If This Is A Replay Of The Asian Crisis Of 1997-1999, It Could Be Good For Stocks

Includes: DIA, IVV, SPY, TUR, VOO
by: Linus Wilson

The Dow (NYSEARCA:DIA) has lost 5% since the year began, through the end of trading on January 29, and an emerging market crisis looms. Does this mean doom for U.S. stock investors with long positions in SPY, IVV and VOO? If the Asian crisis of 1997 to 1999 is any guide, U.S. stocks will shrug off emerging market worries to new highs.

Frontline gives a nice timeline of Asian crisis from May 14, 1997, to the last International Monetary Fund, IMF, capital injection in March 25, 1999. From May 1, 1997, to April 1, 1998, the S&P 500 returned 65% or about 30% on an annualized basis. The Asian crisis led to some bad days for stocks such as when the Dow dropped 554 points on October 27, 1997, but, overall, who would not want to be invested when the market returns about 30% a year!

That being said, Q4 earnings have been solid, but not spectacular and the S&P 500 has been ugly in January. My fund, Oxriver Capital, has benefited from its conservative risk management and a strategy designed to preserve capital through holding cash when the market's 60 day to 270 day signals are good, but less than stellar. I believe this risk management and market timing will allow risk-averse, investors to benefit from bull markets and outpace passive investors during stock market turmoil.

I don't think currency crises in Argentina and Turkey and weakness in China are enough to derail the bull market, but I'm not optimistic enough yet to deploy all Oxriver's cash or take on leverage right now. China, for example, has been for decades a one sided trading partner with the U.S. China's consumers have not been big buyers of U.S. exports. If China's consumers don't buy, that is not necessarily doom and gloom for the exporters in the S&P 500.

For longer term investors who wanted more exposure to stocks but were priced out of the rally, this may be the time to buy the dip. There are even better opportunities for traders. Betting against pegged currencies, can be so profitable because it is a asymmetric bet. If the bet goes against the trader, the most likely outcome is that he pays a commission and loses nothing. If the trader is correct, he makes a bundle. (One of the biggest risks in that strategy is that the country suspends convertibility and the trader is left with dead money.) Countries with dwindling foreign exchange reserves often raise interest rates as Turkey did to attract hot money, but that leads to stock market routs. (The Turkish stock market ETF (NYSEARCA:TUR) has taken a beating in the last six months.) Traders with a lot of stomach for volatility can short the stock markets of embattled countries with pegged exchange rates. Great rewards will go to the traders who can predict the next country to fall victim to the emerging market contagion.

Disclosure: I am long SPY, VOO.

Business relationship disclosure: Oxriver Capital has no plans to initiate positions in foreign exchange or the securities of non-U.S. companies. The views and positions of Oxriver Capital can change without notice. Potential investors in Oxriver Capital should read the warnings in the private placement memorandum and the investor presentation. I am an owner of the management company for Oxriver Capital. I am invested in the hedge fund Oxriver Capital. More information can be found at oxrivercaptital.com