If you want to do well in today’s market, ignore this rally. Pay all your attention instead to the only class of companies you need to know about. I call these companies the “best of breed.”  They’re probably the least-talked about companies in the market. Many investors are missing the boat. And that’s a shame. Read the full story

Banks are not only fighting deteriorating loan portfolios. They also have to fight Washington…

•    Proposals from the US Commodity Futures Trading Commission to limit holdings of oil and gas futures.

•    Investigations by the Department of Justice into the credit derivatives market. Read the full story

You can’t go back. So don’t assume that as the U.S. and the West recovers, they’ll attract foreign capital just like they did before the recession. It’s a far different landscape now. The easy-credit bubbles are gone. And they’ve left us with a hellacious debt burden.

The U.S. debt is expected to zoom to $16.2 trillion by 2012, almost equal to its projected GDP. Italy’s debt is expected to reach 120% next year. France’s debt will approach 90% next year (if President Nicolas Sarkozy goes ahead with his fiscal blitz). All told, by next year, Europe’s debt should rise to about 80 percent of GDP. And then there’s Japan. Its public debt is headed toward unfathomable depths. It should reach 240% of GDP by 2014.

After buying $600 billion in U.S. assets last year, China, for example, is having second thoughts. It won’t come close to matching that number this year. And China has made it very clear that not even relatively cheap assets available in the U.S. will lure Chinese investment money.

In an interview published in China’s state-controlled media, the chairman of China Development Bank said Chinese foreign investment won’t target Western economies. “Everyone is saying we should go to the western markets to scoop up [underpriced assets]. I think we should not go to America’s Wall Street.

So where will China go? The bank chairman says China “should look more to places with natural and energy resources.” That would be Africa, Russia, Australia, plus other places.

The resource war is gaining steam. When the global economy recovers, it’s a sure bet that commodity prices will start getting expensive again. China has concluded that it’s a better deal to buy the mines now rather than the commodities later.

Resource countries are going to be the main beneficiaries. South Africa is known for its metals and mining and gold industry. The ETF covering it, iShares MSCI South Africa Index (EZA), is up 27.6% year-to-date.

If you want to see the future of banks, take a look at how Morgan Stanley did this past quarter. Last week some of America’s biggest banks trotted out short-term profits that hid deeper and longer-term problems. For the most part, they did better than expected. A few even made money. Some people will take solace in that. Since the banks got us into this mess, they want them to get us out. I think that’s asking far too much of banks. Banks have their hands full just trying to save themselves. Saving the economy would be asking too much.

The rule of thumb is, as the economy goes, so goes the banks. Can the banks even save themselves while households absorb the $15 trillion hit they’ve taken to their net worth?

Morgan Stanley gives us some clues. And we’d be foolish to ignore them. It did the worst of the six big banks which reported last week. So what was its main fix?  It’s replacing the head of its trading desk with a top hedge fund performer. This desk trades bonds, currencies and equities (sort of like what hedge funds do). Morgan Stanley’s trade desk didn’t do very well, especially in comparison to the smart guys at Goldman Sachs…

Goldman Sachs lost more than $100 million on six trading days over the quarter and earned more than $100 million on 23 days. Morgan Stanley lost more than $125 million on four days (including losing $390 million in one day in August) and made more than $125 million on eight days.

Goldman Sach’s ratio of big winning days over big losing days was 3.8. Morgan Stanley’s was two. Morgan Stanley says they’re going to start to take on more risk. Hey, guys, great idea. But you need to get better doing your trades first.

This is how banks are now making profits … not from loans but from risking taxpayer-paid TARP money, guaranteed Fed-backed loans and money from depositors and risking it on trades where you can make over $100 million in a single day but also lose $100 million (or in Morgan Stanley’s case $390 million) in a single day.

If you’re good at this sort of thing, like Goldman Sachs and JP Morgan are, then you can ignore your poorly performing portfolio of loans and tell shareholders that banking is still a good business even though it’s not exactly true. If you’re not that good, then like Morgan Stanley you can talk lamely about taking on more risk.

Before banks leveraged up and paid less attention to asset quality, banking used to be a good business. Borrowing low and lending high was a sure-fire way to generate profits. You can’t get more simple than that. But that wasn’t good enough for bankers. They lobbied for and got the repeal of the Glass-Steagall in 1999. Glass-Steagall had separated deposit banks from investment banks. After 1999, banks could take the tens of billions of dollars from depositors and invest it in anything and everything, from low-yield but safe Treasuries to risky but high-yield derivatives.

As you know by now, not enough went into safe Treasuries and too much went into risky derivatives. A few bubbles later banks were forced to write down about $1.6 trillion on their investments.

The one thing banks couldn’t talk about last week is improving loan portfolios. American Express hinted that their consumer loans may start to default at slower rates in the second half of the year. But Capital One and every other bank refrained from making such bold claims.

Consumers are in debt rehab. It’s hard to overestimate how bad it’s getting for consumers right now. But it’s going to take a while. They’re still spending much more than they make. In the first quarter they borrowed 128 percent of their income.

There’s absolutely no way that banks can separate themselves from this consumer squeeze. And I don’t see accelerating foreclosures and credit card default reversing this year or next…

•    Foreclosures will go up as long as the economy keeps shedding jobs. Whether the economy loses jobs at rate of 450,000 a month or 300,000 a month doesn’t matter.

•    Credit card defaults won’t improve either. People without jobs run up more card debt than people with jobs. And they have less money to pay back what they owe. And even though refinancing is up, homeowners have already cashed out most of the equity in their houses.

•    In Fed Chief Bernanke own inimitable words, “The possibility that the recent stabilization in household spending will prove transient is an important downside risk to the outlook.”

The Obamarons want banks to lend more so consumers can spend more so the economy can get better. Somebody should write them a memo and point out that consumers aren’t looking for loans and banks shouldn’t be forced to lend to cash-squeezed consumers (isn’t that how we got into this mess in the first place?).

But the real scary ticking time bomb is in banks’ commercial real estate loans. Most commercial real estate loans are balloon loans. Companies only have to pay the interest until the full amount is due. And the expiration dates for many of these loans are now coming due.

There’s a cynical saying in Russia which made the rounds during the good ol’ years of communist rule. It went like this: You pretend to pay me and I’ll pretend to work. Russians barely worked and they barely got paid. You could say the same thing about banks and their corporate customers. Banks pretend that the real estate loans to customers are still good, and these customers pretend that they will pay them back. It’s playing out right now, in broad daylight…

Florida-based resort developer Bluegreen Corp. just got an extension on $130 million worth of loans.  Toys R Us, Tanger Factory Outlets and Washington Real Estate Investment Trust also all recently got loan extensions.

How far has commercial real estate fallen? Even Morgan Stanley’s highly regarded Crescent portfolio of properties has taken a big hit. I had been following Crescent for about five years. Before Morgan Stanley bought them out a couple of years ago, Crescent was a Texas-based real estate company. It owned some of the most prestigious office buildings and hotels in Houston and Dallas. Two years ago, its rents were high and vacancies low. Now, Morgan Stanley’s $2 billion exposure to Crescent’s portfolio is seen as a big albatross as tenants look for lower rents in the cheaper side of town.

The $6.7 trillion commercial property market is slipping fast. Prices have fallen about 35% since the market peaked. Morgan Stanley’s chief financial officer said he did not see the light “at the end of the commercial real estate tunnel yet. Peak to trough, you have already had a pretty nasty correction in the market but it is still not looking very good at the moment.”

It doesn’t look good for banks when it comes to their consumer or commercial borrowers. Sure, some of these big banks made loads of money from their inhouse hedge funds. But that stuff can turn on a dime. Last quarter is already ancient history. Next quarter may be entirely different. And next year who knows. Banks are crossing their fingers and hoping for the best. But the economy isn’t cooperating. Banks are playing a dangerous game. They’re walking a tightrope in a stiff breeze, hoping they won’t fall off.  And I think that breeze is going to get a lot stronger over the 12 months. The banks aren’t through falling yet.

To your investing success,
Andrew

This dark pool of money can make sectors and it can break sectors. In the 1990s, it transformed dozens of funds into gigantic money makers, creating hundreds of millionaires. In 2007-2008 it came to the rescue of the banking sector long before the Treasury Department did. You’d probably guess this pool of money comes from some secret government fund, but it doesn’t have anything to do with the U.S. government. Yet it’s much more important to the economy than the government stimulus bill.

Government stimulus spending is essentially a two-year program. At $787 billion, it spends an average of $1.07 billion per day. This dark pool of money spends more than three times that. And when the stimulus spending ends, it ends. The extra spending money in people’s pocket vanishes. The extra jobs that were created are no longer secure. It’s a house of cards waiting to happen.

Yet amazingly the market seems transfixed by how the government will spend this money, how much it will spend, and how long it will be spending it. Buffett says we need another stimulus bill. The White House says it’s too early. The eyes of Wall Street are on government spending.

In the meantime, the companies which used to spread money around have decided to sit on their piles of cash. The big banks, hedge funds, and private-equity companies are supposedly bouncing back. Goldman Sachs and JP Morgan reported blow-out earnings last week.

Big deal. I’m not impressed by a couple of banks reporting big profits. And I certainly don’t care if it means that a couple of hundred bankers won’t have to sell their Hampton homes now.

Listen, there’s Wall Street. And then there’s Main Street. And the two have never been as far apart as they are right now. Wall Street has basically given up on Main Street. They’ve stopped lending. The money which used to fertilize economic growth has disappeared.

In the meantime, quietly and without fanfare, around $3.6 billion from a dark pool of money pours into the global markets day after day. Wouldn’t you want to know where this money is going? Some sectors will thrive from its huge infusions of cash. Deprived of this money, other sectors will crash. Following this dark pool of money would allow you to make winning investments in the strongest parts of the global economy. It would be like having your own cheat sheet.

In the 1990s and early 2000s this dark pool of money helped hedge funds and private-equity funds experience explosive growth. In 2007 and 2008 it poured $32 billion into banks and helped save many of them from extinction. And unlike government stimulus spending, this pool of money isn’t going away anytime soon. As a matter of fact, it’ll be getting bigger over the next five years and beyond.

Several countries contribute to this pool. Russia, Norway, and the UAE are the three biggest contributors. Russia has put $1.1 trillion into the fund, the UAE $710 billion and Norway $860 billion. Other major contributors include Saudi Arabia, Kuwait, and Qatar.

What do these countries have in common? They all get their money from oil revenue…

With the price of oil stabilizing in the $60-65 range, there’s no reason why oil revenue should decrease. As a matter of fact, with volumes rising and the price of oil much more likely to go up then down in a year or two, the flow of petro-dollars should increase.

So how are these countries planning to spend their trillions? Much of that information is private, but there have been plenty of public statements from these oil-producing countries … enough to give you a good idea of what to expect.

For example, the Abu Dhabi Investment Council said this past April that it would like to launch an international real estate fund. The Kuwait Investment Authority is also turning its attention toward global real estate plus equities. The Qatar Investment Authority is focusing more on commodities and infrastructure but not here or in Western Europe. It’s looking at developing countries in Africa and Asia. It’s sinking $400 million into infrastructure in South Africa, $850 million into Indonesia and $1 billion into Vietnam.

From this and other anecdotal information, it seems inevitable that three global sectors will be getting a lion’s share of this huge dark pool in the near future…

1. Real estate prices have dropped not just in the U.S. but everywhere. Global real estate (including the U.S.) will be attracting a big portion of the dark pool.

2. Emerging countries will also be a target. Money from the dark pool likes long-term potential. Short-term volatility is not a great concern.

3. Commodities will be an irresistible destination for the dark pool. These oil-producing countries are in the commodities business themselves. And many of them are financing major infrastructure projects which require a lot of steel, copper, and nickel. Plus they’ll be using commodities as a great inflation hedge.

Investing in the above three areas is easy. Just use ETFs (Exchange Traded Funds). There’s no more convenient way to follow the flow of dark-pool money. ETFs cover real estate in the U.S. plus globally. They also cover emerging markets. And about a half a dozen ETFs follow commodities. Some track a single commodity and some track groups of commodities.

In the ETF service I run, I’ve recently recommended a hugely promising commodity ETF. It’s catching prices at a low point, just when the seasonal buying season begins and prices will begin to surge. You can click right here to get on my free ETF list and be eligible to find out more about this recommendation and why I expect it to jump at least 30 percent by the end of the year.

To your investing success,
Andrew

It’s easy to identify where jobs are growing and where they’re shrinking. Just go to the Bureau of Labor Statistics website. But in a report issued last week, the White House said that future job growth will look a lot different from past job growth.

You can use job growth to see which sectors are bound for expansion and which are bound for consolidation and then invest accordingly. So how much should you depend on the White House to figure out future job growth?

I’d be careful if I were you. The White House said that job growth would be concentrated in health care, education, and some parts of the manufacturing sector including aerospace and construction.

Of these jobs-growth sectors, health care has been in the news the most. Congress is preparing to pass a universal health care bill which will increase the number of people covered by health care (but won’t really be universal). More business for hospitals and health care providers, right?

Not so quick. 6.5 million people have lost their jobs since the recession began. And until we know differently, it’s much more expensive to get insurance when your employer isn’t subsidizing it. We could easily add another 1 million to the unemployment rolls by the end of the year.

People who are out of work and out of health insurance won’t be spending as much on medical bills. Those newly employed health workers the White House is talking about will be treating a lot more people on Medicaid. The demand for surgeries, drugs and hospital beds could all go down.

Health care is supposed to be one of the safe bets in the economy. But I have my doubts. If you’re looking to avoid risk, stay away from investing in HMO providers and hospital REITs.

It doesn’t matter how you’ve invested. Whether you like it or not, your portfolio is tethered to the unpredictable whims of government spending. Read the full story

Resource companies aren’t the only ones hoping for a strong recovery in China. One American franchiser gets about 25 percent of its growth from China. And in three years its profits from China are expected to match those from the U.S. It has a lot at stake in China. Read the full story

First-quarter earnings reports for the big banks weren’t bad on the surface. But banks had to pull some rabbits out of the hat to do it. For example, Goldman Sachs skipped December in order to post improved numbers. And Bank of America arbitrarily assigned a higher value to its Merrill Lynch assets. Read the full story

Leave it to the government. It’s proposing a “tax and cap” regime for energy producers which will require fossil-fuel generating plants to pay extra.  Read the full story