After a five-month search to find a private buyer for Northern Rock PLC (PINK: NHRKF), the U.K. government has decided to nationalize the struggling bank. The law that would grant sweeping powers to the government to place troubled financial institutions under state control is currently being debated in the House of Commons and should be decided on soon.

While both the Prime Minister Gordon Brown and the Chancellor of the Exchequer [similar to our Secretary of the Treasury] Alistair Darling have taken heat for what the Conservative opposition party considers the mismanagement of the credit crisis, both men are convinced nationalizing the bank is the most risk-adverse way to safeguard the $108 billion (55 billion pounds) of taxpayer money the failing financial institution has already received.

Two private bids from billionaire Sir Richard Branson’s Virgin Group Ltd. were rejected as too risky.

"It is impossible to run a bank without making clear who is running the bank," Darling said before Parliament today. "I want to make clear that the government has no intentions at present to use the bill to bring any institution into temporary public ownership other than Northern Rock."

While the proposed law does have a deadline of one year attached to it, some worry about the wide sweeping powers it affords the government.

The bill grants "unprecedented power to take into public hands any bank or building society," George Osborne, the Conservative lawmaker who speaks on Treasury matters, told Parliament, Bloomberg News reported.

"This is a huge blank cheque," Osborne said. 

Both Brown and Darling have offered assurances that the bill would only be used in regards to Northern Rock. The bill is expected to pass due to the government’s 67-seat majority in the lower chamber.

The privatization will be the first such maneuver since 1984. Ron Sandler, who was instrumental in the turnaround of Lloyd’s of London, has been selected to helm the newly private Northern Rock.

Trading of shares was suspended Monday.

News and Related Story Links:

• Bloomberg:
  Northern Rock Bill to Clear House of Commons Today

• Forbes:
  UK Begins Debating Northern Rock Laws

British Prime Minister Gordon Brown used his New Year’s address to offer a painfully honest appraisal of the United Kingdom’s economic prospects for 2008. And as a former Chancellor of the Exchequer [equivalent to the United States' Secretary of the Treasury] for 10 years under Tony Blair, Brown knows what he’s talking about.

"The global credit problem that started in America is now the most immediate challenge for every economy and addressing it the most immediate priority," Brown said. "I promise to take no risks with stability."

The United Kingdom’s problems have mirrored the United States, as both countries have suffered a decline in housing prices and financial institutions in crisis. 

England-based residential lender Northern Rock PLC (PINK:NHRKF) ran into trouble due to subprime mortgage-backed securities resulting in large write-downs and a new CEO.  Northern Rock has had to borrow $49.6 million from the Bank of England and now Barron’s reports the government might be looking at nationalizing the ailing lender.

The opposition Conservative Party has been vocal in its disapproval of the handling of the economy by Brown’s Labour Party. Labour’s popularity in the polls has slipped in recent months as the British economy shows signs of waning after a decade of strong growth. The housing recession, coupled with tighter lending standards have lead to an economic slowdown, and some fear the country is heading for its first recession since 1992.

But also as in the United States, the United Kingdom holds out the same hopes: Low unemployment and consumer spending will help the country weather the financial storm.

"Our strong economy is the foundation," Brown added. "In 2008, we will steer a course of stability through global financial turbulence."

News and Related Story Links:

• Forbes:
  Gordon Brown Offers Grim New Year’s Outlook

• Barron’s:
  Northern Rock’s Future

• Wikipedia:
  Chancellor of the Exchequer

• Money Morning:
  Global Investing Roundup: Northern Rock Announces New CEO

London stocks plunged yesterday (Monday) following Wall Street’s lead from Friday.  The sell-off crossed all industries with only a handful of stocks in the FTSE 100 Index showing gains for the day as the index fell 1.9% for the day. 

After U.S. Consumer Price Index data was released on Friday, investors around the world worried that stronger-than-expected inflation would be a drag on the U.S. economy, and keep the Federal Reserve from making any further rate cuts. 

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"When we look at economies around the world which are exposed to similar problems as in the U.S., the U.K. is pretty high on our list," Andrew Balls, a global bond fund manager at Newport, California-based Pacific Investment Management Co. (PIMCO) told Bloomberg News.

The United Kingdom seems poised to follow the United States’ lead on more than just stock prices. Like the Fed, the Bank of England had to cut rates at its last meeting.

On Dec. 6, the Bank of England cut interest rates by 25 basis points in response to troubled domestic credit markets and a weakening housing market, as U.K. home prices fell for the third straight month in November. Despite the cut, the spread between the Bank of England’s target rate and banks’ overnight lending rates remains wide, as financial institutions remain wary of lending to one another.

And as in the United States, the rate cut had an adverse effect on currency. The British pound, which had enjoyed a historic high of $2.1161 just last month, has fallen to $2.0168 since the cut. Although the pound is still strong against the weak dollar, it has been losing ground to most of the other 16 actively traded world currencies, including the euro and yen. 

In fact, the pound "will be the standout underperformer next year," Ian Stannard, a senior currency strategist at BNP Paribas SA (BNP) in London told Bloomberg News.

He expects sterling to fall as low as $1.83.

"The housing market looks as if it is falling off a cliff. Sterling is now going to fall quite sharply," he said.

News and Related Links:

• Bloomberg:
  Pound Peak Fuels Pessimism as Currency Mimics Dollar

• MarketWatch:
  Inflation, growth concerns rattle London

• Money Morning:
  Walls Closing In On The Fed As Inflation Rises

Virgin Group Ltd., and a team of investors, have won British government approval to buy troubled lender Northern Rock PLC (PINK: NHRKF), sending the embattled bank’s U.K.-listed shares up more than 28% in trading yesterday (Monday).

In a statement released by Northern Rock, Virgin’s proposal will immediately repay $22.7 billion (11 billion pounds sterling) to the Bank of England, and inject $2.69 billion (1.3 billion pounds sterling) into Northern Rock. The Virgin-led group says it has no intention of cutting jobs.

Once the transaction is completed, the Virgin-led group – which includes billionaire Wilbur Ross, American International Group Inc. (AIG), Toscafund Asset Management LP and First Eastern Investment Group – will hold no more than 55% of the new bank, which will be folded into its Virgin Money unit.

The deal isn’t yet a done deal, as Northern Rock plans to entertain offers from other suitors, namely Olivant Advisers Ltd., according to the London Times. Should a takeover fall though, the bank could be nationalized or put into administration, a worst-case scenario for shareholders.

"This stock is not for the faint hearted, and the range of outcomes for shareholders is very wide," said Nic Clarke, an analyst at Charles Stanley in London, told the Associated Press.

However, Virgin’s government approval is a mighty weapon to wield, especially considering Northern Rock’s debts to the Bank of England are near 25 billion pounds ($51.79 billion) in taxpayer money. Should Virgin become the sole suitor, the remaining 14 billion pounds owed to the Bank of England would be paid within the next three years, the BBC reported.

The BBC also reported that several Northern Rock shareholders aren’t very warm to the Virgin takeover.

Hedge funds RAB Capital and SRM Global and a group of smaller shareholders warned they might vote against any Virgin takeover if the bid isn’t at least on par with their standards.

"If we feel that we are being entirely ripped off, ripped out, kicked out of the long term, then shareholders may not be happy to just to roll over and go along with these people who it has been reported are preferred bidders," Robin Ashby of the Northern Rock Small Shareholders Group, told the BBC.

News and Related Story Links:

• Associated Press:
  Virgin Takes Lead in Northern Rock Bids

• BBC:
  Virgin’s Rock bid may be blocked

• Money Morning:
  Northern Rock Buys Time Before Getting Bought Out

• Northern Rock:
  Update on Strategic Review

The U.K. housing market is slowing, and housing prices could actually decline next year, according to analyst forecasts and the latest batch of government economic reports.

United Kingdom housing prices actually rose 0.3%, a slowdown from the 0.5% advance in August and the scorching 2% leap in July. Also, the annual rate of house-price inflation slowed to a 10.8%, down from 11.3% in August and 12.3% in July, according to the Department of Communities and Local Government (DCLG). The average house in the United Kingdom is priced at about $454,000 (220,111 British Pounds Sterling).

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News on housing prices yesterday (Monday) followed a Friday memo from Citigroup Inc., (C), which said that home prices may fall as a result of higher interest rates, property overvaluation and record debt levels pushing potential homebuyers out of the market, Bloomberg News reported.

"We suspect that the number of buy-to-let home purchases will fall outright in 2008, hence contributing to a sharp drop in overall housing turnover … there is a sizeable risk that the outturn will be worse," Michael Saunders, Citigroup’s chief western European economist, said in an e-mailed note, published by Bloomberg. Saunders also forecasted a price decline of between 1% and 2%.

Also on Friday, a report from Halifax Bank said that housing prices also fell in October. Halifax also said that the annual rate of house inflation continued to drop, down to 8.9% in October, the United Kingdom’s Independent reported.

The bank also warned that housing-market activity was declining, with 11% fewer mortgage approvals during this year’s third quarter than in the same period last year.

Home Prices Tripled in Past Decade

U.K. house prices have nearly tripled in the past decade, largely due to the recent surge of buy-to-let investors – people who buy properties and then rent them to tenants, Citigroup said. This has disguised the fact that mortgages to first-time homebuyers have dropped 31% in the past five years. Now, with rental yields falling, landlords are sweeping up fewer properties, uncovering another nasty gray area in the U.K. housing market.

Saunders, the Citigroup economist, went as far as predicting the Bank of England will cut its benchmark lending rate by half a percentage point (50 basis points), from 5.75% to 5.25%. Last week, the Bank kept rates in check for the fourth month in a row.

"Given weakness in housing and financial market strains, risks lie on the side of more, rather than less, easing," Saunders said.

And understandably, forecasts for the U.K. economy are just as dreary. Despite a possible rate cut, the British Chambers of Commerce (BCC) forecasted a 1.9% GDP growth in 2008, compared with the 3.1% it predicted for the end of 2007. The BCC’s predictions factored in two quarter-point rate cuts by the summer.

More clues of the country’s economic health will emerge this week when the Bank of England publishes its quarterly economic report and October’s inflation numbers.

News and Related Story Links:

• Bloomberg News:
  U.K. Home Prices May Decline in 2008, Citigroup Says

• The Independent:
  House prices fell in October, says Halifax

• Price Association:
  Slowdown of Economy Predicted

Shipping stocks have soared globally. Even in Japan, where most of the market has barely budged for months, the Maritime Transport Index is up 58%. The boom is being fueled by the same dynamics as everything else these days – the huge growth in Asia.

It costs so much to get goods from one side of the world to another in this environment that "in some cases, the cost of the shipping can exceed the value of the cargo," Jonathan Allum, of KBC Group NV, the Belgium-based banking-and-insurance group, wrote in his weekly newsletter, The Blah!

For example, as noted in The Wall Street Journal, imagine you want to get a ton of iron ore from Brazil to Asia. The ore will cost you $60, the shipping $88. Overall, the average price of renting a ship to carry raw materials from Brazil to China has nearly tripled – rising from $65,000 a year ago to $180,000 a day today, the Journal reported.

Ship Shortages and Small Ports

There’s a single explanation for this huge price run-up, and it’s very simple: There just aren’t enough of the right kind of ships. There are plenty of oil tankers around, for instance. The size of the fleet expanded 3.8% this year and the global tanker fleet is forecast to increase by 32% over the next five years, Bloomberg News reported. When shipping titans Teekay Corp. (TK), Frontline Ltd. (FRO) and Overseas Shipholding Group Inc. (OSG) found they had turned over $2.2 billion between them in 2004, they used the proceeds to order 522 new tankers.

This frenetic building spree could well lead to a glut in that shipping sector, Bloomberg reported.

There are also plenty of container ships available to ship such consumer goodies as TV sets and refrigerators to the developing world, but dry-bulk shippers haven’t been as quick to get their orders in as the others – and the current shortage is the result.

Dry bulk shipping is the marine transportation of significant commodities in bulk, such as gold, or metal ores.

An armada of ships have been ordered – the order book for dry bulk ships is already equal to 45% of the current fleet – but given the typical 36-month lag between order placement and actual ship delivery, the bulk of the dry-bulk navy won’t be out of dry dock and seaworthy before 2010.

But even if the ships were ready to move full steam ahead immediately, shipping rates aren’t likely to decline very much anyway. The reason: Most of the ports in the busiest countries are just not big enough to handle the recent spurt in shipping traffic caused by the global boom.

In Brazilian ports, ships must typically sit offshore for as long as two weeks before they can unload. And, as of last week, there were 131 coal and iron-ore vessels lining up to get into one of Australia’s main ports.

Charter rates are also being boosted by the longer voyages that dry-bulk shippers are undertaking, the Journal reports. With China consuming resources from Australia at an incredible rate, and Japan attempting to follow suit, much of the demand from the remainder of Asia must be satisfied by distant South American mines.

It is entirely plausible that some surplus oil tankers will soon find themselves shipping dry goods around the world, but even with the hope that this might relieve the pressure, we can still expect to see shipping rates escalate all the way through 2008, Jeffries maritime analyst Douglas Mavrinac tells Investor’s Business Daily.

Simply put, demand is overwhelming supply. And with India embarking on a massive urban infrastructure project in 62 second-tier cities, China is no longer performing a solo when it comes to crying out for dry-bulk companies to ship badly needed steel, concrete and other construction-related wares.

Delivering Bulk Profits

Dry-bulk-shipping titan DryShips Inc. (DRYS) appears particularly well positioned to benefit from the record charter rates the industry is right now enjoying. Because DryShips hasn’t locked itself into long-term contracts at the low rates that dominated prior to the current shipping shortage, it has excellent exposure to the escalating spot rate for dry-bulk charters. Mavrinac, the Jeffries maritime analyst, estimates that 98% of the firm’s fleet will be available on unfixed price contracts next year – meaning if the high rates remain, the DryShips will reap the financial benefits.

DryShips operates 33 vessels, and specializes in shipping iron ore, coal and grains. The fleet is composed chiefly of Panamax ships, the largest of dry-bulk vessels, which have seen their daily charter rate soar from $10,000 to an extraordinary $85,000 over the last decade. Since Jan. 1, its stock has skyrocketed 588%. And still, the company trades on a very reasonable forward Price/Earnings Ratio of 9.5.

A company that is taking the opposite approach by locking itself into fixed contracts to ensure steady growth is Greek shipper Quintana Maritime Ltd. (NASDAQ:QMAR). The $1.1 billion outfit has a fleet of 29 vessels, including 11 Panamax ships, which puts it in a pretty strong position at the top end of the dry bulk food chain in what is a highly fragmented market. Although the shares are up 149% already this year, but are still trading at only 11.8 times projected earnings.

And there’s a bonus: The stock offers a 4.6% dividend yield.

Associate Editor Mike Caggeso contributed to this report.

News and Related Story Links:

• Bloomberg News:
  Frontline, Teekay Crash Nears Amid Tanker Glut, Crude.

• Money Morning Investment Analysis:
  Three Ways to Profit From Australia’s Strong Dollar and Massive Natural Resource Reserves.

• Money Morning Investment Analysis:
  China and Japan Digging Up A Skirmish ‘Down Under.’

• Wikipedia: Panamax ships.

Free-market U.S. conservatives like to talk about "old Europe." They tell stories about the sclerotic EU bureaucracy, the intransigent French unions, and the rigid German banking system.

Problem is, they ignore the really interesting Europe. The Europe that is growing rapidly. The Europe with soaring productivity, low inflation, small public sectors, an excellent education system, and high foreign investment in factories that quickly learn to undercut their neighbors in Western European.

This new Europe – centered around Poland, the Czech Republic, Slovakia and Hungary – is difficult for the average U.S. investor to buy. But there are still some inbound pathways with solid profit potential. Let me explain…

The Productive Key to Growth

As my readers in the Money Map Report know, productivity growth is the key to long-term gains. The United States manages productivity growth of just over 2% a year, Western Europe a little less, and Latin America an abysmally low 1% per annum.

At the opposite end of the spectrum, wealthy Asian countries like South Korea and Taiwan enjoy productivity growth of more than 4% a year. This makes their companies more competitive year by year against their Western counterparts.

Poland, Hungary, the Czech Republic and Slovakia are all quite wealthy – much wealthier than their neighbors further east. Yet each of their productivity growth rates over the last five years are almost up to Asian standards: Poland (3.1%); the Czech Republic (3.3%); Hungary (3.4%); and Slovakia (4.9%).

Real economic growth was also good in 2006, clocking in at 6.1% in Poland, 6.4% in the Czech Republic, and 8.3% in Slovakia.  Only Hungary (3.9%) was a little slower. Inflation, budgets, and balance of payments are all in balance or, at worst, are in a modest deficit.

The lower growth in Hungary illustrates the one remaining political problem in the region. Electorates in former Communist countries like to throw their governments out every few years. (I guess it’s partly the thrill of being able to do so after so many years under Communism.)

However, throwing one government out means putting another one in, and in all these countries, until now, the Socialists have been the replacement party. The Socialists are generally opposed to the free market, corrupt and full of survivors from the Communist regime.

That slows down economic progress, as it has in Hungary, where the Socialists have been back in power since 2002.

In Slovakia, the bad guys were in power until 1998, but were then succeeded by a wonderful reformist government under Mikulas Dzurinda that introduced a 19% flat tax and brought rapid economic growth. Alas, after the World Bank praised the Dzurinda government as the "best reformist government in the world," the Slovakian prime minister lost the 2006 election. So the country’s stellar growth in 2006 is likely to be the last such performance for some time to come.

Poland, at last, found a way around this progress blockade. In Sunday’s election, the ruling "social-conservative" Law-and-Justice government was thrown out – but wasn’t replaced by the Socialists, who got only 13% of the vote.

Instead, they were replaced by the "economic-conservative" Civic Platform. Since Law and Justice were themselves pretty competent economically, the Polish electorate can now enjoy the pleasure of throwing out its governments, while replacing them only with other governments equally committed to the free market and economic growth.

This is wonderful news for investors in Poland. And since these four countries tend to copy each other, it is likely to be wonderful news in the long run for investors in the other three countries, as well.

How to Play Emerging Europe

Since few stocks or American Depository Receipts (ADRs) are traded on the U.S. exchanges, the best bet for emerging Europe is the Spider Standard & Poor’s Emerging Europe (GUR) exchange-traded fund (ETF). It invests in the share indexes of the Czech Republic, Hungary, Poland, Russia and Turkey.

However this ETF was only founded in March, and currently has a market capitalization of only $39 million. That’s up from $29 million a month ago. Of the five countries I just listed, Turkey’s also a good bet (though it may hiccup from the Iraqi-Kurdistan problem). I would only be nervous of Russia.

There is also a closed-end fund, the $180 million Morgan Stanley Eastern Europe Fund (RNE), which trades at around net asset value. However, it has a high expense ratio of 1.6%, and invests mainly in Russia.

Mutual funds are usually for the risk averse. But in the case of the San Antonio, Tex.-based U.S. Global Investors Inc. (GROW), mutual funds are worth a look by conservative and aggressive investors alike. The reason: U.S. Global’s funds are almost always top performers. Their U.S. Global Accolade Eastern Europe Fund (EUROX) is no exception. You can invest in it with confidence.

News and Related Story Links:

• Money Morning Investment Analysis:
  Three Ways to Profit from a Messy Market.

• Boston.com:
  Opposition Wins Poland Election.

• Money Morning Investment Analysis:
  When Corruption is Low, Your Profits are High.

• Wikipedia:
  Socialism.

• Money Morning Investment Analysis:
  U.S. Global Investors to Focus on Global Infrastructure Investment Opportunities.

• Wikipedia:
  The Economy of the Czech Republic.

• Wikipedia:
  The Economy of Slovakia.

• Wikipedia:
  Mikulas Dzurinda.

Heineken NV (HINKY.PK) has entered into talks with Carlsberg A/S (CABHF.PK) regarding a joint takeover bid for Scottish & Newcastle PLC. The two companies have not made any formal approach, but have said any takeover offer would be in cash. The unexpected announcement came in a joint statement released Wednesday, according to the AFP news service.

"Carlsberg and Heineken confirm that they are in discussions regarding the formation of a consortium to make an offer for the entire issued share capital of Scottish & Newcastle," the statement said.

Scottish and Newcastle, whose brands include Fosters lager and Strongbow cider, said it was confident in its future as an independent group. S&N officials are reportedly "furious" over the reported takeover bid, which would result in the company being split up between the two suitors, and said in response that "the proposed break-up bid from Heineken and Carlsberg, the company’s joint venture partner in BBH (Baltic Beverages Holding), is unsolicited and unwelcome."

Scottish and Newcastle has been the subject of takeover speculation all year long.

Carlsberg, the largest Nordic brewer, and Scottish and Newcastle are currently partners in the BBH joint venture.  Baltic Beverages owns Russia’s largest brewer with a 38% market share, and other interests based in France and Greece. Its revenue grew 36% in the first half to $856 million, while operating profit soared 48%.

If the takeover is successful Carlsberg will take complete control of BBH, and the French and Greek operations, while Heineken would get the U.K. and European brands. The statement didn’t specify who would get S&N’s Asian assets.

Analyst Richard Withagen at SNS Securities told the AFP news service that the Heineken-Carlsberg takeover was a smart move.
"I think from a strategic point of view it’s obviously a good deal for Heineken and Carlsberg," Withagen said, "Heineken would gain market leadership in the UK and become the number two in Belgium and Portugal, and a leading market player in Finland."

In addition to advancing in Belgium and Portugal, a successful deal would give Heineken the top spot in the U.K. where it currently commands less than 1% of the  market.

The takeover would also help the two companies to keep pace with SABMiller and Molson Coors (TAP) who recently joined forces. That brewery union could save as much as $500 million a year in manufacturing and shipping costs and provide the combined entity with 30% of the U.S. beer market.

News and Related Story Links:

• Money Morning Investment Analysis:
  Thirsty for Profits? Ten Ways to Play the Worldwide Beer Market.

• AFP:
  Scottish and Newcastle snubs possible bid from Carlsberg, Heineken.

• Bloomberg:
  Carlsberg, Heineken in Talks for Scottish & Newcastle.

• The Financial Times:
  Carlsberg, Heineken Poised For S&N Bid.

• The Physics Factbook:
  Volume of World Beer Consumption.

The almighty consumer accounts for two-thirds of the economy’s growth (or, at least, that’s what the "experts" always claim). Well, last week, they received some pretty mixed signals about consumer activity: past, present, and future. While the world’s top retailer, Wal-Mart Stores Inc. (WMT), surprisingly increased its earnings forecast for the third quarter, few others had anything positive to report. Clothing stores ranging from Limited Brands Inc. (LTD) to The Gap Inc. (GPS) to J.C. Penney Co. Inc. (JCP) to Nordstrom Inc. (JWN) announced weaker sales in September and all reduced their outlooks for the rest of the year, a pretty concerning trend heading into the holiday season. Many of these retailers are already trimming prices in an attempt to get folks to catch the shopping bug a bit early this year. However, a recent survey by NPD Group showed that 40% of consumers will not even begin to focus on their gift buying until after Thanksgiving (better late than never, we always say…) While naysayers already started predicting plenty of coal for each stocking come December, the U.S. Commerce Department reported stronger-than-expected retail sales in September (see below). Mixed signals, indeed.

Alcoa Inc. (AA) kicked off another much-anticipated earnings season by announcing higher profits, largely due to the sale of its interest in a Chinese aluminum company. Management also increased its share buyback program, a move often perceived as positive for the future of the firm. PepsiCo Inc. (PEP) and General Electric Co. (GE) each reported double-digit earnings growth and attributed their gains to international/global sales. While consumers may be staying away from the malls, they haven’t lost their appetites for Big Macs as fast-food giant McDonalds Corp. (MCD) projected another strong quarter. And, as we demonstrated here with a Money Morning investment analysis, Yum! Brands Inc. (YUM) used yet another strong quarter to demonstrate that this appetite for fast food (KFC, Taco Bell and Pizza Hut) is becoming a global phenomenon – reporting strong results from China and the rest of Asia.

Heading into earnings season, many analysts raised concerns about the subprime mortgage mess (so what else is new?) and the impact it had on companies within the financial services and housing sectors. Microchip Technology Inc. (MCHP) tried to blame its quarterly woes on the subprime fiasco, but analysts generally weren’t buying. Only time will tell how many companies really are affected.

A few key mergers were proposed this week and corporate boardrooms seem to be buzzing again about the ‘art of the deal,’ and with promising transactions. Software leader Oracle Corp. (ORCL) took aim at rival SAP AG (SAP) by offering to buy BEA Systems Inc. (BEAS) in a $6.7 billion deal, but Oracle CEO Larry Ellison had the door slammed in his face. GE’s media division, NBC Universal (now known in some circles as "Nothing But Chicks"), will be acquiring Oxygen Media and its network that targets women viewers. Last year, the company bought web site iVillage, which caters to a similar audience. Male beer guzzlers took note of the proposed merger of the domestic operations of Molson Coors Brewing Co. (TAP) and SABMillerPLC to create the number two U.S. brewing company behind Anheuser-Busch Cos. Inc. (BUD). The deal will likely undergo a strict regulatory review for antitrust implications.

The bulls are celebrating a milestone five-year anniversary as the prior bear market (remember the dot.com bubble?) ended in October 2002. Stock-market investors reacted positively to Tuesday’s release of the minutes from the Sept. 18 meeting of Federal Open Market Committee (FOMC) policymakers (see below), and economists now believe more rate cuts are in the cards. While earnings season produced some decent early results, the jury is still waiting for the large investment houses to report.

Techs led the charge this week as news of the Oracle acquisition helped investors overlook a negative report on Chinese Internet firm, Baidu.com (BIDU). The Nasdaq climbed to its highest level in six and a half years. Bonds moved lower with the sudden renewed interest in stocks. (If only consumers could renew their interest in shopping…I’m just kidding, honey).

Economically Speaking: Fed Minutes, Inflation Worries…

"Given the unusual nature of the current financial shock, participants regarded the outlook for economic activity as characterized by particularly high uncertainty, with the risks to growth skewed to the downside…Although financial markets were expected to stabilize over time, participants judged that credit markets were likely to restrain economic growth in the period ahead." On those "concerning" notes, the Fed unanimously agreed to take "the most prudent course of action" and cut the Fed Funds Rate by 50 basis points (half a percentage point) last month.

The love-fest for Chairman Ben S. Bernanke began in earnest as a WSJ.com poll showed that 76% of economists surveyed believe that the aggressive move was appropriate, and 90% gave him favorable marks in his role as Fed Chief. (Somewhere out there, a man named Greenspan is both bitter and jealous.)

In addition to the minutes, some key economic reports were released last week. The significant recalls of Chinese products have started to impact the global trade picture as the U.S. deficit dropped to its lowest level in seven months.

Retail sales jumped by 0.6% in September as strong car sales helped overcome the weakness in apparel demand. The large increase was surprising given the poor sales results that had been reported by the nation’s retailers just a day earlier. Unseasonably warm weather and ongoing credit concerns have given many shoppers some good excuses to put off buying those winter wardrobes.

Energy prices soared by 4.1% and PPI jumped by 1.1% in September, though the more closely watched core number (ex-food and energy) rose by a mere 0.1%. Keep up the good work, Dr. B. Sorry about Talladega, Sterling (Keep your chin up!). Happy 70th, Dad. Good Investing…

SAB Miller PLC (SBMRY) and Molson Coors Brewing Co. (TAP) agreed on Tuesday to merge their U.S. brewing operations, creating a worthy rival for Anheuser-Busch Cos. Inc. (BUD). The deal also highlights the fact that – pretty well throughout the world (well, may be not in Moslem countries) – beer is one whale of a business: After all, SAB got to be big enough to merge with Miller from a base in South Africa, not one of the world’s wealthier markets.

I thought it might be interesting to look at the eight foreign beer companies that have ADRs outstanding, which a U.S. investor might buy, perhaps making a pick or two as to which has the thirstiest and fastest growing base of consumers, and that’s also selling at a reasonable price.

Generally, once the plant itself has been paid for, a brewery that has a dominant position in a local market is essentially a license to print money – indeed, several breweries have been used as the nexus for major local conglomerates, because of their reliable cash flow. On the other hand, there are limits to economies of scale – there are no brewing equivalents of General Motors Corp. (GM) or Microsoft Corp. (MSFT).

To get revenue and earnings growth, population growth is important. But so is “emergence:” While beer sales increase slowly in a wealthy market like the United States or Holland, they may grow much more rapidly in countries like India and China, in which a new middle class is emerging.

The first of the foreign brewers, alphabetically, is Compania Cervecerias Unidas SA (CU) of Chile. CU produces and distributes beer in Chile and Argentina, having its own flagship brand, Cristal, as well as distributing Heineken and several other international brands. However, with sales of $1.1 billion it appears limited to those two markets, which have a combined population of only 56 million people. If I was more bullish on the economic and political prospects of Argentina and Chile, I would be more bullish on CU, but with a Price/Earnings ratio of 20 and a PEG (Price/Earnings to Growth Rate) ratio of 2.1, it seems fully valued.

Companhia de Bebidas das Americas (AMBEV) (ABV), is Brazil’s largest brewer, operating in 14 Latin American countries. It’s also active in soft drinks, bottling and distributing Pepsi Cola outside the U.S. market. It’s a much larger company than CU – as you’d expect, since Brazil has a population of 190 million – has sales of $10.3 billion, and has more room to grow given its presence in Latin America’s middle-income emerging markets. Unfortunately, it’s very high-priced, with a P/E of 32 and a PEG of 2.4. A pity – beer companies do especially well in countries with hot climates!

Foster’s Group Ltd. (FBRWY.PK) is the leading alcohol company in Australia and the Pacific region, alas only quoted on the Pink Sheets. As well as beer, it has a substantial wine operation. And as most folks know, being aware of the brand, Foster’s Lager has good market penetration across the English-speaking world.

With sales of $4 billion, it has a P/E of 17 and has recently been growing around 12% per annum, giving it a PEG ratio of 1.4. Its market capitalization is $13 billion, so there’s plenty of liquidity internationally, preventing a “pink sheet” investment from getting out of line with its underlying value.

Heineken NV (HINKY.PK) of the Netherlands is a gigantic company, so why it’s too cheap to list itself properly – and not just on “Pink Sheets” – I don’t know. It claims to be the world’s most valuable beer brand, and is distributed worldwide. Heineken has a market capitalization of $14 billion and a P/E ratio of 18, but is only growing at about 6%, albeit in euros, which gives you an additional kicker when the dollar is weak, as it is now. Since its home EU market is huge, but relatively slow growing, I would generally recommend Foster’s instead.

Kirin Holdings Co. Ltd. (KNBWY.PK) is the largest brewer in Japan, again listed only on the Pink Sheets. It has operations across East Asia, but is growing relatively slowly at about 6%, since its home market has slow population growth and is already rich. It has a market capitalization of $13 billion, and a P/E ratio of 27 – relatively high, as is typical of Japanese companies. However, since the yen looks likely to be strong and it does not export heavily from Japan, it may be worthwhile as a currency play.

SABMiller PLC (SBMRY.PK) is listed only on the pink sheets, in spite of owning Miller Brewing Co. It’s now a British company, with important operations in the United States, Eastern Europe, and all across Africa, particularly in South Africa. At $45 billion, its market capitalization is much larger than its competitors, but its P/E ratio is at a nose-bleed-high of 27. While there are prospects for long-term growth in Eastern Europe and Africa, the U.S. beer market looks pretty mature, so you’re paying 27 times earnings for its ability to do merger and acquisition deals. Maybe not.

San Miguel Corp (SMGBY.PK) is the largest brewer in the Philippines (population 91 million, growing at 1.8%, emerging market, hot climate) and also has beverage and packaging businesses, with operations throughout Southeast Asia. Beer represents 25% of sales and 49% of operating income. It has a market capitalization of only $4 billion, so with only a pink-sheet listing, it may be somewhat illiquid. However, with sales of $5.7 billion and a P/E ratio of about 16, it seems to be quite a good value, provided you’re prepared to live with the Philippine country risk and the dangers of its two-tier share structure, which might produce a conflict of interest between its controlling shareholders and outside investors.

Tsingtao Brewery Ltd., (TSGTY.PK) is China’s largest domestic brewer, and the best known internationally. It has sales of $800 million and a market capitalization of $5 billion on Hong Kong (its A shares in Shanghai are quoted at double the price of its Hong Kong H shares). Regrettably, even the H shares have a P/E ratio of 60. Despite the allure of 1.3 billion thirsty Chinese, and even though the share price is up 178% in the last year, the stock seems a bit rich.

However, Anheuser-Busch (BUD) owns 27% of Tsingtao and is on a P/E ratio of 20, so you may prefer to invest in it by that means.

In summary, beer companies are generally highly valued in today’s market. That’s not surprising: Their steady cash flow and recession-proof operations make them valuable properties, especially if their market has reasonable growth prospects. However at multiples of 25, 32 or even 60, they are overpriced. I would recommend the two companies with reasonable multiples and good growth prospects: Fosters and (more hesitantly, because of its home) San Miguel.