No Rain, No Rainbow

08/13/2009 9:16 am EST

Focus: GLOBAL

Igor Greenwald

Chief Investment Strategist, MLP Profits

Will the monsoons come? Will the hurricanes? After last year's crush of unnatural disasters, sweating mere weather once again is a relief. Unless it's a sign that investors feel a tad overexposed, this far out on a limb.

There have been altogether too few clouds over India, where a shortage of rainfall threatens crops and the agrarian economy, precipitating a quick 7% market correction. And while drought has turned the sweet-toothed subcontinent into a sugar importer, the cane fields of top exporter Brazil have suffered from too much rain. Farmers' misfortunes have stirred up sugar futures, which have nearly doubled since December to their best levels in 28 years.

Another reason to glance skyward periodically would be to figure out when the easy-money manna might run out. In the UK, forecasts call for a continuing drizzle of pound sterling. The Bank of England said last week it would print an additional £50 billion for its debt-buying kitty, expanding "quantitative easing." With job prospects teetering between dismal and hopeless, the central bank acknowledged it had underestimated the depth of the downturn.

China shared sunnier statistics this week. Retail sales were up 15% year-over-year, even as consumer prices sagged. But Chinese banks noticeably scaled back liberal lending in July, spooking stock speculators. The Shanghai Composite index is down nearly 10% from its recent highs.

The Chinese and Indian stock markets may have traced bearish technical patterns known as "double tops," as more investors look to lock in spring-time profits. Prieur du Plessis had warned at the outset of the week that many of the markets he follows looked severely overbought—his list of danger signs now seems prescient. 

Double top or not, China imported record volumes of crude oil in July, 42% more than a year ago. Auto sales surged 64% last month, continuing to outpace demand for vehicles in the US. These trends have driven big Chinese oil driller CNOOC (NYSE: CEO) to seek out extra production far afield, including its recent deal off the coast of Angola. Yiannis Mostrous of The Silk Road Investor believes that was money well spent, and argues that the company is poised to capitalize on growing Chinese energy demand.

Provident Financial (LSE: PFG) couldn't be more different from CNOOC if it tried—instead of furthering a rising superpower's ambitions, its agents peddle modest loans to hard-up Britons door to door. Moreover, Provident has deferred growth, rejecting most of the applicants for new credit lines. This choosiness will pay off big one day when the tide turns, because less prudent rivals will be in no shape to compete, writes Peter Shearlock in The IRS Report.

Fund manager Stephen Peak has done a remarkable job of exploiting similar situations on behalf of his Henderson European Focus Fund (HFEAX). He had the UK bank Barclays (NYSE: BCS; LSE: BARC.L) pegged as a winner when most weren't sure it could survive. And he's finding plenty of other values out there.

The next month will almost certainly prove bumpier than the preceding run of bumper market gains. But raindrops needn't portend a disaster. Every pasture needs a good soaking now and then. 

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