News and commentary

RightSide Commentary -Internationals

By Vivian Lewis
Updated: Thursday, July 03 2008 05:07:PM

She's baaack!
            The middle of the year is a time for looking back and looking forward. The best recent characterization of the market I have seen is from Daniel C. Chung, chief investment officer of Castle Convertible Fund, a U.S. closed-end fund I happen to own, which is becoming an open-end fund in the Alger Group.
 
     Mr. Chung writes: “we think the worst of this cycle may be behind us” and adds “the recent downturn may actually provide investors with an opportunity to take advantage of what we are calling an ‘if only’ market’>
 
     An if-only market is one looked back on some years from now when you will say to yourself: “if only I had known then what I know now, I would have bought, bought, and bought some more.”
 
     I do not know Mr. Chung; I knew the late David Alger who was killed on 9/11. And the fund does own the common (but very high-yielding) stock of a British bank I like.
 
     But I wanted to take a moment to cut through the mood of gloom. After a really lousy quarter, such as we have seen, it is unusual for a second lousy quarter to follow. This is shown by historical studies of the S&P which go back a quarter century.
 
     Declines of 5% or more do not happen in quarterly sequence. After a sell-off, market bounce back.

     Or to quote the old adage: the time to buy is when there's blood on the streets, attributed to Nathan de Rothschild. Of course, you also want to be sure that there isn't a knife sticking out of your tummy which is the source of the blood. 

     So let us look at the past quarter, which was a bummer by any definition. As always, international proved more resilient than domestic, but we are talking about a lower drop in stock prices, not about any index gains. Depending on which index you favor, the world is down in the low double digits in H1 and the U.S. markets are down marginally more (the Dow vs the MSCI.)
 
     If you look at June (you have to look at June; you must face reality!) the fall is 8.6% for the S&P 500 and only a fall of 7.66% for the non-U.S. markets in the Citi index.
 
     By country the best performers were Latin America and producers of raw materials like Canada, Russia, and Norway, which eked out slight gains. But nothing compared to Saudi Arabia whose stock market is up 21% since the start of the year, or Brazil, up 14.7%.
 
     The BRIC countries which consume raw materials (India and China) have had the worst performing markets this year; those which produce commodities have done better.
 
     The main reason of course is that commodities are hot. In the half year, they outperformed all stocks by 2 ½ times, with a gain of 26.8%. Oil and gas commodities are up even more, as everyone known, just under 30%.
 
     One obvious question is whether this can continue. I frankly do not know. But I am pretty sure that the silly political games being played about stopping the speculators will go nowhere. The energy markets are not the site of the interplay of supply and demand; they are highly politicized.
 
     And when the president of the leading Russian oil and gas company forecasts that oil will reach $250 per barrel, he is not expressing an analytical opinion. He is talking his own book. And as Joan Lappin of Gramercy Capital Management put it in the current Forbes, he is also restoring Russian pride. There is an edge against the U.S. in all this, by the way: Russia is financing a new oil drilling program offshore Cuba in the Caribbean.
 
     Meanwhile other commodities in which you cannot speculate (because there is no market except as contracts between companies) have also seen incredibly price rises. Look at iron ore, a major Brazilian export, whose price has been jacked up over 75% in the most recent round of contracts with Asian steel-makers. Consider uranium, which is also becoming more expensive even without a commodities market for speculators to speculate in.
 
     Another bit of interventionism that I also hope will be deflected is the notion that we want to stop Middle Eastern sovereign wealth entities from investing in the U.S. If they want to buy shares in U.S. companies and help finance their future, why would anyone want to block this?
 
     Of course we need rules rather than a panicky politicized negative. But I would imagine that if a Persian Gulf wealth fund wanted to buy a stake of, say, GE, their motive would be to make more money than they have with their positions in Citi. I would welcome this investment because the balance of interests among these oil sheikhs would wind up being aligned more closely with my country’s.
 
     The U.S. has a cheap currency and with a less horrendous bill for energy, we might even resume economic growth stimulated by exports.
 
     And now a word from our sponsor:
 
     I wanted to reach out to your subscribers and let them know that there was a Blog posted that was not written by you, and that your access had been taken away (which prevented you from fixing the situation).  For this I sincerely apologize, and hopefully I am taking the right steps to cure this situation.
Jake Vale
President – Rightside Advisors