The Shadow Stock Trader
Friday, July 18, 2008
By Horacio Marquez
Email – #6
** With a lot of volatility and the third most impressive reversal since 1950, we move forward, ready for huge profits
Timing bottoms is a fools’ game. You can only pick excellent value and use a moment of maximum negativity to go in. Over time, you are likely to excel. Such was the maxim of the recently deceased, the great Sir John Templeton. His disciple, Mark Mobius, is acting accordingly these days, looking hard and deep for superb opportunities that have been hit brutally in emerging markets.
We are already there with our iShares MSCI Emerging Markets Index Fund. The story of emerging markets is by no means gone. Actually, it is just about to start its second phase: The huge development of its vast, untapped consumer markets. Expanding lending internally and developing housing through continued urbanization in Chindia and growth of housing in Russia, Brazil and Mexico and development in the Middle East will do this. Market-wise, we can expect 25% to 30% corrections in emerging markets every year-and-a-half or so, to trim excess fat. We just concluded a 25% correction and we are still in a long-term massive rally.
Aiding our view is the expectations of a reacceleration in the United States in the second half, thanks to the success of the fiscal package and the additional stimulus of the low U.S. dollar and low Fed Funds rates. In the reports by banks, we just saw how their traditional lending business increases in profitability as the U.S. yield curve steepens and loans grow – despite deleveraging of badly performing asset classes and some speculative assets.
At the same time, U.S. inflation remains subdued, with core inflation barely above 2% and commodity prices taking a breather from their overblown levels. China also saw success in their inflation fight, while still growing at a scorchingly fast, yet slightly slower pace. With respect to some weakness in commodities, there is forced liquidation of these very profitable trades at the banks, which is causing weakness. I am looking at entry points in steels, energy and other commodities to take advantage of the “sale.”
At the same time, the massive interest in financials put us back on track for massive profits. Thanks to the SEC banning abusive naked shorts and the great reports by Wells Fargo, JP Morgan Chase and Citigroup, which showed accelerating strength in their core lending businesses, while declining charge-offs, the financials soared this week.
We also have to thank the SEC for an investigation into malicious, fraudulent rumors launched about both Bear Stearns and Lehman Brothers in the markets. This type of conduct is illegal and should be prosecuted. Lehman enjoys a superb liquidity, has de-levered their balance sheet and raised capital to the point that their capitalization ratios are now strong and poses credit risk normal to these economic times.
Also, the failure of IndyMac was absorbed by the system without a hiccup. This should be the largest of a limited string of small banks that are due to fail because of over-concentration in risky real estate exposures.
With respect to Australia, the banking system down there is extremely oversold. It’s back at the January lows and is bouncing strongly, led by the U.S. banks. The miners are seeing great interest by Citi, Posco and Mittal Steel in buying additional mining stakes in order to block outright takeovers by competitors or further consolidation. So expect smaller miners to be up strong. The larger miners have corrected strongly and should be bouncing right away.
I am awaiting the next market breather, or forced liquidation, to add into any of the beat-up sectors with strong fundamentals. Stay tuned closely next week.
Enjoy and Profit,
Horacio Marquez
All Shadow StockTrader recommendations will be posted on the Monument Street Publishing website. Simply go to http://www.monumentstreetpublishing.com and click on “Money Shadow Stock Trader.”
Stock
Current Price
Comments
iShares MSCI Emerging Markets Index (EEM)
$129.76
Buy
Vanguard Financials ETF (VFH)
$38.95
Buy
iShares MSCI Australia Index (EWA)
$25.46
Buy
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