The global investing trend is dead, and the next big thing is what I call the “America trade,” i.e., investing in North and South American stocks.
For years, U.S. investors have been told to “go global” in search of stronger growth and higher returns. Americans obliged and poured billions of dollars into international stocks, mutual funds and exchange-traded funds (ETFs), which have outperformed during the past seven years.
But, as the saying goes, “Trees do not grow to the sky.” The seeds of underperformance were sewn by the over-performance of Chinese, Indian and European stocks. Nothing lasts forever, my friends.
The time of shorting U.S. stocks and going long stocks in emerging markets is over.
The global markets topped out in late 2007, while the United States — the source of the subprime nightmare — has dramatically outperformed some of last year’s hotshots.
The U.S. stock averages have lost much less than their major European and Asian counterparts in this global bear market. The six-year run in which the foreign bourses routinely thrashed the S&P 500 (SPX) and the Dow Jones Industrial Average (DJI) has come to an end.
Once everyone has piled into a trend, it no longer works. As for going global, when everyone including my grandmother has 70% or more of the money in their 401(k) plan in developing countries’ markets, you can bet the trend is dead. And when those people open their 401(k) statement for the first quarter, it’s going to hurt — not as much as it did after the Nasdaq meltdown in 2000, but it’ll still be painful.
Winnipeg Motel Rooms Long Extended Stay
Sphere: Related Content
We should all be grateful for the bear market rallies that followed, because they gave us another opportunity to lighten up on stocks and build cash in preparation for the real end of the bear market.
I hate to be the bearer of bad news, but the worst of the sub prime mortgage mess hasn’t even begun. We have more pain to go through before we can call the bottom.
Now, the post-rate-cut question is:
A) Do the worst offenders in the sub prime market have a liquidity problem?
Or…
B) Do the financial institutions heavy with sub prime debt — Washington Mutual (WM), National City Corporation (NCC), etc. — have a solvency problem?
The correct question to ask is B, and we should expect to see lower housing prices and more liquidation, a la Bear Stearns (BSC), before the “all clear” signal is sounded.
Before this is over, we’ll see more of these investment banks carried out in body bags to reconcile the enormous level of bad judgment and runaway greed that is behind this whole fiasco.
Now let’s not get too bearish here — we’re making progress. Personally, I can’t wait to take advantage of some of the great opportunities that lie ahead.
As a matter of fact, we’re already taking advantage of some opportunities that are just too good to pass up — particularly in the Freddie Mac and Fannie Mae guaranteed mortgage paper owned by mortgage real estate investment trusts (REITs). That paper is discounted 50% below its actual value.
Come Back to Reality
As with all problems in life, we have to leave the denial zone and enter reality.
Remember, in August, the turmoil in the financial markets was characterized as a “temporary liquidity problem.” The B&P Paribas and Bear Stearns hedge funds blowups were seen as isolated incidences.
Now, seven months after this “temporary” problem, and $200 billion (probably headed to $500 billion) in bad loans write-offs later, the politicians are still in denial.
We need to step back and recognize that the current situation is not a liquidity issue, and hasn’t been one for a long time.
The problem is the genuine uncertainty about the underlying value of the assets, and that’s a solvency problem, which is exacerbated by the fact that many of the entities that own these bad assets are financial companies with 20- to 30-to-1 leverage.
There are still dozens of these special purpose entities out there sitting on a pyramid of paper that’s supported by leverage — and no one has any idea what they’re actually worth.
If this were a simple liquidity problem, then the action that’s been taken by the Federal Reserve and other Central Banks ($1.5 trillion worth) would have solved things — but it hasn’t. Instead, the Fed’s actions have resulted in bear market rallies, followed by pullbacks.
If you still think we’re dealing with a liquidity problem, consider the following:
1) Credit spreads — the cost of buying credit is higher today than it was seven months ago.
2) Mortgage rates — these are also higher today than they were seven months ago, even with all of the liquidity that has been pumped in by the Fed.
3) Corporate debt spreads for banks — corporate bank debt is now paying a higher rate than what they can hope to get lending the money out, which is unheard of.
We are now experiencing the classic example of what George Akerlof described in “The Market for ‘Lemons.’”
He basically said that, absent better information, it is perfectly rational for the buyer of an asset to assume that the assets offered for sale are lemons, i.e., the bad stuff.
This is why we’re currently seeing the flight to quality in the way of Treasuries and other things that people can value, while the rest of the stuff is floating out in la-la land.
Well, we are turning lemons into lemonade, so to speak, by taking advantage of some of these situations.
But until the financial institutions and politicians come out of denial and we get to the hard business of triaging the dead loans from the live ones — and, unfortunately, moving about 1 million unqualified homeowners back into the apartments they can really afford — we have more pain to go.
However, we don’t need all of the pain out of the markets to get the “all clear” signal for stocks — we just need to get about halfway there.
Forex Forex Currency Economics
Virtual Tour Downtown Winnipeg Hotels
Finance Winnipeg Volkswagen Car
Sphere: Related ContentThink back to some of the massive financial fiascos and blowups that turned the tide in the stock market: Penn Central declaring bankruptcy in 1970; the Fed stepping in to rescue the Continental Illinois Bank in 1984; Mexico’s peso debacle in 1994; and the Long Term Capital Management crisis in 1998.
This brings us to 2008 and the Bear Sterns (BSC) calamity. We were staring into the abyss, but the Fed stepped in and the market rebounded more than 400 points.
This is the stuff bottoms are made of!
We almost certainly have reached a bottom in the financials, but that is not to say there won’t be more blowups and down days ahead. For the most part, though, things can’t get much worse than they are right now.
Consumer confidence is extremely low and we’ve seen the steepest year-on-year drop in home prices since 1968. In fact, some people are buying houses again, because prices are coming back in line with reality.
So, investors should be thinking six to nine months down the road as they’re looking at what to buy now. One area you definitely want to get positioned in is alternative energy.
The 30% to 40% secular growth in alternative energy stocks will not be stopped by a recession or a bear market because:
1) Governments are beginning to mandate the use of cleaner and greener energy and technologies.
Forex Forex Currency Economics
Sphere: Related ContentLook to the West
The answers to the world’s problems are not coming from countries like China or India. They’re coming from the Americas.
Brazil has the first energy-independent economy of the 21st century.
Canada has the resources to replace Saudi Arabia as the No. 1 energy exporter.
The United States has the technology, educational and capital systems, and entrepreneurial spirit to solve the 21st century’s biggest problems. The mortgage meltdown has made people forget that the majority of the solutions needed to keep China and India growing are coming from the good old U.S. of A.
The “America trade” is what you want to be invested in as we come out of this bear market. There’s big money to be made in North and South American stocks that sell their products and services throughout the world
.
Winnipeg Motel Rooms Long Stay
Winnipeg UsedPre-Owned Volkswagen
Where Can I Buy License Frames in Winnipeg
Winnipeg Auto Financing