Looking Beyond Financials: Global, Agriculture, Clean Energy

Financial stocks in the Financial Select Sector SPDR (XLF) traded at a high of 38 in June of '07. They currently trade just below 30. That is a 21% decline... which is a bear market for this segment of the economy.

The debate that the investment public is having about the financial turmoil is whether or not subprime/credit/lending/insuring/banking spills over. One day, major benchmarks are within striking distance of 52-week highs. The next? Monstrous sell-offs.

Most corporations... outside of finance, real estate and auto... have been remarkably successful. Oil services, infrastructure stocks, alt energy, technology, aerospace -- they've been huge winners.

Even more compelling has been the global growth story. Outside of the banks, in fact, the world keeps marching on. The iShares S&P Europe 350 Index (IEV) is up 15%+ in 2007, while the iShares MSCI Asia Pacific ex-Japan (EPP) has tacked on gyyy-normous 36%.

The rewards abroad have not come without significant risks. The mid-summer global credit crunch witnessed selloffs of 15%-20% in major international benchmarks... 1.5-2.0x the U.S. downdraft.

Earlier in the summer, I favored the Warren Buffett/Bill Miller/Joseph Lewis thinking; that is, with respect to deep value, these beaten down financial firms are going to be the comeback kids of the century. (Someday!)

However, without clear evidence that the worst is behind us, one simply can't go bargain-hunting in financial stocks. Maybe early in 2008... but not right now.

Why? Because this is a momentum marketplace. Contrarian/Deep Value strategies, like the kind that Bill Miller advocates, require a confirmed shift in sentiment. Tech, Energy, Large Growth, International... these stories will need to lose the "momentum shine" before you can get brand new leadership.

What about the possibility that financial woes will sink all ships? Doesn't the Nasdaq's worst 2-day drop since September 2002 demonstrate the likelihood that the whole U.S. supertanker is sinking?

I'm not in that camp. (And for the record, the new bull market officially started in October of 2002... right after the last overwhelmed investor raised the white flag.)

I'm in the camp that believes crises and humongous market drops DO NOT mean the beginning of a bear. No crisis or sudden selloff marked the beginning of the 2000-2002 "tech wreck."

What we have here is an inexpensive stock market in a rate-cutting environment. And this good news is occurring when the entire economy has shown plenty of resilience outside of the noted financials/real estate arena.

Truth be told, we may see some more corrective behavior in stock assets. But as long as the Fed shows a willingness to come to the rescue... stocks will be worthy. Granted, the Fed cutting rates again is a pretty big caveat, but they're not afraid to do it... that much we know.

I might be inclined to buy dips in agriculture with the Market Vectors Global Agribusiness Fund (MOO). I might explore clean energy with the PowerShares Global Clean Energy Fund (PBD). I might even maintain a natural resources bias with a bit more of the iShares Canada Fund (EWC).

Comments

[bshimon1]

My comment on this artucle is good