Brian Shriver

An Outcry from Emerging and Developed Markets Alike

Jonathan:

I think what's happening with emerging markets is an excellent example of manic-depressive Mr. Market. Market price movements have had little to do with underlying reality and as a result a large gap (read buying opportunity) has opened up.

Most emerging markets are in excellent shape - including massive trade surpluses and foreign reserves which will enable them to ride out the current crisis in relative comfort - and even come bottom-fishing in the US before too long. Only a relative few are dependent on foreign investors (Baltics, Balkans, Hungary, Turkey, maybe South Africa, kinda sorta maybe India).

Right now you can buy the Chinese market for a P/E ratio of less than 10, or the Russian market for a P/E ratio of less than 3! These prices are very low and won't last long.

I'm sure there are other bargains out there after all the panic selling, but emerging markets are really a phenomenally good bargain right now. It's a great time to take advantage of other people's misconceptions and panic.

Largest Bond ETF Now Trading At a Massive Discount

This is an interesting article - it will be interesting to see how it develops. We are seeing a few oddities in the ETF market, but this is one of the most surprising. Have you talked to anyone at IndexUniverse about this?

Thanks, and keep us informed!

Chinese Market Annihilated - Cramer's Lightning Round (9/24/08)

Clowns should be required to wear funny red noses!

Congress: Please, Don't Rush the Bailout Plan

I agree and I hope they listen. This strikes me as, among other things, a liquidity solution to a solvency problem. And not particularly well targeted - all holders of toxic waste will benefit, not just systemically important US banks.

To address the solvency problem, an automatic, mandatory recapitalization for all US banks would be a better. If banks currently have a market cap of $2T then $700B should buy about 25%. This would certainly help the majority of healthier banks survive, and would let the markets continue to try to value the toxic waste. There could even be provisions for eventual buy-backs which might cap the profits of US taxpayers.

Giving Paulson a $700 billion check to dole out to his circle of friends is just obscene.

A Peek Under the Wisdom Tree

Ray:

Again thanks for this great stuff.

I want to re-iterate a point I think I made in a comment on an earlier post (hoping Mr. Lavine will read this) that these products would be improved by increasing the duration of the debt purchased, at least for countries with higher interest rates. Not only would you get a higher local interest rate, but also you would improve the stability of the asset values in view of interest rate changes.

How does this work? Forex rates are pushed up by investment inflows and down by outflows. While forex markets are noisy, it is reasonable to assume that if the local R falls, investment will tend to shift outward, putting downward pressure on the currency. Meanwhile, however, the local bond has appreciated in value in local currency terms - but only in proportion to the duration of the bond.

The two effects offset each other. Conversely, currency ETFs with minimal duration in countries with high interest rates are more vulnerable to interest rate adjustments.

What's the general rule? When interest rates are high, it pays to invest in longer durations. When interest rates are low, it pays to invest in shorter durations. Good advice in any market. In this way you can benefit from long-term reversion to the mean.

Personally, I am already a fan of several of these products, but I would be more interested in investing in high-R currency products if the duration was longer.

Regards,
Brian

Carrying the Dollar Upstream

Ray, as always I enjoy your posts on this topic.

I would recommend to Mr. El-Asmar that they introduce a product like DBV but with longer bond maturities, say 10 years. The carry trades implemented with longer maturities would be less sensitive to local interest rate movements. On the one hand, if New Zealand lowered their interest rates you'd probably lose a bit on the forex. But with a long duration, the local value of the bond would rise.

FWIW

How Is GM Still Alive?

Felix:
Good question - I was wondering the same thing myself. GM seems to have negative net worth and should be bankrupted. Apparently, though, we have to wait for a cash flow crisis to hit.
I think there's a lot of denial at work.

NationCapShares: An ETF Idea for Developed, Emerging and Frontier Markets

According to Siegel and others, In the US at least, the largest-cap stock has a significant negative alpha. Why would you want to systematically capture that negative alpha across markets?

Currency Bundles Pegged to the Dollar

Ray:
Good stuff - thanks for the analysis.
I am wondering about the local currency interest rate that is available via these funds. For example, on the Wisdomtree website, they suggest that some currency ETFs will be implemented via non-deliverable currency forwards, which may not be trading at "full carry" and therefore may not reflect local interest rates. For example, the Chinese forwards imply a negative local interest rate.

I am wondering whether the local interest rates offered by these funds will reflect actual local rates or rates implied by forwards. Barclays can promise whatever they want but ultimately ought to hedge their exposure. What is your understanding?

Thanks and regards,
Brian Shriver

Debating 'Fundamental Weighting' and Indexing

Good article. Good points. Thank you.

GDP Growth vs. P/E for International ETFs

The S&P/Citigroup Global Equity Indices have frequently updated fundamental data for all countries, etc. Included are IBES FY0 and FY1 P/E ratios. You might be able to get implied earnings growth rates by dividing the former by the latter and subtracting 1. Not sure about the precise definitions of IBES FY0 and FY1 P/E ratios though.

U.S. Export Trends: Looks Good, Feels Bad

Nice article, good points, etc.

I would only clarify that the US trade deficit does not depend so much on "how many US dollar financial assets the rest of the world desires to accumulate" - this is strictly correct but too general - but rather on how many US dollar financial assets a dozen or so foreign central banks (and SWFs) desire to accumulate.

Based on Brad Setzer's data over at rgemonitor.com, it looks like a small group of "sovereign creditors" is financing not only the entire US trade and current account deficit, but also a substantial "capital flight" of private investors. Although hard to quantify, my sense is that the "capital flight" is maybe 2% of GDP but growing.

Interesting stuff.

Ironic Quote of the Day: Alan Greenspan on Inflation

I guess we can file this under "self-fulfilling prophesy" !?!