Blood on the trading floors of London, Tokyo and New York…
Blood on the streets of Tehran...
What a dramatic start to the week. This could be the start of the next leg lower for stock markets.
At the same time, it could be the start of a great move higher in another investment. I’ll show you how to get into that in a moment. But first, the background…
Stock, indices across the world plunged on Monday. New York was down 2.1%, Mexico was hammered by 2.2%. Tokyo fell by 1%, Brazil plunged by 2.8% and London closed 2.6% lower.
The rout continued yesterday… and there’s more blood letting today across Europe.
This is just the beginning of a major sell-off in stocks
The whole thing has the feeling of an end to this fool’s rally in stocks. Investors have reached the point where they are asking where growth is going to come from. And more importantly, they’re asking how much longer this can go on for. Not much longer, I’d say.
I have been forecasting a sharp correction in the markets for a while now. And we seem to be reaching that point. The falls we have seen so far this week are just the beginning.
That’s bad news for the speculators who have piled into markets recently. But it’s good news for the smarter investor. You see, this sell-off that I see coming should allow us to buy into top quality longer-term investments that we are stalking at more realistic prices. And there’s one market that is a roaring “buy” right now, as I’ll explain…
The emerging markets have led the rally this year. The benchmark MSCI Asia Index has now risen by some 44% since its five-year low on 9 March. And they have dragged the developed markets up along with them.
But the emerging markets are now in a bubble. There is absolutely no doubt about that. Even after the recent falls, the benchmark MSCI Asia Index is now trading at an unreasonable 23.4 times the value of its forecast earnings.
To put that another way, if the market were a company, and you bought it at its current price, you would have to wait 23.4 years to earn back what you paid for it. And that is if those companies that make up the index actually earn the sort of profits that analysts are currently forecasting. That’s hardly a good investment.
Given the beating they took last year though, investors have been desperate to make-up their losses. Investors have put $10.5 billion into emerging markets equity funds since China’s stimulus package earlier this year. At the same time, they have pulled $46.7 billion out of developed market funds.
Investors piled into the emerging markets because that’s where they expected them to lead the global economic recovery. Now, I expect the emerging markets to outperform the developed economies in a rally. But they are clearly well ahead of themselves at the moment, even after this week’s sell-off. That means they could well outperform to the downside too, as world markets continue pulling back.
A senior strategist at Mitsubishi UFJ Asset Management Co. in Tokyo summed it up very nicely on Monday. “Those who bought stocks on a perception the economy would improve are now selling on reality,” he said.
In the US, the Standard & Poor’s 500 Index trades at 14.5 times estimated earnings. And even that looks expensive when you consider how badly the US economy is doing.
Just listen to Barry Knapp. He is the head of US equity portfolio strategy at Barclays Capital. In yesterday’s Financial Times he said “People are starting to realise that even when the economy recovers, certain sectors such as consumer spending are going to remain under pressure. This is a realisation stage for the markets.”
The sharp sell-off we saw at the start of the week looks like a turning point in this fools’ stock market rally to me…
Meanwhile, as stock markets continue to fall, there’s still money to be made in other markets, as money chases real growth potential. The price of oil, for one, continues to rise. And events in Iran may give it a further boost over the short-term.
Take a look at the chart below. It shows the oil price over the last four decades. You will see that the price of the black fuel jumped dramatically in the period 1978-1981. That was right after the Islamic Revolution in Iran thirty years ago brought down the Imperial government and disrupted oil production by some 2- 2.5 million barrels per day in 1978-79.
Three decades later, Iranians have taken to the streets again in huge numbers to protest again. Now, the protesters aren’t calling for the end of the Islamic regime. They just want more transparency and greater freedom.
But if political chaos continues in that country, oil traders are going to start paying a lot more attention to “what if” scenarios about possible disruptions to the oil supply. That should benefit the oil price over the near term. We may not get the kind of “super spike” that was seen in the late 1970s, but the unrest in Iran should certainly help the case for oil.
One of the easiest ways you could profit from this is through ETFs that track the oil price. Some of them like the ETFS WTI 1-year (OSW1) give you a chance to make shorter-term bets. Others like the ETFS WTI 3-year (OSW3) give you a chance to bet on the longer-term trend in the oil price.
Good investing,
Manraaj Singh
For The Right Side
Editor’s Recommendation: ETFs are what I’d call the “safe” option for playing the coming oil boom. But if you are the sort of investor who is willing to take a slightly higher risk in return for a potentially much bigger gain, you might be interested in this backdoor way I have found to play oil. You can take a look at that report here.
Note: Your capital is at risk when you invest in shares, never risk more than you can afford to lose. Seek independent financial advice if necessary.
MARKET NOTES
The ‘sinners’ still have it
BY SHIVVY ARORA
Drinking, gambling and smoking rarely go out of favour. The recession doesn’t seem to have dampened demand for these ‘sin’ sectors. So could it be that folks are turning more to vice to drown their economic sorrows?
Take a look at the chart below. It shows the International Securities Exchange (ISE) SINdex (blue line), which includes manufacturers of cigarettes and other tobacco products, producers of alcohol and owners of casinos and gaming facilities.
So far this year, the SINdex has climbed by more than 17%. The broader S&P 500 index (brown line) on the other hand, is down by 2% for the same period.
Currently trading at the 87 range, SIN has rebounded by more than 78% off its March lows of 48.8, compared to only 35% for the wider market.
Sin sells well during tough times – just look at how it’s outdoing the broader markets…
You would think that businesses selling non-essential items wouldnt not be enjoying a good run… but it seems that people are reluctant to give up their ‘vices’. And sin stocks often do well during a recession.
Sin stocks’ outperformance of the broader market is explained to a large extent by the ways of the human psyche. Behavioural psychologists say that people often look to escape their worries during hard times by indulging in vices.
Vice investing isn’t a sure bet. As with any company, you still need good management and a solid business strategy to survive. So bear in mind that you should pick these stocks carefully. But so long as you’re not worried about the moral element, there could be some profits to be made here.
The Daily Reckoning – Nothing fails like success
BY BILL BONNER
London, England
Wednesday, 17 June 2009 The Dow fell another 107 points yesterday. Oil held steady at $70. The dollar fell to $1.38. And gold rose $4 to 932.
What if the rally is over? Could be... It began on 9 March. That makes it more than 3 months old. Most likely, it will continue through the summer. But who knows?
The important thing to remember is this: there can be no major, sustained bull market without one of two things happening.
Either... the mistakes of the Bubble Epoque must be cleared away... allowing for a new era of genuine growth and real prosperity. At best, this would take a few years to achieve. Just imagine how long it will take to restructure GM into a profit-making business again. Just imagine how long it will take consumers to pay down their debts so they can begin to spend again. Just imagine how long it will take to save enough money to build new factories... and convert shopping malls to warehouses and apartment complexes...
And just imagine how long it will take with the feds fighting it tooth and nail. At least a decade!
Or... people must be willing to go even further into debt... thus increasing the errors of the debt-soaked boom. Anything is possible. But here at the Daily Reckoning we think the economy is already saturated with debt. It can’t absorb more. Besides, the financial industry is no longer capable of pushing debt on the public. That machine is broken. The bubble in finance exploded when Lehman Bros. went down. Once a bubble blows up, it can’t be reflated.
And so far, the feds’ efforts to reflate the bubble in consumer finance have caused a return of speculation in oil, commodities, and emerging markets. There is no sign of consumer price inflation or expanding consumer credit. Instead, consumer credit is contracting. So don’t expect a real bull market.
Instead, let’s move on... this just in... The Financial Times reports that a vending machine company is soon to install machines in Germany where you’ll be able to buy gold as easily as buying a chocolate bar. There’s one machine already in the Frankfurt Airport, where for 30 euros you can buy a 1-gram wafer of gold.
Already, in Switzerland, you can buy gold in the Post Office.
What do these yodelers and sausage eaters know that we don’t? Germany was required to pay reparations after WWI. The amount was about $1.121 trillion in today’s money. In gold. She had no choice. She had to turn over her real money – gold – to the victorious French and English. Thus, she had no real money left in the domestic economy. What could she do? Germany printed up marks... not backed by gold and experienced hyper-inflation, up close, in the ‘20s.
Coming not long after the debacle of WWI and the Treaty of Versailles, it not only destroyed the economy... it also wiped out savers and destroyed Germans’ residual faith in their own sausages. Soon after, there were armed gangs of communists and national socialists fighting for control of the streets. And we all know how that turned out...
Read on...
To read the Daily Reckoning in full, click here.
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