THE GLOBAL BULL BETS ON BOMBAY

Indian banks are one of my favorite global themes around. While Chinese banks boast record market capitalizations that exceed that of established capitalist giants such as Citibank and Bank of America, Indian banks are trading at one-tenth the value of their Chinese rivals. That ten-fold difference will not last forever.

Truth be told, the Indian financial culture is less developed than China’s. India’s population exceeds 1.1 billion — yet there are only about 300 million bank accounts in the country. Less than 2% of Indian households own stock brokerage or mutual fund accounts. But overall credit growth in India is projected at 25-30% annually as far as the eye can see. And HDFC already is making huge profits from the explosion in consumer finance that is fueled by robust demand for home and car loans from India’s prospering middle-class population. Here’s another advantage: India boasts real banks, not just government-owned basket cases re-branded by the Chinese government. This makes India’s banks a better long-term bet.

About 10 days ago, the Indian government declared that it would limit the participation of foreign brokers in the Indian market. That sparked an almost 10% intraday plunge of the Bombay Stock Exchange’s benchmark Sensex index — just as it had breached record highs the week before. That was the kind of non-event which offers a terrific entry point for savvy investors. The government effectively backtracked, and the Indian market already has quickly recovered.

At a forward P/E of 26, HDFC is priced just about right relative to its growth rate. That also puts it at about 40% of the valuation at which Chinese banks are trading. And when you buy an Indian stock such as HDFC, you are gaining both in stock appreciation and currency appreciation. With the Indian rupee hitting record highs against the U.S. dollar almost every day, that’s a nice tailwind for a profitable journey. But this time of the year is all about momentum. And HDFC has plenty of that.

So buy HDFC Bank (HDB) at market today and set your stop at $89.00. If you really want to profit from this momentum play, I recommend the April $125 call options (HDBDE.X)… and hold on for what may be a bumpy (but profitable) ride.

PORTFOLIO UPDATE

After a jittery start, our Global Bull Market Alert portfolio had a roaring week. We have a lot of stops to adjust and are taking a lot of profits on options — and also rolling some of these profits over into some new options plays. So please pay close attention.

DryShips Inc. (DRYS) was up more than 20% at one point in the week, and settled with a gain of about 18%. With the stock up a whopping 63.34% since Sept. 10 and the options up 361.29%, take your profits on the remaining options here and roll some of those big profits over into the March $130 calls (DQRCV.X). Move your stop to $80.50.

Global resource giant BHP Billiton (BHP) has soared 42.12% since late August — and the options are up a whopping 289.71% during the same period. Let’s sell our remaining options to lock in these gains and roll over some of our profits to buy the February $90 calls (BHPBR.X). Let’s tighten our stop on the stock to $70.50.

Uranium giant Cameco Corp. (CCJ) finally found its feet this week, leaping more than 15%. With the stock up 17.21% overall and the options up 78.85%, there is more of the same to come. Hold on to the stock and options for now, and tighten your stop to $41.50.

Our Hong Kong ETF iShares MSCI Hong Kong Index (EWH) also jumped more than 15% on the week, and the options now are up 85% since Oct. 1. Lock in your profits here on the short-dated December call options, and roll some of your profits over into March $24.00 call options (EWHCZ.X). Tighten your stop to $19.75.

Korean steel maker POSCO (PKX) surged more than 20%, as key shareholder Warren Buffett visited Korea for the first time ever. The Oracle of Omaha called Korea one of the cheapest markets in the world. That sharp move helped our February $200 calls recover somewhat. Adjust you stop to $144.00.

Russian steelmaker Mechel Open Joint Stock Company (MTL) has soared 17.69% in the last two weeks — and the options are already up 81.25%. I’m betting the upward momentum on this stock will continue, so hold on to both the stock and options for now. Tighten your stop to $64.00.

Our other Russian play, Vimpel-Communications (VIP), is up 26.43% since Sept. 17. With gains of 105.13% in the options, let’s sell half our options here to lock in a solid triple-digit percentage gain. Tighten your stop on the stock to $25.25.

Last week’s pick, Brazil’s Unibanco (UBB), soared 9.42%, and the options are up just about 28% — in just four trading days. Hold on to this momentum play for now. Move your stop to $133.50.

Sincerely,

Nicholas Vardy

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