The markets see great buying, as margined investors keep getting liquidated. But not for long

October 24, 2008

The Shadow Stock Trader
Friday, October 24, 2008
By Horacio Marquez

Email – #27

** The markets see great buying, as margined investors keep getting liquidated. But not for long.

The market gapped down at the open today as futures were limit-down across the board, following the massive losses yesterday night in Asia. But we are well off the lows, as well-funded investors keep coming in to take advantage of these ridiculous prices.

We’re in the process of cleaning up a global margin call of hedge funds and other wildly leveraged players. That’s why we’re seeing the unwinding of the leveraged trades, which are funded in the lowest-yielding currencies: the Japanese Yen and the US Dollar.

These currencies have rallied tremendously, not as a function of fundamentals, but as a function of the tremendous forced unwinding of leverage. The prices of securities that you see have decoupled from fundamentals terribly, as the leveraged players have been forced to sell regardless of the merit of those securities.

Hence, we have to be seen as providers of liquidity to a hugely illiquid market… for a fee. And the huge fee that we are getting right now is the tremendous discount to fundamentals that these securities evidence. This is not the time to panic and sell. Quite the contrary; this is the time to pick up discounted securities!

Emerging markets will post rates of growth next year of between 5% to 9%. Brazil’s exports account for only some 13% of GDP. And the government is already stimulating the purchase of homes and cars, supporting its long-term projects with local financing and reducing minimum reserve requirements for its very strong banking system.

China, likewise, is already reducing interest rates as inflation has already halved this year. Chinese local savings are 10% of GDP, higher than investment, so the problem for the Chinese has been dealing with excess investment domestically. Now, they have plenty of room and firepower to stimulate their economy. And they will continue to do this more aggressively next year. If you don’t believe me, just ask Jim Rogers, who has moved to Asia so as not to miss the huge opportunities that China will continue to deliver.

In this moment, we have hit our automatic risk-management trailing stops in some positions. We will stick to our discipline and sell them. However, we should redeploy the capital immediately, taking advantage of the massive value in the market. Leverage liquidation cannot continue forever, and owning companies, especially at this once-in-a-generation level of buying opportunity, will definitely outperform the “safe comfort” but terrible returns that cash gives us.

The three trillion in economic stimulus packages approved by the US and the other G7 countries is going to have a huge effect on the economies and in the markets as they get deployed. Do not throw in the towel.

The market seems poised for an earth-shattering rally from here. Get ready to buy some more.

Current Portfolio:

Name: S&P DEP RECEIPTS (AMEX: SPY)
Current Price: $86.71
Comments: Buy

Name: Powershares DB Agriculture Fund (AMEX: DBA)
Current Price: $24.15
Comments: Buy

Name: Oil Services HOLDRs (AMEX: OIH)
Current Price: $83.92
Comments: Buy

Name: Materials Select Sector SPDR (AMEX: XLB)
Current Price: $23.25
Comments: Buy

Name: HealthShares Enabling Technologies (NYSE: HHV)
Current Price: $23.25
Comments: Buy

Name: Market Vectors Agribusiness (AMEX: MOO)
Current Price: $22.54
Comments: Sell. Stock Hit Trailing Stop.

Name: Energy Select Sector SPDR (AMEX: XLE)
Current Price: $43.65
Comments: Buy

Name: Market Vectors Steel ETF (AMEX: SLX)
Current Price: $26.86
Comments: Sell. Stock Hit Trailing Stop.

Name: iShares MSCI Emerging Markets Index (NYSE: EEM)
Current Price: $19.97
Comments: Sell. Stock Hit Trailing Stop.

Name: Vanguard Financials ETF (NYSE: VFH)
Current Price: $27.39
Comments: Buy

Name: iShares MSCI Australia Index (NYSE: EWA)
Current Price: $13.19
Comments: Sell. Stock Hit Trailing Stop.

Enjoy and Profit,

Horacio Marquez

All Shadow StockTrader recommendations will be posted on the Money Map Press website. Simply go to http://www.moneymappress.com and click on “Money Shadow Stock Trader.”

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