The Chinese and Indian stock markets hit new 52-week highs during the first week of August. Emerging markets investors worried about a pullback can do what Bob Phillips, a managing partner at Spectrum Management Group in Indianapolis, calls "creating an anchor." That means taking 50% of the money you've earmarked for emerging markets and putting it into cash. The other half goes into an emerging-market index fund or exchange-traded fund. Every month the allocation should be rebalanced back to a 50-50 split. Over time, Phillips says, that strategy has produced 75% of the returns with half the volatility. More aggressive investors can replace the cash with the iShares MSCI EAFE exchange-traded fund, which invests in global developed markets, says Tom Wilson, a managing director in Brinker Capital's institutional investment and private client group. When done right, each strategy will provide investors a margin of safety. "It's hard to refute the case that emerging markets will be the fastest-growing economies in the world," says Phillips. "But that doesn't mean they'll always go up."
The Economics of Oil
Does the rise in oil prices threaten a nascent recovery? Prices are up more than 60% this year, to $72 a barrel, and hit a seven-week high on Aug. 3. The rule of thumb, says Deutsche Bank (DB) chief energy economist Adam Sieminski, is that every sustained $10 increase in oil reduces annual gross domestic product by half of one percent. But it's hard to measure a "sustained" increase given the price volatility over the past year. University of California at San Diego economics professor James Hamilton instead looks to gasoline prices, which in the second half of 2008 fell from more than $4 a gallon to $1.61, giving U.S. consumers an added $350 billion in annual spending power. In 2009 gas is up to an average $2.58 a gallon. But that increase offsets only $130 billion of 2008's windfall, not enough to hurt—yet, says Hamilton. "I'd start to be more concerned if gas gets back above $3 a gallon nationally."
A Brewing Storm?
Shares of coffee companies are piping hot. Case in point: Green Mountain Coffee Roasters (GMCR), a wholesaler that reported impressive earnings on July 29. Coffee has "proven pretty recession-resistant," says Ric Rhinehart, executive director of the Specialty Coffee Assn. He says coffee-shop sales have slipped, but at-home consumption is up. Green Mountain's innovation is an at-home brewer that makes a single cup of coffee in about 30 seconds. Sales of the brewers rose 187% last quarter, and earnings per share jumped 125%.
However, investors hoping to profit from the coffee craze may have missed their chance. Green Mountain's stock is up 159% in 2009 on hopes of accelerating growth. Stifel Nicolaus (SF) analyst Mark Astrachan rates it a "sell" and warns that sales growth could slip from 140% in fiscal 2009 to 96% in 2010. That's still impressive, but with shares trading at almost 60 times Astrachan's 2009 earnings estimate, Green Mountain is an expensive and risky bet.