2012 is the year of the dragon. Because the dragon, the icon of China’s emperors, symbolizes power and wealth, families in China see children born in a dragon year as especially fortunate. Dragon years, historically, produce a mini baby boom with about 5% more children born in a dragon year. Add that to the echo from China’s own baby boom and the loosening of government restrictions on family size and China is projected to see increasing birth rates that peak around 2016.

That’s led to a stock market boost in the shares of companies that are likely to tap into the baby bump. Chinese companies such as Inner Mongolia Yili Industrial Group (baby formula), Hengan International Group (baby diapers), and Boshiwa International Holding (retailer of kids clothes) have been tagged by China-based analysts as beneficiaries of the baby bump.

But I think Mead Johnson Nutrition (MJN) is an even better bet. Read more

It’s early. The results are open to revision and interpretation. And one month doesn’t make an investible trend anymore than a single swallow makes a spring.

But have you noticed? In the last month emerging stock markets such as China and Brazil have outperformed the U.S. market.

And that’s an absolute turnaround from results in 2010 and for most of 2011. Does it mean that we’re about to reverse the pattern that’s held for more than a year and see emerging markets start to outperform developed markets? Well, sort of. The picture right now shows that the outperformance is limited to some emerging markets and even in those markets, so far, the outperformance is spotty.

But I do think there’s the beginning of a trend here that your portfolio needs to respect. And since it’s so early, you need to pay attention to what kind of stocks in these emerging markets investors are willing to buy right now.

Here’s the data.

For the U.S. markets–for 2010 the Standard & Poor’s 500 stock index was up 15.02%. For 2011 to date, as of November 15, the S&P 500 was up 1.65%. In the last three months it gained 5.05% and for the last month 2.85%.

For Brazil—for 2010 the iShares MSCI Brazil Index ETF (EWZ) was up 7.69%. For 2011 to date as of November 15, it was down 19.54%. In the last three months the loss was a more modest 2.80% and in the last month the index climbed 4.35%.

Yep, after trailing for 2010. After getting killed in 2011 to date. After trailing badly over the last three months. In the last month the Brazil index beat the U.S. market.

China shows the same pattern—with some important wrinkles. Read more

As an indicator of the global economy, Alcoa’s earnings come up short

As indicators go, this one is sure tough to read. It’s not clear exactly what Alcoa’s (AA) quarterly earnings say about the global economy—except that it’s tough out there.

Yesterday, Alcoa announced third quarter earnings of 15 cents a share. That was short of the Wall Street consensus forecast of 23 cents a share but with so many special items, it’s not clear to me exactly how short of estimates earnings were. After taking out the positive items (such as an income tax benefit) and the negative (including flood damage), it looks like Alcoa’s adjusted earnings of $164 million were short of Wall Street estimates of $172 million.

But what interests those of us who own other stocks—but no shares of Alcoa—is the “Why?” of the miss. That’s where we’ll find clues to the prospects for the global economy.

The company said that demand for aluminum held up everywhere except Europe. Alcoa actually raised its projections for demand in China to 17% for 2011 from an earlier 15%. That should be enough, the company said, to offset falling demand in Europe. The company kept its projections for growth in global aluminum demand at 12% for 2011. That’s down just slightly from the 13% growth in 2010.

I have some trouble, though, putting that demand forecast together with the company’s reported drop in the price of aluminum, which has been falling since May. Yesterday’s price on the London Metal Exchange was about 22% below the May high.

That could be a sign that others in the aluminum market see demand as softer than Alcoa does—which, if true, wouldn’t be great news for the global economy. Or that those speculators that built stocks of aluminum thinking the price would go higher have been selling.

On the other hand, the drop in price could simply be a reflection of the structure of the global aluminum industry. Read more

Global stock markets wait on tomorrow’s economic numbers from China and United States for direction

Fasten your seat belts; it could be a bumpy ride tomorrow.

Two economic numbers, one from China overnight (from a U.S. perspective) and one from the United States before the New York market opens, have the power to move stocks in the current very volatile environment.

The Chinese number is the official version of the preliminary manufacturing purchasing managers index (PMI). The preliminary version, released by HSBC and Markit Economics on September 22, showed the manufacturing PMI falling to 49.4 in September from a reading of 49.9 in August. Any index level below 50 indicates that the sector is contracting.

The Shanghai Composite Index fell 2.8% on September 22 and has been dropping since. As of September 29, the index was down 5.9% from September 22.

The fear is that the drop in the manufacturing PMI signals that China’s economy is slowing more than expected and that projections for 8.2% to 8.5% GDP growth in 2012 are still too high and will have to come down, bringing company earnings and stock prices with them.

But the September 22 preliminary reading on the PMI only includes data from about 85% to 90% of China’s companies in the fuller survey that will be released tonight. That extra 10% to 15% might not seem like a big deal but the missing surveys tend to come from China’s biggest state-owned companies. And not only are these companies major exporters but also since they have ready access to financing from the country’s state-owned banks, they haven’t been hit as hard as the smaller companies in the survey by the lending slowdown engineered by the People’s Bank. Anecdotes and data from China say that smaller companies are starved of capital right now.

The market hope is that the full number from the PMI will hang above 50. Read more

Will the superior economic performance of developing economies such as China and Brazil translate into superior stock market returns over the next 12 months?

Or will the dismal performance of the world’s developed economies—as the United States and the European Union slide toward slow to no growth—drag all boats down to the bottom?

In other words will emerging stock markets decouple from developed stock markets in the last part of 2011 and in 2012?

I think that’s the most important question facing stock investors right now.

What’s decoupling? It’s when a stock market dances to its own tune rather than moving in lockstep with other markets or with the global market as a whole.

Decoupling is different—or maybe you can call it an extreme case–from relative out- and underperformance.

We’ve been through a good example of out- and under performance in the last part of 2010. In the fourth quarter of 2010, for example, the U.S. Standard & Poor’s 500 gained 10.8%. The Brazilian stock market, as tracked by the iShares MSCI Brazil Index Fund (EWZ), gained just 4%.

Sometimes the outperformance can be really extreme. From December 31, 2010 to its peak on April 29, 2011 the S&P 500 climbed to 1364 from 1258. That’s a gain of 8.4%. From December 31 to April 29 the MSCI Brazil Index Fund went from $76.23 to $76.55. That’s a gain of 0.4%.

But even then the two markets moved in the same direction—even if just barely.

Pure decoupling is different—and rarer. Like what happened in 2007. That year in the fourth quarter the S&P 500 went down by 3.6% while the Brazil Index Fund went up by 11.4%. For the year the S&P finished ahead a paltry 4.9% and the Brazil Index Fund was up 74.8%.

Could we see that kind of decoupling in the remainder of 2011 and in 2012? (Or even just extreme out performance?)

The economic growth trends give decoupling a good chance. Read more