rknapton (84.18)

Bargains Bargains Bargains

October 09, 2008 – Comments (2) | RELATED TICKERS: BKF , GXC , PIN

Friends,

 

The .VIX got a reading of over 65 today.  This is the highest level since the crash of 1987 (upon which turned out to be one of the greatest buying opportunities ever).  Historically any reading of over 30 shows a very high level of market fear and is thus used by contrarians as buying opportunities.  As of today the market is down an additional 20% over just the past ten days which compares to the total crash on Black Monday in 1987 of 22.6%

 

There are a lot of bargains out there.  Today I will briefly explore some of the economies outside of the U.S. and provide ways to invest in those economies through exchange traded funds (ETFs).  Many of these economies are still growing rapidly, and the pullback in their stocks has created an incredible buying opportunity.

 

But first, let’s explore further (beyond what has been in my previous writings) why our own market is attractive.  Based on forward earnings as of last week, the S&P 500 was trading at 12 times earnings.  Even if you cut these already lowered estimates by an additional 10%, the market is trading at 13 times earnings –which is a 7.7% earnings yield.  Now this is before this week’s crash, so these numbers are even better now that the numerator of the P/E equation is substantially lower.  This is not 1929.  Stock market valuations were at absurd levels going into that crash (similarly to the NASDAQ stocks of the late 90’s trading at 40+ times earnings).  Investors in 1929 had also borrowed absurd amounts of money –in order to not “invest” in a tangible asset like a house –but to “invest” in the stock market!  In fact, 40% of bank loans back then were used to buy stocks!  Of course as soon as the market had a severe enough glitch, margin calls perpetuated themselves and led to more forced margin call selling, thus driving market prices down further and further (even quite beyond reasonable levels –to the point where some companies had more cash and liquid assets per share than their share price was- essentially these companies were worth more dead than alive).  Additionally, during this period (1929-1933) bank failures were widespread –and without FDIC insurance, their depositors lost everything.  That can’t happen now (and I’m sure you have seen the FDIC limit has been increased to $250,000 per account).  Finally, in 1933 an astounding 44% of mortgages were in default.  Although at modern-day highs, there are just 6.4% of mortgages at least one payment late and still only 2.75% of are in foreclosure.  So again, This is not 1929.

 

Incidentally, I have a solution to pull the economy out of this crisis.  High-tech companies in the U.S. are always complaining of how they cannot obtain enough highly skilled workers here (due to quotas on work visas) (heck, the WSJ even recently did an article on how illegal immigrants are now leaving the U.S. due to our weak economy -http://online.wsj.com/article/SB122289829299095859.html .  So, to strengthen our economy (which would lead to illegal immigrants wanting to stay here –which further strengthens our economy) we could get over our excessive fears of both; losing “American” jobs, and the fear of more terrorism happening due to allowing more foreigners in.  These highly skilled workers (who tend to make good wages) are then capable of adding to the demand for housing (which the decline of home prices is the root cause of our problems due to reduced consumer spending and also banks holding these “toxic” MBS assets which then led to reduced lending).  Thus as demand increases for housing, (now think of a supply and demand curve) the demand curve shifts to the right, which leads to a higher equilibrium price.  Since housing prices would increase, both consumer confidence would increase and also the firms holding the MBS would see their balance sheets substantially improved as they would finally be able to do some “write-ups” on these assets instead of continuous write-downs as the market for these assets would be stronger and thus the mark-to-market accounting method for these would not reflect “fire-sell” prices, and thus, many of our economic problems would be fixed (or at least a bit closer to how they use to be).  I argued this method of fixing the underlying problem quite awhile ago, and have since read Alan Greenspan writings that make the exact same point.  Unfortunately, as he said, it would be “politically difficult” (could you imagine either of the presidential candidates arguing for this at any of the debates?  They would be booed off the stage by voters worrying about their job security).  So remember, there is a relatively quick fix, but it won’t happen due to poli-tics -remember, Greek for “many” –small blood sucking creatures.  But I’ve digressed.

 

Now, we’ll get to some emerging market information.  Wall Street use to have a saying that applied to the importance of the U.S. economy, its stock market and it’s relationship with the world: “When the U.S. catches a cold the rest of the world catches pneumonia”.  Meaning that if the economy of the U.S. slowed down, well it was such a large proportion of the worlds GDP, that the rest of the world slowed down even greater.  More recently the “decoupling” argument has gained strength –saying that many of the rest of the world’s economies are diversified and strong enough now to not be highly correlated with the results that the U.S. is having.  So now, the best of both these situations has provided itself as an opportunity to investors due to the following:

 

These economies have largely “decoupled” from the U.S. and still growing strong.  (From the new IMF projected economic output growth numbers)

·        China’s economic growth:  (2008: +10%, 2009:+9%)

·        India’s economic growth:  (2008: +8%, 2009: +7%)

·        Russia’s economic growth:  (2008: +7%, 2009: +5.5%)

·        Brazil’s economic growth:  (2008: +5%, 2009, +3.5%)

 

The stock markets in these growth economies have pulled back drastically (to the “pneumonia” level as if they were still entirely dependent on the U.S. economy.)

·        China’s Hang Seng index is down over 50%

·        India’s Bombay Sensex is down almost 50%

·        Russia’s RTS index is down about 70%

·        Brazil’s Ibovespa Sao Paulo is down about 50%

 

Now, knowing that these economies are still growing (at paces we in the U.S. could only dream of), and at a fraction of the price they traded at just a year ago, lets take a look at how we can own an index of their broad markets.  Here are some ETFs.

 

BKF    My favorite.  This ETF has exposure to all the “BRIC” specific (Brazil, Russia, India, China) countries.  It is down over 65% from its highs.  All these countries are going to have tremendous growth that lasts for years and years, and this is the diversified version of that growth.

GXC    This China specific ETF has heavy exposure to what will eventually be the largest economy in the world.

PIN      This is the PowerShares India portfolio ETF 

RSX     Even a crap-hole like Russia is going to benefit tremendously due to the continued increasing demand for their resources (which is still a ridiculous % of their GDP).  If their consumer based economy ever comes to the level it could and should be at, well, there will be a lot more economic activity there.

EWZ    This Brazil based ETF has been red-hot (just like their economy) since late 2002.  The recent pull-back has provided the opportunity to invest in it at 2005 prices.

 

So there you have it.  Five different three lettered stock trading symbols to be able to own some of the fastest growing economies in the world.

 

I bought some BKF yesterday.  I’d advise taking some time to do some thought exercises with yourself as to how bad our economy really is going to get (like: are we going to face 25% + unemployment again?, and are all the emerging markets economies going to collapse just because less than 3% of mortgages in the U.S. are in foreclosure?)  And then if you come to the same conclusion I have, then do some further thought exercises to figure out how you’d like to take advantage of these incredible price declines during this market turmoil. 

 

RK