Dear subscribers,
This is update #1912 for Friday morning, August 23, 2013.
As is often the case immediately before any major announcement, such as the monthly U.S. employment report or any statement by the Fed, many investors waited until after Wednesday's release of the minutes of the previous Federal Open Market Committee meeting before taking action, while others became especially nervous right around the time of the actual news release. This resulted in unusually sharp volatility, with investors anticipating the worst before the announcement, becoming relieved following the news when nothing startling was revealed, and then turning increasingly gloomy all the way through Wednesday's after-hours session when the S&P 500 would have traded at 1635.21 shortly before 8:00 p.m. Eastern Time as measured by SPY. There were persistent jitters about U.S. Treasuries, which on Thursday morning slumped to their lowest points in more than two years. VIX peaked at a seven-week high prior to the Fed news, as options traders became maximally worried in advance.
The price of gold once again slumped to another higher low, as is typical of any asset which is in a strong bull market. Its most recent higher low for the most active December 2013 futures contract was 1354.50 U.S. dollars per troy ounce, touched Wednesday evening at 6:55 p.m. Eastern Time. The previous higher low of 1351.60 occurred the previous day at 2:35 a.m. Expect a few dozen additional higher lows between now and whenever gold achieves a new all-time high, which will most likely occur during the first half of 2014.
U.S. residents are so accustomed to the 30-year fixed-rate mortgage that removing its current easy, government-guaranteed availability would be like outlawing birth control, forbidding the sale of fruit pies, or not allowing gas stations to prominently post their prices next to a huge American flag. In Canada, however, where there is no history of such mortgages for most people, Canadian homeowners are oddly accustomed to having their rates change--sometimes drastically--roughly every five years. (If you're a U.S. resident and you think I'm making this up, I'm not.) If you live in Canada and you have a mortgage, and for some reason you don't want to sell your house near its highest price since before the Canadian Mounted Police were invented, here's another reason to sell: consider what rate you'll get when you are forced to refinance your mortgage in 2018, 2019, 2020, or 2021. Here's a hint: the first number will be a one and there will be another number before the decimal point. The moderate rise in global government bond yields worldwide during the past year has translated into higher mortgage rates in Canada:
Whenever any asset is in a true bull market, such as gold mining shares are now and as general equities had been four years ago, you'll be bombarded with a flurry of analysts telling you after each pullback why new historic lows are likely in the relatively near future. In a true bear market, which has already begun for most high-yielding assets, you'll be reminded repeatedly why the long-term trend remains higher. It takes time for sentiment to catch up with reality--usually several months and sometimes more if we have experienced a particularly notable extreme in either direction:
Here is another bearish outlook toward gold and gold mining shares:
Obviously not all analyses in the precious metals sector are as negative as the two cited above, but it would be challenging to find two equally negative opinions about high-dividend securities, REITs, or other sectors which are probably much more intelligent short positions, while finding gloomy forecasts for gold mining shares or U.S. Treasuries is easy. This is of course because the behavior for most of the past year or two has been positive for dangerously overvalued consumer staples or REITs, while action for most mining shares, emerging markets, and U.S. Treasuries has been primarily downward. Analysts and advisors are excellent at telling you what you should have done a year or two ago, and useless at looking forward.
India has been around for a few thousand years, and if the following analysis is correct, its equity market has transitioned from a brief uptrend of a few decades to a bearish downtrend which might last for another thousand years or so. Among other laughable comments, this guy actually says that "we are at our lowest point in at least twenty years". You probably don't have to keep watching this for nearly an hour, unless you are truly a glutton for punishment:
Near any market bottom, bearish analysts will give astoundingly lower price targets and so-called bullish analysts will tell you why they're not buying yet (remember Jim Rogers among many others), as we saw dozens of times with precious metals and other commodity-related shares in late June:
The last paragraph of this analysis is especially amusing, since it reprises the absurd decoupling myth of 2007-2008 in reverse:
Martin Pring, who has been analyzing the financial markets since the 1960s, gives cogent arguments for anticipating sharply higher prices for most commodities:
This is a fascinating analysis of gold's periodic nature. To the author's credit, he wrote a strongly bullish article on the exact day that GDX and related assets completed their respective multi-year bottoms:
Here is a look at gold mining shares using ratio comparisons:
Finally, we have a mostly positive story about gold from Thursday night:
If you went to google.com yesterday, in honor of Debussy's birthday they featured an inexplicably abbreviated version of his "Clair de Lune" with some very clever graphics if you click on the arrow within the red balloon--here it is in case you missed it, followed by a brief explanation:
For a beautiful interpretation of the music itself, this is one of my favorite renditions--apparently many people watched this and similar videos for the first time Thursday because of the Google reference:
The more fundamental the concept--whether with investing or astronomy--the more difficult it is to agree on basic principles:
All data below refers to Wednesday's and Thursday's trading except for the U.S. dollar index.
The U.S. dollar index progressively rallied on Wednesday, dropped to a Thursday 4:00 a.m. low of 81.375, and climbed to a Thursday 6:25 a.m. peak
of 81.719, its highest reading since August 15, before touching a Friday 9:10 a.m. lower high of 81.660 and trading Friday morning near 81.60.
The behavior of the U.S. dollar index over the next several weeks remains important because such action will indicate whether its May/July 2013
foray above the July 24, 2012 intraday high of 84.100 was or was not a false upside breakout.
The U.S. dollar index will likely undergo an intermediate-term pullback toward a level in the mid-70s which will likely be completed
at some point in 2014. Emerging-market currencies have been especially out of favor in recent months, and will therefore be
among the strongest to rebound over the next year.
The U.S. dollar index has been in a peculiar long-term bull market since March 16, 2008, when it had completed an all-time nadir at 70.698.
Since then, the U.S. dollar index completed its first higher low of 71.314 on July 15, 2008; its second higher low of 72.696 on May 4, 2011; its
third higher low of 73.421 on July 27, 2011; its fourth higher low of 73.452 on August 17, 2011; its fifth higher low of 73.525 on August 29, 2011;
and its sixth higher low of 74.724 on October 27, 2011.
It may have completed additional higher lows in November 2011, but we won't know that for certain until the greenback completes its current
intermediate-term retreat.
Peculiar is an excellent word, because the U.S. dollar index surged to an important high in less than one year on March 4, 2009, and has been
forming several important lower highs since then, thereby creating a long-term bear market which has persisted for roughly one year less in duration
than its long-term bull market.
On August 20, 2013, the U.S. dollar index slid to a 9:40 a.m. bottom of 80.754, its lowest mark since June 19, 2013.
On August 15, 2013, the U.S. dollar index rallied to a 10:05 a.m. peak of 81.943, its highest level since August 6, 2013.
On August 2, 2013, the U.S. dollar index climbed to an 8:30 a.m. peak of 82.494, its highest mark since July 21, 2013.
On July 15, 2013, the U.S. dollar index rallied to a 7:50 a.m. peak of 83.460, its highest point since July 10, 2013.
On July 9, 2013, the U.S. dollar index rallied to an 11:40 a.m. peak of 84.753, its most elevated reading since July 5, 2010.
On June 19, 2013, the U.S. dollar index retreated to an 11:00 a.m. bottom of 80.498, its lowest level since February 20, 2013.
On February 13, 2013, the U.S. dollar index retreated to a 7:30 a.m. bottom of 79.840, its lowest point since February 7, 2013.
On February 1, 2013, the U.S. dollar index slid to an 11:45 a.m. bottom of 78.918, its lowest mark since September 18, 2012.
On September 14, 2012, the U.S. dollar index slumped to a 10:10 a.m. bottom of 78.601, its most depressed reading since February 29, 2012.
On July 24, 2012, the U.S. dollar index rallied to a 1:45 p.m. peak of 84.100, its most elevated reading since July 13, 2010.
On May 1, 2012, the U.S. dollar index dropped to a 9:55 a.m. bottom of 78.603, its lowest point since February 29, 2012.
On February 29, 2012, the U.S. dollar index retreated to a 12:05 a.m. bottom of 78.095, its most depressed mark since December 2, 2011.
On November 30, 2011, the U.S. dollar index slumped to a 9:00 a.m. bottom of 77.923, its lowest level since November 23, 2011.
On November 8, 2011, the U.S. dollar index slid to an evening bottom of 76.513, its lowest mark since October 25, 2011.
On October 27, 2011, the U.S. dollar index slumped to a 2 p.m. bottom of 74.724, its lowest level since September 6, 2011.
On August 29, 2011, the U.S. dollar index slid to a very early morning bottom of 73.525, its lowest point since August 17, 2011.
On August 17, 2011, the U.S. dollar index slumped to a mid-morning bottom of 73.452, its lowest level since July 27, 2011.
On July 27, 2011, the U.S. dollar index retreated to a very early morning bottom of 73.421, its most depressed mark since May 5, 2011.
On May 4, 2011, the U.S. dollar index slid to a mid-morning bottom of 72.696, its lowest point since July 29, 2008.
Relevant past peaks for the U.S. dollar index include 88.708 on June 6, 2010; 89.624 on March 4, 2009; 92.63 on November 16, 2005; 99.49 on August
26, 2003; and 120.99 on July 5, 2001.
I expect the U.S. dollar index to complete a historic top near the end of the next global equity bear market, perhaps in the year 2016, which
could be anywhere between 90 and 120.
TLT, a fund of U.S. Treasuries averaging 28 years to maturity, slid to a Wednesday 3:59 p.m. bottom of 102.11, its lowest regular-hours
mark since August 3, 2011, and then retreated further to a Thursday 8:08:19 a.m. pre-market bottom of 101.89, its most depressed point since
August 3, 2011, before touching a Thursday 11:45 a.m. higher low of 102.24, climbing to a Thursday 3:59 p.m. high of 103.23, and closing Thursday
up 1.04 at 103.17.
The behavior of TLT is typical for any asset which is still in a very-long-term bull market, but which has been forming several important lower
highs since July 25, 2012 and is likely to continue its decline during the next several months. This is part of a typical rotation from defensive
to cyclical assets, which occurs during nearly any transition from a multi-year equity bull market to a subsequent equity bear market. Because defensive
assets are more overvalued than usual and cyclical names are more undervalued than usual, this rotation will likely be stronger than average.
TLT is likely to slump to roughly 90-100 where I will progressively repurchase it, probably during the second half of 2013 and perhaps
also during the first half of 2014.
On August 12, 2013, TLT ascended to a 9:33 a.m. peak of 107.63, its highest reading since July 31, 2013.
On July 22, 2013, TLT climbed to a 10:02 a.m. peak of 109.69, its highest level since July 3, 2013.
On July 2, 2013, TLT climbed to a 10:27 a.m. peak of 110.80, its highest point since June 20, 2013.
On June 14, 2013, TLT rallied to an 11:47 a.m. peak of 114.66, its highest mark since June 7, 2013.
On June 6, 2013, TLT rallied to a 12:26 p.m. peak of 116.79, its most elevated reading since May 24, 2013.
On May 22, 2013, TLT climbed to a 10:09 a.m. peak of 118.55, its highest level since May 16, 2013.
On May 16, 2013, TLT rallied to a 2:31 p.m. peak of 118.94, its highest point since May 10, 2013.
On May 9, 2013, TLT rallied to a 1:14 p.m. peak of 121.32, its highest mark since May 3, 2013.
On May 1, 2013, TLT rallied to a 1:24 p.m. peak of 124.26, its most elevated reading since December 12, 2012.
On December 6, 2012, TLT climbed to a 1:58 p.m. peak of 126.08, its highest point since November 28, 2012.
On November 28, 2012, TLT rallied to a 10:08 a.m. peak of 126.20, its highest level since November 16, 2012.
On November 16, 2012, TLT climbed to an 11:28/11:34 a.m. peak of 127.19, its most elevated mark since September 5, 2012.
On August 31, 2012, TLT surged to close at 127.72, its highest level since August 6, and traded in the after-hours session as high as 127.76.
On August 2, 2012, TLT soared to an 11:53 a.m. peak of 130.69, its highest point since July 26, 2012.
On July 25, 2012, TLT climbed to a 10:09 a.m. top of 132.21, an all-time record zenith.
On July 25, 2011, TLT slumped to a pre-market bottom of 94.75, its most depressed reading since July 7, 2011.
On June 30, 2011, TLT slumped to a mid-morning bottom of 93.29, its lowest level since May 2, 2011.
On April 8, 2011, TLT slid to a pre-market bottom of 89.64, its lowest level since February 18, 2011.
On February 10, 2011, TLT retreated to a late morning bottom of 88.14, its lowest point since April 7, 2010.
On April 7, 2010, TLT slumped to an early morning bottom of 87.30, its lowest point since September 20, 2007.
VIX is probably the best-known measure of equity index implied volatility, which is synonymous with investors' fear of an upcoming bear market.
VIX rallied to a Wednesday 11:58 a.m. peak of 16.56, its highest mark since July 3, before slumping to a Wednesday 2:48 p.m. low of 14.67,
closing Wednesday up 1.03 at 15.94, opening Thursday at its intraday high of 15.26, retreating to a Thursday 10:46 a.m. low of 14.66, and closing
Thursday down 1.18 at 14.76.
VIX eventually will form a pattern of higher lows from a multi-year bottom which perhaps occurred at 11.05 on March 14, 2013, and which will
signal an upcoming top for global equities probably during the next several months.
On August 14, 2013, VIX dropped to a 9:33 a.m. bottom of 12.35, its lowest level since August 13, 2013.
On August 13, 2013, VIX slid to a post-4:00 p.m. bottom of 12.29, its lowest point since August 6, 2013.
On August 5, 2013, VIX slid to a post-4:00 p.m. bottom of 11.83, its lowest mark since March 15, 2013.
On June 24, 2013, VIX surged to a 10:05 a.m. peak of 21.91, its most elevated reading since December 31, 2012.
On March 14, 2013, VIX slid to a post-4:00 p.m. bottom of 11.05, its most depressed reading since February 26, 2007.
On December 28, 2012, VIX soared to a post-4:00 p.m. peak of 23.23, its most elevated point since June 14, 2012. Because VIX trades until 4:15
p.m., it reflected the entire post-closing slump for the S&P 500.
On June 14, 2012, VIX climbed to a 9:45 a.m. high of 24.81, just below its June 13, 2012 peak.
On June 13, 2012, VIX surged to a 3:30 p.m. peak of 24.93, its highest level since June 5, 2012.
On June 4, 2012, VIX rallied to a 10:09 a.m. peak of 27.73, its highest point since December 12, 2011.
On December 8, 2011, VIX climbed to a late afternoon peak of 30.91, its highest reading since November 29, 2011.
On November 25, 2011, VIX climbed to an early morning peak of 34.77, its most elevated level since November 21, 2011.
On November 21, 2011, VIX rallied to a late morning peak of 35.29, its highest mark since November 17, 2011.
On November 17, 2011, VIX surged to a 1:52 p.m. peak of 36.46, its highest point since November 1, 2011.
On November 9, 2011, VIX soared to a late afternoon peak of 36.43, its most elevated reading since November 1, 2011.
On November 1, 2011, VIX soared to a noon peak of 37.53, its highest mark since October 7, 2011 and a gain of more than 53% within 1-1/2 trading days.
On October 4, 2011, VIX climbed to a 10 a.m. peak of 46.88, its highest level since August 9, 2011.
On August 9, 2011, VIX rallied to a post-Fed-announcement high of 47.56.
On August 8, 2011, VIX soared exactly 50% to its intraday peak of 48.00, its highest reading since May 21, 2010.
On May 21, 2010, VIX soared to an early morning peak of 48.20, its most elevated mark since March 10, 2009.
The S&P 500 Index slid to a Wednesday 2:07 p.m. bottom of 1639.43, its most depressed point since July 8, rebounded to a Wednesday
2:48 p.m. high of 1656.99, retreated again to close Wednesday down 9.55 at 1642.80, descended another 0.46% from Wednesday's close at its lowest point
in Wednesday's after-hours session (equivalent to 1635.21, as measured by SPY trading at 163.80 at 19:58:31), opened Thursday at 1645.03, rallied
to a Thursday 3:38 p.m. high of 1659.55, and closed Thursday up 14.16 at 1656.96.
Continuing a two-decade pattern, the S&P 500 has achieved a new all-time zenith above its October 11, 2007 top of 1576.09,
but it won't be a new all-time high after adjusting for inflation, just as the 2007 top was above the 2000 peak but not after adjusting for inflation.
Within the next few years, the S&P 500 will slump below its March 6, 2009 bottom of 666.79, just as the 2009 bottom was below the 2002
bottom and its 2002 bottom was lower than its 1998 bottom, thereby continuing another long-term pattern.
Eventually, its dividend yield will climb above six percent, just as U.S. equities overall have done during all prior eras of stagnation.
On August 8, 2013, the S&P 500 rose to a 2:32 p.m. high of 1700.18, its highest point since August 6, 2013.
On August 5, 2013, the S&P 500 rose to a 10:45 a.m. peak of 1709.24, its highest mark since August 2, 2013.
On August 2, 2013, the S&P 500 climbed to a closing peak of 1709.67, a new all-time zenith.
On June 24, 2013, the S&P 500 slumped to a 12:23 p.m. bottom of 1560.33, its most depressed reading since April 22, 2013.
On April 18, 2013, the S&P 500 slid to a 2:58 p.m. bottom of 1536.03, its lowest mark since March 5, 2013.
On February 26, 2013, the S&P 500 slid to an 11:48 a.m. bottom of 1485.01, its most depressed level since January 22, 2013.
On December 28, 2012, the S&P 500 slid to a 3:50 p.m. bottom of 1401.58, its lowest regular-hours mark since December 5, 2012. At 16:14:45 in
the after-hours session, the S&P 500 as measured by SPY at 138.55 would have traded at 1387.61, its most depressed point since November 28, 2012.
On December 5, 2012, the S&P 500 retreated to a 10:55 a.m. bottom of 1398.23, its lowest reading since November 28, 2012.
On November 28, 2012, the S&P 500 slid to a 10:10 a.m. bottom of 1385.43, its lowest level since November 20, 2012.
On November 16, 2012, the S&P 500 slid to an 11:29 a.m. bottom of 1343.35, its most depressed point since July 26, 2012.
If you admire the old monk, the 61.8% Fibonacci retracement is 1346.11, which was slightly broken to the downside on November 16, 2012.
On July 25, 2012, the S&P 500 slid to a 10:57 a.m. bottom of 1331.50, its lowest level since July 24, 2012.
On July 24, 2012, the S&P 500 slumped to a 2:30 p.m. bottom of 1329.24, its lowest point since July 12, 2012.
On July 12, 2012, the S&P 500 slid to a 10:46 a.m. bottom of 1325.41, its lowest reading since June 28, 2012.
On June 28, 2012, the S&P 500 slumped to a 2:31 p.m. bottom of 1313.29, its most depressed level since June 26, 2012.
On June 26, 2012, the S&P 500 slid to an 11:10 a.m. bottom of 1310.30, its lowest mark since June 25, 2012.
On June 25, 2012, the S&P 500 slumped to a 12:00 p.m. bottom of 1309.27, its lowest point since June 12, 2012.
On June 12, 2012, the S&P 500 slumped to a 10:39 a.m. bottom of 1306.62, its lowest level since June 6, 2012.
On June 4, 2012, the S&P 500 slid to a 1:25 p.m. bottom of 1266.74, its most depressed reading since January 5, 2012.
On December 19, 2011, the S&P 500 slid to a late afternoon bottom of 1202.37, its most depressed mark since November 30, 2011.
On November 25, 2011, the S&P 500 slid to a late afternoon bottom of 1158.66, its lowest level since October 10, 2011. If you count the
pre-market session, the futures-equivalent low at 8:36 a.m. was 1149.60, which would mark its cheapest price since October 6, 2011.
On October 4, 2011, the S&P 500 plummeted to a 10 a.m. bottom of 1074.77, its lowest mark since September 1, 2010.
On August 27, 2010, the S&P 500 retreated to a mid-morning bottom of 1039.70, its lowest point since July 7, 2010.
On July 1, 2010, the S&P 500 slid to a late morning bottom of 1010.91, its lowest mark since September 4, 2009.
GDX, a fund of primarily large- and mid-cap gold mining shares, slid to a Wednesday 3:59 p.m. low of 28.91, and then retreated further to
a Wednesday 19:56:29 after-hours bottom of 28.45, its lowest level since August 15, before climbing to a Thursday 10:09 a.m. high of 29.89,
descending to a Thursday 1:04 p.m. higher low of 29.07, and closing Thursday up 44 cents at 29.37.
On August 16, 2013, GDX climbed to a 9:31 a.m. peak of 30.94, its highest point since May 9, 2013.
On August 7, 2013, GDX dropped to a 9:31 a.m. bottom of 23.89, its lowest point since July 10, 2013.
On July 5, 2013, GDX plummeted to a 1:22 bottom of 22.79, its lowest mark since June 28, 2013.
On June 27, 2013, GDX plunged to a 4:00 p.m. bottom of 22.21, its most depressed reading since December 5, 2008.
On May 9, 2013, GDX rallied to a 1:01 p.m. peak of 30.96, its highest reading since April 25, 2013.
On April 25, 2013, GDX rallied to a 2:02 p.m. peak of 31.27, its highest level since April 12, 2013.
On April 9, 2013, GDX surged to an 11:59 a.m. peak of 36.29, its highest mark since April 2, 2013.
On March 21, 2013, GDX rallied to a 1:46 p.m. peak of 38.58, its highest point since February 27, 2013.
On February 26, 2013, GDX rallied to an 11:57 a.m. peak of 39.29, its highest reading since February 19, 2013.
On February 7, 2013, GDX ascended to a 10:54 a.m. peak of 42.94, its highest level since January 30, 2013.
On January 30, 2013, GDX rallied to a 10:39 a.m. peak of 43.14, its highest mark since January 24, 2013.
On January 22, 2013, GDX rallied to a 2:18 p.m. peak of 45.92, its highest point since January 15, 2013.
On January 15, 2013, GDX rallied to an 11:52 a.m. peak of 45.96, its highest reading since January 3, 2013.
On January 2, 2013, GDX surged to an 8:06 a.m. pre-market peak of 47.75, its highest level since November 30, 2012.
On November 23, 2012, GDX rallied to a 12:52 p.m. peak of 49.00, its highest point since November 14, 2012.
On November 8, 2012, GDX surged to a 3:15 p.m. peak of 51.82, its highest mark since November 1, 2012.
On October 31, 2012, GDX surged to a 3:55 p.m. peak of 52.97, its highest level since October 17, 2012.
On October 17, 2012, GDX rose to a peak of 53.40, its highest level since October 9, 2012.
On October 5, 2012, GDX climbed to a 10:22 a.m. peak of 54.64, its most elevated reading since September 21, 2012.
On September 21, 2012, GDX rallied to a 9:41 a.m. peak of 55.25, its highest point since March 2, 2012.
On May 16, 2012, GDX slid to a 1:51 p.m. bottom of 39.08, its most depressed reading since September 2, 2009.
On February 29, 2012, GDX rose to a 9:38 a.m. peak of 57.91, its most elevated price since February 2, 2012.
On February 2, 2012, GDX rallied to an 11:07 a.m. peak of 57.94, its highest point since December 9, 2011.
On December 1, 2011, GDX rose to a mid-morning peak of 61.01, its most elevated mark since November 16, 2011.
On November 8, 2011, GDX rose to a 1 p.m. peak of 63.69, its highest level since September 21, 2011.
On September 21, 2011, GDX rallied to a mid-afternoon (pre-Fed) peak of 66.90, just below its all-time high.
On September 9, 2011, GDX climbed to a mid-morning all-time zenith of 66.98.
On December 7, 2010, GDX rallied to an early morning peak of 64.62, a new all-time high.
Today's main topic is media selectivity.
One of the most important tasks is determining whether or not it is opportune to trade--and if it is, which securities to select for that purpose. By using ladders of orders and small trading increments, as I recommend, you will have a disciplined foundation of money management, but by itself that won't tell you when to act. Much of the determination about buying and selling is based upon factors which are not as easily quantifiable as those which I usually discuss in my updates. Traders' commitments; insider activity; fund flows--these all have their role in determining how extreme the current situation is, and certainly they are of paramount importance. However, when it is time to make a decision about which assets to actually trade, the above information is about equally valid for many funds of commodity producers, or many funds of emerging markets, or many high-dividend shares. Being able to select among a dozen or two choices, to identify those which are most compelling, often requires a more thorough examination of the media and public sentiment.
Probably the easiest way to explain this concept is through examples. By the time of President Obama's first inauguration on January 20, 2009, global equities had resumed their downtrend which was briefly interrupted during the previous two volatile up-and-down months since November 20, 2008. I was pretty sure that I should be buying something, since we already had numerous positive divergences in which many commodity producers had formed several lower highs. The situation was analogous to today, although even more so: 1) commodity producers had mostly bottomed at incredibly depressed levels two months earlier; 2) Chinese equities had already begun to quietly rebound; 3) most emerging markets remained under heavy pressure and were still trying to find their bottoms. Looking at internet sites and briefly watching some cable TV, it quickly became clear that the favorite whipping boys had become Brazil and Russia. Both of these were mentioned frequently, with an emphasis on how their currencies were being rapidly devalued, how their shares had plummeted, and how the fundamental problems in those countries probably wouldn't be resolved for many more years. This was, of course, the same media which eight months earlier in May 2008 had declared that because of decoupling, investors would continue to enjoy huge gains in Brazil and Russia for several more decades even if U.S. equities were in a bear market.
I was especially impressed by the repeated references to the sharply lower currencies. The mainstream financial media usually couldn't care less about exchange rates; whenever they emphasize something atypical, it usually means that they have even less understanding than usual about what is going on. Since Brazil and Russia mostly produce goods which are sold on the world market at current world prices, a lower currency means lower wages and similarly lower costs, thereby improving profit margins. However, this was never mentioned--either because they hadn't considered it, or more likely because the media almost never mention any positive facts about an asset which has recently been slumping. Paradoxically, the amount of attention dedicated to Brazil and Russia was at a level of intensity which hadn't been experienced since the previous spring when they were wildly positive about them, when they were trading at five times their early 2009 valuations. The only other emerging market which received unusually repeated attention in January 2009 was Pakistan, and that was because there was exciting video about investors throwing rocks at the primary exchange building.
If the media are discussing any topic far more frequently than usual, then it probably represents a trading opportunity. I took advantage of the bombardment of news about Brazil and Russia to purchase shares of RSX, a fund of Russian equities. I was considering also buying EWZ but I foolishly did not do so--perhaps because I had sold it short the previous year and maintained an irrational negative bias toward its rebound potential. Emerging markets overall performed strongly during the following year, with Russia and Brazil, in that order, being among the top performers. The only country with a greater percentage gain over the same period of time was--you guessed it--Pakistan, showing that a highly emotional occurrence such as rock throwing can trump less thrilling events like repeated devaluations and investor panic.
The situation today is obviously not identical to early 2009, partly because U.S. equities have generally been powerful in recent years rather than the reverse. However, some of the same principles apply. During the past few weeks, the mainstream media's coverage of India's financial markets has been unusually frequent and negative. The popular "China is slowing and its stock market is set to collapse" story started becoming boring near the end of the first half of 2013--just in time for its equities to begin to rebound--so they were looking for somewhere new and exciting to take over the role of current hopeless country. India fit the bill, with an overabundance of analysts ready to prattle on for an entire hour about why Indian civilization will never be the same again (see the link from earlier in this update; I'm not making it up). Investors who never gave a second thought about India were being treated to a deluge which reminded me in many ways of Brazil and Russia in January 2009.
More recently, Indonesian shares plummeted even more dramatically than those in India. It must be more difficult to locate financial analysts in that country, or maybe the media figured that Indonesia is more obscure emotionally to most viewers, because the coverage was far less intense. Vietnam has been slumping in recent weeks, but you would hardly know it from any of the cable TV channels. It's not just the size of the country that matters, although it's probably a factor; tiny Iceland received intense coverage when its central bank refused to pay loans to the U.K. and was forced to enter a form of bankruptcy. I would attribute some of this to Björk; if Indonesia or Vietnam had an equally popular entertainer then maybe it would have garnered more coverage of their financial situation. India obviously had a leg up after the release of "Slumdog Millionaire", which resonated with millions of people who otherwise didn't know much about that highly populated country in south Asia. With Brazil, of course there's "The Girl from Ipanema", and Russia will always have "To Russia with Love", not to mention the cartoon characters Boris and Natasha. If there's ever a Scandinavian crisis, I can bet that Sweden's stock market will be mentioned much more frequently than Norway or Finland, due to Abba and Ingmar (and Ingrid) Bergman. Turkey had been ignored until they had the uprising in Taksim Square. Any time you can get action-packed videos, regardless of the reason, the financial markets will simultaneously be covered more intensely. Partly this because if they're going to spend money to send photographers and reporters to the scene, then they may as well find out something about what else is going on nearby. In recent weeks, Taksim Square has been calm with little reason for international coverage, so the collapse for Turkish equities--did you know how TUR has been performing recently?--has been almost a complete non-story (sorry for inventing a new word).
Of course I'm being a bit tongue in cheek in the previous paragraph, but it's actually true that media coverage is often chosen based upon how viewers will resonate emotionally, rather than which story is financially more compelling. The financial markets in many Eastern European countries have periodically been among the best or worst performers, but these events are almost never discussed because the media assume that no one cares about what's happening in Poland unless something really dramatic has occurred. The entire continent of Africa is essentially assumed not to exist; while the financial markets in several African nations have been among the most volatile in recent years with some periodic powerful rallies, there are almost no exchange-traded funds or other investment vehicles which have been created to capitalize upon them. It's not because of market capitalization; many countries in other continents have much smaller populations and market caps. This is nothing new; after World War II, Japan's economic resurgence was dismissed for roughly four decades until their soaring real-estate prices and equity valuations could no longer be ignored. Until about twenty years ago, most of the rest of Asia wasn't being followed, while South America was similarly considered not to be news until that continent had some of the most impressive GDP growth numbers in recent decades.
When the term BRICs was popularized six years ago, it became a clear sign that investing in those countries had shifted from being almost completely ignored to becoming far too popular with average investors. Several weeks ago, as I had reported in one of my links, the person who invented the above acronym declared that these had become "hopeless" assets--something which I always look for as a confirming buy signal. If anything which was extraordinarily popular just over five years ago has become just as dramatically unpopular, then almost certainly the pendulum is about to swing convincingly in the opposite direction yet again. The tone of the media's coverage is often as useful as its frequency; whenever they declare that a particular state of affairs will continue "for many more years", "indefinitely", or "as far into the future as we can envision", then almost always we are very close to a major trend reversal.
It may seem odd to rely on how a particular piece of news is being covered by the media, rather than focusing on the story itself. However, as with much of life, with investing it is often the case that perception influences reality. If people who have been holding emerging-market shares for years--perhaps since they first bought them due to positive media frenzy in late 2007 or early 2008--then it shouldn't be surprising that the same investors would decide to finally throw in the towel when they see one negative story after another about China, Russia, Brazil, and India (roughly in that chronological order) in 2013. Those who are still holding BRICs shares either don't follow the news, have learned that the media are almost always most wrong whenever they are most insistent, or are rare contrarians. When the media ignore important developments in places including Turkey, Africa, and Eastern Europe, this also has an influence on present and future valuations. In the 1980s, people would have laughed at you if you would have suggested that investors would be paying attention to Brazilian, Russian, Indian, or even Chinese equities; today, if you were to theorize that within a decade people will be debating whether to invest in South Africa, Ghana, Nigeria, or Kenya, you would be equally ridiculed. The media both reflect and influence the collective opinions of millions of individuals; their primary goal is to increase their audience which is mainly achieved by understanding how to resonate emotionally with the public. Many investors make decisions which are partly subconscious, because they don't realize how dramatically they've been influenced by what they hear on a repeated basis. One of the most challenging aspects of being a contrarian investor is not simply identifying unpopular investment concepts, but realizing that almost no one will accept them because they go against everything they are being bombarded to believe by those whom they have learned to accept implicitly as authority figures.
Take care.
--Steve