Stay Cool
By Yiannis G. Mostrous
FALLS CHURCH, Va.–Selling has resumed in the markets, and it looks like we’re in for another leg down. As I discussed last week, profit-taking is likely to persist for a while longer (see SRI, 7 March 2007, Tempting):
Keep in mind that Asian market corrections tend to last longer than those for other regions, and equities decline usually by an average of 11 percent peak-to-trough. During May 2006, Asian equities declined 17.5 percent.
Investors should remain on the sidelines. Note that my working assumption is that long-term readers have followed the guidance I’ve set out since the end of December—and have gradually booked profits and trimmed positions. I also hope that readers were prudent enough to establish positions in some of the hedge ideas I’ve recommended, as they’ll prove most useful during a prolonged and vicious selling period.
That said, investors who would like to add to positions in Portfolio recommendations at lower valuations should focus on the following markets, in order (for both countries and sectors): Korea, Malaysia, Russia (telecom, energy), Singapore (telecom, banking, industrial, housing), Europe (pharmaceutical, media, banking, insurance), Hong Kong, Japan (industrial, banking), India (pharmaceutical, banking), China (consumer, power), Taiwan and Macau.
I’m currently looking for some value in the markets, and it looks like we’ll be able to make some additions to the Portfolio in upcoming weeks.
For the record, there’s a credible bear case to be made, one I’ve addressed in previous issues (see SRI, 10 January 2007, Fiddler On The Roof). To review, that argument calls for an economic slowdown in the US, leading to a recession as the housing market collapses under the weight of the subprime mortgage fiasco. Ultimately, under this scenario we’re looking at 1 percent GDP growth in the US this year and next.
There’s a strong probability that this outcome will come about, but I’m not ready to endorse it just yet. I detailed my view on housing last week, and I stand by it: The process will lead to a risk adjustment by the market and reduced liquidity but not a credit-crunch crisis.
I still expect the US economy to slow to a 2 percent annualized growth rate during the first half of 2007, and I anticipate economic activity will start to pick up in the second half of the year.
Finally, despite all the grand, esoteric market talk out there (i.e., subprime lending, the Japanese yen carry trade, the credit crunch and the like), the most-important risks for the global economy and the markets are geopolitical uncertainty and domestic policy mistakes (see SRI, 10 January 2007, Fiddler On The Roof). I hope they remain risks; otherwise, the subprime threat would seem like a big joke.
SRI Mechanics
I often include some notes regarding how I view the investment process. Long-term readers who have a grasp on how we do things can take a break, but those who are unclear on such issues should read on.
The SRI Portfolio has been constructed around the view that domestic economic demand and investment are driving Asia’s economic ascent. The areas I’m looking at for investment ideas continue to be property, infrastructure, financials, retail, telecom and utilities.
I’ve noted repeatedly that the Portfolio should be viewed as a whole rather than an assortment of stocks. It’s my hard-earned assumption that investors seldom follow such advice, so I occasionally offer some direction in an effort to assist with the decision-making process.
That said, Portfolio recommendations should be taken at face value, in the sense that, if a stock is recommended as a buy and trades below the price indicated in the Portfolio tables, then the recommendation stands for new readers as well as longer-term ones.
Occasionally, I recommend–as I did quite often toward the end of 2006 and the beginning of 2007–that long-term readers take profits off the table. In December, I wrote:
I’d like to make a couple clarifications. Regarding mechanics, I expect investors to look at their profits (i.e., how much money they’ve made above the initial investment) and then calculate how many shares they need to sell in order to take these profits off the table. Second, if you’re not a “long-term reader,” chances are you probably don’t have profits to take from the specific stock; you’re unaffected by the recommendation. The fact that I haven’t advised selling the stock outright indicates that it remains a good long-term holding.
SRI has one main portfolio, the Long-Term Holdings, and an alternative, the Alternative Holdings-Permanent Hedges. Investors should look first to the Long-Term Holdings for asset allocation in the markets I cover.
In the Alternative Holdings-Permanent Hedges Portfolio, readers can track permanent hedges and shorter-term recommendations. It also includes companies I’ve recommended for longer-term or more fundamental reasons but haven’t added to the Long-Term Holdings; for example, Lukoil provides extra exposure to a favored theme.
On the left-hand side of the Web site’s main page, under the title “Portfolio Performance,” readers can get a snapshot of the Portfolio’s return compared to other major indexes.
On the Portfolio page, you can click on the asterisk next to each holding to review the original commentary and recommendation. We plan to enhance the Portfolio table with extra features, and we welcome comments and suggestions.
FALLS CHURCH, Va.–Selling has resumed in the markets, and it looks like we’re in for another leg down. As I discussed last week, profit-taking is likely to persist for a while longer (see SRI, 7 March 2007, Tempting):
I maintain the view, detailed last week, that it was a profit-taking incident. Still puzzling–assuming it stops here–is the short duration of the selloff. It looks like investors were eager to book profits and to reduce risk as soon as possible–getting it over with and moving forward.
It’s, therefore, become very tempting to buy the market. Last week’s action wiped out USD1.5 trillion of the world’s equity markets’ capitalization–reducing valuations to more-acceptable levels at the same time.
I’ll resist this temptation for now. The relative brevity of the selloff suggests this may be, in a sense, too much of a good thing. As the table below indicates, corrections–particularly where the context is Asia–tend to last more than a week.
Keep in mind that Asian market corrections tend to last longer than those for other regions, and equities decline usually by an average of 11 percent peak-to-trough. During May 2006, Asian equities declined 17.5 percent.
Investors should remain on the sidelines. Note that my working assumption is that long-term readers have followed the guidance I’ve set out since the end of December—and have gradually booked profits and trimmed positions. I also hope that readers were prudent enough to establish positions in some of the hedge ideas I’ve recommended, as they’ll prove most useful during a prolonged and vicious selling period.
That said, investors who would like to add to positions in Portfolio recommendations at lower valuations should focus on the following markets, in order (for both countries and sectors): Korea, Malaysia, Russia (telecom, energy), Singapore (telecom, banking, industrial, housing), Europe (pharmaceutical, media, banking, insurance), Hong Kong, Japan (industrial, banking), India (pharmaceutical, banking), China (consumer, power), Taiwan and Macau.
I’m currently looking for some value in the markets, and it looks like we’ll be able to make some additions to the Portfolio in upcoming weeks.
For the record, there’s a credible bear case to be made, one I’ve addressed in previous issues (see SRI, 10 January 2007, Fiddler On The Roof). To review, that argument calls for an economic slowdown in the US, leading to a recession as the housing market collapses under the weight of the subprime mortgage fiasco. Ultimately, under this scenario we’re looking at 1 percent GDP growth in the US this year and next.
There’s a strong probability that this outcome will come about, but I’m not ready to endorse it just yet. I detailed my view on housing last week, and I stand by it: The process will lead to a risk adjustment by the market and reduced liquidity but not a credit-crunch crisis.
I still expect the US economy to slow to a 2 percent annualized growth rate during the first half of 2007, and I anticipate economic activity will start to pick up in the second half of the year.
Finally, despite all the grand, esoteric market talk out there (i.e., subprime lending, the Japanese yen carry trade, the credit crunch and the like), the most-important risks for the global economy and the markets are geopolitical uncertainty and domestic policy mistakes (see SRI, 10 January 2007, Fiddler On The Roof). I hope they remain risks; otherwise, the subprime threat would seem like a big joke.
SRI Mechanics
I often include some notes regarding how I view the investment process. Long-term readers who have a grasp on how we do things can take a break, but those who are unclear on such issues should read on.
The SRI Portfolio has been constructed around the view that domestic economic demand and investment are driving Asia’s economic ascent. The areas I’m looking at for investment ideas continue to be property, infrastructure, financials, retail, telecom and utilities.
I’ve noted repeatedly that the Portfolio should be viewed as a whole rather than an assortment of stocks. It’s my hard-earned assumption that investors seldom follow such advice, so I occasionally offer some direction in an effort to assist with the decision-making process.
That said, Portfolio recommendations should be taken at face value, in the sense that, if a stock is recommended as a buy and trades below the price indicated in the Portfolio tables, then the recommendation stands for new readers as well as longer-term ones.
Occasionally, I recommend–as I did quite often toward the end of 2006 and the beginning of 2007–that long-term readers take profits off the table. In December, I wrote:
I also advise long-term readers to take profits from ICICI Bank and Dr. Reddy’s Laboratories–without selling the stocks outright. Take any gains you have and leave the initial capital invested.
I’d like to make a couple clarifications. Regarding mechanics, I expect investors to look at their profits (i.e., how much money they’ve made above the initial investment) and then calculate how many shares they need to sell in order to take these profits off the table. Second, if you’re not a “long-term reader,” chances are you probably don’t have profits to take from the specific stock; you’re unaffected by the recommendation. The fact that I haven’t advised selling the stock outright indicates that it remains a good long-term holding.
SRI has one main portfolio, the Long-Term Holdings, and an alternative, the Alternative Holdings-Permanent Hedges. Investors should look first to the Long-Term Holdings for asset allocation in the markets I cover.
In the Alternative Holdings-Permanent Hedges Portfolio, readers can track permanent hedges and shorter-term recommendations. It also includes companies I’ve recommended for longer-term or more fundamental reasons but haven’t added to the Long-Term Holdings; for example, Lukoil provides extra exposure to a favored theme.
On the left-hand side of the Web site’s main page, under the title “Portfolio Performance,” readers can get a snapshot of the Portfolio’s return compared to other major indexes.
On the Portfolio page, you can click on the asterisk next to each holding to review the original commentary and recommendation. We plan to enhance the Portfolio table with extra features, and we welcome comments and suggestions.