Showing posts with label investing in emerging markets. Show all posts
Showing posts with label investing in emerging markets. Show all posts

Thursday, April 15, 2010

How to Out-Trade the Mighty Goldman Sachs

Want to know the secret to trading better than the mighty "Government Sachs"?

That's easy - don't do as they say, do as they do!

Tyler Durden of ZeroHedge fame hits the nail on the head when he points out that you should take Goldman's investment advice to their clients with "the usual airplane carrier full of salt, and dodecatuple reverse psychology" - ha!

Thanks to Tyler for posting this presentation, which is a real yawner to anyone with the slightest contrarian bend to their investment outlook:
Goldman Where to Invest

"Invest in the BRIC's...S&P rally to continue for now...yawn"

Want to make some real money? Then think about shorting the BRIC's - that's probably what Goldman is doing right now!

Hat tip to good friend Jonathan Lederer for passing this along - I trust Jon's S&P fair value estimate a lot more than these Goldman jokers!

Saturday, September 26, 2009

Using the Wall Street Journal to Gauge Investor Sentiment


I thought it’d be fun to peruse the Wall Street Journal to see if we could glean some insights into current investor sentiment. Mainstream business publications are famous for (unintentionally) signaling tops and bottoms in markets – but is this really the case, or more of an old wives tale than truth?

I couldn’t think of a better publication to test out than the Wall Street Journal. Those who believe they’re getting an inside scoop by reading the WSJ are amusingly naïve about their “inside source,” which is read by millions of other investors each morning. Even pre-Murdoch, the Journal wasn’t hiding any investment secrets. These days, it has the added bonus of catering to the masses – combined with its wide reach and coverage, what a perfect match!

So please join me, as I flip through the pages (web pages, of course) in this week’s Journal, in an effort to gain an edge – by taking the other side of the trade!


Further Evidence the Dollar Has Bottomed

From the front page of today’s Online Edition, we see a story entitled:

Small Investors, Big Bets on Currencies.

Oh my. The piece begins:

The dollar is zigzagging, falling below the 90 yen mark Friday and testing the depths it plumbed against the euro a year ago. That kind of action is music to the ears of investors such as Ray Firetag.

As most of America slept on a recent Monday night, Mr. Firetag was in front of his computer in Elk Grove, Calif., wagering on the Australian dollar.

For those of you not familiar with Elk Grove, please allow me to fill you in. It’s a (somewhat lower) middle class suburb about 15 minutes south of Sacramento. From 2002 until about 2006, it was regarded as an “up and coming” neighborhood, where many first-time home buyers in the Sacamento flocked to buy homes that were relatively cheap.

Three years or so after the top of the housing bubble, an astounding number of homes in the town sit empty – either officially foreclosed, or unofficially abandoned – while prices languish 40-50% off their highs.

You should always “short” Elk Grove – always. When their residents are buying homes, you should be selling. When they are trading the Australian dollar in their pajamas, you should probably be backing up the truck to go short!

When small investors are on the front page of the Wall Street Journal trading currencies, you’ve gotta think we’re probably in for a massive rally in the buck.


And Gold is Topping Out

Gold was down this week, settling once again below the $1,000. Thus my search for Gold related stories was initially disappointing, until I came across this great headline:

India’s ETF Investors Make Up for Missing Gold Buyers

Oh boy – this is going to be good!

MUMBAI -- Record prices have forced many of India's traditional gold-jewelry buyers out of the market in recent months, but a new source of demand is on the rise -- investors looking for the safety and convenience of exchange-traded funds backed by gold.

While India continues to be a price-sensitive market, with every rally hitting demand, the rising popularity of ETFs indicates that the Indian market could ...

I can’t read beyond the “…” because I let my WSJ subscription expire a few weeks ago – but that’s OK, it’s really not necessary.

It seems like we’re hearing that India, which traditionally bought gold hand over fist this time of year to, surprising, actually use as jewelry. Now they can no longer afford to buy it – at least for its traditional use.

So they’re speculating on the price instead – and best of all, via ETF’s that take long-only positions!

This is classic stuff! I’m downright giddy right now – I thought of this WSJ concept for a column on my drive to the coffee shop, with no idea that we’d be able to find such fantastic sources.

OK well we can’t just end with two. We need one more to close out strong. We had three wishes…thus far, we’ve used two…we know the dollar is set to rally, and gold is in some trouble.

What’s one more topic we can ask the Swami WSJ to look into its crystal ball and forecast? I got it…


Emerging Markets are Toast

Alright, I am typing “recession” into the search box…let’s see what comes up…OK here we go! Another nice short candidate:

“Emerging” Stock Markets Are Looking Better

The first paragraph says it all:

On the heels of one of the worst years in stock-market history, some experts say investors should shift more money into a surprising area: emerging markets.

Good to know that if you do shift more money into emerging markets, you’ll probably be one of the last investors to the party! This article should sweep in the 11th hour bulls just in time for the rally to die.

On the heels of 50-100% gains in many emerging markets, I can’t see how this could end well for longs. Fortunately we’ve got the WSJ ringing the bell for us here at the top!

When the global markets turn down again, emerging markets are likely to get slaughtered. What great short candidates!


Three Solid Trade Ideas

Well kids, here’s what we’ve learned from reading the Journal this week:
  1. Bet on the buck
  2. Short gold – or at least stay away from it
  3. Short the heck out of emerging markets
We’ll check on these trades in a few months to see how they worked out. In the meantime, can the last dollar bull out the door please turn out the lights!


Checking in on Our Leading Market Indicators

They are on the ropes. Can we get a standing 8-count?

On our August 16th update, we picked out three indicators that have led the markets over the past few years. They were:
  1. China – the poster child of this economic recovery
  2. The Baltic Dry Index – when the global economy is healthy, more stuff gets shipped
  3. Oil – which is still the fuel for the global economy
When we last pulled up the charts on these, they were not looking so hot. All three had turned down. I thought this was probably a bad sign – but added a disclaimer that if they rallied to new highs, I’d be wrong.

You can check out the latest charts by revisiting that post and – here’s a cool feature of the charts – just mouse over them, and use the “hand” to drag them over to today’s date:

If a picture’s worth a thousand words, an interactive one has to be worth a multiple of that. You’ll see that these sick charts have gotten sicker since we last saw these three patients.
Stock market bulls, beware!


Most Popular Posts Last Week

Positions Update - Still Long the Buck

The dollar continues to see strong support at these levels, while sentiment appears to still be quite negative. The dollar's performed pretty well over the past couple of years for a sick, doomed currency!

Reports of the dollar's demise have, until now, been greatly exaggerated.
(Source: Barchart.com)

Open positions:


Thanks for reading!

Current Account Value: $25,239.83

Cashed out: $20,000.00
Total value: $45,119.83
Weekly return: 0.5%
2009 YTD return: -50.3% (Yikes!)

Prior yearly returns:
2008: -8%
2007: 175%
2006: 60%
2005: 805%

Initial trading stake: $2,000

Sunday, February 15, 2009

Why Emerging Markets Appear to be Undervalued

In this guest article, the editors of Casey Research's Without Borders publication make the case that emerging markets are now undervalued. They cite capital outflows as the contrarian indicator to look for in these markets - buy when the blood is in the streets. And right now, it most certainly is.

The Casey folks expect emerging markets to lead the world back out of this recession/depression, and believe they could come roaring back in a big way, when all of this fiscal stimulus money starts looking for a home that is more fundamentally strong than US Treasury Bonds.
---------------------------------------------------------------------------------------------------------------------

Another Look at Emerging Markets
By the editors of Without Borders, Casey Research

After passing much of 2008 standing thankfully on the sidelines, we believe that with current valuations, opportunities have returned for putting capital back into long-term positions in emerging markets. In fact, we believe that emerging markets will recover faster and outperform developed markets over the long term.

In our December 2007 edition of Without Borders we wrote:

“So much money has been sloshing around the globe in search of an "above average" return that even risky assets have been bid up tremendously. At this stage, however, with new holes in the financial dike showing themselves almost weekly – more holes, we suspect, than officialdom has fingers – the money flows are building toward a reversal. This will hammer the emerging markets the hardest because, historically, in times of crisis, capital packs up its bags and goes home. When that happens, shares of good companies get sold at the falling bid simply because the seller must get liquid, whether to calm his fears or to cover his losses elsewhere. Asset prices become screaming passengers strapped into a luge ride.

“This creates opportunity, of course. Even though the economies of all the most prospective emerging-market countries are strong enough to weather any likely storm, their financial systems aren’t. This is emphatically true in India, China, Brazil, and other fast-track economies. Even so, when foreign financial capital has fled, the physical and human capital will remain, it will still be valuable, and good investments will be cheap in the extreme. But the opportunity won’t be available for everyone – just the investors who’ve been patient.”

Then in April 2008, we gave our presentation on “Bottom Fishing for Stocks in Emerging Markets,” during which we highlighted that the single most important factor in emerging-market stock markets is capital flows. In the emerging markets, the time to invest is when capital has fled the country.

We know we disappointed the crowd when we said that there was not one emerging market we found attractively priced and that shorting in emerging markets is almost impossible, so our strongest recommendation was to do nothing.

It’s quite a skill to do nothing and do nothing well. We sidelined ourselves and watched, staying away from emerging markets for most of 2008.

But now… finally, the catastrophic sell-off in global financial markets had the effect that we expected: there was a huge sucking sound coming from public equity and currency markets in Russia, Brazil, China, Taiwan, Malaysia, India, South Korea, Colombia, Chile, etc. Foreign institutional investors came face-to-face with the reality of lower risk tolerance and deleveraging and were forced to sell. Everything.

The ensuing flight to quality left emerging markets and their currencies decimated… but herein lies the opportunity. We just hope the IMF and World Bank will run out of money or leave them alone, thereby preventing the return to the boom/bust cycle of the 1990s.

Bullish long-term outlook

Remember, the sell-off in emerging-market equities, bonds, and currencies reflects a rush for the exit sparked by global deleveraging and a need to raise cash, rather than any change in the fundamentals. When the current turmoil subsides, we believe that emerging markets will fare better than developed markets and will outperform the latter over the long term. As such, we find that current valuations are solid entry points for putting our hard-earned capital into long-term positions. Consider:

  • Emerging-market economies will prove resilient during this economic slowdown and may account for all of world economic growth in 2009 as developed markets slow to zero.
  • Emerging economies are not nearly as dependent on consumer spending and almost not at all exposed to consumer credit.
  • Emerging markets by and large suffer neither the demographic imbalance nor the entitlement imbalance that plague the developed nations.
  • Corporate and personal balance sheets in emerging markets are stronger than those in the developed markets.
  • In many emerging markets (Brazil, most of South East Asia, India) as well as several African nations, domestic or regional demand is now more important than exports for GDP growth.
  • Among stronger economies, high foreign-exchange reserves and lower foreign debt levels act as insurance against the global slowdown; reserves have grown six-fold to over $4 trillion over the last ten years.
  • Over the past ten years, emerging-market companies have produced higher profits with lower (but not necessarily low) leverage, while profits expanded annually by double digits during the past ten years.

Cash Rich, Resource Rich

Compared to the late 1990s Asia crisis, the present situation is much more stable for emerging markets. While we expect current account surpluses to deteriorate given the global slowdown and recessionary pressures, emerging markets will face this challenging period with cash in their bank accounts.

The importance of this change cannot be overstated.

Much like individual households that stash away something for a rainy day, many emerging-market countries now have a greater reserve of wealth with which to buffer financial market headwinds. This gives them the option of taking fiscal stimulus measures to offset the effects of a developed-markets slowdown without having to go into debt. While we decry these neo-Keynesian actions as throwing water on an electrical fire, historically they have boosted share prices.

As part of their fiscal stimulus, we also expect to see higher infrastructure spending by countries with the financial muscle to do so. China, for example, which is projected to have more than 200 cities with populations exceeding one million people by 2025, up from just 23 in 2005, announced in early November 2008 a two-year infrastructure investment and stimulus package of up to 4 trillion yuan ($586 billion). While much of this stimulus will come in the form of strong-arming banks, there will be substantial cash injections in the Chinese economy, and they have the cash to do it: highways, railroads, and airports. The government hopes that this stimulus package will also encourage increased consumer consumption. All this is good news for raw-materials companies, one of which is an undervalued Chinese cement company that is a cornerstone of our portfolio. (Learn more about this company here.)

The turning point

Emerging markets will be the catalyst for global economic recovery, not the West. Like China, many emerging markets that have been saving for a rainy day have the cash and political will to spend on development projects that require raw materials. Others, like Chile and Angola, have the raw materials to sell. Even more so, a few countries like Brazil and Saudi Arabia have both. The economy will get jumpstarted with these countries initiating their own trade without the leadership or consumptive traditions of the Western world.

Perhaps even more pointedly, we foresee a highly inflationary environment over the next several years… all of the dollars with which President Obama will be flooding the world will have to find a home somewhere. This will more than likely spark another commodities boom, which is supported by the world’s ever-growing demographics, resource scarcity, and climate-change legislation.

As such, resource-rich emerging markets are going to find themselves being the future home to foreign investment capital again. Institutional capital will trickle, then gush into these markets as the world wakes up one day and finds oil and copper trading at twice their present levels.

Consequently, today’s emerging markets will be the net recipients of the future inflation that is being created by the West.

Capital Flow Conclusions

We have long said that capital flows are the most important indicator for emerging equity markets. Investor outflows in the second half of 2008 already equal one-third of the total inflows into emerging-market equity funds over the prior five years. This is a positive sign for contrarians looking for a bargain. There has been a bloodbath, and this is a buying signal.

We recognize that the ride will likely be bumpy. Fiscal stimulus, trillion-dollar deficits, and politicoramus bickering may cause a roller-coaster ride to the top… but the evidence strongly suggests that, once institutional funds finally realize that U.S. Treasuries are a fool’s bet, remaining capital will be on the hunt and flowing back into emerging markets. The window is open, and we are dedicating our efforts to finding the most undervalued companies with rock-solid management and balance sheets.

******

In times of economic crisis, prudent investors are well advised to diversify their portfolio… ideally, some of it in global stocks and real estate. Without Borders brings you the inside scoop from two globetrotting ex-CIA agents with privileged connections around the world. They’ll suggest sound international investments, as well as the most beautiful, stable, safe, and cheap places to live and invest.

Kick the tires of Without Borders risk free for 3 months, for just $49. If you decide Without Borders isn’t for you, we’ll refund every penny – no questions asked! Learn more here.

Most Popular Articles This Month