Mad Hedge Fund Trader

African Risk and Opportunities

xxch Feel like investing in a state sponsor of terrorism? How about acountry whose leaders have stolen $400 billion in the last decade andhave seen 300 foreign workers kidnapped? Another country lost four warsin the last 40 years. Still interested? How about a country thatsuffers one of the world’s highest AIDs rates, endures regularinsurrections where all of the westerners are massacred, and racked up5 million dead in a continuous civil war? Then Africa is the place foryou, the world’s largest source of gold, diamonds, chocolate, andcobalt! The countries above are Libya, Nigeria, Egypt, and the Congo.Below the radar of the investment community since the colonial days,the Dark Continent has recently been attracting the attention of largehedge funds and private equity firms. Goldman Sachs has set up EmergingCapital Partners, which has already invested $1.6 billion there. Chinasees the writing on the wall, and has launched a latter daycolonization effort, taking a 20% equity stake in South Africa’sStandard Bank, the largest on the continent. In fact, foreign directinvestment last year jumped from $53 billion to $61 billion, whilecross border M & A leapt from $10.2 billion to $26.3 billion. Theangle here is that all of the headlines above are in the price, thatprice is very low, and the perceived risk is much greater than actualrisk. Price earnings multiples are low single digits, cash flows arehuge, and returns of capital within two years are not unheard of. Thereality is that Africa’s 900 million have unlimited demand for almosteverything, and there is scant supply, with many firms enjoying localmonopolies. The big plays are your classic early emerging markettargets, like banking, telecommunications, electric power, and otherinfrastructure. For example, in the last decade, the number oftelephones has soared from 350,000 to 10 million. It reminds me of theearly days of investing in China in the seventies, when the adventurousonly played when they could double their money in two years, becausethe risks were so high. This is definitely not for day traders. If youare willing to give up a lot of short term liquidity for a high longterm return, then look at the Market Vectors Africa Index ETF (AFK),which has rocketed by 82% from the March lows to the recent highs, andthe SPDR S&P Emerging Middle East & Africa ETF (GAF).

Market Memory: Where I’m Invested Long-Term (Part Two)

ccsc The dinosaurs of the market, like myself, are collectively being struck by the similarity of the current stock market and that of September 1987, just before the one day, 25% plunge in the Dow. That was when I tied to buy stock with the index down 300 from a payphone in Paris, only to have the trader at Morgan Stanley burst into tears and smash the phone down on the desk (remember that David G.?). My new guru is Gluskin Sheff’s strategist David Rosenberg, who says that stocks have already discounted two years of recovery and now carry a lot of risk. It is priced for 40% EPS growth and a “V” shaped recovery, which we have zero chance of getting. GDP this year will come in at negative 2.5%, and will claw back a listless 1-2% rate in 2010. Stocks are discounting a 4% GDP growth, compared to only 2% for bonds, so he’d much rather own those. With a deflation rate of minus 2% and high yield returns of 12%, junk now offers a 14% inflation adjusted yield, not bad. The secular 25 year bull market in credit expansion is over. Rent still accounts for a third of the CPI, and they are falling for the first time in 17 years. Sure, we’ll see ephemeral sugar highs like those for cash-for-clunkers and the tax credit for first time home buyers. But at best, it will only add up to a series of small “W”’s, or what I refer to the as the “square root” shaped recovery. With the price of everything stretched, you better start reeling in some of that risk.