Glimmers of Recovery: Emerging Markets Leading New Bull Market, Base Metals on a Tear

Excerpt from Raymond James strategist Jeffrey Saut's latest essay, published Monday (April 20th):

...[A]gain this morning, we reiterate that we will leave the question as to whether this is a new bull market to Dow Theory. If the DJIA, and the D-J Transportation Average, can better their early January 2009 closing highs, then according to Dow Theory we will be in a new bull market.

That said, there are some positive signs. I believe it was none other than Chairman Bernanke who suggested that for him the sign things are getting better would be when a financial company could raise equity via a stock offering. From his lips to God’s ears, for Goldman Sachs (GS) has done just that.

However, it is not just Goldman that has done it. According to The Financial Times, “the number of companies to list their shares on the U.S. stock market since the start of the year doubled [last] week – to four. Bridgepoint Education (BPI), an online education company raised $141 million after it slashed its offering price. [Meanwhile] Shares in Rosetta Stone (RST) jumped 40% after it raised $112 million on Thursday.”

We also stated in last week’s verbal comments that the “job” of a bear market is to transfer leadership from one sector to another. As history shows, the leading sector of the previous bull market typically is not the leader of a new bull market. This suggests that despite the dazzling performance of the Financials since the mid-March “lows,” they are unlikely to lead if this turns out to be a new bull market.

Unsurprisingly, the emerging markets appear to be “emerging” as the new leaders. Unsurprising because we think emerging, and frontier, markets will account for 70% of the world’s growth going forward, yet they currently constitute less than a 20% sector weighting in most of the All-World Indexes. If we are correct in that assumption, their weightings should increase over time. Therefore, we think portfolios should be over-weighted in international exposure.

To accomplish this we are using the MFS International New Discovery Fund (MIDAX/$12.32) and the MFS International Diversification Fund (MDIDX/$8.63). And, while we like a number of emerging markets, last week we highlighted the 4.4%-yielding iShares MSCI Brazil (EWZ). We also like select technology companies as a long-term play on Asian demand, a number of which such companies populate our Analyst Favorites List.

In conclusion, we offer this insight from Barclay’s Capital. “Thursday’s market surge exemplifies the nature of the recent rally and how far it has over-extended itself. Our Valuation Index experienced one of the best days in its nearly 60 year history and our Sentiment Index experienced one of its worst. We do not believe the current trend is sustainable.”

The call for this week: ... [T]he base metals remain on a “tear” with copper gaining 62.8% year to date. As Nobu Su, head of Taiwan's TMT group, which ships commodities to China, states in Ambrose Evans-Pritchard’s article titled “A Copper Standard for the Word’s Currency System,” “Beijing is trying to extricate itself from dollar dependency as fast as it can. China has woken up. The West is a black hole with all this money being printed. The Chinese are buying raw materials because it is a much better way to use their $1.9 trillion of [currency] reserves. They get ten times the impact and can cover their infrastructure [needs] for 50 years.

The next industrial revolution is going to be led by hybrid cars and they need copper. You can see the subtle way that China is moving into 30 or 40 countries with resources. The SRB (China’s State Reserve Bureau) has also been accumulating aluminum, zinc, nickel, and rarer metals such as titanium, indium (thin-film technology), rhodium (catalytic converters) and praseodymium (glass).” We continue to invest, and trade, accordingly.

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Comments

[kelm]

Good article. Anecdotal reports from China that I am hearing indicate the Chinese domestic economy is growing smartly so all that ore and metal is not just being stockpiled - it is being used. I think the surprise coming will be when the west realizes that China has moved much farther from export dependency than we had imagined.

The problem with the rising wedge is twofold: Fist everybody is looking at it and second there are a number of ways to draw the wedge which will give you very different downside targets. I've also found they have an annoying habit of morphing into other patterns.

2009 Apr 21 11:58 AM