Making Money Alert
Emerging Markets Bursting at the Seams
10/13/2010
Today’s action in stocks saw more of the same buying pressure that we’ve seen since the beginning of September. U.S. stocks have been up big of late and, since falling to its August lows, the S&P 500 Index is up about 13%. That’s impressive, but not as much as the performance of stocks in the emerging markets.
Stocks in this ultra fast-paced market segment are getting so fat with gains that they have been bursting at the virtual seams, as you clearly can see by the chart below. Since hitting its August low, the iShares MSCI Emerging Markets Index Fund (EEM) has surged 18.5%. The fund now is trading at multi-year highs, and right about where it traded way back in June 2008 -- before the global meltdown kicked in.
Nearly as impressive a recent run can be seen in Chinese stocks, with the iShares FTSE/Xinhua China 25 Index (FXI) now up 17% from its August low.
So, what’s the explanation for the recent gains in emerging markets and China? The bottom line is growth expectations. While the United States is expected to see gross domestic product (GDP) growth of around 2% in 2011, emerging markets are expected to grow about 6.5% next year. That’s a whopping difference, and it’s definitely enough of a reason to explain the flight of capital into the hottest emerging markets.
According to research firm EPFR Global, investors put some $6 billion into emerging market equity funds during the first week of October. This was the best week for emerging market fund inflows since late 2007, and the second best week on record, according to EPFR.
Money always seeks the highest returns, and right now, emerging markets feature those high returns.
Currently, investors following my Successful Investing advisory service are holding some hefty emerging market gains. If you’d like to find out how you, too, can ride the emerging market wave, then check out Successful Investing today.
High-Frequency Trading in "60 Minutes"
On Sunday, iconic TV news show “60 Minutes” did a very interesting segment on the phenomenon known as “high-frequency trading.” The piece gave a detailed account of the fact that most stock trades in the United States are no longer made by actual human traders. Most trades actually are placed by robot computers capable of buying and selling thousands of different securities in the time it took you to read this sentence.
The “60 Minutes” segment showed how supercomputers actually decide which stocks to buy and sell, based on the proprietary, and highly secretive, instructions programmed into them by Wall Street math wizards. The broadcast also showed how high-frequency trading played a distinct role in exacerbating the “flash crash” that took the Dow down some 600 points in about 15 minutes on May 6.
I think that the “60 Minutes” story is a must watch for every investor, as the producers did what I thought was a very good job of covering the issue from several important angles. If you have any money in the market, or if you ever plan to have any money in the market, then watching the “60 Minutes” piece is time well spent.
Thoughts on "The Big Picture"
On Saturday, Oct. 10, I did what was, in my opinion, one of the best radio shows that I have ever done. The title of the show was “The Big Picture.” The one-hour broadcast let us take a step back from the day-to-day machinations of the market and focused on some of the overriding issues facing both the U.S. and global economies. We also looked at the challenges and dangers ahead for the financial markets, and we examined the current and past political climates that led to our nation’s fiscal mess.
During the show, I even talk about the new film “Wall Street: Money Never Sleeps,” which if you haven’t seen already, I strongly recommend. The film does a great job of depicting the collusion between the big boys on Wall Street and the government during the 2008 financial meltdown. The film is largely accurate, even down to the then-Treasury Secretary Hank Paulson look-alike.
The big-picture issues discussed in last Saturday’s show include the whole financial mess perpetrated by the real estate meltdown, and how a similar breakdown in the bond market, and with state and federal budgets, could spark another major wave of fiscal pain.
I strongly encourage you to listen to a replay of this show, as it will really give you a sense of what I think are the challenges and opportunities going forward. To listen to any of my past broadcasts, all you have to do is go to my radio show archive.
ETF Talk: Readying a Leveraged Short Play
The stock market is in the unusual situation of rising in response to bad news. I personally have my doubts about how much longer this odd trend can continue. For those of you who want to be able to profit if the market falls, I suggest that you familiarize yourself with exchange-traded funds (ETFs) that are designed to rise when equities pull back. One fund that is intended to let you profit twice as much as the market dips is the ProShares UltraShort S&P 500 (SDS).
Let me tell you right now that I am not recommending this fund and I do not expect the market to crash the way that it did during the fall of 2008. But right now, unemployment is high and hovering close to 10%, consumers are wary about spending and many corporations are boosting profits by cutting costs rather than growing revenues. None of those developments typically is good for the market. One big factor that is credited with aiding the market is the Federal Open Market Committee’s (FOMC) stated commitment to use low interest rates and other policies to prop up a struggling U.S. economy.
At some point, the Fed no longer will be able to assuage investors. When this finally happens, stock prices may well retreat. To prepare, you’ll want to be ready to take a short position using an inverse ETF. If you really are convinced that the market will drop sharply, SDS lets you follow your convictions by doubling your potential reward. Of course, you also will assume twice the risk.
The ProShares UltraShort S&P 500 seeks a single-day return of -200% of its target index, the S&P 500. The fund includes a disclaimer that explains that it compounds daily returns, which may cause the ETF’s performance to differ in amount and possibly direction from the target return for the same period. To be sure, the chart below shows the importance of buying SDS at the right time to avoid riding it in the wrong direction.
Nonetheless, there are plenty of reasons to be concerned about the market. U.S. stocks fell yesterday morning as investors grew jittery about minutes of the last FOMC meeting slated for release in the afternoon, only to rally when the Fed confirmed it would keep interest rates low and take other steps to spur the economy. Despite the Fed’s policies, worries are growing about China's efforts to cool its economy and its resistance to allow the appreciation of its currency, the yuan.
Next week's meeting in South Korea of ministers and central bank governors from the group of 20 industrial and developing nations will be the next venue for policymakers to discuss currency valuations that distort trade. I do not expect any genuine progress to take place, based on China’s past intransigence.
Other negative economic indicators are giving me pause, too. The International Monetary Fund (IMF) is forecasting rising currency tensions and sharply reduced economic growth. The U.S. Department of Labor announced on Oct. 10 that the United States lost 95,000 jobs in September. And HSBC's quarterly emerging market index reported last week that the rate of growth in emerging markets fell in the third quarter for the second consecutive quarter. An old investor’s saw is that the market always climbs a wall of worry. Well, those worries are mounting.
If you want advice from me about which ETFs to buy and to sell, I encourage you to sign up for my ETF Trader service by clicking here. As always, I am pleased to answer any of your questions about ETFs, so do not hesitate to contact me if you have one. To send your question to me, simply click here. You may just see your question answered in a future ETF Talk.
Rejoice in Discovery
“Isn’t it sad to go to your grave without ever wondering why you were born? Who, with such a thought, would not spring from bed, eager to resume discovering the world and rejoicing to be part of it?”
--Richard Dawkins
The eminent scientist, author and eloquent advocate of reason certainly has keyed into the incredible passion that lies at the heart of living a learned life. The quote here should give us all cause for reflection on the importance of a healthy thirst for lifelong knowledge.
Wisdom about money, investing and life can be found anywhere. If you have a good quote you’d like me to share with your fellow Alert readers, send it to me, along with any comments, questions and suggestions you have about my radio show, newsletters, seminars or anything else. Click here to ask Doug.
P.S. My publisher, Eagle Financial Publications, is now on Facebook. Click here to see our page and be sure to become a fan when you get there.