Drew Arnold's  Instablog

In a short speech yesterday, Indonesian President Yudhoyono declared that threats to democracy would no longer be an issue for Indonesia, as evidenced by the relatively smooth election that took place in July: "Through this election the people have demonstrated that our democracy has achieved a point of no return."  While his reelection is encouraging given the type of economic policies he will likely implement, it's important to keep in mind the typical troubles experienced by large, complex, developing democracies (i.e. India...see Newsweek's comparison here).  Indonesia has a long way to go in terms of development and investors can take advantage of that.  Infrastructure, education, and health care seem to be the next major challenges for Indonesia, which many investors are already positioned for via ETFs like IDX.


Chart courtesy of StockCharts.com

Just for comparison with the BRIC countries, here is a chart displaying GDP growth rates from 2005 to 2008 along with the projected growth rates through 2014.  These projections are from the IMF.



Disclosure: No position

 

On Thursday of last week, the volatility index (VIX) spiked 6.6% in the face of a broad market selloff.  This move, however, comes after about two weeks' worth of a decline in the VIX, which occurred even as stocks slid.  What does this mean for the stocks in the short term?

During a pullback, it is helpful to know the likelihood of investors buying or selling into the weakness.  Since the markets are currently declining down towards key points of support (S&P 890 and 875), investors could either reload at those points or sell off in order to prevent further losses.  The VIX suggests which way investors are likely to go.

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There has been a lot made out of the prospect that China will drop US treasuries, and even that the rest of the world will follow suit and take on some form of a new global currency.  Let's look at it from a behavioral perspective.

China essentially has two choices: 1.) It could continue buying US treasuries, while running the risk that the debt will continue to fall in value, or 2.) Begin selling off its treasuries and adopt a new preferred form of reserves.  Which decision makes the most financial sense?  That would be option 1.  If the second option were implemented, it would result in a massive loss of reserves for the Chinese.  Their remaining treasuries would plummet and they would put themselves in a race with other treasury-holders to dump them the quickest.

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Over the past few days, traders have been piling into natural gas with the hope that it will converge, as it historically has, with the price of oil.  Oil has left natural gas in the dust over the past few months, and investors are betting that natural gas will catch up.

However, it's important to remember the source of the recent spike in oil prices.  The increase is largely because of inflation expectations.  Investors are looking to oil as a hedge against inflation over the next several years, which is why they've piled in.  Oil has not necessarily increased has a result of lower supply or higher demand, and many analysts claim that the fundamentals of oil are actually bearish.

Even if the convergence theory doesn't check out (at least to me), it still might be a good idea to participate in this trade anyway.  Natural gas is historically cheap right now, and investors are looking to rotate out of the reflation trade to some extent and diversify their holdings.  If UNG breaks out over $16, it could be a nice trade to ride it on up as investors pile in further.

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Just saw a StockTalk from Hedged In that made a great point.  Why bet against Bing?  Everybody has written off Bing as a future competitor with Google, but that set MSFT up to be a great long opportunity.  If Bing fails miserably, everybody was expecting that to happen anyway.  In terms of market sentiment, Bing only has upside, which means MSFT was a nice long play when Bing was released.  MSFT has already taken on these gains, though, so I apparently missed out.

Best Buy is claiming that the Chinese consumer is increasing its demand for domestic goods and increasing its demand for foreign goods.  There are two possible explanations for this shift: one is that the Chinese consumers have experienced a rush of nationalistic and protectionist sentiment, so they're sticking to more domestic goods.  The second and more likely explanation is that their domestic goods are probably cheaper than the imports.  Is it all that surprising that a more cash-strapped Chinese consumer is shifting its preference towards cheaper goods?