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Global Stock Market Risks Increase

Stock-Markets / Global Stock Markets Aug 19, 2008 - 07:07 PM GMT

By: David_Cai

Stock-Markets Best Financial Markets Analysis ArticleEarlier this month, the Russian stock exchange index plummeted with the news that Putin has elected an ex-KGB officer with no prior mining experience as CEO for the Russian nickel mining giant Norilsk (it has since continued to slide). Such events explain the recent weaknesses among Russian stocks and ADRs trading on the NYSE. Coincidentally, it occurs while the Freddie Mac and Fannie Mae debacle is still fresh on investors' minds.

With major news headlines commenting about various Freddie and Fannie matters, one statistic that jumps right out but is seeing no comment is that out of $947 billion of Freddie and Fannie papers being held in foreign exchange reserves, $100 billion is held by Russia. The foreign reserve is Russia's most prestigious component but Putin's willingness to expose such large sums of reserve to such risk to gain a few basis points in yield is unthinkable.

As GSEs, Freddie and Fannie present the notion of being too big to fail, and their papers are traded like Treasuries with a few extra basis points in yield. Though not guaranteed by the U.S. government, most foreign wealth funds are brazenly acting as if they are. Putin's reasoning behind in buying such papers and not Treasuries is anyone's guess. Let's hope that the answer is that some less bright FOREX traders purchased those papers simply for the extra yield and risk, and nothing else.

With Paulson's July 13th announcement of the bailout, the U.S. debt level suddenly jumped from $9.5 trillion to $14.8 trillion. Paulson explicitly stated that there will be no recriminations made on the Freddie and Fannie management-no villains. But they are the ones who walked away with gigantic bonuses due to phantom earnings generated by manipulated financial statements.? These entities should be delisted from the exchange due to their inability to file financial results.

Over in Pakistan, it's found that the country's nuclear technologies are being exported to
countries like North Korea and Iran. This is a messy situation because with the involvement of Iran and it's directly influencing the oil market. This, in turn, increases the uncertainty and volatility of the stock market.

Overall, with all these global issues on hand, the total global risk has increased for investors. Investors can shelter themselves in alternative investments such as commodities and gold.? Assets that have the least opacity to the global risk are favorable, assets like owning commodities and metals themselves, and commodities- and metals-producing companies.

Regarding the issue of off-shore drilling: it is largely favored by American voters and so will most likely be approved down the line. In my recent article, I stated that the value of the US dollar will move opposite to the price of oil , so there's every reason to believe that a continually weak dollar will energize the argument to drill. A recent statistic from an international oil company executive states that adding all the production from the top 7 largest oil producing companies including BP, Shell, Exxon, Chevron, Total, Petro China, and Petro Brazil, we are seeing the 4th straight quarter of declining oil production. On top of this, approximately 600,000 boe/d is lost due to partnership sharing agreements, which these companies have been failing to disclose.

The current oil price helps these companies to generate a higher top line to compensate for the higher bottom line due to cost-inflationary pressure. In retrospective, a lower crude price could actually alleviate some of the cost pressure off these companies.

We've got to assume that something big is going to occur, and oil is a solid sector for the futures Bull, which means you need to start looking at the potential winners, and XOM, SU and PTR are some of the better-positioned companies. The point is that (i) you have to pick sound companies, and (ii) buy and sell their shares at attractive prices so that your dividends-to-basis is always rising. However, only a change in oil industry policy will trigger the event. Don't expect that to occur in this election year, but be prepared for it in 2009.

On food issues, constraint in the global food supply is spreading like wildfire and food companies will be in more demanded situations, exemplified by Russia's decision to form a state trading exchange for half of the country's cereal export. The European Union points out that Russia is using food futures as bargaining power like they are doing now with oil and gas in the global market. All these came when the Doha round collapsed, where countries are not ready to change their agriculture policy even when they can agree on many other issues. In the end, Food kills the Doha round.

By David Cai

David Cai is the International Markets Analyst for Formerly with HSBC, David monitors global financial markets and trends as the editor of's Pre-Market Daily. David can be reached at . To sign up for the FREE Pre-Market Daily, visit us at subscribe.php .

Disclosure: At the moment we have no holding in any of the securities mentioned in this article. editor and analyst Rory Johnston contributed to this report.

The information, opinions, estimates, projections and other materials contained herein are provided as of the date hereof and are subject to change without notice. Some of the information, opinions, estimates, projections and other materials contained herein have been obtained from numerous sources and and its affiliates make every effort to ensure that the contents thereof have been compiled or derived from sources believed to be reliable and to contain information and opinions which are accurate and complete. However, neither nor its affiliates have independently verified or make any representation or warranty, express or implied, in respect thereof, take no responsibility for any errors and omissions which may be contained herein or accept any liability whatsoever for any loss arising from any use of or reliance on the information, opinions, estimates, projections and other materials contained herein whether relied upon by the recipient or user or any other third party (including, without limitation, any customer of the recipient or user). Information may be available to and/or its affiliates that is not reflected herein. The information, opinions, estimates, projections and other materials contained herein are not to be construed as an offer to sell, a solicitation for or an offer to buy, any products or services referenced herein (including, without limitation, any commodities, securities or other financial instruments), nor shall such information, opinions, estimates, projections and other materials be considered as investment advice or as a recommendation to enter into any transaction. Additional information is available by contacting or its relevant affiliate directly. and/or its affiliates may make a market or deal as principal in the products (including, without limitation, any commodities, securities or other financial instruments) referenced herein., its affiliates, and/or their respective shareholders, directors, officers and/or employees may from time to time have long or short positions in any such products (including, without limitation, commodities, securities or other financial instruments). Unauthorized reproduction, distribution, transmission or publication without the prior written consent of is strictly prohibited. (c) Copyright 2008

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