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An Asian Market to Watch
June 10, 2010
The snapback in global markets has been universal as China’s dealt with overheating issues, the EU’s debt woes have grown larger and the strength of the U.S. recovery is questioned. But while many markets have posted double-digits drops, one market has managed a double-digit gain—Indonesia.
This chart shows the year-to-date performance of the major developed (G7) and emerging (E7) markets we track as of last Friday, June 4.
So far this year, China’s been the worst performer, down more than 22 percent with most of that coming in just the past three months. Other major markets like Italy (down 19 percent), France (down 12 percent) and Brazil (down 10 percent) have struggled as well.
In contrast, the Jakarta Composite Index has shot up 9.5 percent the past three months and 11.4 percent for the year. The only other E7-G7 market that is even positive for the year is Pakistan with a 2.7 percent gain.
So why has the 2010 pullback skipped this Asian nation?
There are two main reasons. The first is the strength of the domestic economy we touched on several weeks ago (Indonesia’s Good Position). A doubling of the middle class and rising urbanization over the past few years have led to strong GDP growth.
Second, Indonesia is also the world’s largest thermal coal exporter and its two major export partners—China and India—largely avoided the recession. Each country imported more than 50 kilotons of thermal coal in 2009 and both are expected to see that figure increase in 2010. Despite a slowdown in China, Deutsche Bank says that China and India are going to transform the demand landscape for thermal coal over the next decade.
Indonesia’s also the world’s largest producer/exporter of palm oil, which has seen increased demand as governments search for alternative fuel sources.
As the aftershocks of the credit crisis continue to spread, Indonesia’s established itself as a market to keep an eye on.
The Jakarta Composite Index is Indonesia’s benchmark index of all the stocks listed on the regular board of the Indonesia Stock Exchange. The Shanghai A-Share Stock Price Index is a capitalization-weighted index. The index tracks the daily price performance of all A-shares listed on the Shanghai Stock Exchange that are restricted to local investors and qualified institutional foreign investors. The index was developed with a base value of 100 on December 19, 1990.
Bouncing Back After May?
June 07, 2010
May was a brutal month for stocks. The 7.9 percent decline in the Dow ranks as the sixth worst in history but a report from JP Morgan shows that could bode well for the summer.
| Price Performance | ||||||
|---|---|---|---|---|---|---|
| Rank | Year | May perf (4/30 to 5/31) | June perf (5/31 to 6/30) | June-July perf (5/31 to 7/31) | ||
| 1 | 1940 | -21.7% | 4.9% | 8.5% | ||
| 2 | 1932 | -20.3% | -4.2% | 21.3% | ||
| 3 | 1931 | -15.0% | 16.9% | 5.4% | ||
| 4 | 1899 | -12.4% | 4.3% | 9.2% | ||
| 5 | 1915 | -9.4% | 7.8% | 16.2% | ||
| 6 | 2010 | -7.9% | -- | -- | ||
| 7 | 1962 | -7.8% | -8.5% | -2.5% | ||
| 8 | 1956 | -7.4% | 3.1% | 8.3% | ||
| 9 | 1907 | -7.4% | 2.4% | 1.0% | ||
| 10 | 1929 | -6.9% | 11.5% | 16.9% | ||
| Average | -12.0% | 4.2% | 9.4% | |||
| Source: JP Morgan and Bloomberg | ||||||
The table shows the 10 worst May declines in Dow history followed by subsequent June and July performance. Combined, the average decline for the 10 worst Mays was 12 percent, then a 13.6 percent average bounce back (4.2 percent in June, 9.4 percent in July) over the next two months.
The Dow has traded up during June-July 8 out of 9 times (89 percent) when following one of the worst Mays in terms of performance. The only year to not see a June-July bounce back was 1962 when the market dropped an additional 11 percent.
On average, the Dow has traded positive 59 percent of the time in June-July dating back to 1897.
We haven’t seen anything resembling a bounce back yet but market hangovers from a bad May have tended to linger eight days into the following month. The worst was in 1932 when the market didn’t recover well into July.
While historical data certainly doesn’t ensure how June-July 2010 will shake out, statistics like these can help our portfolio team take advantage of market cycles.
The Dow Jones Industrial Average is a price-weighted average of 30 blue chip stocks that are generally leaders in their industry.
Is the Dollar a Zombie?
June 03, 2010
The title of this entry is the same as the theme for the spring meeting of the Committee for Monetary Research and Education (CMRE) in New York in late May. CMRE is an educational group made of economists, journalists, think-tank researchers, investors and others interested in the principles of sound money.
Given the possible ramifications of the massive sovereign debt loads in western Europe, a better title for CMRE might have been “Is the Euro a Zombie?”
Pessimism prevailed at the podium. Here’s a sampler from some of the speakers.
Market historian Bob Hoye: The people in charge of financial policy reform know little about markets. The stock market rebound from March 2009 low was, historically speaking, a classic bounce-back from a financial crash, and it had to come to an end. Senior gold stocks will see much higher value in the future, and the Dow will be much lower. Junior gold stocks in the future will be much like tech stocks of early 1990s – the big party for that sector is yet to come
Investment manager David Tice: There will be higher interest rates and lower standards of living around the world, and higher gold prices. The inflation vs. deflation debate is yet to be settled. The big question is "What happens when people no longer trust their money?"
Former U.S. Comptroller General David Walker: Government is too big, it has promised too much and it has waited too long to try to fix its problems. The U.S. can’t grow its way out of the current troubles, and it can’t inflate its way out. Reliance on foreign bankers (50 percent of U.S. public debt is held overseas) is not in the nation’s long-term interest.
Heritage Foundation’s Bill Beach: Many governments enjoy creating dependent populations, and part of the dependency culture in the U.S. is that a high percentage of the population pays no federal taxes. This percentage is rising. To pay for growing entitlement programs, the U.S. government will likely turn to more deficit spending in the medium term and much higher levels of taxation in the longer term.
Barron’s columnist Jack Willoughby: The European monetary union can’t hold over time because there is not enough political integration in the eurozone. The U.S. is heavily exposed to the euro crisis through hundreds of billions of dollars worth of currency “swap lines” that the Federal Reserve made available to Europe.
Now I’m not necessarily endorsing any of these viewpoints, but they are well-thought-out by experienced observers, and they are worth offering up for discussion to a broad audience.
What do you think? Email us your thoughts at webmaster@usfunds.com.
The Dow Jones Industrial Average is a price-weighted average of 30 blue chip stocks that are generally leaders in their industry.
Show Me the Money
May 11, 2010
One of the major headwinds facing the global economic recovery and financial market recovery is contracting money supply.
As can be seen in the chart below, U.S. money supply is growing at an anemic 1.5 percent on a year-over-year basis. In Europe the situation is even worse—money supply there is actually contracting.
We like to equate this phenomenon to trying to run a marathon using only one lung—it will both slow you down and leave you gasping for air. Frank Holmes, our CEO, says it another way—“No money, no honey” and “No finance, no romance.” Without a growing money supply to lube the gears of commerce, the economy and the financial markets suffer.
There was a lot of concern regarding last week’s trading action, but these short-term factors often just distract from the bigger and more important macro issues. We really shouldn’t be too concerned over a “fat-finger” trade—a “skinny finger” when it comes to money supply, however, is something to worry about.
The struggling economies in the eurozone—Spain, Ireland and Greece among them—carry more than $2 trillion in external debt as a group. Generating the kind of growth needed to get out from under that collective burden is not impossible, but it is certainly more difficult when money supply growth is negative.
As we navigate through these turbulent markets, we will continue to use a matrix of statistical models to monitor market volatility and money flows. As a result, we may at times maintain higher-than-normal levels of cash.
This contribution from director of research John Derrick originally appeared in the May 7 version of our Weekly Investor Alert.
M2 Money Supply is a broad measure of money supply that includes M1 in addition to all time-related deposits, savings deposits, and non-institutional money-market funds. M3 money supply is the broadest monetary aggregate, including physical currency, demand accounts, savings and money market accounts, certificates of deposit, deposits of eurodollars and repurchase agreements.
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.
Greed Isn’t Good?
March 26, 2010
The most quoted line in the 1980s film Wall Street goes “Greed is good,” but fascinating new research suggests otherwise.
An Economist article highlights the work of researchers in Canada who wanted to measure how much different societies value fairness in their dealings with others.
They set up an experiment of volunteers from 15 small-scale societies around the world, among them the Hadza (nomads in Tanzania), Dolgan (Colombian fishermen) and Sanquianga (hunters in Siberia).
Participants played two money games. In the first, involving two players who did not meet, one was given an amount of money and could decide how much (if any) to give to the other. The researchers then tweaked the rules to add a punitive element – the second player had to decide ahead of time how much he would accept, and if the offer wasn’t close enough, he turned it down and both players ended up empty-handed.
The researchers discovered that societies with little market integration (expressed in terms of how they meet their food needs) were the ones where fairness counted the least. The greater the market integration, the more fairness played an important role in the exchange between the players.
The graphic plots the results. The Hadza nomads had the least market interaction and thus the least emphasis on fairness. The Sanquianga hunters in Siberia had among the highest levels of market integration, and they exhibited a high degree of fairness in how they played the money game.
This experiment may shed some light on how we see commerce evolve in the future. For example, many emerging nations that were once isolated economically are closely linked with developed countries in the West through globalization. How will their various notions of fairness evolve in these interactions?
If governments and corporations don't play fair, they could be marginalized in the global market. A good example of this is Venezuela, where the socialist Chavez government has nationalized the assets of foreign oil companies, supermarket chains and other businesses. This has damaged the country’s reputation and consequently its economic growth prospects.
By clicking on the link, you will be directed to the Economist website. U.S. Global Investors does not endorse all the information supplied by this website and is not responsible for its content.
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