Cheap gas tomorrow and cheap gas yesterday but no gas at any price today.

Turns out there are worse things than $4 a gallon gasoline.

For instance, there’s driving up to the pump and discovering that there is no gas for sale. Energy shortages are happening across a big swath of the developing world. And it’s occurring not just with gasoline but also with diesel fuel and even electricity.

The reason is very simple: Governments from Russia or China to India to Indonesia to Brazil have pressured or required oil refineries (and other energy companies) to keep consumer prices low even though the costs that they’re paying for oil (and coal) are rising. That’s turned these companies from oil refineries into red ink machines. Not surprisingly they’re reacting to these economics by cutting production– if you lose money on every sale, you’re going to cut volume. Or by exporting gasoline to countries that pay market prices for their petroleum products. And that has resulted in massive shortages of everything from gasoline to diesel fuel to electricity.

The shortages have become large enough to potentially cut economic growth in the economies that the world increasingly counts on for growth—just as central banks are raising interest rates in these economies to slow growth in an effort to fight inflation.

I’d argue that despite all the worry on Wall Street about how higher U.S. energy prices will hurt the U.S. economic recovery, the biggest danger to economic growth from higher oil prices is in those developing economies that are now caught trying to control prices without squashing supply.

Russia, the world’s biggest oil producer, is a good example of how a developing economy can get caught between a rock and a hard place by rising energy prices  Read more

Plotting the bottom for emerging market stocks

So where’s the bottom in emerging markets stocks? Or if picking the absolute bottom is too hard (and it is most of the time) when is enough risk out of these stocks to justify some serious bargain hunting?

Emerging market stocks have had the “emerging” beaten out of them in the last month. Brazil’s Bovespa index is down 7.8% from the April 5 local high to the close on May 6. India’s Sensex 30 index is down 6% from its April 4 local high to the close on May 6. China’s Shanghai Composite index is down 6.3% from its local high on April 18 to the close on May 6.

But this recent drop is just an accelerated version of the decline that most of these markets have suffered since they peaked back in the first half of November. From those November highs the Bovespa is down 10.4%; the Sensex is down 11.2%, and the Shanghai Composite is down 9.0%.

Since the beginning of the year I’ve been saying that the U.S. market will be the best performing stock market in the world in the first half of 2011. And it has been with the Standard & Poor’s 500 index up 5.3% even after the carnage of the last week.

But I’ve also been saying that investors should rotate into emerging market stocks, beginning slowly in May or so, because they would outperform in the second half. On current performance you’re entitled to ask “Oh, yeah? When?”

In the last few weeks I’ve been writing that “May or so” should definitely emphasize the “or so.” Today’s post is my attempt to explain why the timetable for rotating into emerging markets has slipped but remains fundamentally intact. And to give you some concrete guidelines for planning your rotation into emerging market stocks.

First, a quick summary of everything that was going to fall into place to make emerging markets outperform. Read more

It comes with the territory: When people I meet in traveling discover that I manage money and write about the stock market, they ask “What’s your favorite stock?”

So it was no surprise that on my recent trip to India, conversations with U.S. or European travelers would take that turn.

What was surprising was the exact form of the question.  What, they’d ask, is your favorite Chinese stock? And we’d be off on a discussion of dairy and food company Bright Food Group, or Internet search engine Baidu (BIDU) or China Railway Construction.

In Mumbai, Kochi, and Delhi, the question was always the same. Against a background of Mumbai’s construction cranes, the surprising new high-rise skyline of Kochi, and Delhi’s ubiquitous ads for new schools of English, engineering, and computer science, all that the Western travelers wanted to talk about was China.

After a while it got downright perplexing. In the midst of an economic boom that is projected to see India’s GDP grow by 9% in the fiscal year that ends in March 2012, no one wanted to talk Indian stocks?

And after a while it led me to wonder, if investor indifference was so pervasive, could India’s stocks be undervalued? Read more

Is the violence in Libya the last straw for the world’s emerging economies? Or at least for investors in those markets?

I certainly think that the big drops in emerging market stock markets are leading some investors to abandon markets that they never felt all that comfortable with in the first place.

For those of us—and I do mean us—who do believe in the long-term emerging markets story (and I wouldn’t have started a global mutual fund if I didn’t), it is still important to acknowledge that what we can call the Libya crisis for short has increased the medium term—say the next six to nine months–risk of these markets.

How come? Higher oil prices are a big problem.

Yes, I know that Saudi Arabia has lots of excess oil capacity and has pledged to pump to meet any losses from Libya. I know that it’s likely that once the Libyan crisis is over oil prices will retreat from current levels so that the world is probably not looking at $110 a barrel oil as the new base price. (I argued all this in my post http://jubakpicks.com/2011/02/23/its-still-a-little-early-in-the-libya-crisis-for-bargain-hunting/ )

And I know that the worries of the moment have concentrated on the world’s developed economies, especially Europe, which is very dependent on oil and gas supplies from Libya. The worry here is that higher oil prices—and Brent crude traded at $111 a barrel on February 23—will stall the weakest economies in the European Union. (A rule of thumb among economists is that every $10 increase in the price of a barrel of oil cuts GDP growth by half a percentage point within two years.)

But higher oil prices, even modestly higher oil prices, couldn’t come at a much worse time for emerging economies where governments are waging a tough battle to control inflation without tipping their economies into a big slowdown.

That balancing act, already difficult, got much, much harder with Libya. Read more

India shows why money is flowing out of emerging markets right now

Want to see why investors worry so much about the world’s emerging markets that they are taking money out of these stocks? Just take a gander at India.

In an effort to fight inflation the Reserve Bank of India has raised interest rates seven times in the last 12 months. So far the effort hasn’t slowed inflation—India’s wholesale price index, the Reserve Bank’s inflation measure, was up at an 8.43% annual rate in December. But it does look like the interest rate increases may have started to slow the economy. Industrial production in India climbed at an annual rate of just 1.6% in December. That’s a big drop from the 3.62% rate of growth in November.

And, with inflation still racing higher, Reserve Bank governor Duvvuri Subbarao has signaled the bank will keep raising rates, even though growth has slowed. Read more