Marc Faber: Short Emerging Markets - Barron's

Today's economy is largely manipulated by central banks which use interest rates to create artificial liquidity, Barron's Roundtable participant Marc Faber says. U.S. corporate earnings are destined to disappoint. Faber also notes that net of the energy sector, the S&P's P/E ratio is an overvalued 20, not 15. Trades he likes:

• Short DryShips (DRYS) - tanker rates have plunged, while dry shippers have not.

• iShares MSCI Japan Small Cap (SCJ) - Faber notes Japan has fallen out of favor with investors despite the fact that its valuations are very low compared to Japanese bond yields. He says to wait for a 10% correction, then buy.

• Currency trades - short the pound vs. the yen [Editor: sell FXB, buy FXY]. Short the euro vs. the yen [Editor: sell FXE, buy FXY].

• Short emerging markets - by buying ProShares Short MSCI Emerging Markets (EUM), shorting iShares Trust FTSE-Xinhua China 25 Index Fund (FXI), and buying ProShares UltraShort FTSE/Xinhua China 25 (FXP).

Comments

[sliman:]

He is wrong about DRYS too much value.

2008 Jan 27 08:08 PM

[HarMegiddo:]

im not saying DRYS will go up, but saying it hasn't plunged yet is unfactual.
with that said, they are the best short if rates are dropping, DRYS is totally dependent on short term spot rates. much more than the other dry bulk carriers.

2008 Jan 27 11:29 PM

[Long-Short Guy:]

Faber has been bullish on emerging markets for a while, so seeing him turn negative is significant.

2008 Jan 28 03:14 PM

[beegdawg007:]

If in fact Faber's view of DRYS is as simple as he says... "tanker rates have plunged, while dry shippers have not", then he will be wrong about DRYS. The shipping rates for dry bulk shippers did drop quite a bit during Jan. But, that was do entirely to short term issues. For example, coal could not ship from Australia do to flooding. Iron ore was not shipping from South America because of some port issues. Etc. However the demand is clearly there. The Baltic Dry Index - a handy index which, on a daily basis, tracks the dry bulk charter rates for shipping for the major shipping routes - has been steadily increasing since late January.

www.dryships.com/index...

These dry bulk shippers break even at rates which are less than half the current charter rates. Analysts est. that DRYS will earn between $18 and $20/share this year. My own analysis is a bit higher. DRYS is currently trading with a forward PE of 4!!!

Now, short sellers have been all over DRYS recently, so perhaps Faber new something other than what he said! The earnings however are really quite easy to calculate. Many have done so. And, the lowest forecast I have seen to date for 2008 is $13/share. I figure EPS to be closer to $22/share. It is also worth noting that DRYS has recently put more of its ships under longer term charters. Now, 40% of the fleet is locked in for a year or more. The largest of the DRYS fleet, the cape size vessels, are now chartering for over $140,000 PER DAY!!

I should conclude by saying that thus far Faber has been right about shorting DRYS. So if his comment in Barron's was for the short term, he was right. However, if he meant to short this for the longer term, he will get burned by that short because there is no quetion that 2008 earnings for DRYS will be stupendous. FYI... DRYS earned over $4.00, during the fourth quarter of 2007.

2008 Mar 09 11:18 AM

[Michael Riley:]

i found the most interesting comment was looking at the pe of the market with energy stripped out. Approacjhing 20 times very shaky earnings. this flies in the face of the usual bkather of taking out the finacials to tell us how cheap the dow or S& P are. This is a market of stocks and they are not cheap .

2008 May 04 09:48 PM