Facing the Music 

09/03/2009 11:48 am EST


Igor Greenwald

Chief Investment Strategist, MLP Profits

Who's next? On Sunday, Japanese voters fired the Liberal Democrats, ending the party's 55-year rule. The next prime minister's wife believes her soul once rode a UFO to Venus, and that's only slightly less improbable then the landslide victory by the opposition after the recession-weary electorate finally rebelled.

No politician is safe when the economy malfunctions. German Chancellor Angela Merkel is tipped to consolidate her power in the September 27th election, but her party's been taking its share of lumps. Canada, too, could be headed for a national vote, after the Conservatives' minority government lost Liberal support.

In the UK, opposition Tories hold a double-digit lead eight months ahead of the likely election date. And five months after that come Congressional elections in the US. 

China remains blissfully free of such democratic distractions. Its stimulus has averted mass unemployment—and the government promptly deflated a lending boom that seemed to be flowing straight into stock speculation. The Chinese stock market hasn't been the same since. Despite bouncing slightly after Monday's 7% drop, the Shanghai Composite index is down 22% in four weeks. But the economy continues to grow strongly at the forefront of a global rebound in output.

A Chinese government willing to disappoint domestic speculators was never likely to go easy on Wall Street. Still, a report that it might be encouraging state-owned enterprises to renege on their derivatives trades has foreign bankers quaking in their loafers. The companies bought protection against rising commodity prices and the falling dollar just as those trends reversed. The billions in resulting losses, if unpaid, would come straight out of the vaults of the Western investment banks that peddled the contracts. This is hardly the next shoe to drop. But the Chinese have a history of walking away from losses, and could probably do so without losing access to Western markets or banks. China's too big to boycott.

It's also too big, too poor, and too fast-growing not to keep adding power plants. Dongfang Electric (Hong Kong: 1072) shares are down 15% since peaking last week. But as Yiannis Mostrous writes, its long-term potential remains undimmed.

Gordon Pape is considerably less bullish on Japan, dousing recent speculation that the change in government will buoy the stock market's fortunes. The Nikkei arguably doesn't need the help, having rallied 50% since spring before the recent pullback. But there's no arguing that Japan is hobbled by structural and demographic problems: The population is too old; the currency, too strong (despite the huge national debt, tea-partiers should note.)

Canadian grain handler Viterra (TSX: VT) is also saddled with a heavy debt burden, and its tab will swell following the pending acquisition of Australia's ABB Grain. But Benj Gallander and Ben Stadelmann urge patience on hopes for a bumper crop and a higher share price. That bet looked good last week, and not so much since. Short-term traders seem intent on harvesting some profits.

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