Volatility ahead

This year a lot can happen. So much depends on forces outside our control that predicting the markets will be up (or down) X percent by year end would be criminal at best. Instead, I would like to broadly outline the possibilities and risks we face in the months ahead and how best to play them.

As I predicted, we are currently in a rally that began before Christmas and should extend for the next few weeks if not months. I don’t think we will hit any new highs during this period or if we do it won’t be until April. Europe will most likely continue to dominate the news, so we should continue to experience quite a bit of volatility. Be prepared for the 1-3% up days followed by the same or more on the down days.

 I believe that ultimately Europe will get its house in order but between here and there the markets will be quite choppy. A foot in both the equity and bond markets should play best in that environment. Stick with dividend and large cap stocks and defensive sectors in this period along with corporate and high yield bonds and short-term paper.

Although the U.S. economy continues to improve, it is nothing to write home about. Without additional help from the do-nothings in Washington or an end-run by the president around Congress, unemployment will remain high and growth between 1.5-2.5%.That is an optimistic scenario, which assumes that a European recession is inevitable but at the same time contained to their side of the ocean.

If, on the other hand, it appears that Europe’s recession is spreading globally then all bets are off. Remember too that stock markets sell first and collect the facts later in this day and age. Just a hint that something like that is in the cards would be enough for  a major sell-off in world markets Therefore it wouldn’t surprise me if we have a classic “sell in May (or April) and go away” scenario this year.

Granted that would be a worse case scenario but one we must all be prepared for. Further hiccups in Europe, fear of renewed recession here at home without further monetary or fiscal stimulus from the Fed or White House could spook sending the S&P 500 Index back towards its 2011 lows at 1,100. Granted, that would be a worse case scenario but one we must all be prepared for. A switch to all bonds would be best in that case.

But remember, we are also in an election year and markets usually begin to anticipate that in the second half of the year. This could give investors an opportunity once again to buy the dip. If history is any guide, the Obama Administration will want to do anything and everything they can to boost the economy going into the November election. This year that argument should carry additional weight since both parties are campaigning on the economy and unemployment.

In that case, we could see a major move higher in the averages off the bottom this summer that could move the U.S. market to substantial gains by the end of the year and into 2014.  Now, wouldn’t that be nice?

If some or most of my forecasts come true for this year, it is quite obvious that a buy and hold strategy will be a recipe for disaster as will all cash, all bonds or all stocks. There will be times during the year investors will want to be both aggressive and defensive and it will be a lot of work, just like last year. There is an old saying that “if you can’t stand the heat, get out of the kitchen” or in this case, hire a money manager that can make those decisions for you, but be sure you pick the right one.

Before the markets opened, central banks of the U.S., Canada, England, Switzerland, Japan and Europe announced a plan to provide cheap dollar loans to European banks and other institutions, reminiscent of the actions they took after the Lehman Brothers bankruptcy in 2008. This action, like that of 2008, puts all investors on notice that the world’s central bankers have no intention of letting Europe go down in flames anytime soon. It is a lesson we should have learned by now after three years of government intervention in capital markets.

 Clearly, the week was shaping up to be another dismal episode in the European crisis, despite Monday’s 3% rally. The S&P credit agency had lowered the credit ratings on a slew of banks. European sovereign bond prices continued to plummet and rumors abounded of a possible bank failure somewhere in Europe as early as December.  The news came in the nick of time.

And time is the one commodity that is most in demand among Europe’s leaders. Make no mistake; this latest action by the central banks is a stopgap measure. It is intended to give European nations the time to come up with a solution to their crisis. It is not a panacea that will fix the PIGS, Italy or Spain’s faltering economies and enormous debtload.

Think back to our own Federal Reserves’ actions over the last few years.  The bank has continuously injected liquidity into our market through a variety of tools including lower interesting rates, buying bonds, and delving into the credit and mortgage markets directly. Its efforts continue today and are designed to keep the financial markets from collapsing, giving the government and private sector vital breathing room to dig the economy out of a recession.

How has that worked for us?

 In my opinion, their actions avoided a total collapse of financial markets, averted another Great Depression, kept unemployment from climbing even higher than it could have been, and restored confidence among investors. Where the ball has been fumbled is among our private and public sectors.

Our government’s inability to respond to slow growth, high debt and high unemployment is a failure of our politicians. Private companies have also failed by hoarding cash, refusing to lend and bolstering profits by avoiding new hiring while working existing employees to death.  Bottom line, our leaders have frittered away a lot of the time the Fed has given us.

The question: will Europe repeat the mistakes of our leaders or will they use this time to actually come up with solutions to their economic problems?

The challenges are great and in many ways even deeper and more difficult to solve. Their debt issues are with countries as well as banks. Unlike the U.S. dollar, their currency is in jeopardy. Governments are in far worse shape than they were two years ago and there are serious political and economic contradictions within the European Community.

One might dismiss their chances, given the embarrassing and inept handling of the crisis that has already dragged on for two years. I believe that the central bank actions have granted Europe and world markets a temporary reprieve and I fully expect Europe to respond positively to this gift.

Does the little guy stand a chance?

It is not too difficult to understand why investors have abandoned stocks en masse. The declines and losses most investors experienced in 2008-2009 were traumatic. Many investors never returned to the equity markets, but preferred, instead, to keep their money in bonds or money markets. Those who did participate in the subsequent stock market rally from March, 2009 to the beginning of 2011 made quite a bit of their money back.

This year, however, the individual investor experienced a level of volatility that was beyond comprehension. It didn’t matter whether you were invested in stocks, mutual funds or exchange traded funds, or in defensive areas such as dividend stocks or preferred shares. Nothing was immune and the volatility was insane.

Consider the movement in the S&P 500 Index for one thirty day period in September through October of this year: Up 8.31%, Down 7.34%, Up 5.34%, Down 5.68%, Up 7.38%, Down 8.70%, Up 7.34%, Down 10.14%, Up 6.65%.

By the end of the third quarter the Dow, S&P and NASDAQ all lost more than 12%, the worst decline since the fourth quarter of 2008. If you were invested in Europe, the results were even worse with Germany, Italy and France all down over 30%. Between the volatility and losses, no wonder the few hardy souls who had stuck with the market since 2009 have decided to abandon ship.

Their desertion has drained a great deal of liquidity from the markets over the past few years. Liquidity is a term used to describe the ease in which you can purchase or sell a security without moving the price higher or lower by an appreciable amount. In a recent story in the Wall Street Journal “Traders Warn of Market Cracks”, several Wall Street traders argue that it is increasingly difficult to trade large amounts of stock without moving the market (price level) substantially.

We have all heard of high frequency trading (HFT) by now. These HFT firms represent about 2% of the 20,000 trading firms that operate in the markets today but account for over 73% or more of trading volume. Directed by computerized algorithms, hi-speed computers buy and sell in mini-seconds capturing tiny profits (less than one cent per share in many cases) over and over again 24 hours a day around the world.

In calmer market environments, HFT does provide additional liquidity in the markets and actually drives down costs. Where the system breaks down is in volatile markets like we have today. These traders are geared to make small amounts of money on large volumes. When good (or bad ) news hits and markets begin react “in size” the HFT firms back away from trading, which instantly causes a 73% drop in liquidity at the very time it is needed most. It is what happened during the “Flash Crash” in May of last year.

In addition, some critics are blaming certain leveraged exchange traded funds for contributing to the volatility in the markets. ETFs have experienced explosive growth in the last five years and now accounts for 40% of the daily trading volume. The use of ETFs that provide 2 and 3 times the amount of exposure to an underlying index, they say, causes excess buying and selling that would not occur otherwise. ETF defenders argue that leveraged ETFs only account for 4-5% of volume and are simply reflecting market sentiment not causing it.  A subcommittee of the U.S. Senate has opened hearings on the issue this week.   

The bottom line, in my opinion, is that today’s stock market environment is no place for the retail investor unless you have help from a professional. Rampant insider information between government and Wall Street, both here and abroad, overnight trading by professionals that effectively prevents the individual investor from participating in the market’s big moves, and the above volatility factors make the markets an unfair arena for most of us.

New versus used cars?

My wife, Barbara, and I have been shopping for either a used or new car. We own matching 2004 Subaru’s that we purchased used back in 2005-2006. We would much prefer a vehicle with even better gas mileage, but we live in the Northeast where snow and ice demand a four, or all-wheel drive vehicle and that limits our choice of fuel efficient transportation.

The good news for us is that although all used cars are priced higher these days, smaller, fuel efficient models and hybrids are commanding especially good prices. As a rule of thumb, every $1 increase in the price per gallon of gas, the value of used compact cars rises 8% to 12%. So if the trade-in value of your car was worth $10,000 last year, it could bring $11,000 this year.

However, this shortfall in supply won’t last long. Dealers estimate by late fall or winter the pipeline will begin to fill once again.

Much of this used car price windfall is a by-product of the 2008 recession. The consumer was hit by the double blow– less income and, thanks to the financial crisis, increased difficulty in qualifying for either a lease or auto loan.  As a result, today, three years later, there are a lot less used autos for sale. The average car on the highway today is 10.6 years old, according to Polk, the auto research firm.  That’s up from 9.8 years in 2007.

 Another large source of used cars for dealerships has traditionally been the leased cars market. Companies sell leased cars as used when leases expire. But a lot less leases were written during the financial crisis, leaving a large hole in supply at the wholesale level.

“Wholesale prices are quite high,” says Mike Coggins, General Manager of Haddad Dealerships in Berkshire County, MA. “We haven’t passed those prices on to the consumer so our margins are smaller.”

Still, Coggins isn’t complaining since his used car sales are up 25% this year, leading all of his other divisions.

The effect of Japan’s earthquake has also contributed to an overall shortage of new autos this year. The disaster in Japan disrupted the world’s supply chain of auto parts as well as the export of many Japanese made vehicles to the United States. This is a far cry from three years ago when all three U.S. automakers were on the ropes and dealerships around the country were closing every day.

It may actually make more sense for us to look at replacing our autos with a new car this time around. I am going to do my research, something you should do as well, if you are planning to buy a car.  Figure out the price differences between a used model and a brand new vehicle before making a decision. I tend to drive my auto for many years (as opposed to trading it in every three years) so the new car avenue may make economic sense for me.  Find out a ballpark asking price for your vehicles from “Kelly Blue Book” on the internet and find out what similar cars are selling for in your area.

I know that we would probably get a higher price for our vehicles by selling them to a private party. Something I suggest you try if you really want to get the best price for your car. We will probably take a 10% haircut on the price by trading it in to a dealer.

Yet, neither of us is willing to put the effort into listing it on the internet and haggling with potential buyers. I would much rather devote that time to writing columns for you, my readers.

Investors on the chopping block

            The good news is that September is over. Does that mean we can look forward to better times ahead? Well not quite; we still have to deal with October, which like March, is usually a month that begins like a lion and ends like a lamb as far as selloffs are concerned.

So what makes investors so fearful of October? It might be because October has ushered in some auspicious dates of calamity beginning with a 12.8% plunge in the Dow on October 29, 1929. In today’s markets, a 12 % plunge doesn’t feel like a big deal but back then it was substantial and it didn’t stop there. The market went on to lose 90% of its value and usher in the Great Depression.

Then there was the stock market crash of October 19, 1987. That was my first of many encounters with stock market meltdowns throughout the world.  Fortunately, it was a short, sharp decline and the U.S. markets recovered quickly.

And how could we forget October, 2008? It was the worst month for the S&P 500 Index, NASDAQ and the Dow in 21 years. Global equities lost $9.5 trillion that month and it was the most volatile 30 days in the S&P 500’s eighty year history. We registered the most down days in a single month since 1973.

Actually, despite these gruesome statistics, October historically turns out to be the seventh-best month to own stocks, tied with April, putting it in the middle of the pack.

September, on the other hand, is the bad boy of the calendar year. It holds the record for most miserable month as far back as 1929. If we look even further back in history we discover the root cause of September’s stock market underperformance.

Back in the day, much of 19^th Century American commerce consisted of East Coast purchases of newly harvested crops from the South and Midwest regions for sale to the rest of the country. September was harvest month so bankers and other investors would borrow large sums of money from Wall Street, temporarily pushing up interest rates while redirecting money flows away from stocks and into the bond market.  This would also coincidentally push down prices in the stock market that month.

Although money flows have long since been regulated by the Federal Reserve for events like the planting season, the tradition of down Septembers persist. Since 1959, the S&P 500 Index has declined an average of 0.9% in September. In the first two years of a presidential term the performance is a bit worse. Overall, investors have suffered the most double digit losses in that month as well.

In today’s world. other concerns might explain September’s continued poor performances. There is the ‘back to work’ phenomenon, which occurs just after the Labor Day holiday. Many investors typically take the summer off and when they come back are disappointed to find that their portfolios gained little during the summer months. They lose patience and sell.

One reason for that disappointment may be that a company’s earnings for the year have not met the expectations of the market. The normal end of June, early July, quarterly earnings announcements often time disappoint. What may have seemed a reasonable expectation by company management at the end of the prior year may not be a reasonable estimate by mid-year for a variety of reasons. The company’s stock price may decline or simply mark time temporarily. Many investors won’t want to hang around for yet another earnings disappointment at the end of September, so they sell ahead of earnings season.

This year, September has certainly lived up to its reputation with the averages declining almost 5% overall while volatility has skyrocketed. The bottom line is that if September is usually the month when crashes occur, then October is the month that ends them. Since September is over, the good news is that we have weathered the worst and if history is any guide, the future should be a bit better.

Is the White House and Fed planning a big REFI?

For the longest time, I have been convinced that the housing market holds the key to economic growth (or lack of it) in the U.S. As such, I have been hoping against hope that one or more of a long line of presidential candidates would actually have the courage and intellect to recognize and address our main problem.

Instead, I hear how “we need to get America back to work” or “we need to roll back all these regulations that are preventing businesses from investing.” While all of those jingoistic slogans sound good, none of them address the main issue: how to deal with the trillions of dollars in underwater mortgages and the people who hold them.

The Fed, through QE II, attempted to push interest rates low enough so that borrowers could stave off foreclosure by refinancing their mortgages. The problem is that lenders insist that the market value of homes to be refinanced must be no lower than 25% of the mortgage they carry. That’s a real “Catch-22” for most borrowers, thanks to the decline in housing values over the last three years.

 Their houses are now worth a lot less than that. So mortgage holders are in a bind.   They can’t sell their property because they won’t get back enough to pay off the loan. They can’t refinance because the house is worth less than the mortgage and they can’t afford the monthly mortgage payments. As the situation drags on, more and more Americans slip into bankruptcy or walk away from their home/mortgage leaving and already weakened financial system to pick up the pieces.

Right now this is just my guess of what the Obama administration may be planning.  Over the past week a number of governmental trial balloons have been floated in the media concerning refinancing of up to $1 trillion of mortgage loans on easier terms. It won’t be a giveaway, if it occurs, in the sense that to qualify for re-financing, you must be current on your mortgage payments and the loans must have been guaranteed by Fannie Mae, Freddie Mac or the FHA. How would it work?

Homeowners who qualify would get a new 30-year loan at say 4% and payoff 100% of the old mortgage (presumably carrying a much higher rate of interest). This is called prepaying your loan in the mortgage business. Your bank receives the proceeds and pays off the old loan to Fannie and Freddie. These two government mortgage entities would receive these billions in prepaid mortgages and dispense them to the ultimate mortgage holders in the mortgage-backed securities market.

Now, guess who holds the lion’s share of mortgage backed securities in this country? You guessed it, the Fed.

That still leaves Fannie and Freddie with a problem. They need to refinance all these new 30-year, 4% mortgages. They are also assuming a lot of risk since lending now, when interest rates are at historical lows, is a dicey business.  Who will buy them and how can they protect these new mortgage loans from future losses when interest rates begin to rise? The answer was revealed in yesterday’s Fed announcement.

The Federal Reserve announced that it intends to drive long-term interest rates lower by purchasing long term U.S. Treasury bonds. The Fed said it will also juggle its $2.65 trillion securities holdings by using its enormous cash flow to buy more mortgage debt. In other words, since it will be on the receiving end of all these billions in prepaid mortgage money, it will just turn around and use that cash to buy up billions in these new refinanced mortgages. At the same time, by driving long rates lower through their purchase of long dated treasury bonds, they effectively remove the risk of rates rising anytime in the near future. The Fed becomes both buyer and seller of this entire refinancing operation.

The beauty of this move, in my opinion, is that the White House will be able to launch a new refinancing program/stimulus plan without going through congress for approval.  Nor will it add to the deficit, since all of these transactions will be run through the Federal Reserve. The Republicans may have gotten wind of this, thus the letter to the Federal Reserve Board just prior to their meeting, warning the Fed members not to do anything further to stimulate the economy.

Well, boys, the Fed just blew you off and you can’t do a thing about it.

Is this all a hair-brained scheme of mine born of too much work and too little vacation? Time will tell. But if I’m right, I would expect an announcement fairly soon. I have to hand it to the Obama Administration if it is true and they can pull this off. The scope of refinancing they are planning will put $2,000 or more a year into borrower’s pockets, which will amount to a huge stimulus program that bypasses congress and goes straight to the people. I hope I’m right.

All eyes on the Fed

The stock market has been climbing over the last week in anticipation that the Federal Reserve will, like last year, announce another monetary stimulus program similar to QE II. There are several problems in betting on that outcome in my opinion.

Number one is investor’s knee-jerk expectation that the government will save the stock market every time we have a selloff of 10% or better. We have become conditioned to expect some sort of governmental intervention ever since the 2008-2009 financial crises. That’s when the TARP Plan was passed, followed by the stimulus plan, the extension of the Bush tax cuts and the cut in payroll taxes, not to mention last year’s QE II announcement almost exactly a year ago today.

The second problem is that the Fed has already done quite a bit to stimulate the economy with mixed results. Their announcement of just a few weeks ago that they will keep interest rates low until mid-2013 is actually an extension of QE II, (call it QE 2 ½). I doubt that they will be willing to move much beyond their present efforts until the economic data clearly indicates further weakening.

There has been some talk that the Fed might change its focus from buying short-term U.S. Treasury bonds to buying long -term U.S. Treasury bonds. I am at a loss to understand why they would want to do that. Lowering long-term rates would theoretically make borrowing cheaper. An implicit assumption is that lower rates would encourage long-term investment in plant and equipment. The problem with that theory is that large corporations already have record amounts of cash to invest but are still not investing in long–term projects. They believe there is simply too much uncertainty within our political system, our regulatory environment and in the economy to warrant additional investment right now.

As for smaller corporations, those that represent the majority of America’s work force, only those businesses that don’t really need to borrow are eligible for loans. It is not the level of interest rates that prevent banks from lending. It is the uncertainty that loans to small businesses will be paid back that has created an almost complete cessation of new lending in that arena. It has already been shown (via QEII) that banks are not willing to lend no matter how low rates fall.

            In any case, it is not our economy that has been driving markets lower. The financial problems in Europe are what have most investors spooked. Make no mistake, Europe’s problems are serious and their leaders have yet to come up with a decisive, comprehensive plan to deal with their financial problems.  The Fed’s actions here won’t resolve the problems on the other side of the Atlantic.

            In summary, unless the Fed pulls a bull-sized rabbit out of their hat tomorrow, the markets will swoon. Let’s see what happens.

.

Bill Schmick is registered as an investment advisor representative with Berkshire Money Management.  Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM.  Direct inquires to Bill at 1-888-232-6072 (toll free) or e-mail him at Bill@afewdollarsmore.com

Stock market free falls, such as the one we are presently experiencing, are called “waterfall declines,” which are sudden drops of 20% or more compressed into a few short weeks or days. They are fairly rare events and most follow a roughly similar pattern consisting of three phases.

 The first phase is the decline itself followed by a sharp bounce higher. We may be experiencing that bounce right now. Following the bounce (and possible re-test of the lows), the market should drift into a basing period that could last for one to three months.

 During that time the market could move up and down in a sideways pattern similar to what we experienced in May through June of this year.  Finally in the last phase there is a rally lasting 6-12 months that could move the markets higher by about 25%.

In reviewing 10 waterfall declines from 1929 thorough 2002, three months after the post-waterfall low, the stock market was higher in all 10 cases. Six months later, the market was higher in nine of the ten cases with the average gain at 17%. A year later the market was higher in nine out of ten cases with the average gain equal to 24%. The financial crisis of 2008-2009 was in a league all by itself. The market, three months after the low of March, 2009, was up 37%.

If we drill down even further, say to the next two weeks, one can expect a ‘relief rally’ of as much as 10%. Then, if the pattern holds, we should “re-test” the bottom. In this case, if we have truly found a bottom for the S&P 500 Index at around 1,100, we should bounce again from there.

“So what happens if we break down through that 1,100 level?” asked a nervous client from Manhattan.

The short answer is 1,100 wasn’t the bottom and we go lower, by as much as 10%, to S&P 1,000.

Waterfall declines are often recession-related. There have been exceptions to that rule, for example, in 1987 the market fell sharply for two days only to spring back. The Dot Com boom and bust of 2002 was another waterfall decline that did not usher in a recession.

So what is the best way to navigate through a waterfall decline and its aftermath? It is obvious that one should ride out the turbulence; at least for the next few months. If we are truly entering into a recession, the economic data will confirm that fear or dispel it. If we are going into a double-dip, then I advise you to get defensive—bonds, dividend paying stocks, etc.

 But it may turn out that the market was simply correcting, as it does periodically after a long and profitable run. Remember, the S&P 500 Index was up over 80% in over two years, so a 20% pullback doesn’t look as serious from that perspective.

What to do when the bear is staring you in the face?

Most of the losses have occurred quickly, in around 8-9 days, which although painful, could be a blessing in disguise. Sharp, short corrections, in my opinion, are much better than corrections that drag on for months losing a little each day.

Of course, these large declines often trigger strong emotional reactions among investors but decisions based on panic rarely prove to be the right ones in hindsight. So I thought I would provide a little perspective on why the markets are selling off and whether or not you want to join the ranks of sellers.

Over the last few months the macroeconomic data began to weaken. At first, economists explained that it was caused by bad weather, then the Japan earthquake, but as the numbers continued to come in at a less than expected rates investors grew increasingly nervous. Then last week, while all eyes were focused on the debt ceiling crisis, the Commerce department announced that second quarter GDP came up short– 1.3% versus 1.7% expected. Even worse, the first quarter was revised downward to just 0.04%, a shockingly dismal performance.

That number, combined with an unemployment rate above 9%, plus continued uncertainty within the poorer countries of the EU, was enough to tip the scales. The trading range that the markets have been locked in since the end of April was finally resolved to the downside. Since then, we have broken several technical supports and are hovering just above a big one at 1,225 on the S&P 500 Index. If it breaks down and through this level, the chances of additional losses are quite high.

Sounds like doomsday, doesn’t it? Well, the same thing happened last year for the same reasons. The economy was slowing, unemployment rising, Europe was in trouble and the markets dropped 16% from April, 2010 through August. It was then that the Federal Reserve Bank announced the possibility of QE II. The markets reversed, exploded upward and investors never looked back.

Since March, 2009 we have had seven such “dips”. Each pullback was considered a buying opportunity and those investors that did so have been mightily rewarded. No one knows if this will be number eight or if we are going to continue lower.  At some level, stock prices will become just too cheap for value buyers to remain on the sidelines. Some say we are at that level now.     

My advice is to decide how much you are willing to lose and when you reach that limit sell and move to the sidelines. For some investors that can mean 5% (you should already be out), others will accept 10%, while some might be willing to sustain even more. Once your limit is reached don’t hesitate. Be prepared emotionally for the possibility that the markets could turn around a day after you sell out. Accept that if it happens, and don’t beat yourself up for not staying the course.

For those of you who have bond investments, keep them since bonds and gold are benefiting from the stock selloff.

Emerging markets are no longer monolithic

While the investing world is distracted by the U.S. debt ceiling crisis and the on-going drama of Italy and Greece, I’ve noticed that a small but increasing stream of money is finding its way back into some emerging markets.      

Last year I advised investors to lighten up on emerging markets. That proved to be the right call. The Chinese market is now below the levels last seen in late 2009. India and Brazil have lagged world markets as has Russia.  But usually you want to begin to invest in these markets before their stock markets turn. Today, I think it may be the right time to start nibbling in the area. Here’s why.

The increase in commodity prices was a major negative for many emerging markets, notably China, India and Brazil. Their factories are voracious users of energy, such as oil and coal and a host of base metals and agricultural food stuff. When prices of these inputs go up, combined with a fast growing economy, inflation follows quickly.

 Many emerging market governments have had to contend with this problem by tightening credit and raising interest rates over the last two years. When commodity prices come down, as they have done over the past four months, it relieves some of the inflationary pressure and allows governments to loosen monetary policy a bit. That reversal of fortunes is happening at the moment.

China, the big dog of emerging markets, has raised interest rates five times this year. Last week they raised them again but indicated that it may well be the last hike this year. The Chinese central bank has not changed its rigid stance towards fighting inflation quite yet, but it expects to see some lessening in the inflation rate this month. Investors have worried that all this the belt-tightening in China (and other countries) would lead to a “hard landing” for the economy, but the country reported steady growth for the second quarter coming in at 9.5%, only slightly lower than the first quarter’s 9.7% growth rate.

But things have changed in the investing landscape among emerging markets. Gone are the days when one could simply buy a fund that is exposed to all emerging markets and hope to prosper. Brazil and other Latin countries, for example, are tied to the prices of the commodities they produce, so what may be good for China, may be bad for Brazil.

India, like China, has an inflation problem but seems to have a better handle on controlling inflation and imports more natural resources than they export. Some other Southeast Asian countries such as Vietnam, Indonesia, Malaysia, Singapore and Taiwan have their own set of economic variables, although many of them still depend on China’s continued growth for their own prosperity.

Korea, on the other hand, may not even be an emerging market any longer in my opinion. Latin American countries like Mexico, Peru, Chile and Argentina join Brazil in combating high inflation brought on by the very thing that is responsible for their growth, natural resources.

About the best that can be said is that as emerging markets develop, each country’s particular set of circumstances can provide both an opportunity and a challenge. Gone are the easy money days of simply buying them all and watching your portfolio go up and up as it had in the period of 2002-2007. Now it takes some homework and a bit of luck.