Alex Trias

Avoid China and Emerging Markets in 2010

Does the author mean "don't invest in China" or "don't invest in FXI?" These are certainly not the same propositions at all, and the article is entirely unclear on that point.

As far as FXI goes, the security rests below it's 65 and 30 day exponential moving averages, which signals intermediate term weakness. It is still higher than the 200 day exponential moving average, which signals FXI is still within a longer term upward trend. Conclusion: no technical reason to take a bullish or bearish position on this security - at least, viewed simply at a chart of FXI.

Let's dig a bit deaper, though. Companies listed in Taiwan have rather significant China exposure. Unlike Chinese companies listed in Shanghai, Taiwan shares are not restricted to domestic investors, so arguably, the Taiwan markets could offer a very accurate picture of China's equity market's health and prospects. At the moent, EWT (Ishares Taiwan) is within a strong short, medium and long-term upward trend, and continues to set higher highs and higher lows. No reason to sell that baby now, at least from a narrow technical perspective.

Hong Kong? Same argument. Like EWT, EWH (Ishares Hong Kong) also remains above its 30, 65 and 200 day exponential moving averages. It has not set a new high above it's most previous high point, so it may not be as technically attractive as EWT to some investors - others would argue EWH has more upside potential than EWT for that reason. Bottom line is that there is no technical reason to contend Hong Kong or Taiwan is poised to fall off the cliff just yet, and since they ride in large part on the health of the Chinese economy, I'm guessing the equities markets are indicating a probability of continued gains in China. Why argue with the market, unless you want to lose money?

Perhaps the author is simply a contrarian. My dog knows China is the place to invest, and I don't even have a dog. The China growth story is common knowledge, which itself should make us a bit jumpy. But that's not enough of a reason to stake out a public position that investors ought to avoid investing in China. That's more like offering a hunch than solid investment advice.

Avoid emerging markets? I'm having trouble with this. EEM (Ishares MSCI Emerging Markets) rests comfy above its short, medium and long term moving averages. MACD is breaking positive, and we are still in the process of setting higher lows and getting closer to a higher high. Until proven otherwise, emerging markets are in a bull market. You have a hunch that too many people are too bullish? Fine, but it is not wise to argue with the market unless you know something nobody else does, or unless some technical trading signal starts flashing "sell".

It's a fine thing to buck conventional wisdom, and even more fine when it turns out you were right. You just need more and better arguments to support why your wisdom is better than that of the market , and I don't see those arguments in this article.

Finally, what does the Case Shiller index have to do with China and emerging markets, by the way?

NYPD is reportedly evacuating the Nasdaq (NDAQ) building as a precautionary measure related to a suspicious van in Times Square. (CNBC)

It truly seems the markets are fairly immune to the threat of terrorism at this point. An attempted attack on an airplane in the US, and a bomb threat in Times Square have just been shrugged off. You know you've won the war when you have denied your enemy the means to accomplish his objective. The objective of terrorists is to spread fear and sow the seeds of panic. The markets' reaction to today's potential attack, and the thwarted attack this Christmas, demonstrates terrorists have lost their war against the rest of us.

2009's Billion Dollar Man: David Tepper

Must know something I don't. Unlike the broader market, financials are not making new highs. Momentum seems to be turning negative on some issues - Citi being one of them. Goldman Sachs (shares of which I own) is pinned below it's 50 day simple moving average, and from a technical perspective, appears poised to probe lower (and that PE ratio of 35 or whatever doesn't make it look like any sort of value play, either). Maybe we're simply seeing the pause that refreshes, and Tepper brass thingies will be vindicated, but there looks like a meaningful possibility that they could get blown to bits.

The Coming Economic Nightmare: Part 1

The Dow Jones Industrial Average started to rally at the front end of the Great Depression, and never looked back. Conclusion: contrary to common sense, the state of the macro economy and the state of capital markets were not that closely related during the last century. Has that changed? Does anything ever change? I wouldn't bet on it. Unemployment, earnings, fundamentals - that stuff matters only insofar as they have an impact on how eager a buyer of stock is relative to a seller of stock. The question you should ask is not "how bad off is the economy" but rather "are investors greedy or frightened right now". Plenty of investors are plenty greedy during recessions, and as a reflection of that are happy and able to bid up asset prices.

Breakout or Fake Out?

Every technical trading thing I read is focused on how the markets have overcome their 50% retracement levels. Some argue that if the S&P 500 can observe current price levels as support, then the path of least resistance is higher. Seems silly to me, but the market is a silly place - particularly if enough traders decide to get silly together.
Being silly is fun. Especially when you're making money at it. Silly times tend to last a while, much longer than rational people ever thought possible. So, I expect traders will bid the market up higher yet until at last, one day, every comment you read on this and other web pages will smack of stubborn conviction that we are in a new era of prosperity and hope. That's about the time when the music ends with a violent jerk. But that said, I still hear the tinkling carnival music playing at full tempo, fueled by central banks desperate to inflate asset prices and some vocal, and very stubborn, bearish commentators.

Real Estate ETFs to Consider if the Recovery Continues in 2010

Most of the time, what the real estate market in the US does is absolutely nothing. Prices can remain flat on an inflation adjusted basis for decades upon decades at a stretch. After the vast run up in real estate prices from 1990 to 2007, it is not unreasonable to expect that prices could grind lower, or move nowhere at all, for twenty or more years. The only reason I would see for owning real estate is (1) to live there, or (2) as a yield investment. Let's focus on (2). Yields on REIT ETFs are comparable to yields on a ten-year US Treasury. Three conclusions follow. One, risk-free yield is better than risky yield, so why not buy the Treasury and skip the REIT? Two, if REIT ETFs only pay out the risk-free rate, and yet, are risky assets, doesn't it follow that REIT ETF pricing is irrationally high at the moment? If so, it will not be fun to own them at all. Three, what happens when (not if, WHEN) interest rates go up? If the yield on ten-year US Treasuries jumps up to, say, 6%, why wouldn't REIT values get smacked down hard? I couldn't tell you.
Maybe I am going to be proven wrong, but I fail to see any reason at all to own any REIT ETF at the moment. There are plenty of other risky assets that offer far more yield - preferred stock, junk bonds, master limited partnerships, and even certain equities ETFs.

Fannie and Freddie: Wards of the State, Yet Management Receives Private Sector Pay Packages

Once upon a time, both of these institutions had duel, conflicting mandates: to maximize shareholder return on the one hand, and to foster home ownership for Americans on the other hand. At times, it was possible for FNM and FRE to manage both mandates, but that time ended with the bursting of the real estate bubble. It is irrational to attempt to manage these companies now with a view towards enhancing shareholder profits - and I agree that Treasury's actions over the holidays shows that our government has come to terms with that. FNM and FRE now have but a single mandate, and that is to promote or foster American home ownership. Shareholder value, it seems, will not play much of a part in how these babies are run from this point forward.
The bad news is that the companies were created with this conflicting mandate on purpose - the fear was that government would interfere unduly with real estate pricing. Handing out cheap mortgages with taxpayer money around election years was a very real concern when FRE and FNM were incorporated. That fear, I think, should be stronger now than it was then. However, once you let the fox into the hen house, it is very hard to get the fox to leave, which is why banks like BAC, JPM and GS have been desperate to repay the TARP loans while the government will still allow them to do so. I believe FRE and FNM were too far gone, and management (inept as ever) was far too slow to realize what they were climbing into bed with.
Today's little rally in FRE and FNM is probably due more to short covering than anything else. That the broader financial sector has moved lower in recent trades today seems to bear that assumption out. Owning FRE or FNM for the long term is probably a very foolish idea.

What Does the Yield Curve Say About ETFs?

A very good point! It's valuable to watch the price of currency and equities at the same time as we study the yield curve. If investors are dumping long term Treasuries at the same time as they are dumping dollars and equities, your second thesis is at play. If investors are buying dollars and US equities at the same time as they are dumping long term Treasuries, thesis number one is at play. I believe the author may be focused on your thesis number one due to the fact that domestic equities are rising as Treasuries are falling, and, possibly, due to the recent rally in the US dollar. Then again, I may be putting words in his mouth. In any event, your comment is very well put.

On Dec 28 12:27 PM Wesley Mouch wrote:

> There are two reasons for yield curve steepening. The first, as noted
> by the author, is money searching for returns from higher risk investments.
> This is good, as it signals confidence and strength in the economy
> as a whole. High volume in riskier assets reflects this reallocation.
>
>
> The second, is money fleeing really poor fundamentals. After all,
> the yield curve would be pretty steep if it was generally believed
> that longer dated products would expire worthless, or would be repayed
> in drastically devalued currency. This is bad, as it reflects a lack
> of confidence in the borrower or manager of the money supply as a
> whole.
>
> So, with this current steepening, which is it? Probably not all of
> the first, but certainly some of the second.

Odd Signals from Financial Markets: Who's Wrong Here?

The problem here is that you're looking at too narrow a snapshot. Yes, things look a bit extreme if you look at the move from March, 2009 to now. What about that impressive move from January 2009 to March 2009? If you're going to say that the move in the latter half of the year is unwarranted and extreme, what about the move in the FIRST half of the year? You cannot look at one leg of market volatility without looking at what came before it, unless you want to get an incomplete (and probably inaccurate) picture of the market's dynamics.
I doubt that the volatility we have seen this year says much of anything, except that investors seem to tend to over-react in the short run. I suggest taking a much longer-term view, measuring where the market has gone in the last decade. Ben Graham's lessons still ring true to me. Earnings are volatile, so I measure value based on an average of the past ten years worth of earnings. I use average growth rates in the past decade to figure out a reasonable rate to apply for measuring future projected growth. It takes a bit more digging, but based on those metrics, the US stock market as a whole is really pretty cheap right now - compared to the price of a ten year US Treasury.

Market Surprise: Stock Market Decouples from Dollar

Excellent charts. Thanks for the article. Stepping back, I think we can explain the shifting correlation thusly. Two reasons investors would buy the US dollar:
(1) Investors are certain the economy is imploding, starvation and rioting in the streets is breaking out across the planet, mahem, despair, and the US Dollar is a safe asset in an otherwise foaming sea of blackness and death. Think March 2008. Sentiments that generally are not great for equities.
(2) Investors are certain the economy is roaring back to life, US assets are poised to rally, and the time to get on board is now, now, now. Budget deficits, trade deficits, and structural imbalance are irrelevant compared to the coming surge in earnings investors think are bound to follow. Sentiment that is favorable for equities pricing.
The question we need to ask is, are we seeing factor (1) or factor (2) at play right now. Most of us are going to take the lessons of early 2008 to our graves, but the problem with hard-learned experience is that it teaches you to know things that are no longer true. I'm sure I am not the only one who is still clinging somehow to knowledge I felt certain of back in early 2008, but I also recognize that facts evolve and situations change.
Has the situation changed? There's the sixty-thousand dollar question. I don't know, but maybe the market can supply the answer. If we are seeing factor (2), you'd expect the market to reflect higher risk appetite across multiple assets. You would expect a falling VIX (which we are seeing), you would expect higher equities prices (yep, we're seeing that, too), you would expect people to be selling risk-free assets like US Treasuries (uh hu, yep, we're seeing that), you would expect a steep yield curve (right, there it is, yep), TED spreads to be low (yes), LIBOR would be low, too (check). Simply put, the market for risk across the entire Earth would be going up, and with it, the dollar. That describes today, and so it seems clear to me that we are no longer in a millieu like this last March, where factor (1) prevailed. We are now in a new situation, driven by factor (2).
Don't get me wrong, I am not saying that the entire global capital market is correct in its assesment of rosy times ahead. But I'm also not one to argue with the entire market, either.
Last point. Watch where the dollar goes from here. The dollar index rests now at its 200 day exponential moving average - formidable technical trading resistance. Traders are winding down positions, if they have not already done so, and heading off for a two week vacation. When they get back, if the dollar is still stuck at the 200 day exponential moving average, we could very well see the greenback swoon. If we do, no great surprises there. If not, then the path of least resistance for the dollar will be higher for a time - at least until folks start to get back with the idea that low interest rates, and high trade and budget deficits, support a weeker currency. Unless, of course, the economic situation really, truly has changed and the Fed starts to raise rates, the US starts to export more goods and services than it imports, and the US government starts to turn budget surpluses again as it did under the Clinton administration.
Investors will need to avoid bias, preconception, and the temptation to argue with the tape.
Have a great holiday.

'Pleased but Not Satisfied' by David L. Sokol: A Must-Read for Berkshire Shareholders

Yes, Buffett is obviously an asset that cannot be replaced - a fact the man himself is certainly aware of. He's also a strategic, long-term thinker. What he's done at Berkshire is to create a system of core values that will long outlast his tenure at the company. For instance, the basic business model at Berkshire is to pick great managers, to get out of the way, and allow them to unlock their company's potential. I doubt that when Buffett is gone, Berkshire will abandon that principle. At the end of the day, Buffett's value is not actually his investing prowess - in fact, with only a few exceptions, Buffett doesn't even try to hit the ball out of the stadium anymore, as he did in the 1980s. Buffett's value is that he's created a unque, and hopefully lasting architecture of principles at Berkshire. The question is how well his successor can implement those principles, but keep in mind that Buffett has already empowered a vast team of managers who implement those principles every day. In a sense, his "successors" have been running the company's businesses for a couple of decades now, and we've seen how well that's worked.

USD Weekly Outlook: Sovereign Debt Threat, Thin Liquidity, Stalling Stocks Boost the Buck

The DXY is poised right about dead on its 200 day exponential moving average. This is an area that frequently acts as support/ resistance to long-term trends in dollar pricing. I suspect this time will be no different. If the dollar can slice through resistance at these levels, perhaps observe the 200 day exponential moving average as resistance, we could really be onto something. Unless and until that happens, we may simply be watching some year end unwinding of carry trades.

I'm not sure that a rising dollar necessarily indicates risk aversion. Equities (US equities, at least) have managed to hold it together somewhat, despite a huge dollar rally. Also, we are seeing yields on ten year treasuries spike up - which really doesn't indicate much in terms of risk aversion. The TED spread remains in a normal range, and the VIX is still relatively low. If anything, complacency and risk appetite seem to be on the dance card these days. If the dollar continues to rise, and if other risk indicators continue to be bullish on risk, we might want to examine whether the dollar strength has some economic component to it, as opposed to simply risk aversion on the part of investors.

Which is a big "if". Again, the dollar remains in a long term bearish trend, and until proven otherwise, I will assume the dollar will continue to grind lower as trade and budget deficits mount, and interest rates in the US continue to remain lower than other developed nations.

The U.S. Dollar: A Key Element of the 2010 Investment Puzzle

DXY now rests at its 200 day exponential moving average. The US dollar should observe some technical resistance at this area, but should it break through and observe this moving average as support, then we could be in for further gains in the value of the dollar. Unless and until we see the US dollar surmount long term technical resistance, the US dollar remains in a long term secular bear market, from a technical perspective.

From an economic perspective, low yields on US Treasuries, and growing budget and trade deficits, have driven the dollar down in the past decade, and remain formidable headwinds. Coupled with still as yet bearish technical trends, and the recent dollar rally appears suspect until proven to be otherwise.

I would chalk the dollar's strength up to the fact that as year end is now upon us, traders are winding down carry trades and locking in profits. So many were so bearish on the dollar, that the unwind has been somewhat sharp. Early January will be a time where traders once again look to borrow low yield US dollar-denominated debt, and go long on higher yield non-US dollar denominated debt. If those trades are put back on in early January, we could see the dollar sell off sharply.

By the same token, if we do not see a sharp sell off in the dollar, we should start to take this rally as a portent of a changed economic situation, where investors are actively going long on the US dollar based on a belief that the US economy is now relatively stronger and US dollar assets are now relatively more attractive. That may well be a game changer, and investors should keep a flexible attitude.

Narrowing CDS Spreads Bode Well

Thanks for this article. The only caveats I might add are (1) will sovereign debt issues send CDS spreads soaring higher? (2) does recent strength in the dollar indicate higher risk aversion in response to Greece, Dubai, Spain, Ireland debt issues? (3) VIX is popping up a bit - will this bear on CDS spreads?

Fed Policy: See No Evil, Hear No Evil

Slight of hand on the part of bankers? Impossible! Would never happen!


On Dec 16 02:39 PM robert.b.ferguson wrote:

> Ahh but through slight of hand the fourth banker put in the biggest
> IOU while taking all of the assets and currency off the table. Now
> the IOUs are all that's left.