The Health of Nations
If the 18th century Scottish economist Adam Smith were around today, I have no doubt he would have much to say regarding the state of the world economy. The degree to which governments worldwide are influencing markets has surpassed what even modern economists thought was wise just three years ago. Setting CEO pay, influencing hiring and firing of corporate leaders, and issuing debt to fund government investment in public companies is just the tip of the iceberg. I suspect editors of Merriam-Webster's Dictionary will be struggling to define 'free market' in the next revision.
Many governments, ours included, are trying to design a way out of the latest recession. They are crafting complex policies and interjecting in the markets to 'correct' problems that have plagued our economy for years: too much spending, too much leverage, and not enough savings.
But these are challenges that many countries have as well. Witness the debt issues in Greece, Portugal and Spain that are driving stocks down today, just days after the Obama Administration released a budget projecting a $1.6 trillion deficit for 2010. That figure will come to 10.6% of GDP, the worst in modern time. So the question must be asked: have government policies become the Invisible Hand that now guides society?
The theory behind the Invisible Hand that Adam Smith spoke of (and the one I prefer) is that if consumers and merchants buy and sell whatever they want and at whatever price they can get, then markets will efficiently divide resources and everyone will benefit. Smith felt government intervention just messed things up. Basically, by acting through their own self-interest, people allocate capital to those areas with the greatest returns.
So what does this have to do with small cap investing you ask? Everything.
Thankfully, we still have some semblance of a free market when it comes to investing in stocks. So investors can freely invest in both U.S. and foreign stocks. And while there are many profit opportunities in U.S. based small-cap stocks, I see tremendous potential in emerging market stocks for 2010.
I've talked a lot about China here in Small Cap Investor Daily and how Small Cap Investor PRO subscribers and I are following a number of high growth small-cap stocks in the country. That includes China Green Agriculture (AMEX: CGA), a stock that is up 86% since my initial recommendation. That's a healthy gain even after a pullback for stocks since the beginning of the year. In fact, I recently put together a webinar to help individual investor learn how to invest in China. You can watch China Inc: Understanding China for Outstanding Profits when you click here.
Yesterday's request from Jim to look at Houston American Energy Group (Nasdaq: HUSA) brought up the subject of investing in another emerging market - Colombia. I've been watching this stock for a little while now, and Jim has been on it since early July when it was just a $2.00 stock.
Colombia is a country that is in the midst of a transformation process as it moves away from an economy disrupted by rebels to more stable future. I told you that I would take a closer look at Huston American, and I intend to do that in Monday's issue of Small Cap Investor Daily. But I want to give you a little background on the country first.
Colombia is about four times the size of Montana and with 440,000 square miles it is the fourth largest country in South America. Around 70% of the country's 44 million people approve of the job President Alvaro Uribe Velez is doing, a positive sign for foreign investors. In fact, Mr. Uribe is one of Washington's closest allies in Latin America, and joint efforts to raise the level of safety in the country appear to be working.
The Revolutionary Armed Forces of Colombia (Farc) is one of the strongest rebel groups in Colombia. However, the group has faced a number of setbacks since Mr. Uribe entered office. This includes the surrender of 31,000 paramilitary leaders in 2003, the release of 40 high profile hostages in 2008, and the death, and desertion, of numerous senior rebel commanders. The rebel movement has also not been helped by the death of the Farc's leader Manueal Marulanda in 2008.
The improved safety in the country has had a dramatic impact on the quality of life for Colombians. Between 2002 and 2006 attacks by insurgents on rural towns in Colombia decreased by 91%, and the country had a 37% decrease in homicides, a 78% decrease in kidnappings, a 63% decrease in terrorist attacks, and a 60% decrease in attacks on the country's infrastructure. Those are huge gains that have direct positive impact on the flow of capital around and through Colombia.
And drug trafficking, a problem that has plagued Colombia for years, is down significantly as well. The Office of National Drug Control Policy (ONDCP) reported a reduction of 39% in overall cocaine production between 2007 and 2008. And 14 of 15 top drug kingpins identified in 2007 have been captured.
The improved security has made Colombia much more attractive to foreign investors and an influx of capital helped GDP grow from just 2.9% in 2000 to 7.6% in 2007. The oil and gas industry has been one of that fastest growing areas and foreign investment is projected to top $4 billion in 2010.
Now, I'm not trying to say that investing in Colombia is a sure thing - the country still faces many challenges. The recession hit the country hard and GDP in 2008 plummeted to 2.5% in 2008. It will be essentially flat in 2009. Plus, improvements in security and reductions in drug trafficking are all relative. These efforts will require perseverance and commitment from new leadership. Especially if President Uribe is not allowed to run again in 2010 (the current constitution prohibits a third term).
But progress to date is a big step in the right direction and bilateral discussions with the United States to advance security, free trade, and social and human rights programs could well return the Colombian economy to the go-go growth days of the mid 2000's.
Colombia is on our investing map, and we'll be talking about the country, as well as others in Latin America, in the coming months here in Small Cap Investor Daily. As independent investors, we still have the power to guide our own 'invisible hands' when it comes to how we invest our hard earned dollars.
If you would like to learn more about the companies I recommend, I encourage you to begin a trial subscription to Small Cap Investor PRO. You can likely cover the cost of a yearly subscription within just a few weeks of investing in my favorite stocks. Plus there is absolutely no risk when you sign up for a trial subscription. Just click here to find out more about how you can get started with Small Cap Investor PRO today.
