The global stock markets have lost their mojo. Investors and wanna-be retiree’s have lost more than just their mojo, they’ve lost thousands of dollars and the prospect of retiring in style anytime soon. Like looking for a misplaced set of keys, the first order of business is to look for opportunities elsewhere to recoup occurred losses.
Obviously, the S&P 500 (AMEX: SPY) and Dow Jones (AMEX: DIA) with their 35% drops have lost some credibility as baby-boomers preferred investment choice. The search is on. Armed with a pen and highlighter we sift through stock tables and databases to find the next hot market, sector or country.
The only bull markets to be found however, is in financial bailouts and stimulus packages along with short ETFs. In fact, as of Sep. 30th, 2008, the 28 best performing ETFs are all short our double short ETFs issued by Rydex and ProShares. The iShares FTSE NAREIT Residential ETF (NYSEarca: REZ) is lucky number 29. REZ however has shed 30% in the past 25 days.
Looking for the next hot sector or fund was the mainstream investment strategy for decades. Morningstar built an entire business around backward looking performance ratings and helped create a society of performance chasers. Performance chasers are having a hard time as hot markets are short in supply. Now is the time to go bottom fishing and value hunting.
Gulf State ETFs
From a contrarian point of view, oil is starting to look attractive. From its all time high of about $147/barrel, oil has come down to below $70. Analyst forecasts of $200 fueled the race to issue ETFs linked to oil producing countries. July 2008 saw the launch of four new ETFs linked to Gulf States, so called frontier market ETFs.
The Africa ETF (NYSEarca: AFK), the WisdomTree Middle East Dividend Fund (Nasdaq: GULF), the PowerShares Frontiers Portfolio (Nasdaq: PMNA) and the Gulf States ETF (NYSEarca: MES) all lost between 30% and 40% since July.
High country allocations to the oil producing countries of Kuwait, United Arab Emirates and Qatar (Kuwait, United Arab Emirates, Qatar, Saudi Arabia and Oman make up the Gulf Cooperation Council) resulted in pronounced losses.
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Lower oil prices are not all bad for the Gulf Cooperation Council (GCC) though. Cheaper oil along with a slowdown in local and international financing could do what the region’s central bankers have so far failed to: rain in the region’s double digit inflation. The GCC countries continue to book budget surpluses as long as the price of oil does not drop below $50 / barrel.
Israel
Ronnie Moas, President of Standpoint Research recommends taking a look at Israel. Mr. Moas still sees many overvalued stocks in the iShares FTSE/Xinhua China ETF (NYSEarca: FXI), but believes that the Israeli market in its entirety has been oversold.
Banks have also been sold indiscriminately even though Israel has negligible exposure to the problems plaguing the U.S., Asia and Europe. Israeli GDP grew by 5% in 2007 and will be up 4% in 2008. GDP per capita is more than $30,000 and places Israel in the top 25 in the World on that measure. The biggest risks to Israel’s economy are terrorism, security and geopolitical.
The two ETFs tracking the Israeli market are the iShares MSCI Israel ETF (NYSEarca: EIS) and NETS-TA 25 (NYSEarca: TAV). The top 10 holdings tie up about 65% of EIS and TAVs assets. Health care accounts for 27% of the fund, followed by materials (21%) and financials (18%). TEVA Pharmaceuticals (Nasdaq: TEVA) is now selling at 13x 2009 estimates and Checkpoint (Nasdaq: CHKP) at 10x.
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“There will be a correlation between the U.S. market and EIS shares, in other words, I am looking for EIS to rise by a factor of 1.4x the U.S. market. On the Downside, I think it will move by a factor of 1.0x”, Mr. Moas states.
Emerging Markets
Of course you don’t have to limit yourself to any one small country or region. Dare to think big. Max Rottersman reports that the iShares MSCI Emerging Markets ETF (NYSEarca: EEM) is in high demand. EEM saw net creations of $3.7 billion from September 18th to October 8th. EEM seems to always go up more than the U.S. market and down more than the U.S. market. To you this means that you’ll smoke your neighbor’s 401k account the next time (whenever that will be) the market goes up. read more
If you are looking to capitalize on a bounce in emerging markets, consider the Vanguard Emerging Markets ETF (NYSEarca: VWO). An apple to apples comparison with EEM reveals that VWOs expense ratio is 0.49% lower. In addition, EEM holds only 325 of the 779 stocks in the index while VWO holds 822. This may explain EEMs tracking error. In 2007 it lagged the index by 4.8%.
At the end of 2007 talking heads on CNBC, Fox and the likes announced the end of the correlation between global markets. “De-coupled” was the in-term of the moment. It turns out that Wall Street’s wisdom was more de-coupled from reality than one regions market from the next.
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