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Forget the Alphabet Recovery

|Includes:AMX, EWY, iShares MSCI Brazil Capped ETF (EWZ), FXI, IFN, TEF

We continue to receive anecdotal evidence the economy is healing. While the financial contagion began domestically, it spread globally. The responses to the ensuing crisis and recession have been massive and appear to have been effective, thus far. Will it be enough? We are, I believe in the early phases of recovery. The earliest being, stabilizing the economy. Evidence suggests the rapid pace of deterioration of the US and global economic contraction has eased significantly. That does not mean we will immediately return to an expansion mode. Not for awhile. Job losses are still mounting at troubling levels. Keep in mind how bad things were though. The job loss numbers as measured by the monthly non-farm payrolls were applauded when the June announcement reflected only 300,000+ workers no longer existed in the workplace. Wall Street practically did back flips. Currently, there are in excess of 7 million workers unemployed. We must stabilize the economy first, then find a way to stimulate growth. There continues to be significant spare capacity in the US. Steel manufacturers are running at 60% up from 50%. The rate of Capacity Utilization for total industry stands at roughly 68.3%. Companies need to use that spare capacity before real growth can occur. So, while I believe we’re in for a long bumpy ride, I believe the worst is behind us. I hear the “experts” analysts and economists on Wall Street scouring the alphabet to describe how they see the recovery coming. Strong snap back, V-shaped recovery, no snap back just grind out a bottom, L-shaped recovery, double dip, W-shaped recovery, just heard about strong snap back, flat line then dip back, so, H-shaped . I tend to think of the shape of the recovery appearing as a smiley face. The economy is grinding out a bottom and attempting to stabilize, which will take some time. We could show flat to positive domestic GDP growth as early as the 2nd quarter, more likely this will be reflected in the third and fourth quarters. We should return to subdued below trend growth in 2010. So, why invest here if growth will be so constrained? Corporate America is running extremely lean on inventories and head count. As the stabilization of the economy occurs, this productivity and profitability should boost earnings dramatically. So, initially we most likely will see a jobless recovery until we use up all that spare capacity, which should be reflected in a surge in productivity.

International markets offer attractive opportunities. From Brazil, Russia for commodities and inflation/reflation exposure. While Russia presents significant opportunity, their remains political risks that need to be seriously considered before investing. Then, South Korea, China and India for their educated workforce and cheap labor. Keeping in mind the India and China PMI have crossed over 50 already reflecting a resumption of economic expansion. Looking for additional Brazilian exposure? Look no further than America Movil and Telefonica two large and growing wireless operators.

The market is finally taking a breather. Many market participants have incorrectly predicted this wave of profit taking numerous times during this 40% rise off the lows. Many hedge funds and money managers have missed a good part of this move and underperformed their respective bench marks. They are in the process of raising cash in anticipation of redemption calls from their investors. They missed the move last year when their black box models and quantitative investment models failed to adjust to the quickly deteriorating conditions and they quite frankly, many got their doors blown off. Fast forward to 2009, and they were overly cautious, bought into the Armageddon fear, were gun shy about re-engaging the markets and either stayed in cash too long or continued to sell into all rallies. Either way, it points to under performance, and quarter end will be accompanied by angry investors demanding their money back.

We are in the process of working through this along with quarter end. With the close of the quarter, we have the opening of earnings season, which early evidence leads me to believe, will be another pleasant surprise from overly pessimistic estimates.

So, in closing when thinking about the recovery, forget the alphabet soup approach, just take a look in the mirror and smile.

I may own or plan to own in the future EWZ, EWY, FXI, IFN, TEF, AMX, TMRFX