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Redefining 'emerging markets'
One strategist says countries like India, Korea, and Brazil deserve a new category and some props for their newfound stability.
NEW YORK (Fortune) -- The news that Dubai World may default on $60 billion in loans has reawakened investors' suspicion towards emerging markets.
But experts say certain Latin American and East Asian countries have proven their economic mettle during this global recession and are unlikely to catch Dubai's contagion.
That's why Barclays strategists say they deserve a new label: Advanced emerging markets.
FTSE Group, which creates stock indices, has already given that title to six countries with high national income levels or developed market infrastructures: Brazil, Hungary, Mexico, Poland, South Africa, and Taiwan.
Barclays strategist Eduardo Levy-Yeyati would add countries such as India, Korea, Singapore, and Chile to the list, and leave out the United Arab Emirates, which he says lacks the "financial depth and policy track record." China, he says, is in a different asset class altogether because of its sheer size.
Financial advisors usually tell investors to keep a minority of their stock portfolio in international equities and a fraction of that amount in emerging markets. About 15% of the MSCI All Country World Index -- which tracks stocks from 45 countries -- comes from emerging markets.
Levy-Yeyati expects that to expand over the next few years. "The weights in the benchmark don't fully represent the economic upside of emerging markets," he says.
Some investors are apprehensive of emerging markets, according to Levy-Yeyati, because they fear a reprisal of the catastrophic episodes that occurred in the 80's and 90's, like Brazil's bout with epidemic inflation.
"Skeptics used to say the next crisis would show that [emerging markets] were no different from how they were before," he says. "But this time, they showed: 'We're different.'"
While the Brazilian and Indian stock markets fell further than the S&P 500 in 2008 -- and rebounded higher -- those countries' economies were hardly shattered by the global recession. In fact, the IMF estimates that all will post GDP growth topping 3% next year, while the U.S. is expected to achieve growth of just 1.5% (the IMF's projections are conservative by most analysts' estimates).
In a recent note to investors, Levy-Yeyati and his team marveled at advanced emerging markets' ability to reduce risk while maintaining growth. The analyst attributes the phenomenon to structural changes, many of which he says were implemented after the economic crises of the 90's.
Local governments, he says, have become more stable, using liquidity gained in boom times to build war chests, or reserves. "Fiscal consolidation and monetary credibility are here to stay."
Because of those fundamental changes, advanced emerging markets were able to cut interest rates and implement government stimulus over the last year without causing currency runs or credit sell-offs. While there was once a contagion effect -- if one market crashed, the others recoiled -- emerging market credit barely reacted when Ecuador defaulted last year. Following the Dubai incident, emerging market stocks and bonds faltered slightly, but are already bouncing back.
"Ultimately, these structural changes gave many E.M. countries the ability to enact countercyclical policies in bad times for the first time since the creation of the E.M. label," Levy-Yeyati wrote.
So what's keeping advanced emerging markets from becoming fully developed? "There are three aspects in which they're lagging," he says. "Currency convertibility -- many already have that -- income distribution, and institutional progress. For example, there's more uncertainty about the length and cost of investments and bureaucratic processes in these countries."
Levy-Yeyati says the second factor, income distribution, could take the longest to achieve. But now that these markets have achieved "macroeconomic stability," he says, they're closer to that goal.
The recent stabilization of emerging markets doesn't mean that they have decoupled from the G8 economies -- economic indicators still show a strong correlation between developing countries and the rest of the world. But that correlation, says Levy-Yeyati, has skewed heavily towards China, which is why many advanced emerging markets have rebounded.
"Empirically, it's very simple," he says. "China is increasingly the most important global factor."
Because China has become the main trading partner of Latin American and East Asian countries -- where most advanced emerging markets are based -- the country now drives their business cycles, he says. Eastern Europe and Mexico are still exceptions, yoked respectively to Europe and the United States.
Given many analysts' optimistic forecasts for China, it isn't surprising, then, that Levy-Yeyati expects advanced emerging markets to surpass expectations. "Indeed, because of the backward-looking nature of financial markets, the structural improvements ... have been only partially reflected in asset prices," he wrote. "The performance of a new group of Advanced Emerging Markets will likely look better in five years than what past data suggests."
As a result, he says, if investors take an overweight position in emerging markets now, they'll be ahead of the curve.
The domestic drilling backlash
From New York to Texas, energy companies have come under fire as natural gas drilling gets close to big cities.
NEW YORK (CNNMoney.com) -- "Drill baby drill" is so 2008.
More than a year after Republicans rallied around the now-famous call, a growing number of Americans are saying not-in-my-backyard when it comes to more oil and natural gas drilling.
At a recent drilling hearing in New York City the crowd was certainly riled up, but not in a way that might please Sarah Palin.
"We don't want more hearings, we want a total statewide ban," exclaimed one protestor, jumping on stage at the hearing's start before being escorted away by uniformed officers. The standing-room-only crowd, many carrying protest signs, erupted in applause.
Most Americans still support increased oil and gas drilling. But opposition is growing, especially when that drilling nears more populated urban areas. Currently there are natural gas booms happening around New York City, Dallas-Fort Worth, Western Colorado, the Midwest, and elsewhere. Opponents fear this new drilling will ruin the drinking water for millions of people, among other concerns.
And energy companies, accustomed to dealing with rural populations familiar with drilling and eager for jobs and lease royalties, are increasingly finding themselves at odds with a more educated and wealthy populace wary of energy development.
This is especially true outside New York City.
Just north of America's largest metropolis lies one of the country's most promising new sources of energy: The Marcellus Shale.
Running much of the length of the Appalachian Mountain rage, the Marcellus is thought to hold up to 500 trillion cubic feet of natural gas - more than twice the nation's current total reserves.
In the age of global warming, natural gas as an energy source is gaining favor. Burned to generate electricity, it emits about half as much pollution as coal.
It can also be used to power cars, and some, including the oil billionaire T. Boone Pickens, are pushing this idea as a way of weaning the country off foreign oil.
Growing fear about contaminated water
New horizontal drilling technologies have made the gas in the Marcellus shale and other shales across the country more accessible. But extracting it requires breaking the shale rock with a mixture of chemicals, water and sand, blasted down the well hole. While the process, known as hydraulic fracturing, has been around for decades, it's never been done on this scale, and so close to major population centers.
The shale lies thousands of feet below the water line, and both energy company officials and state regulators across the country say the chemicals used in the fracturing process have never resulted in ground water contamination.
But across the country a few high profile mishaps have occurred, resulting in contaminated drinking wells, flammable tap water, and even houses exploding. Radiation, often naturally occurring in rocks, has also been found in drinking water.
Regulators from various states said the contamination is not due to chemical fracturing but to drilling or surface spills. And while acknowledging they are unfortunate, state officials note these incidents make up only a fraction of the hundreds of thousands of wells drilled nationwide.
The federal Environmental Protection Agency has just begun looking into the issue. EPA had been largely sidelined from regulating this practice thanks to a 2005 law exempting the drilling from the Clean Water Act and declaring the chemicals trade secrets not subject to disclosure.
"EPA is reviewing available information to determine whether hydraulic fracturing fluids have contaminated drinking water," the agency said in a statement to CNNMoney.com.
That's of little consolation to many New Yorkers.
"I consider it a grave threat to our resources," said Joe Lavine, an architect from Brooklyn with a weekend house near the drilling. "Nobody knows if [the chemicals] are migrating."
So Levine helped organize a group called Damascus Citizens for Sustainability. Named after a nearby town, its members are calling for stricter drilling regulations.
Unlike many grassroots opposition groups that are often initially unfamiliar with the nuts-and-bolts of an issue, this one has plenty of technical expertise. It includes a former head of New York City's water system and a Columbia-trained geophysicist.
8 weird ways to save the Earth
"We've had a great handle on this from the beginning," said Levine.
They've networked among other grass roots groups in New York State, traveling to Ithaca, Binghamton, and other towns dealing with increased drilling.
Levine said there are now some 50 groups in New York State alone that receive emails and get their members out to sign petitions or turn up at public hearings.
This activism likely played a part in a recent decision by Chesapeake Energy (CHK, Fortune 500), one of the country's largest natural gas companies, to not drill on any of the land it has leased in the New York City watershed.
In a press release, the company said "the concern for drilling in the watershed has become a needless distraction from the larger issues of how we can safely and effectively develop" other gas fields in New York. Chesapeake noted the watershed leases are just a tiny part of their overall holdings in the state, and that they were the only company holding leases in the watershed.
It seems clear that calls from activists seeking a complete state-wide ban are making energy companies nervous.
Beyond New York
The activism in New York is firing-up concerned citizens in other parts of the country.
In Fort Worth, Texas, hardly an area known for anti-drilling sentiment, Don Young said the number of people on his email list has gone from 200 to 400 in the last few months.
Young, a stained-glass artist who lives right across from a natural gas well situated next to a public park, started the blog FWCanDo five years ago. It acts as a sort of clearing house for information on natural gas drilling.
He said many people are now singing up from the New York area, but he's also getting inquiries from Michigan, Arkansas, Ohio and elsewhere.
In Fort Worth where the Barnett Shale is located, natural gas drilling and hydraulic fracturing has been going on literally right under the city for roughly a decade. Opposition here is getting a bit hotter, he said.
"The crowds are greater, and the hard questions are a little more frequent," said Young, "At first it was all about the money, but now it's about health, safety and the environment too."
Global warming's grand bargain
In Western Colorado, public awareness of drilling and the potential dangers has increased as wealthy people from nearby resort towns have become interested in the cause, said Theo Colborn, president of the Endocrine Disruption Exchange, a group studying the effects of drilling chemicals on humans.
Colborn recounted the story of a nearby town where the local officials were considering allowing more drilling. Soon after, residents had their cars leafleted with pamphlets describing the associated dangers. Turns out, a local resident had hired a public relations agency to come in and run the campaign.
"A lot of wealthy people have been affected, and they can afford the lawyers or PR firms to come in and do stuff like this," she said.
Nationwide, few expect rising public concern to put a stop to new natural gas development.
"On balance, future regulation will likely attempt to accommodate industry in order to preserve the energy security and climate change policy benefits of expanded domestic gas production," Robert Johnston, director of Energy & Natural Resources at the political consultancy Eurasia Group, wrote in a recent research note.
But the days of this industry operating in relative obscurity and with little federal oversight are likely numbered.
Credit card rates: Nowhere to go but up
New law will rein in many practices long decried by consumer activists. What it won't do is keep interest rates, now at a low point, from rising.
WASHINGTON (CNNMoney.com) -- For millions of credit card customers, here's the good news: As of Feb. 22, a new law will bar banks from a host of practices that consumer advocates have long blasted as unfair.
No more rate hikes based on, say, the late payment of a cell phone bill. No more increases on existing balances. And consumers will know how long it takes to pay off their balance when they make minimum payments.
But here's what the new law won't do: It won't prevent interest rates from going up for the vast majority of customers.
Even after Feb. 22, holders of so-called variable-rate cards can expect to see increases. Variable rates are based on the prime rate and meant to follow the rise and fall of that index.
The problem for consumers is that the prime rate is at 3.25%, an historic low. It will almost certainly go up, experts say. And so will credit card rates, which currently average 14.9%, according to the Federal Reserve.
"It does leave a lot of room for growth and prices will go up," said Joshua Frank, a senior analyst for the Center for Responsible Lending.
While most credit card holders already have variable-rate cards, banks have been busy these past few months making sure nearly all customers have those kinds of cards. In addition, some banks are setting a floor on certain accounts to prevent rates from sinking below a minimum level, according to a Pew Charitable Trusts study.
"The credit card reforms outlawed some seriously abusive practices, but the cards will still be loaded with other tricks and traps," said Harvard University professor Elizabeth Warren, an advocate for consumer financial protections.
Indeed, the expectation that interest rates will tick higher exemplifies the difficulty lawmakers faced when crafting the new rules: They wanted to protect consumers without killing credit availability at a time when bank loans are already choked.
Congressional aides and banking lobbyists say it's fair to allow rate hikes that aren't under the control of the bank but influenced by market pressures.
"These rates are tied to an objective index that is not controlled by the credit card company," said Scott Talbott, chief lobbyist for the Financial Services Roundtable, a bank lobbying group. "Any future rate changes are driven by changes in that objective index and not the industry."
The new world of credit cards
The law's provisions tying variable-rate cards to the prime rate has prompted banks, including the two largest U.S. credit card issuers - Bank of America (BAC, Fortune 500) and JPMorgan Chase (JPM, Fortune 500) - to make sure most of their customers have credit cards with variable rates.
Industrywide, variable-credit cards accounted for 94% of all new credit cards offered between July and September, up from 67% of the same period in 2007, according to Mintel, a market research firm.
The banks acknowledge that the moves are in response to the new law, which will make it harder to raise interest rates on customers who fall behind.
"Pending regulations will limit our ability to price for risk and also limit our ability to make rate adjustments based on market fluctuations," said Gail Hurdis, spokeswoman for JPMorgan Chase. "As a result, it is necessary for us to move accounts ... to a variable rate now in order to mitigate against future losses and to properly reflect future changes in Chase's funding costs."
Bank of America has also moved some customers into variable rate cards, said Anne Pace, a Bank of America spokeswoman. She noted that these customers haven't seen rate hikes, since the prime rate hasn't changed in recent months.
Keeping rates high?
Along with switching customers into variable-rate credit cards, some banks are setting floors to prevent rates from sinking below a certain level.
A recent Pew Charitable Trusts study found that more than a third of the largest card issuers had instituted minimum interest rates. In December 2008, only 10% of banks had such a floor.
The industry considers these minimum interest rates a way of accounting for the inherent risk in credit card lending.
But consumer groups say minimum interest rates undermine the law's intention to tie rates to the prime rate.
"They add these footnotes that your rate will never be less than 13.25%, that's where I see the problem as unfair," said Nick Bourke, co-author of the Pew Charitable Trusts credit card study. "Truly variable rates should go up and down with the market."
Pew is among several consumer groups and at least one key lawmaker that have taken their case to the Federal Reserve. The Fed is in charge of interpreting the new credit card laws and issuing rules that determine how the laws should be implemented.
The consumer advocates argue that banks should lose the law's provision allowing them to tie variable-card rates to prime.
"In my view, as one of the authors of the [new credit card laws], this type of interest rate does not and should not qualify under the exemption for variable interest rates," wrote Sen. Carl Levin, D-Mich., in a letter to the Fed.
The Fed has received the comments but hasn't given any indication of which way its leaning, advocates say.
Jobless claims slide to near 15-month low
Number of initial filers for unemployment insurance falls to 457,000, lowest level since September 2008.
NEW YORK (CNNMoney.com) -- The number of first-time filers for unemployment insurance fell last week to a nearly 15-month low, according to a government report released Wednesday.
There were 457,000 initial jobless claims filed in the week ended Nov. 28, down 5,000 from a revised 462,000 the previous week, the Labor Department said.
That's the lowest level since the week ended Sept. 6, 2008. The week being reported included the Thanksgiving holiday.
A consensus estimate of economists surveyed by Briefing.com expected 480,000 new claims for the week.
The 4-week moving average of initial claims was 481,250, down 14,250 from the previous week.
Continuing claims: The government also said 5,465,000 people filed continuing claims in the week ended Nov. 21, the most recent data available. That's up 28,000 from the preceding week.
The 4-week moving average for ongoing claims fell by 75,750 to 5,541,500.
But the slide in continuing claims may signal that more filers are falling off those rolls and into extended benefits.
Continuing claims reflect people filing each week after their initial claim until the end of their standard benefits, which usually last 26 weeks. The figures do not include those who have moved to state or federal extensions, nor people who have exhausted their benefits.
Obama's jobs forum. The Obama administration is holding a jobs summit Thursday. The president will meet with labor representatives, financial experts, small-business owners and other business leaders to discuss how to revive the labor market.
The 130 forum participants are meeting on the eve of the government's November unemployment report.
The nation is expected to have lost another 125,000 jobs, with unemployment remaining at a 26-year high of 10.2%, according to a consensus of economists surveyed by Briefing.com.
Last month, the Labor Department reported that the nation's unemployment rate rose above 10% for the first time since 1983.
A separate report released by outplacement firm Challenger, Gray & Christmas Inc. Wednesday showed the pace of job losses slowing to the lowest level in two years, but the number of cuts announced in 2009 have already exceeded last year's total.
State-by-state data: Only one state reported initial claims fell by more than 1,000 for the week ended Nov. 21, the most recent data available.
Claims in Michigan decreased by 1,242, which the state attributed to fewer layoffs in the auto industry.
Nineteen states said that claims increased by more than 1,000. California reported that claims rose by 14,796; Illinois had 6,168 more claims; North Carolina's increased by 5,557; Pennsylvania saw a jump of 5,285; and Texas claims rose by 3,500.
Oil edges higher
Crude prices recover from previous day's selloff, but gains are contained on growing stockpiles.
LONDON (Reuters) -- Oil prices rose on Thursday as fund activity helped the market to recover from a sell-off the previous session, but oversupply curbed gains.
U.S. crude for January delivery rose 69 cents to $77.29 a barrel, after settling down $1.77 at $76.60 on Wednesday.
Wednesday's falls, which stemmed a two-day rise, followed U.S. government data showing crude stocks rose 2.1 million barrels last week, topping the forecast for a 400,000 barrel rise in a Reuters poll.
The mass of available crude had a particularly marked impact on contracts for delivery in the near term and fund flows were moving from the front-month January contract into February crude, analysts said.
A European Central Bank announcement that it would maintain its main interest rates at 1%, widely expected and generally priced in, held no sway over oil prices, but set the stage for an eventual phase-out of its financial crisis support.
The focus will now be on what ECB President Jean-Claude Trichet says at a news conference.
"The end result over the next six months is you have low interest rates with unleveraged cash in bank accounts seeking somewhere to go in search of yield, and this favors risk appetite and supports equities," said senior BNP Paribas commodities analyst Harry Tchilinguirian.
This can also support oil, but its weak fundamentals have modified the potentially bullish impact.
"Oil will keep doing what it has been doing in relation to equities since March. It's not that oil prices are disconnected from fundamentals, it's that front month prices are reacting to equity markets," Tchilinguirian said.
European shares rose for a third consecutive session on Thursday. The FTSEurofirst 300 was up 0.4% at 1,020.20 points and 58% from the life-time low in March after slumping 45% in 2008 because of the global economic downturn.
OPEC output
Oil hit a high of $82 a barrel in October, but failed to hold above that level as the combination of excess supply, sluggish demand and nervousness about a fragile world economy have knocked the market lower.
The Organization of the Petroleum Exporting Countries meets to reconsider its output policy on Dec. 22 in Angola.
Ahead of that, ministers of the core Arab members of OPEC meet at the weekend in Cairo, where they are expected to discuss supply and demand but without taking formal decisions on the group's production.
Kuwait's oil minister in comments to reporters on Thursday said he was concerned about the high levels of inventory, although he did not expect the group to change output targets at its December meeting.
Adding to OPEC's challenges, the biggest non-OPEC oil exporter Russia set a fourth consecutive monthly output record in November.
It is currently the world's largest producer, although Saudi Arabia is the world's biggest exporter and has shut in spare capacity.
Bernanke under fire at confirmation hearing
Central bank chairman gets support from some key senators, but even praise is qualified, while others offer harsh attacks.
NEW YORK (CNNMoney.com) -- Federal Reserve Chairman Ben Bernanke got a rough going over from both his supporters and detractors at his Senate confirmation hearing Thursday.
Even some of those who praised his actions during the financial troubles of the last two years, such as Senate Banking Committee Chairman Chris Dodd, balanced that support with arguments that the central bank should be stripped of some of its bank regulation powers due to its past failures of oversight.
While many Democrats on the banking panel joined Dodd in saying they would vote for another four-year term for Bernanke, some of the Republicans questioned whether they could support the chairman who was first appointed by President George W. Bush.
One, long-time Bernanke critic Jim Bunning, R-Ky., said he was ready to do everything he could to block or delay the confirmation, joining a similar threat made late Wednesday by Sen. Bernie Sanders, the Socialist senator from Vermont who is among the 60 members of the Democratic caucus.
The threat of a filibuster by Sanders and Bunning, two senators with diametrically opposed views on most issues, shows the breadth of anger faced by Bernanke sparked by the Wall Street bailouts of the 15 months. A filibuster would meant that Bernanke would need to get at least 60 votes, rather than the simple majority of 51, in order to be confirmed.
And the questions by Dodd and others about the Fed's continued role as a bank regulator raised questions about how Bernanke will be able to do his job if he is confirmed for another term, which is still widely expected.
Dodd said Bernanke and the Fed deserved credit for the steps taken in the financial crisis of a year earlier to stop the economic crisis from becoming significantly worse than it did.
".I believe you are the right leader for this moment in the nation's economic history and I believe your reappointment sends the right signal to markets," Dodd said during his opening statement.
But the committee's ranking Republican, Sen. Richard Shelby of Alabama, was far more critical of Bernanke in his opening statement, telling Bernanke "I fear now our trust and confidence (in the Federal Reserve) was misplaced."
"Not everything that went wrong depends on the system because that system also depends on the people who run it," he told Bernanke. "It's those individuals who need to be accountable for their actions or their failure to act."
Still, despite the implication that he couldn't support confirmation, Shelby did not say how he intended to vote.
Fight over Fed's future powers
Dodd has proposed legislation that would strip much of the bank supervisory duties from the Fed, giving them instead to a newly created authority. He said it might be better if the Fed simply focuses on using monetary policy to support economic growth and fight inflation while maintaining a stable financial system.
Dodd also said the financial crisis is at least partly due to poor supervision of the banking sector by the Fed.
"I admire what you've done over the last two years," he said. "But we shouldn't have had to go through what we did for the last two years had there been cops on the street, doing their jobs, telling us what was going on and allowing us to avoid the problems in the first place."
"Why should I give an institution that failed in that responsibility the kind of exclusive authority we're talking about here?," Dodd asked.
Bernanke responded that the Fed could not have taken the steps that Dodd had praised to stabilize the financial system if it were stripped of its role as banking regulator.
"There's no way we could have been as involved and effective in this crisis if we did not have that knowledge and expertise," he said.
Bernanke also opposed a proposal that recently passed the House Financial Services Committee to give the General Accountability Office power to audit the Fed's monetary decisions, saying that it would be seen by investors as giving Congress the power to pressure the Fed to reverse or delay unpopular rate hikes.
He said if there are increased worries about Congressional interference in the Fed action, it would not be able to stop real rates from rising because investors would demand higher yields on bonds.
Questioned by Sen. Robert Bennett, R-Utah, about the risk of a return of soaring inflation of the late 1970's, and whether the Fed would have to raise rates to the record highs of that era to once again to conquer such runaway prices, Bernanke said he was confident there is not a risk of a return of such inflation.
But he added that the ability of the Fed to beat inflation at that time was a "case study" of why Congress should not audit monetary decisions of the Fed.
Mistakes were made
Bernanke admitted that the Fed made mistakes in supervising the banking system ahead of the financial crisis, and promised to do better. But he said that supervision is already improving, and that it would be a bad idea to strip the Fed of its powers.
"If you fight a battle and lose the battle, does that mean you never use the army again? You have to improve and fix the situation. You don't have to necessarily eliminate the institution," he said in response to one of Shelby's question. "We didn't do a perfect job by any means, but I don't think we stand out as having done a worst job than other regulators."
Bunning, the only member of the Senate to vote against Bernanke when he was first nominated to head the central bank four years ago, was again his harshest critic.
Bunning said Bernanke and previous chairman Alan Greenspan were responsible for helping to inflate the housing bubble whose bursting caused the housing crisis, and that the Fed continues to create more problems by pumping too much cheap money into the system.
At one point Bunning even slipped and referred to Bernanke as "Greenspan," prompting chuckles from both the chairman and his critic.
"You put the printing presses into overdrive to fund the government spending and hand out cheap money to your masters on Wall Street, which they used to rake in record profits while ordinary Americans and small businesses can't get loans for their everyday needs," Bunning said. "Where I come from we punish failure, we don't reward it."
He attacked Bernanke for the bailout of American International Group (AIG, Fortune 500) and a recent report from an inspector general that the Fed should not have paid 100% of the money owed by AIG to leading financial firms.
"The AIG bailout alone is reason enough to send you back to Princeton," Bunning said.
Dodd joined Bunning in his criticism of the Fed's handling of those payments in the AIG bailout. Bernanke answered that he did not have the leverage to force those banks to accept lower payments during those negotiations.