December 3rd, 2012

New Geographic Diversification Opportunities Emerging

Our economy and markets have been the world’s top dog for so long that we sometimes take a parochial view of investment opportunities but the time may have arrived when we should beyond our borders to incorporating some foreign exposure into our portfolio.  For that matter, it may be time to dust off the old “geographic diversification” mantra.

This view that I’ve been thinking about for the past several weeks was echoed in some recent statements by the big boys on Wall Street.  As reported in BusinessInsider.com last week,

“Goldman sees this reversing. Growth is expected to bounce back, and Goldman is above consensus in its BRICs growth estimates.

In BankAmerica/Merrill Lynch’s equity outlook, it also sees a return to over-performance among companies with foreign exposure.”

What piqued my curiosity in the first place were the similar bottom reversal formations that have been evolving in many of the foreign market ETFs.  The last time I thought about foreign markets was in October 2010 in a piece entitled EEM: Expanding Triangle or Consolidation? in which I included a chart of the EEM and quoted the following typical evaluation of that sort of pattern:

“The expanding (widening) triangle becomes formed when prices behavior makes a sequence of ascending maximums and descending minimums. This pattern indicates that the market is getting the state of hysterical instability. Bears and bulls are panicking. Their combat is getting too hot for the ascending trend continuation. So to say, the expanding triangle “kills” the ascending trend.”

The EEM chart updated to today is:

EEM’s price did continue advancing slightly for another 3-6  but then corrected around 30%; it’s about the same level as it was two years ago.  The dramatic difference, however, is that rather than expanding the triangle has the appearance of a conventional symmetrical triangle.  Furthermore, a flat volume trend as measured by OBV has carved a supportive “positive divergence” relative to the declining price trend (although one could also argue that price has likewise remained flat since it’s fluctuated within the triangle.  This chart supports the view that emerging markets could be on the verge of an upside breakout.

In yesterday’s Weekly Recap Report to Members, I included the following long-term chart of the S&P 500 in which I inserted what I call the 2011-2012 Sovereign Budget Crisis Congestion.  The area during which world markets have been struggling with the uncertainties brought on by the Euro debt crisis and our own budget negotiation debates.

When you look at many of the foreign market ETFs, it looks like there’s a chance that stock markets around the world at least are close to breaking the stranglehold of their uncertainties.  In much the same way that the trend of the Emerging Markets ETF looks as if its in a bottom reversal, the same could be said about many other foreign ETFs (click on symbol for chart):

  • EWA (Australia)
  • EWD (Sweden)
  • EWG (Germany)
  • EWH (Hong Kong)
  • EWJ (Japan)
  • EWK (Belgium)
  • EWM (Malaysia)
  • EWN (Netherlands)
  • EWQ (France)
  • EWS (Singapore)
  • EWT (Taiwan)
  • EWU (United Kingdom)
  • EWY (South Korea)

Do you see the same similarities as I do?  Do you see the same diversification opportunities?  Perhaps we’re closer [perhaps another year] to exiting the 12-year Secular Bear Market than we might imagine.

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January 24th, 2012

The Outlook for FXI and Chinese Stocks

From the EconomicTimes of India:

“China’s economy is showing signs of slowing, with foreign investment falling for the second straight month in December and home prices dropping in most cities, the government said Wednesday.

The latest indicators came a day after data showed the economy expanded 9.2 per cent last year, narrowing from 10.4 per cent in 2010, as global turbulence and efforts to tame high inflation put the brakes on growth.”

From USAToday:

“China’s gross domestic product grew at its slowest pace in more than two years in the fourth quarter, and the worst may be yet to come, as weak exports and government tightening ripple through the world’s second-largest economy.

In the final three months of 2011, China’s GDP — the total value of goods and services — increased 8.9% from a year earlier. That was a fourth-consecutive quarter of slowing growth and the slowest expansion since the second quarter of 2009, when the economy grew 8.2%, the Chinese government said Tuesday.

For all of 2011, China’s economy expanded 9.2%, compared with 10.4% the year before.”

And finally, from The Guardian in the U.K.

“China’s economy is also “unstable, unco-ordinated and ultimately unsustainable”, a verdict delivered not by some capitalist running dog on a Canary Wharf trading floor, but by none other than premier Wen Jiabao. Nevertheless, any appraisal of China’s prospects must begin by admitting that the Middle Kingdom is the most astonishing development success story in the world today, and that its three decades of 9%-plus growth have been achieved in the face of widespread scepticism from foreign observers.”<

When we look at a chart of FXI, the ETF of Chinese stocks, we see a classic inverted head-and-shoulder or ascending triangle or any of a number of bottom reversals:

From the above chart it appears that the Chinese market would rebound in sync with the US market ….  should that come to pass.  The extent of that rebound, however, is bound by different constraints than the US market when viewed from a longer-term term perspective:

This short-term inverted head-and-shoulder may signal the beginning of a Chinese market recovery but a complete reversal of its long-term downtrend would also require a cross above a long-term descending trendline stretching back to the heydays of 2007 followed by a cross above the top boundary of what now looks potentially like a multi-year ascending triangle at 46-47.

The near-term inverted head-and-shoulders supports a move to 47 but moves above that need more umph and momentum to overcome their local economic and international trade challenges.

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December 16th, 2011

World Stock Markets are Correlated

If thanks are in order then it’s from me to all of you.  It’s because of you that I take the time to be analytic, to look at the forest instead of at the trees, to look in places and directions that are different than those we regularly hear and read about in the business media.  For example, when attempting to divine our market’s future we often see with blinders on.  We look at individual stocks, we look at the S&P 500 and we look at our economy but we don’t often to look at what might be happening to other markets around the world, something that’s relatively easy to do these days because of ETFs.  I scanned those ETFs and was surprised by what I found.

In an article in today’s Reuters, “Stock markets have become so highly correlated to one another that it can feel like a one decision world: in or out.  The massive and global nature of the series of related financial crises since 2007 have robbed diversification of much of its value. Nearly every asset class is now closely correlated.”  The article quotes a study by Societe Generale that “a massive increase in correlation, from about a .5 correlation in the early 1980s to nearly .9 percent in recent months.”

The same seems to be happening to the returns generated by the “Herd”, the hedge funds who get paid huge fees to generate better than average returns on the large sums of money they manage.  According to Reuters, “these correlations in the 1990s were at about the .6 level, now they are topping the .9 mark, begging the question of why investors are paying expensive managers.”

We can’t explain the new correlation or, for that matter, care to know the cause.  The point is that “Diversification was the low hanging fruit of wealth management” and due to the increase in international trade, it’s no longer available.  We can see it in the ETFs of stock markets around the world; I could have picked more from the 30 some ETFs but you get the picture (click on image to enlarge):

  • Brazil: a possible double-head reversal top
  • Hong Kong; a surrogate for various Asian markets, including China
  • EAFE: 22 developed countries in Europe, Australasia, and Far East other than US and Canada
  • S&P 500: an argument can be made for forcing a reversal top, in this case an emerging head and shoulder formation, on the S&P 500 Index

We’ve spent a lot of time and emotional energy trying to figure out in which direction the market will break out of the trading range. We waiver back and forth depending on the news out of Europe. We turn optimistic when we finally start getting a little bit of positive news on our economy (like “things aren’t getting worse” or “things are slowly getting better”). Bottom line ….

  1.  in today’s market, diversification gives way to market timing and
  2. we might fair no better than other world markets and have to endure a further 20-25% decline before we’ll see a bull market trend begin.

Like it or not, truly, today We are the World.

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November 30th, 2011

Impact of Coordinated Central Bank Action

“These are the times that truly try investors’ confidence.”  Just when you thought the market was going to perform in a relatively predictable way, out from somewhere in left field jump the Fed, 5 European and the Chinese central bankers promising what appears to be a coordinated “global Q(uantitative)E(asing)?”.  Quoting from the CNBC newswire,

“The world’s major central banks made it easier Wednesday for banks to get dollars if they need them, a coordinated move to ease the strains on the global financial system. Stock markets rose sharply on the move.”

Yes, the market’s initial reaction was a greater than 2.5-3.0% jump in market futures but, as some more level-headed analysts see it, is this not also a sign of the bankers’ frustration and desperation at the inflexibility and inability of legislators to act to cut spending and deficits.  Bottom line, things actually may be worse than we thought.  Remember the market’s reaction when the Fed launched QE I and QE II.  It skyrocketed 30% over the succeeding 8 months but we’re still laboring under 9+% unemployment and the market failed to sustain the gain and is still stuck in a trading range with yesterday’s close 13.94% higher than it was prior the QE I and actually below the level prior to QE II.

Let’s take a look at the chart as of last nights close:

S&P 500: 11/29/2011

If professionals can’t see what lies in the future and complain about not knowing whether to buy long or sell short, then clearly individual investors like you and me are having a very difficult time of it.  There’s only two ways to go: 1) stay long, collect your dividends, weather the storm and hope for the best, or 2) insulate your money as best as you can by either moving into cash or being portfolio protection in the way of hedges like index put options of leveraged short ETFs.

In other case,  the best to close your eyes and ears from the daily news (some call it noise) and stay focused on the long-term.  I’m looking at the trendline around 1220-1225 which has acted as an impenetrable resistance level several times.  The second event I’m watching is the the 200-dma inevitably crossing below the 300-dma, something that can’t be prevented without the market moving above 1260-1275 for several weeks.  The Market Momentum Indicator with which my subscribers are very familiar is based on 4 moving averages plus the position of the Index itself relative to those four.  As I outlined in my report to subscribers this past weekend,

Without some sort of dramatically positive surprise, the moving averages will move into a precise bearish alignment (arranged from slowest to fastest). May 29, 2009 was the last time we saw a perfect bear market alignment as the market was exiting from the Financial Crisis Crash. That period of perfect bear market alignment began just over four years ago on November 7, 2007 as the market was entering the start of the Financial Crisis Crash.

Was today’s announcement that “dramatically positive surprise” or is the market about to enter a period similar to November 2007?  No one knows with confidence so, for right now, rightly or wrongly I’m not willing to gamble and am basically watching from the sidelines.

September 22nd, 2010

China is One Big Greenfield Project

For those of you unfamiliar with him, I recommend you read Thomas Friedman of the NY Times. In an OpEd piece today entitled “Too Many Hamburgers?” The passage that really caught my eye was:

“With enough cheap currency, labor and capital — and authoritarianism — you can build anything in nine months……But have no illusions. I am not praising China because I want to emulate their system. I am praising it because I am worried about my system. In deliberately spotlighting China’s impressive growth engine, I am hoping to light a spark under America.

For democracy to be effective and deliver the policies and infrastructure our societies need requires the political center to be focused, united and energized….. For democracies to address big problems — and that’s all we have these days — requires a lot of people pulling in the same direction, and that is precisely what we’re lacking.”

It reminds me of something from a while back, “Becoming A “Go-Ahead” Nation … Again” in which I had written:

“No wonder the stock market can’t move ahead. And it won’t until it finds new technologies, new industries, new growth vehicles, new catalyst to spark this century’s “go-ahead” enthusiasm. That’s where the country’s leaders should be focused…..Rather than punishing the majority, they should fund technological innovation, incentivize capital investment, reward risk taking and innovation, spur hiring.”

Ah, great minds thinking alike (with no disrespect meant nor intended, Mr. Friedman).

Graduate school was so long ago that there isn’t much I remember from it but one thing that has stuck was a class discussion comparing the US steel industry with those of Germany and Japan (without giving too much personal information away, let me say that the discussion could have taken place anytime between 1965 and 1975).

Those two economies were devastated by World War II and yet their steel production capacity was more efficient and profitable than ours. Our behemoths were US, Bethlehem and Inland Steels; theirs were both small specialty and large commodity producing mills. How did they do it? The answer was in the fact that they didn’t have any “legacy mills” to refurbish. Their whole economies started as greenfield projects, with their slates wipe clean because of the War, they had no legacy projects, they were building from the ground up.

The situation is true of China today. Not only do they have cheap labor and an authoritarian regime as Friedman points out, but they also are starting from the ground up, with greenfield projects, with little in the way of legacy plant and equipment that needs to be refurbished. That’s why they can build bullet trains, new train stations and new convention halls (see the Friedman article).

When’s the last time you heard of a new train station, airport, convention hall or rail line being built here. Have you heard of new bridges, dams, hospital centers or universities being built. About the only thing we build these days are sports stadiums.

Competing against the Chinese (and we have to think in terms of competing because not competing means stagnating, falling behind becoming second rate and withering away) begins by reallocating our Federal budget, cutting our defense spending (yes, perhaps ending the wars) and shrinking our global footprint so that more of our human and material resources can be redirected to those things that will help us compete in the 21st Century.

In the meanwhile, you investors keep one eye on FXI. By the way, the Chinese symbols read “The journey of a thousand miles starts with a single step”