYSE: FXI)
• $877,700 into Van Eck’s Market Vector Russia ETF Trust (NYSE: RSX)
• $817,300 into iShares MSCI Mexico Index Index (NYSE: EWW)
• $390,400 more into iShares MSCI South Africa Index (NYSE: EZA)

Harvard’s fund also took a first-time, $45.5 million position in iShares MSCI South Korea Index ETF (NYSE: EWY), as well as two foreign titans – a $16.7 million stake in China Mobile Ltd. (NYSE ADR: CHL) and a $12.6 million stake in Israel’s Teva Pharmaceuticals Industries Ltd. (NASDAQ ADR: TEVA).

Obviously, an institution such as Harvard does its homework before making such an aggressive play call, and committing so much money to the emerging economies of the world – global regions whose stock markets took even bigger hits than the United States’ Standard & Poor’s 500 Index.

Since the market bottomed out at 676.53 on March 9, the S&P 500 has gained an impressive 34.2%.

During that same span, however, the ETFs that received Harvard endowment dollars have handily trounced the performance of that U.S. bellwether index. Just as an example: Vanguard Emerging Markets ETF is up 58.1% and iShares FTSE/Xinhua China 25 Index ETF has gained 51.2%. 

And the overall MSCI Emerging Markets Index ETF (NYSE: EEM) – which measures a 26-country-tracking index of the same name – is up 55.2% since the bottom.

Emerging Market Professors

One of the market professors Harvard is listening to is Robert G. Doll Jr., vice chairman and chief investment officer for private equity fund BlackRock Inc. (NYSE: BLK). Doll said earlier this week that the global economy has likely seen the worst of the worldwide financial crisis, and that developing economies are already emerging from recession.

“If, in fact, we have seen a bottom in markets and economies are going to recover, the emerging parts of the world will recover the most and the fastest,” Doll told Bloomberg News. “After all, their recessions were largely unwanted inventory build-up and not the credit bust in the Western world.”

Earlier this month, Doll said he believed the S&P 500 would fall from its current levels (which it had), and then rally to end the year at around 1,000 – for a gain of about 11%.

“Emerging markets, if they are going to do better than that, are going to do closer to 20%,” Doll said. “There are some that already have. Some have done better than that.”

A couple weeks before Doll’s vote of confidence, Mark Mobius, famed investor and head of Templeton Asset Management Ltd., said that emerging-market stocks are building a base to enter a bull market at the end of the year, Bloomberg reported.

“We are at the base-building period for the next bull market,” Mobius told Bloomberg while attending a conference in Indonesia. “What I see happening is perhaps this continuing till the end of the year, and then a breakout.”

Many of these emerging and developing economies are on the cusp of breaking out, but are being held back by the drought of others. The ultimate catalysts that set them loose will be falling interest rates and easing inflation, Mobius said. 

In the first week of May, about $4 billion was pumped into emerging-market equity funds. It was the largest weekly inflow since December and the eighth-largest on record, MarketWatch reported. Most of that went into ETFs, and long-term positions at that.

Not coincidentally, the specific countries seeing the largest inflows are represented in Harvard’s portfolio. Brazil posted its second-largest weekly inflow on record. China, India and Russia also saw huge gains, MarketWatch reported.

Those four markets – Brazil, Russia, India and China – comprise the so-called “BRIC” economies of the world.

Emerging Market ETF Plays 

How to capitalize on emerging markets reemergence from recession depends on your risk tolerance. And risk levels can vary by country and investment sector.

Carl Delfeld, head of global investment advisory firm Chartwell Partners, noted that while the U.S. financial sector is the chief culprit of the global financial crisis, some healthy-capital foreign banks are currently very nicely positioned because they didn’t get involved in the bad U.S. debt, and because they have the fastest-growing growing base of consumers in the fastest-growing markets. 

And a good way to play this trend could be the soon-to-be available Global Shares Dow Jones Emerging Markets Financial Titans ETF, Delfeld writes in the May 25 issue of Forbes magazine. Of the fund’s top-10 holdings, four are China-based, three Brazil and two India.

More speculative investors might be interested in another new ETF, the WisdomTree Dreyfus Emerging Currency Fund (NYSE: CEW), a basket of 11 equally weighted emerging market currencies that are rebalanced every quarter.

The currencies in the fund are the Brazilian real, Mexican peso, Chilean peso, Israel shekel, Turkish lira, Polish zloty, Chinese yuan, South Korean won, Taiwan dollar, Indian rupee and the South African rand.

For more general plays on specific countries, Harvard’s list of new investments could be a good starting point.

Money Morning Contributing EditorHoracio Marquez recommended iShares MSCI Brazil Index (EWZ) in his popular “Buy, Sell or Hold” column last October. It’s also one of the five emerging market ETFs that Money Morning’s Martin Hutchinson recommended earlier this year. Others included iShares MSCI Chile Investable Index (ECH), iShares MSCI Taiwan Index (EWT) and iShares MSCI Singapore Index (EWS). 

News and Related Story Links:

• Yahoo! News:
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• Bloomberg:
  Emerging Markets Stocks May Rise 20% in 2009, BlackRock Says

• Bloomberg:
  Emerging Markets May Rally by Year-End, Mobius Says

• MarketWatch:
  Huge flows into emerging-market funds in past week: Merrill

• ETF Trends:
  It’s Here: An ETF That Bundles Emerging Market Currencies

• Money Morning:
  Buy, Sell or Hold: iShares MSCI Brazil Index

• Money Morning:
  The Five Most Promising Emerging Markets ETFs for 2009.

• Money Morning Special Investment Report (Part II of II):
  Special Report: Hit the BRICs for a Global-Investing Double Play.

• Money Morning Special Investment Report (Part I of II):
  Special Report: Hit the BRICs for a Global-Investing Double Play.

• Money Morning:
  As Problems in India and Russia Escalate, Let’s Drop the BRIC.

U.S. housing starts and permits unexpectedly plummeted to record lows in April, torpedoing hopes of a housing market recovery as well as hopes the overall economy is regaining traction.

Starts for privately owned homes clocked in at a 458,000 annual rate, a 12.8% decline from March’s revised rate of 525,000 and a 54.2% dive from April 2008’s annual rate of 1,001,000 starts, according to a report from the U.S. Department of Commerce.

Meanwhile, building permits for privately owned housing units were applied for at a seasonally adjusted annual rate of 494,000, 3.3% below March’s revised rate of 511,000 and a 50.2% plummet from April 2008’s revised rate of 991,000.

The Commerce Department report also sheds light on the complexity of the housing market’s fallout and path to recovery.

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Most strikingly, while starts in the West have dropped 52.9% from last year, they actually rose 42.5% from March 2009. The Northeast, Midwest and South all posted double-digit monthly declines and steeper annual losses.

Also, the drop in building permits isn’t necessarily a bad thing, says Peter Kenny, managing director at Knight Equity Markets. Like the retail sector’s recovery, the first step for the ailing housing market is getting rid of all the houses already on the market, he said.

“There is so much inventory on the market that the sooner we stop building and start eating into existing inventory the better off we’ll be,” Kenny told Reuters.

For the short term, April’s housing figures won’t help the country’s top home-repair retailers, The Home Depot Inc. (NYSE: HD) and Lowe’s Cos. Inc. (NYSE: LOW).

Each company posted quarterly earnings that beat analysts’ forecasts, but not because they’ve been blessed by a return of consumer demand.

Rather, the retailers discounted items and cut costs across the board.

Earlier this year, Home Depot announced plans to cut 7,000 jobs, freeze officers’ salaries and close some specialty outlets – moves that shed 16.4% from operating costs, Reuters reported.

In April alone, building-material and garden-supply stores, shed 7,500 jobs, according to the U.S. Department of Labor.

The moves have clearly been effective, but also entwined with a bitter irony.

And as long as unemployment continues climbing, there won’t be a consumer base for every element for the housing market, including the merchandise on their shelves.

News and Related Story Links:

• U.S. Department of Commerce:
  New Residential Construction in April 2009

• Reuters:
  U.S. housing starts, permits hit record lows in April

• Reuters:
  Home Depot profit beats Street, but shares fall

• Wall Street Journal:
  US Retail Industry Has Record Unemployment As Cuts Continue

Right now many investors probably don’t want to shoot for the moon. The global financial crisis gave their portfolios one the fiercest beat downs since the Great Depression, draining investors’ resources and mood for anything but safe investments.

But it’s unfair to associate small-cap investing as moon shooting, especially as the global economy pulls itself back together. Historically, small caps have beaten the socks off blue chips as both emerge from recession.

After the 1973-74 recession, small stocks beat larger ones for the following 10 years. Going back further, to 1932, the year before the Great Depression ended, small cap stocks beat the market for 11 of the following 13 years, CNNMoney reported.

More recently, however, the Russell 2000 Index (the most common benchmark of publicly traded small-cap companies) has gained 40.2% since the market bottomed on March 9. In that span, the blue-chip-weighted S&P 500 has chugged 24.2%

The difference isn’t extraordinary, but institutional investors who pour millions into these companies know the difference between those figures could spell fortunes.

And even on an individual level, you’d be hard-pressed to find an everyday investor unsatisfied with sitting on a 40.2% gain after a year and a half drought.

Small caps rebound faster because they are typically saddled by less debt and have fewer people on their payrolls – making it easier to restructure and regain footing.
                       
Compare that to behemoths like Ford Motor Co. (NYSE: F) and General Motors Corp. (NYSE: GM), which have been reducing overhead, downsizing and streamlining operations for years.

Also, small caps’ operations and revenue streams are more regionally based, whereas a global titan like General Electric Co. (NYSE: GE) has operations all over the world. While a globally diversified business model ensures better overall stability, it also means more vulnerability at a time when the global financial crisis has crippled nearly every economy in the world.

What’s more, a recent study from the Paris-based Organization of Economic Cooperation and Development (OECD) shows that the United States’ economic deterioration is slowing down at a faster rate than Italy, France, England and China.

In Small Caps We Trust

For practical purposes, small caps can be defined as publicly traded companies with a market capitalization between $250 million and $1 billion. But that’s just an approximation, since there is no official definition or internationally accepted market-cap boundary.

Small cap stocks have fewer shareholders than mid-cap ($1 billion to $10 billion) or large-cap companies ($10 billion and up), and their lack of liquidity makes it much easier for the share price to spike, or plunge, with a major shift in trading.

Think of it them as boats in an ocean. The winds and waves will cause a small boat to rock much more than they would a tanker. But a strong current will push a smaller vessel to its destination faster than it would a larger ship.

Investors are attracted to small caps because they can take a larger stake in a company (and usually at a lower entry price) with the expectation that as the company grows – or gets bought out – their small investment will reap a large reward.

And right now – as the economy and stock market rebound from the vicious recession – it’s an especially good time to eye small-cap companies. Small caps have already proven to be the more profitable investment as global economies are licking their wounds.

Of course, there are two things to consider before investing a dollar in small caps.

The first is volatility. Because they companies are vulnerable to shifts in market sentiment, it is not advisable to apportion a large block of your portfolio in small-caps.

Secondly, now may not be the best time to jump in. Those closely watching small caps believe they have overshot their values – meaning a pullback is expected soon, if it’s not happening already.

Small caps stocks have risen 40.2% since March 9, but they are also down 5.9% from their May 8 peak.

“All in all, we think [small-caps] have moved too far, too fast,” Bank of America Merrill Lynch small-cap strategist Steven Desanctis recently wrote to investors.

Desanctis expects the small-cap pullback to continue because small companies’ price-to-earning ratios have moved above average compared to those of larger companies.

Also, analysts expect at least a few more months of market-wide volatility – and the tossing and turning of small caps stocks may not sit well with many investors.

Medium-to long-term though, small caps have proven their profitability, especially when investors amass positions in a recession’s late stages. 

Here are six ways to invest in a variety of small cap stocks, should the current pullback present a favorable opportunity.

The iShares Russell 2000 Index ETF (NYSE: IWM) is a fund that tracks the movements of the Russell 2000 Index. The Fund invests in a representative sample of securities included in the index that collectively have an investment profile similar to the index.

The iShares Russell 2000 Value Index ETF (NYSE: IWN) tracks an index that measures the returns of safer, less speculative small-cap stocks. And the iShares Russell 2000 Growth Index ETF (NYSE: IWO) tracks an index that measures the returns of riskier, more growth-oriented small-cap stocks.

Vanguard also has variety of small cap funds, but they track the movements of a different index of small U.S. companies, the MSCI US Small Cap 1750 Index.

The Vanguard Small-Cap ETF (NYSE: VB) tracks the movements of the MSCI US Small Cap 1750 Index not only by amassing a position in nearly every company traded in the index, but attempts to mirror the proportions of those holdings as well.

The Vanguard Small-Cap Value (NYSE: VBR) tracks safer, less speculative small-cap stocks on the index. And the Vanguard Small Cap Growth (NYSE: VBK) goes for more growth-oriented returns on the index.

News and Related Story Links:

• OCED:
  Composite Leading Indicators (CLIs), OECD, May 2009 update
• CNNMoney:
  Small-caps poised for a comeback
• The Wall Street Journal:
  What Small Caps Are Saying

One business day removed from the government’s bank stress tests, four of the largest U.S. banks – BB&T Corp. (NYSE: BBT), Capital One Financial Corp. (NYSE: COF), U.S. Bancorp (NYSE: USB) and KeyCorp (NYSE: KEY) – announced plans to raise capital through stock offerings.

BB&T said it plans to raise $1.5 billion by selling common stock, combine it with "other funds," and repay all the capital from the U.S. Department of the Treasury’s Troubled Asset Relief Program (TARP).

The Winston-Salem, N.C. bank also said it will cut its divided 68% to 15 cents a share, an action that will save $725 million in capital a year. Chief Executive Officer Kelly King said the dividend reduction is temporary, and making the decision was marked "the worst day in my 37 year career."

"However, we firmly believe this action is in the long-term best interests of our shareholders and our company because of the risk and uncertainty associated with being a TARP participant… When market conditions improve and our earnings provide for an increase in the dividend, we are committed to increasing it accordingly," King said in a statement.

Capital One said it plans to raise about $1.75 billion by selling 56 common stock shares at $27.75 a piece. The bank expects net proceeds "to be used for general corporate purposes" and repaying the Treasury.

U.S. Bancorp plans to raise $2.5 billion by selling common stock to the public with the intention of repaying the Treasury with the proceeds. The Minneapolis-based bank also said it may offer medium-term notes in a benchmark amount in a public offering.

KeyCorp filed with regulators a plan to offer up to $750 million in common shares to raise capital.

Disdain for Government’s Eye

On Friday, the government’s stress test revealed that these banks are four of 10 that need to raise more capital if they were to survive a prolonged deterioration of the U.S. economy.

U.S. Bancorp borrowed $6.6 billion from TARP, Capital One took $3.55 and BB&T received $3.1 billion. In taking the billions in emergency loans, the banks also agreed to have tighter government control of their operations – including clamping down on executive pay.

The capital-raising plans – combined with the previously announced plans by Citigroup Inc. (NYSE: C), Morgan Stanley (NYSE: MS) Wells Fargo & Co. (NYSE: WFC) to pay back TARP money – show just how much these banks disdain working on the government’s dime and under the government’s eye. And it shows that they’re willing to further suppress their stock value and possibly upset their shareholders to break the government’s chains.

"Rational, objective lending is one of the most important purposes of the banking system, and when you inject Congress and the administration into it, it effectively politicizes the process, which is not healthy," BB&T’s King told Reuters.

News and Related Story Links:

• Reuters:
  Four big U.S. banks selling stock

• Money Morning:
  Bank Stress Tests: The Results Are in; Now What?