Don Dion posts his current insights on the stock, bond, commodity and currency markets in his RealMoney blog , anticipating which ETFs will be in play next. Among his blogs this week are the following, in which he wrote about the selloff in India, why commodities have further to fall and the outlook for a brokerage ETF.

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India Selloff Should Bring Better Prices

Posted 7/7/2009 10:04 a.m. EDT

India's Sensex Index tumbled 5.8% on Monday after the government projected a much-larger-than-expected deficit and failed to deliver on promises of reform. Shares recovered on Tuesday but remain well below the Friday close. Monday's tanking is a foil to the 20% surge in May, which followed the election of a centrist government that many Indians expected to reform the economy. Instead, the finance minister announced the fiscal deficit would be 6% of GDP, but the prime minister's advisers already expect at least an 8% deficit, given that more stimuli may be necessary.

Although many news articles focused on the deficit, the main concern should be that India's economy is much weaker than expected. Government stimulus may be the worst way for an economy to allocate resources -- generally speaking, stimulus is like drinking a beer to cure a hangover. It makes you feel better for a while and tides you over, but doesn't solve the problem. Already in the U.S., Obama adviser Laura Tyson came out in favor of a second stimulus and economist Paul Krugman also argued for more stimulus spending. On the other hand, India's stronger growth rate should help it pay for the stimulus package, and much more of the money is aimed at tax relief and infrastructure projects.

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India's leaders didn't deliver the reforms promised during the election. While this is the best time to pass market reforms, it is also the most difficult. Only the strongest and/or wisest of governments will push in the opposite direction of popular sentiment (Hungary's minority socialist government, for instance, passed tax cuts and shifted taxes from production to consumption). Grading on a scale, this isn't the worst budget proposal and does not mean reforms will never arrive. Long term, therefore, the drop in Indian stocks is overdone. Short term, however, the larger-than-expected deficit is another piece of negative news that mows down the "green shoots" story. Investors interested in India's future may have the opportunity to enter at lower prices in the coming weeks.

There are three pure-play Indian exchange-traded products: WisdomTree India Earnings ( EPI), PowerShares India ( PIN) and iPath India ETN ( INP).


Commodities Have Further to Fall

Posted 7/9/2009 10:17 a.m. EDT

The Baltic Dry Index is down 27% in a little over a month, a sign that China's demand for raw materials may be abating. The break in commodity prices is visible in several ETFs, such as PowerShares DB Oil ( DBO), PowerShares DB Base Metals ( DBB), SPDR Gold ( GLD) and PowerShares DB Agriculture ( DBA). Though the Baltic peaked on June 3, the commodities cracked just over a week later on June 11. GLD held up the best, down 5%, while DBO tumbled 16.5%, DBB slid 13.5%, and DBA lost 15%.

There's a story here in the correlation between the Baltic Index and commodity prices, but the larger story is Chinese demand and the "green shoots" story. Many of the global "green shoots" were based on Chinese demand for raw materials, with the Alcoa ( AA) CEO as the latest adherent.

However, there's strong evidence that Chinese demand wasn't permanent, but rather a combination of low prices and massive loan growth. Chinese companies found themselves flush with cash as the banking sector became a tool for stimulus and they faced a world with severely depressed commodity prices. It is probable that the recent demand was not a resumption of previous growth levels, but future demand packed into a few short months. Companies betting on Chinese demand, such as Alcoa, may be in for a third-quarter surprise.

Traders wanting to profit from further commodity declines can use the inverse ETNs offered by PowerShares. PowerShares DB Crude Oil Double Short ( DTO) has good volume. PowerShares DB Base Metals Double Short ( BOM) has very little volume and can only be used for very small positions at this time.

Energy and metals are most correlated with China's economy, but those who think agriculture or gold also have further to drop can check out PowerShares DB Gold Double Short ( DZZ), which trades on high volume, and PowerShares DB Agriculture Double Short ( AGA), with very low volume. PowerShares offers single-short ETNs as well, but these are less popular and hence have even lower volume.


Brokerage ETF Should Climb, Thanks to Us

Posted 7/9/2009 2:30 p.m. EDT I anticipate "better than bad" results in the next few weeks from U.S.-taxpayer-supported Goldman Sachs ( GS), JPMorgan Chase ( JPM) and Wells Fargo ( WFC) -- three of our better TARP recipients. These results could continue to power the iShares Dow Jones U.S. Broker Dealer ETF ( IAI). A Bank of America analyst upgraded Goldman today, on account of its trading revenue, despite the problem with its $400,000-per-year Russian computer programmer. The lack of competitors, due to the failures of Lehman Brothers and Bear Stearns, coupled with the huge wave of public capital-raising by U.S. and foreign financial institutions, should have powered Goldman's earnings in the second quarter.

Our taxpayer dollars have also lowered their cost of capital, and that should allow these firms to resume their huge salaries and bonuses. Nantucket and the Hamptons may be more crowded next summer.
At the time of publication, Dion had no positions in stocks mentioned.

Don Dion is the publisher of the Fidelity Independent Adviser family of newsletters, which provides to a broad range of investors his commentary on the financial markets, with a specific emphasis on mutual funds and exchange-traded funds. With more than 100,000 subscribers in the U.S. and 29 other countries, Fidelity Independent Adviser publishes six monthly newsletters and three weekly newsletters. Its flagship publication, Fidelity Independent Adviser, has been published monthly for 11 years and reaches 40,000 subscribers.

Dion is also president and founder of Dion Money Management, a fee-based investment advisory firm to affluent individuals, families and nonprofit organizations, where he is responsible for setting investment policy, creating custom portfolios and overseeing the performance of client accounts. Founded in 1996 and based in Williamstown, Mass., Dion Money Management manages assets for clients in 49 states and 11 countries. Dion is a licensed attorney in Massachusetts and Maine and has more than 25 years' experience working in the financial markets, having founded and run two publicly traded companies before establishing Dion Money Management.

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