But there is an exception: when both valuations and sentiment reach severe extremes simultaneously.

That’s what happened with the dollar a few months ago. And, seeing the planets in alignment (as I’ll explain), I immediately wrote a column, predicting that the greenback would soar in the months ahead.

As is the case with most contrarian calls, my message was met with immediate catcalls and derision from respondents. Readers e-mailed me that a weaker dollar was a “no-brainer.” With the size of our budget and trade deficits and nearly $60 trillion in unfunded liabilities, they insisted, the U.S. currency had nowhere to go but down.

But, oh, how times have changed…

Less than three months later, the euro has plunged 10% against the dollar. And it will almost certainly fall further.

Fortunately, there is plenty you can do to protect yourself – and profit. Here’s how…

Spanish Decisions… Made in Germany

Anyone taking even a sidelong glance at the news knows that huge budget problems in Greece are undermining the euro. In response, Athens is proposing serious austerity measures to shore up the country’s finances.

But this is just a finger in the dike. There are other leaks in the euro that are ready to spring in Portugal, Italy, Ireland and, especially, Spain.

Imagine for a moment that you’re a Spaniard:

• Your country has a 19% unemployment rate,
• A deflating housing bubble,
• Enormous debts
• And a gaping budget deficit.

Your economy contracted 3.6% last year and is likely to shrink again this year, leaving Spain in its deepest and longest recession in more than 50 years.

But there’s a bigger problem…

Because Spain is a member of the 16-nation eurozone, it can’t devalue its currency to make its exports more attractive, or its sunny beach resorts cheaper. Why? Because the euro’s value is driven by Germany’s bigger, more competitive industrial economy.

Furthermore, Madrid can’t slash interest rates or print money to spur borrowing or spending, because the European Central Bank now makes those decisions in Frankfurt.

In other words, “Goodbye, Spanish autonomy… hello, recession.” And “Tim-ber!” for the euro, which is vulnerable, overvalued and is now enduring concentrated attacks from hedgers, speculators and hedge funds.

The Eurozone’s Dangerous “One-Size-Fits-All” Policy

Don’t get me wrong. The euro isn’t going to collapse like the British pound did in 1992 when George Soros booked a $1 billion profit in one day by shorting the euro.

The euro is an extremely deep market, with over $1.2 trillion in daily trading volume, dwarfing the British pound’s daily volume in 1992.

But the euro has a major structural problem – one that investors were much more wary about when the currency made its debut 15 years ago. You have widely disparate European economies all tied to the same central bank policies. And now the cracks are beginning to show…

The eurozone economy will grow much more slowly than the U.S. economy this year. And Fed chairman Ben Bernanke is likely to start raising short-term interest rates sometime in the second half of the year.

(Bear in mind, the rate increase won’t be due to a substantial increase in inflation. That’s unlikely. Bernanke will raise rates to signal that the world economic crisis is abating and to put some arrows back in his quiver. After all, you can’t cut rates if they’re already at zero.)

And this move will be bullish for the U.S. dollar. So what should you do?

Three Moves to Combat a Strong Dollar-Weak Euro Scenario

As I’ve said for the past few months, here are three moves to combat a strong dollar-weak euro scenario…

• Pare back on holdings of euro, pound and yen-denominated bank accounts and bonds. A stronger dollar will hurt these the most.
• Maintain your exposure to European and other foreign equities. If you own the right stocks, especially exporters, their capital appreciation can outstrip a negative move in the local currency.
• If you want to be even safer, there is one – and only one – exchange-traded fund (ETF) that hedges away all currency risk for dollar-based investors. It’s called the WisdomTree International Hedged Equity Fund (Nasdaq: HEDJ).

Expect to see it near the top of this year’s top-performing international exchange traded funds.

Good investing,

Alexander Green

View original at: Investment U

(ETF) Why It’s “Mayday” For the Euro And What You Should Do

I’ve made no secret here recently that I believe the dollar is likely to soar against the euro, the pound and the yen this year. Yet this remains a distinct minority opinion.

Most analysts are focused on the huge U.S. budget and trade deficits, nearly $60 trillion in unfunded liabilities for Social Security, Medicare, Medicaid and the new prescription drug benefit, and the Federal Reserve’s penchant for conjuring trillions of dollars out of thin air to “fix” the economy.

These are indeed real and intractable problems that weigh on the dollar.

But people forget that currencies are measured in other currencies. And most of the world’s major economies have it worse than we do…

Why the Dollar Should Surge in 2010

Here’s a why the dollar will soar in 2010. Consider that…

• Japan and Western Europe are both growing more slowly than the United States.
• Both are also more socialistic – with bigger imbalances down the road.
• Many foreign nations are in worse fiscal shape than the United States. Our budget deficit as a percentage of GDP, for example, is only one-third as big as Japan’s.

In addition, the United States is likely to outperform these other economies in 2010 and the Fed is likely to start raising short-term rates toward the end of the year. That’s a catalyst for a surge in the dollar.

Despite the fundamentals, though, sentiment still weighs heavily against the dollar. In fact, there’s almost an air of disbelief when you talk to knowledgeable investors about the potential for a rising dollar. (These are the same smart guys, incidentally, who thought Internet stocks were a “new paradigm” and residential real estate values were a one-way street.)

And it’s this sentiment – as much as the fundamentals – that makes the case that the dollar should be a wonderful contrarian investment in 2010.

That means foreign currency-denominated bonds and bank accounts should be held for hedging purposes only, in my view.

However, I’ve also received letters from subscribers asking if they should bail out of their international stocks, too.

Absolutely not. Here’s why…

Head to Emerging Markets and Capitalize on a Falling Dollar

Foreign stocks can appreciate strongly enough to overcome a falling foreign currency. (Most emerging market stocks are denominated in undervalued currencies or ones that are pegged to the dollar.) And some foreign companies, especially exporters, actually benefit from a falling local currency.

However, make no mistake: If the greenback rises it will diminish total returns on international assets for those investors keeping score in dollars.

The exception will be those investors who hedge their foreign currency exposure with futures and options. For most investors, this alternative is too cumbersome and expensive. (After all, you have to hedge every currency you own for each foreign stock for each holding period.)

An International ETF That Offers Foreign Diversification Without Currency Risk

That’s why I’m happy to report that WisdomTree has recently introduced an international exchange-traded fund (ETF) that allows you to own foreign stocks with the foreign currency exposure totally hedged…

It’s called the WisdomTree International Hedged Equity Fund (Nasdaq: HEDJ).

The fund invests in a trio of ETFs:

• WisdomTree Europe Total Dividend Fund (NYSE: DEB)
• WisdomTree Japan Total Dividend Fund (NYSE: DXJ)
• WisdomTree Pacific ex-Japan Dividend Fund (NYSE: DNH)

Of the roughly 250 international-stock ETFs on the market, this is the only one without foreign-currency exposure. And the total expense ratio for HEDJ is a reasonable 0.58%.

So if you want the diversification power of non-U.S. stock holdings – which you should – without the foreign currency risk, HEDJ is your natural choice.

And if the dollar rises, as I expect this year, this fund should end 2010 near the top of the heap for international fund performance.

Good investing,

Alexander Green

View original at: Investment U

(ETF) How to Play Rising Foreign Stocks and a Rising Dollar

If you’re looking for some calm during the market’s ongoing storm, don’t expect to find much in the commodities sector.

Not that this is a bad thing.

If you know what you’re doing, commodities offer some of the most lucrative and potentially explosive profits anywhere in the investment world. And because simple supply and demand is the key driver for many of these everyday products, it’s a sector ripe for volatility and speculation from hedge funds and large institutions.

Heck, you only have to look at the oil market to see that in action.

It’s not uncommon to see prices cycle from highs to lows and back to highs again in a relatively short time. And it’s this rapid-fire, rollercoaster movement that causes many would-be commodities investors to park themselves on the sidelines, rather than risk their cash.

But this is often a mistake – particularly since there are some quick and easy ways that investors can take advantage of the world’s commodities. So let’s see what 2010 has in store…

Why The Price of Oil Is Headed Back to $100

It wasn’t long ago that oil prices blasted to all-time highs around $147 a barrel (July 2008, to be exact).

But they then set off on a remarkable decline that culminated with the price sinking to lows around the mid-$30 level by early 2009 – a full $115 or so lower than the record high, which equates to a staggering $115,000 move in equity on just one contract.

But as the chart below illustrates, oil has spent most of 2009 busily clawing back a sizeable chunk of the downward move – and I expect that trend to continue in 2010.

With momentum still on the bullish side, oil prices should continue to rise next year, due to the following factors…

• Global oil demand is ticking higher.
• Geopolitical issues are ongoing in the Middle East and oil-producing parts of Africa.
• Oil is a great speculator’s market – a fact that the massive amount of media attention helps to perpetuate.

In addition, the price of oil currently sits just above a major support level – the green 200-day moving average.

Right now, oil is still about $10 away from its high of $82 in October, but look for the price to test the $100 level again in 2010.

So how do you play the move?

Two Ways to Trade Rising Oil Prices

It’s not as difficult or risky as some in the media would like you to believe. The easiest way to trade oil, aside from investing in individual oil stocks, is to go for the very popular and liquid, exchange-traded fund (ETF).

• United States Oil (NYSE: USO): This trades like any other stock on the NYSE and gives investors a safer, cost-effective way to capitalize on the movement of oil prices. It also has options available.

If you’re familiar with commodities trading, though, you can opt for this route…

• Futures Options: You can trade oil directly through the futures, or futures options market on the floor of the NYMEX. But I suggest you steer clear of futures contracts and stick with limited-risk call option strategies.

The June 2010 options offer the best value right now, and whether you play them through the futures options market, or USO, it should give plenty of time for your directional prediction to play out.

But given the volatility of the oil market, if you have profits, take some money off the table.

Now onto the gold market…

Gold $2,000? How to Play New Highs for the Yellow Metal in 2010

They say a picture tells a thousand words, so just take a look at the chart below…

Having begun 2009 trading around $850 an ounce, gold has spent the year shooting higher. The frenetic run culminated with an all-time high of $1,218.

The reason is two-fold: The U.S. dollar’s demoralizing decline, coupled with the weak state of the U.S. economy that has seen many investors flock to traditionally safer investments like gold. Mix in a hefty bout of bullish speculation and you’ve got the recipe for higher prices.

But with gold prices falling from that lofty perch over the past couple of weeks, we may well see plenty of investors trying to “buy on the dip” and take advantage of the next upward move. These are likely the same investors who believe the dollar will continue to languish, so expect to see gold set more new highs in 2010. Some analysts are even calling for gold to top $2,000 per ounce.

In the short-term, however, we could see gold continue to pull back to the 50-day moving average line just under $1,100. And if that line is breached, there is solid support at the 200-day moving average at $985.

If you want to take advantage of the pullback by buying gold on the current dip, there are a few ways to play your prediction…

• SPDR Gold Trust (NYSE: GLD): Like USO for oil, GLD represents an easy, cost-effective, safer way for you to capitalize on the movement of gold prices. But if you want more leverage, you could buy call options on GLD. This allows you to put less money into the trade while potentially making a much larger percentage return than just buying shares of the ETF outright.
• Gold Futures Options: If you want to go to the source, you can buy gold futures and/or gold futures options that trade on the COMEX in New York. But given the high risks associated with trading futures contracts, we recommend you stick with limited-risk call option trades instead. Go for option expiration dates at least six months in the future. June 2010 gold options are your best bet.

Good investing,

Lee Lowell

View original at: Investment U

(ETF) Gold and Oil: Why These Two Commodities Are Set to Blast Higher in 2010

“It’s illegal, but I’ll do it anyway.”

Famous last words by former President, Bill Clinton.

Last month, I had a chance to talk one-on-one with Clinton at the annual International Crisis Group Award Dinner at the Waldorf Astoria Hotel in New York City. I was the guest of Frank Holmes, president of US Global Funds and co-chair of the dinner.

It was my second meeting with Clinton. The first was after the 1996 presidential debates when I jogged with him for 30 minutes on a beach in San Diego, surrounded by Secret Service agents. It was there that Clinton said those immortal words when I asked him to sign a dollar bill: “It’s illegal, but I’ll do it anyway.”

Inevitably, I asked him what he thought of President Obama’s first year in office – especially his tax-spend-and-regulate policies. And what Clinton told me was very revealing…

The Middle East Conundrum

The IGG doesn’t play favorites. About 400 people came to witness former Presidents George H.W. Bush and Bill Clinton receive the Fred Cuny Award for the Prevention of Deadly Conflict, followed by a short concert by James Taylor.

Bush had a prior obligation and couldn’t attend, but Clinton spoke passionately for half an hour on armed conflict around the world. Much of his remarks were pointed toward the Obama administration, warning that the United States needs to “walk a tightrope” when it comes to Middle East peace negotiations.

“Ultimately,” he said, “the Middle East must do it on their own.” He continued by saying the Israelis and Palestinians must be willing to “get over it,” referring to past wars and hatred, and when they do, they will become a region known “not for energy, but for enterprise.”

He pointed to Rwanda as an example. In 1994, the central African nation was torn apart by a bloody civil war between the Hutus and Tutsis, resulting in the mass murder of one million civilians. But Clinton’s State Department sat around and did nothing to stop it, for which Clinton later apologized.

But Clinton said the Rwandans have moved beyond the genocide and have made tremendous progress in rebuilding their country. And while nations like Haiti have seen no increase in per capita income, Rwanda’s has tripled.

Everyone can agree on the evils of war. But after Clinton finished his speech, I had the chance to ask him about what he thought about Obama’s tax-and-spend policies.

Clinton Calls for Corporate Tax Relief

Specifically, I asked: “You left the presidency with a budget surplus, but since then our country has seen massive deficits. What went wrong?”

He bluntly replied that while he had a “pro-surplus” policy, George Bush had a “pro-deficit” policy and that President Obama has inherited an even worse “pro-deficit” policy. (My note: I personally believe that this is why Wall Street hasn’t gone anywhere in 10 years.)

Clinton said he understood and approved of the need for running deficits this year to avoid another Great Depression, but that unlike the 1930s, foreigners are financing a great deal of the federal deficit these days – specifically, the Chinese.

“That’s a serious danger,” Clinton said. (My note: I believe that’s why the dollar keeps falling.)

Then, raising his finger, Clinton emphasized that President Obama must “cut spending” when the economy finally recovers. So I followed with: “What about raising taxes? Do you favor cutting the corporate income tax to stimulate job creation?”

Clinton’s answer surprised me: “Our tax system is anti-business and too complex. Now more than ever, we need tax relief for American business.”

Of course, both Clinton and I know that no such government cutbacks will happen under Obama, especially as he and the Democrats push through an expensive healthcare program.

But Clinton’s message to me was clear: Obama is no Clinton. In fact, I got the distinct impression that Clinton thought President Obama was anything but a “pro-growth” new Democrat.

The question is: What does this mean for investors?

Three Stocks to Combat Three Big Problems

Simple: Look for more deficits, higher taxes, and slower growth under Obama.

To combat this potent mix, I recommend investing abroad. Specifically, buy these three stocks…

• Templeton Emerging Markets Fund (NYSE: EMF): It’s shot up by 107% this year and I believe it’s likely to go even higher.
• SPDR Gold Trust (NYSE: GLD) and the iShares Silver Trust (NYSE: SLV): It never hurts to hit the traditional safe havens of gold and silver – especially with precious metals faring well under the Fed’s zero interest rate policy.

Good investing – AEIOU,

Mark Skousen

View original at: Investment U

(EMF) Bill Clinton’s Thoughts On Obama’s Tax-and-Spend Policies

Emerging markets first hit investors’ radar screen about 20 or so years ago. There was a lot of skepticism and a lack of understanding about emerging markets, which was understandable because there were few emerging markets open enough (or large enough) to invest in with a degree of safety.

That has all changed in the past two decades as most emerging markets are open to foreign investments and have a high degree of liquidity. The number of so-called emerging markets has also grown from a mere handful to over 60.

Yet Wall Street seems to have missed these changes – there is still a lot of skepticism on Wall Street when it comes to investing in emerging markets. That is where the opportunity for investors lies.

Famed investor Jim Rogers says he likes to wait to invest until somebody else puts money down in the corner so he can “walk over and pick it up.” Well, Wall Street seems to have left a bundle of money labeled “emerging markets” for investors to go and pick up. Here’s why… and two easy ways you can do it.

Emerging Market Growth

The emerging market growth story has been a remarkable one over the past two decades – the story of the economic progress being made by about 80% of the world’s population. Some of the highlights include:

• Emerging markets recorded a combined annual growth rate of 5.5% over the past 20 years. Over that period, developed markets grew at a 2.3% rate.

• Emerging market companies have raised an incredible $1.4 trillion in IPOs and follow-on issues since 1989. This shows how far their financial markets have progressed over time.

• The weighting of emerging markets in the MSCI All Country World Index has risen from 2% in 1988 to over 13% today.

• In the period from 1998 to 2008, the market capitalization of emerging markets included in the S&P/IFC emerging market index rose from $300 billion to $7.5 trillion.

• During that same timeframe, the total number of companies listed in these markets increased from 5,400 to more than 15,400.

The New Decoupling

Wall Street has been quick to dismiss the idea of emerging markets decoupling from the developed world, especially the United States. Unfortunately, it may have been written off too hastily.

But there may be opportunity here.

Even if America’s economy remains weak, there are signs that some of the larger emerging economies could see decent economic growth. Exhibit A of this new decoupling is China. Most economists agree that output will grow faster than seemed plausible only a few months ago.

Economists now believe that China’s growth could be close to 8% this year, by any stretch that’s a blistering pace.

India’s growth estimates have also been ratcheted higher. This optimism about economic growth has fueled a rally in commodity prices, which has brightened the outlook for Brazil and other commodity-producing countries. Because of its resilience to the current global financial crisis, Brazil’s credit rating is under review to have  in hopes of being upgraded to ‘”nvestment grade” .

That being said, even the best performing countries will grow more slowly than they did over the past several years. The emerging market resilience will not be universal, either. Eastern Europe’s indebted countries will suffer as global banks cut back and emerging economies intertwined with the United States, like Mexico, continue to be hit hard. So will smaller, trade-dependent countries.

The new decoupling is more narrowly focused and confined to the biggest and the least indebted emerging economies. That’s the part that Wall Street has missed.

The biggest emerging economies are less dependent on American spending than commonly believed. For example, over half of China’s exports go to other emerging economies. They have proven more able and willing to respond to economic weakness because of their strong financial positions . Many of the developed countries are the ones bumbling along, looking for a way to respond to the financial crisis.

Two Ways to Profit From the New Decoupling

How does an investor profit from the “new decoupling?” The best way for long-term investors to participate is through having a diverse portfolio of stocks in the more successful emerging economies. Here are two ways for investors to achieve that goal:

iShares MSCI BRIC Index Fund (NYSE: BKF)

This exchange-traded fund (ETF) has a portfolio of about 175 stocks from the  BRIC countries. Despite a gain in excess of 40% year-to-date, the fund is still down over 30% over the past 52 weeks, so valuations are still not back to pre-crisis levels.

The breakdown for the ETF by country is as follows: China and Hong Kong: 42%, Brazil: 32%, India: 13% and Russia: 13%.

The top 10 components of the fund consist of many large new global giants. They are: China Mobile, Gazprom, Reliance Industry, Petrobras, Vale, Itau Unibanco, HDFC Bank, China Life Insurance, Lukoil and Industrial & Commercial Bank of China.

Templeton Emerging Markets Fund (NYSE: EMF)

Our second choice is a closed-end fund. The reason for this choice is simple – the manager of the fund is the emerging market guru, Mark Mobius. Mobius has been with the Templeton since 1987 and has blazed the trail for emerging markets investors.

In his portfolio, Mobius has the largest allocations to the following countries: Brazil: 23%, China and Hong Kong: 23%, India: 10%, Russia: 9%, Thailand: 8%, Turkey and South Korea: 7% each.

The top 10 components in his portfolio include – Petrobras, Vale, Petrochina, Akbank, Denway Motors, Itau Unibanco, Sesa Goa, Banco Bradesco, Aluminum Corp of China and SK Energy.

What’s nice about this closed-end fund is that recently it has often traded below its actual net asset value. It is currently just 1% below . During recent panic sell offs, the discount has often reached 10%. What a bargain – getting Mobius’ expertise at a discount.

In summary, one of the greatest events in human economic history is unfolding – 80% of the world’s population is moving from poverty to a better standard of living. It’s an unstoppable, irreversible trend. A trend that will be profitable for long-term investors hang on for the ride.

Adding these two funds to your portfolio will give you a quick, easy way to participate .

Good Investing,

Tony Daltorio

View original at: Investment Advice and Investment Research with a Contrarian Point of View

(ETF) Profit From the “New Decoupling”

Another week and another plunge of equities on fears about the intensity of the global recession and renewed skepticism regarding the beleaguered financial sector. And, yet again, flight-to-safety trades such as the US dollar (at a three-year high) and government bonds took center stage.

Our family yesterday celebrated my son’s eighth birthday. While the kids were amusing themselves in pirate garb, the parents engaged in a more subdued deliberation about the exhausting stream of ugly news on the financial front. Interestingly, never in a career of 26 years have I had so many people sympathizing with my “day job” as investment manager. Will the arrival of food parcels at my front door perhaps herald a bottom in the stock market?

Back to the past week’s action on the markets. Globally, stocks were generally in the red, as summarized by the week’s movements of the MSCI Global Index (-7.1%, YTD -24.2%) and the MSCI Emerging Markets Index (-2.2%, YTD -13.9%). As far as mature markets are concerned, European countries like Italy (+15.6%), Denmark (-11.7%), Belgium (-10.0%) and Holland (-9.2%) were on the receiving end of the selling orders.

The FTSE Eurofirst 300 Index touched the lowest level in its 12-year history, whereas the Japanese Nikkei 225 Average (-5.2%) came to within a stone’s throw of a 26-year low.

But a few bourses also up put a good show, mostly among emerging markets. The Russian Trading System Index (+5.8%) and Chinese Shanghai Composite Index (+5.3%) brought some joy to investors, while Eastern European markets like Poland (+2.9%) and Romania (+2.3%) rebounded. (Click here to access a complete list of global stock market index movements, in local currency terms, as supplied by Emerginvest.)

As shown in the table below, the major US indices suffered another miserable week, recording eight losing weeks out of nine in 2009 and falling to 12-year lows. The Dow Jones Industrial Index’s 2009 year-to-date decline of 24.5% is by far the worst start to a year after 44 trading days since 1900. According to Bespoke, there have been 19 previous years where the Dow was down 5% or more at this point, and only four of those years ultimately finished in positive territory.

The Dow is currently down by 53.2% since its peak of October 2007. Chart of the Day points out that since 1896 only the bear market that started in 1929 has produced a larger slump.

On the exchange-traded fund (ETF) front, John Nyaradi (Wall Street Sector Selector) reports that “all things short” was again the theme of the week, with ProShares Short Financial (SEF) leading the way with a gain of 18.1%. Other inverse leaders were ProShares Short Russell 2000 (RWM) (+10.0%) and ProShares Short MidCap 400 (MYY) (+9.3%).

Among “long” ETFs the notable leaders were iShares MSCI Taiwan Index (EWT) (+5.0%) and US Oil  (USO) (+3.5%).

Notwithstanding supply concerns, government bond yields in the US, UK and Germany declined as investors continued their flight to safety. Yields of 10-year Treasuries, Bunds and Gilts were down by 15, 58 and 20 basis points respectively.

In the case of the UK, the Bank of England introduced quantitative easing as its new monetary tool and unveiled an ambitious plan to buy UK government paper by printing money. Speculation rose that the Federal Reserve may also commence a program of buying longer-dated government securities. In typical David Fuller style, he offered the following advice to governments: “The patient is hemorrhaging on the operating table; do anything and everything to resuscitate (inflate) this deflating body.”

On the credit front, Markit’s spreads show that the cost of insuring corporate debt against default has increased markedly throughout the world over the past month. This is illustrated by the movement in the spreads (expressed in basis points) for the five-year credit derivative indices listed below.

• CDX (North America, investment-grade) Index: up from 196 to 250
• CDX (North America, high-yield) Index: up from 1,458 to 1,824
• Markit iTraxx Europe Index: up from 161 to 204
• Markit iTraxx Europe Crossover Index: up from 1,065 to 1,150
• Markit iTraxx Japan Index: up from 400 to 528
• Markit iTraxx Asia ex Japan IG Index: up from 363 to 462
• Markit iTraxx Asia ex Japan HY Index: up from 1,210 to 1,325

Next, a tag cloud of all the articles I have read during the past week. This is a way of visualizing word frequencies at a glance. Key words such as “banks”, “economy” and “markets” dominated the list, whereas “China” seems to be gaining more prominence by the week.

Having breached the November 20, 2008 and October 2002 lows, the Dow and S&P 500 have fallen significantly below their respective 50- and 200-day moving averages, as shown in the customary table summarizing important chart levels. The large deviations of the moving averages point to a massively oversold situation – almost like a spring that is stretched too far. Meanwhile, I have added the July 1996 lows to the table as these levels are now in sight of the indices.

According to Thomas Lee, US Equity Strategist at JPMorgan, retracing 12-year lows for the Dow is an incredibly rare event (see chart below). “Besides the retest of 1997 lows seen on Monday, this has only happened two other times, on April 8, 1932, and December 6, 1974,” said Lee (via The Big Picture). It is noteworthy that the 12-year low in 1932 was three months before the end of the bear market and the one in 1974 was exactly the low for that bear market.

Barry Ritholtz added: “Hitting a 12-year low is by no means proof the bear market is over. And, two prior examples do not make a sufficient sample. [But] the oversold nature of the market, as well as the virtual straight down drop that brought us here, does present a real possibility of a strong market rally.”

The precipitous stock market declines are reflected in the results of this week’s survey of investor sentiment by the American Association of Individual Investors (AAII), courtesy of Bespoke. Investors are now at their most bearish levels since the start of the survey in 1987 with 70.27% of respondents currently in the bearish camp – a necessary prerequisite for a major market low.

James Montier, strategist of Société Générale, said (via FT Alphaville): “We have long argued that the final stage of the de-bubbling process is revulsion. This phase is characterized by overwhelmingly cheap asset prices. Recent price moves in the UK and European stock markets have taken us to levels that have generally been associated with revulsion. Of course, cheap markets can always get cheaper, but for the long-term investor this may provide an excellent entry point.”

Montier’s preferred valuation measure is the so-called Graham and Dodd price-earnings ratio that pitches the share price against a 10-year moving average of reported earnings. On this basis, the S&P 500 Index is currently trading at 13.6 compared with an average of 18 since 1871 and a typical “bargain basement” level of 10. (Keep in mind that this indicator dropped to 5 in the Great Depression.)

As usual, some interesting thoughts were also contributed by Richard Russell (Dow Theory Letters): “The stock market doesn’t live in a vacuum. This huge decline in less than two years is telling us (me) something. It’s a warning. I think it’s a warning of very hard times to come, maybe as difficult as those times we saw during the Great Depression.
“I know that I stand pretty much alone with this scenario. I don’t think most Americans see or even envision the potential danger ahead. They don’t believe in the ‘truth of the stock market’. Over 60 years of studying the stock market and the economy, I’ve learned to believe the ‘language of the market’.

“I know that great bull markets and great bear markets tend to overrun at the extremes. Let me leave you with one thought – prepare for the extremes. Just as the bull market that ended in 2007 rose to the extremes, I believe this bear market will go to the extremes.”

At this juncture, short-term movements are almost impossible to predict, although the sell-off over the past few days – a capitulation in some respects – could nourish the long-awaited tradeable rally. Also, Lowry’s 90% down-days, like we experienced on Monday and Thursday, are often followed by two- to seven-day bounces. But we are not yet at the point where we leave the defeated bear’s carcass behind, although each downward move brings us closer to the eventual bottom.

For more discussion about the direction of stock markets, also see my recent posts “Video-o-rama: Gloomy investors shun risky trades“, “Technical talk: Bounce not that impressive …“, “Louise Yamada: Don’t ‘venture into the waters’” and “Stock market performance round-up: Nowhere to hide“. (And do make a point of listening to Donald Coxe’s weekly webcast, which can be accessed from the sidebar of the Investment Postcards site.)

Economy
“A pall continues to hang over global business confidence as it has since sentiment collapsed last fall. Confidence remains near a record low,” said the latest Survey of Business Confidence of the World conducted by Moody’s Economy.com. “Most worrisome is the recent collapse in pricing power – a record over one-third of respondents now say they are cutting prices for their goods and services.”

Confidence is uniformly weak across all industries and regions of the globe, as highlighted in a recent Forbes article by Nouriel Roubini (RGE Monitor): “With economic activity contracting in 2009’s first quarter at the same rate as in 2008’s fourth quarter, a nasty U-shaped recession could turn into a more severe L-shaped near-depression (or stag-deflation).

“The scale and speed of synchronized global economic contraction are really unprecedented (at least since the Great Depression), with a free fall of GDP, income, consumption, industrial production, employment, exports, imports, residential investment and, more ominously, capital expenditures around the world. And now many emerging-market economies are on the verge of a fully-fledged financial crisis, starting with emerging Europe.”

The European Central Bank’s growth projections for the Eurozone were significantly lowered from a range of -1.0% / 0.0% to a range of -3.2% / -2.2% for 2009, while for 2010 the range was revised from +0.5% / 1.5% to -0.7% / +0.7%, incorporating the possibility of an extended recession. As a result, the ECB lowered its refinance rate by 50 basis points to 1.50%, bringing its cumulative rate cuts to 275 basis points since mid-October 2008.

In an attempt to restore flagging confidence, the Bank of England also cut its target interest rates by 50 basis points to 0.5% and announced plans to start quantitative easing by printing money to purchase government bonds and other securities with an initial amount of £75 billion.

On a more positive note, China’s manufacturing Purchasing Managers’ Index (PMI) strengthened for a third consecutive month in February, climbing to 49.0% from 45.3% the previous month. As discussed in a recent post (”China – better days ahead“) and as shown in the graph below, China’s improving PMI seems to indicate that the country might have seen the worst of its GDP growth statistics in this cycle. (The Hong Kong PMI is used as a proxy of the Chinese PMI prior to 2004.)

A snapshot of the week’s US economic data is provided below. (Click on the dates to see Northern Trust’s assessment of the various data releases.)

March 06
• February employment report underscores severity of recession

March 5
• Productivity decline reflects GDP revision
• Factory inventories-sales ratio registers new high
• Jobless claims – decline is noteworthy but too early to identify as a turning point

March 3
• Bernanke hints more may be necessary and notes that “premature removal of fiscal stimulus could blunt recovery”
• Auto sales decline once again
• The decline of the Pending Home Sales Index suggests home sales remain under stress

March 2
• Consumer spending gains strength in January, but underlying fundamentals raise questions
• ISM Manufacturing Survey – insignificant gain in February
• Construction spending – non-residential and public components deteriorate more
• Affordability – silver lining of housing sector

Commenting on the payroll employment data, Asha Bangalore (Northern Trust) said the statistics need to be evaluated within the context of the growth of the labor force. “The chart below takes into account the growth of the labor force and indicates the extent of job losses in each recession in the post-war period from the peak of payroll employment to the end of a recession. The 3.17% drop in payroll employment in the current recession of 14 months is the largest percentage drop in jobs since the 1957 recession.”

At the same time, Bangalore said there was a silver lining in the housing market that might have been overlooked. As shown in the chart below, the Housing Affordability Index of the National Association of Realtors shot up to a record high of 166.8 in January. Also, the Obama administration has made available details of the Homeowner Affordability and Stability Plan, which raises expectations of improvement in the housing market.

Week’s economic reports

Click here for the week’s economy in pictures, courtesy of Jake of EconomPic Data.

Source: Yahoo Finance, March 6, 2009.

The US economic highlights for the week include the following:

Source: Northern Trust

Click here for a summary of Wachovia’s weekly economic and financial commentary.

Markets
The performance chart obtained from the Wall Street Journal Online shows how different global markets performed during the past week.

Source: Wall Street Journal Online, March 6, 2009.

“Every man has a right to his opinion, but no man has a right to be wrong in his facts,” said legendary investor Bernard Baruch. Hopefully the “Words from the Wise” reviews will assist Investment Postcards readers to get the facts right, and provide some fodder for formulating sensible opinions. But  remember the golden rule: don’t take investment decisions that will keep you from a good night’s sleep.

That’s the way it looks from Cape Town.

View original at: Investment Postcards from Cape Town

(ETF) Words from the (investment) wise for the week that was (March 2 – 8, 2009)

The Central and Eastern Europe (CEE) region is the sick man of emerging markets. While the global crisis means few, if any, bright spots worldwide, the situation in the CEE area is particularly bleak. After almost a decade of outpacing worldwide growth, the region looks set to contract in 2009, with almost every country either in or on the verge of recession.

The once high-flying Baltics (Estonia, Latvia, Lithuania) look headed for double-digit contractions, while countries relatively less affected by the crisis (i.e. Czech Republic, Slovakia and Slovenia) will have a hard time posting even positive growth. Meanwhile, Hungary and Latvia’s economies already deteriorated to the point where IMF help was needed late last year.

The CEE’s ill health is primarily driven by two factors – collapsing exports and the drying-up of capital inflows. Exports were key to the region’s economic success, accounting for a significant 80-90% of GDP in the Czech Republic, Hungary and Slovakia. By far the biggest market for CEE goods is the Eurozone, which is now in recession.

Meanwhile, the global credit crunch has dried up capital inflows to the region. An easy flow of credit fueled Eastern Europe’s boom in recent years, but the good times are gone. According to the Institute of International Finance, net private capital flows to Emerging Europe are projected to fall from an estimated $254 billion in 2008 to $30 billion in 2009. Whether or not this is formally considered a ‘sudden stop’ of capital, it will necessitate a very painful adjustment process.

Classic emerging markets crisis in the works?
What is especially worrisome is that the days of easy credit flows were accompanied by rising external imbalances that rival or even exceed the build-up of imbalances in pre-crisis Asia – e.g. current account deficits in Southeast Asia from 1995-97 fell within the 3.0-8.5% of GDP range, while those in CEE were in the double-digits in Romania, Bulgaria and the Baltics in 2008. As examined in a recent RGE analysis piece, the vulnerabilities in many CEE countries – high foreign currency borrowing, hefty levels of external debt and massive current-account deficits – suggest the classic makings of a capital account crisis a la Asia in the late 1990s.

Spillover effects to rest of world
Like the Asia crisis of 1997-98, a regional crisis in Eastern Europe would have far-reaching effects. As Harvard professor Kenneth Rogoff noted in a recent New York Times article: “There’s a domino effect. International credit markets are linked, and so a snowballing credit crisis in Eastern Europe and the Baltic countries could cause New York municipal bonds to fall.” Western Europe looks set to be particularly impacted via its strong trade and financial linkages. Of particular concern is the strong presence of Western European banks (via subsidiaries) in the CEE, where they hold 60-90% market share depending on the country, which paves the way for contagion.

So is this the making of a cross-border banking crisis? It could be. Given the sharp contraction in Eastern Europe’s economies, combined with high foreign currency-denominated lending (particularly in Croatia, Hungary and Romania), weakening currencies and heavy reliance on non-deposit external financing, Eastern Europe’s banks will likely see a large spike in non-performing loans. Banking systems in the region are likely only as strong as their weakest link – or in this case, weakest country. That’s because of the “common lender” phenomenon. As many CEE countries share foreign parent bank(s) in common, this paves the way for problems in just one of these countries to have ripple effects into other CEE countries. So even a relatively healthy economy/banking system like the Czech Republic’s – with a reasonable loan-to-deposit ratio and scant fx-denominated lending to households – is still vulnerable.

Austria is far and away the Western European country most heavily exposed to the CEE region (via Austrian-based banks like Raiffeisen and Erste Bank). These banks’ collective exposure to the region amounts to over 70% of Austria’s GDP. Notably, however, other Western European countries’ total exposure is far less.

Belgium and Sweden are the next in line after Austria; their lenders’ total exposure to the region amounts to a still significant 20-25% of GDP. Some fear that parent banks, if they get into trouble, could either fire-sell subsidiaries or simply walk away. Another concern is Europe’s fragmented regulatory system, which means that if a cross-border bank needs to be unwound, the process is likely to be extremely messy.

Source: RGE Monitor, February 25, 2009.

View original at: Investment Postcards from Cape Town

(CEE) Roubini Global Economics: Eastern European Tinderbox – How Explosive Could It Get?

When Bad is Good

We’re nearly a month into the New Year, the United States has a new President, and many investors are looking forward with more than a little trepidation. They’re wondering if it’s at all possible to eke out a few gains in the coming months.

It’s a safe bet most investors didn’t do well last year. A quick look at how the major indexes have down in the last 13 months sums it up fairly well: the DOW is down 39%, the S&P fell 43%, and the Nasdaq slid nearly 44% since the beginning of 2008.

Recent market sentiment isn’t exactly painting a great picture looking forward, either. Markets slid negative in four out of the last five trading sessions. Adding to the sense of impending doom are record home foreclosures, soaring job losses, consumer confidence waning at a 15 year low, and bank failures on the rise. With all this bad news, how can the average investor make any money?

The answer to that depends on whether you believe this financial morass will end any time soon. Even with massive amounts of monetary stimulus, it will take some time to turn the global economic ship around. When that happens, there will be certainly be opportunities on the long end of the equation.

But in the short term, many companies will continue to report lower and lower earnings and guidance, and their share prices will continue to drift down as a result. After all, stock prices ultimately reflect the earnings power of a business.

With that trend in place, all one has to do is embrace the doom: bad is ultimately good. This line of thinking is what’s behind many ETF’s that bet on falling companies, and even entire sectors.

For instance, if you had invested in Deutsche Bank’s Banks Short Exchange Traded Fund (ETF) at the beginning of 2008, you’d be sitting on a tidy 184% profit. Trading primarily on European stock exchanges, the fund closed last September after Britain’s Financial Services Authority instituted a ban on short selling of financial stocks. It has since reopened to new investors.

Other financial short funds – available to investors here in the states — haven’t done bad either: Proshares UltraShort Financials (NYSE:SKF) is up over 4% since the beginning of this year and nearly 25% since the start of 2008. ProShares has no less that 46 short ETF’s covering just about every major sector as well U.S. Treasuries, and most of the world’s major currencies.

Rydex, the creator of the first short equity and fixed-income mutual funds, has a number of offerings as well. Its Inverse 2x S&P Select Sector Financial ETF (NYSE:RFN) seeks to provide a return that matches 200% of the inverse performance of the Financial Select Sector index. So far this year, it’s up almost 67%.

Juicy returns to be sure. But a word of caution: many of these ETF’s are small, thinly traded and can be very, very volatile. A market rally of 200-300 points – not that uncommon these days – can send them dropping like a rock.

But as part of a short-term trading strategy based on the performance – or lack thereof – in the financial or other targeted sectors, they may be worth a look.

View original at: Investment Advice and Investment Research with a Contrarian Point of View

(ETF) Proshares UltraShort Financials: Stock of the Day