The U.S. Market Outperforms
09/15/08
The year has already seen more 2% + moves in the major indices than the prior 5 years combined. This past week for example saw the Dow Jones rise 300 points on Monday due to the announcement that Fannie and Freddie had been put in receivership and thus could no longer endanger the financial system. That move was completely reversed the next day on some other "relevant" news. Wednesday was a quiet day with only 1.5% intraday price movement. Thursday morning the Dow Jones Industrial tanked by 175 point only to reverse course immediately and ending the day up 178 points. 350 points or 3% in a single day – that's what I call volatility. Fear and anxiety may be rising slowly in U.S. markets, but in the critical economies of Brazil, Russia, India, and China, (the "BRIC" countries) clear signs of panic are spreading. The carnage in emerging markets has been astounding. Brazil has lost since the middle of July some 30%, Russia 45% since May, India 30% since January and China over 60% since October. The declines in other global equity markets have also been mind boggling. Japan, Spain, Italy, South Korea, Singapore, Sweden, Taiwan, and Hong Kong all join China and Russia with equity markets off at least 30% from their 52-week highs. International exposure has never hurt so badly.
The pictures above speak more than a thousand words. All emerging (and developed) currency markets have reversed between one and three year worth of gains in a matter of 2 months. The respective stock markets have not fared any better. This does not mean that those economies have reversed one, two or three year's worth of growth. No, these economies are only guilty of slowing down, but that is often enough for all the players to want to leave at once. Perception is reality and the price of an asset or asset class is determined by the perception of buyers and sellers or, as in these times of forced liquidation, by margin clerks who force their hedge funds to sell what they can, not what they would like to. Therefore, the unthinkable becomes reality: Asset classes that were thought to be inversely correlated or un-correlated become positively correlated, which means that there is no place to hide. Most commodities for example are now positively correlated to equities as all asset classes have been relentlessly subjected to the deleveraging effect. We had talked about the correlation of asset classes in our February 2007 Newsletter. The main statement was a quote from the "Business Cycle Investor" which says: "International Stock Markets follow Wall Street". (I would like to ad to that: World economies follow the U.S. economy.) Everybody gets hurt in a true bear market. So should you stay in cash and wait it out or are there pockets of opportunities? It depends on your manager. My answer has been known for a couple of months already. I believe that in the coming quarters, "domestic/U.S. equities" will beat "international equities" and that select regional banks offer the best opportunities. Banks are so called early cycle stocks and I believe that they have bottomed already. Look at the two charts below. Regional Banks have left the bear market behind, it seems.
Brett Starnberger has put more work into this aspect and came up with the following facts describing the
Regional Variation in Bank Performance:
"With the help of the Barchart site, I revisited the performance of commercial banks as a function of their geography. Specifically, I looked at the number of banks with stocks that are up on the year and the number of banks that are down 50% or more on the year. Here's how it shakes out by region:
27 of the 37 banks that are down 50% or more on the year are located in the southeast (think Florida) and the west (California, Nevada). The story relatively untold in the media is the number of banks that are up year-to-date in their stock market performance--an astounding feat, given general market and financial sector weakness." Yes indeed. Investors are better off these days to stay at home rather than to incur market risk and currency risk abroad.
Hermann Vohs
"Democracy is the theory that the common people know what they want and deserve to get it good and hard. "
H.L. Mencken
Hermann Vohs is president of Cales Investments, Inc., a registered Broker-Dealer. All material presented herein is believed to be reliable but we cannot attest to its accuracy. Investment recommendations may change and readers are urged to check with their investment counselors before making any investment decisions. Opinions expressed in these reports may change without prior notice. Hermann Vohs and/or the staff at Cales Investments, inc. may or may not have investments in any of the markets cited above. Hermann Vohs can be reached at 303-765-5600.
This information is not to be construed as an offer to sell or the solicitation of an offer to buy any securities.
