FALLS CHURCH, Va.–Last month (see Silk, 29 October 2008, Asia’s Bargain Bin) I predicted that economies around the world would suffer more before things started to improve.

This is one time I hate being right. My prediction remains in place and is still playing itself out, unfortunately.

The preliminary figure on Korean exports, one of the earliest available data points on global manufacturing activity, is showing a drop of 14.3 percent year-over-year; the most recent numbers for Taiwan indicate a 6 percent drop. Export orders from Hong Kong and China dropped 22.8 percent year-over-year in October after a 10.8 percent decline in September.

The weakness isn’t an Asia phenomenon–economic activity around the world will be ugly in the final quarter of 2008. That portends a substantial economic slowdown in 2009.

But economic numbers, like the markets, are stretched to the downside, and it shouldn’t be too shocking to receive a positive surprise in economic activity early in 2009. This may not be the economic bottom, but it should put a floor under the extremely distressed global economy.

But the markets are supposed to be predictive, looking out six months or more. They’re supposed to turn around before economies do. It remains to be seen if market participants think that most of the bad news is factored into stock prices, we could see a strong end of the year rally.

However, even if the rally gets going in a big way, a potential retest next year is more than likely. That said, there are two indicators I usually follow that are currently at very interesting levels.

First, the CRB Index, a measure of global commodity prices, is down almost 50 percent from its peak in July, as shown in the chart below. Commodities tend to peak first in a down cycle, usually well ahead of the market bottom. The usual timing is between three and five months before the market finds a legitimate floor.

Financial crisis-related surprises notwithstanding, based on this metric the timing of a turnaround should be about now.  

The second is the Economic Cycle Research Institute (ECRI) Weekly Leading Index of US indicators. As the chart below depicts, the ECRI Weekly Leading Index recently hit 40-year lows. Although there’s nothing to say that it can’t go lower, its current extreme levels provide some hope for a turnaround.

Usually the index turns upward relatively soon after the market does, about four to six weeks, and when it does it’s often a good signal for a legitimate rally. If the current market strength has any validity, the ECRI Weekly Leading Index should be turning soon.

In Asia, the interesting observation is that Shanghai has outperformed the S&P 500 since mid-September by 25 percent. And local Chinese investors seem to be getting a little more comfortable in the wake of the government’s announcement of a significant stimulus package. As a result, the Chinese domestic market is up 7 percent since its 28 October bottom.

As always, I may be adding stocks to the Portfolio in between issues given the market volatility. Selling recommendations can also occur in irregular intervals.

For now, there are no changes in the Portfolio. New readers should consult the most current issues for the latest new additions to the Long-Term Holdings portfolio.

And always check At These Levels for my latest observations on news and events.

The investment process is constant. If you’d like to add to your positions in portfolio recommendations or allocate new funds in a diversified way, focus on the following markets, in order (for both countries and sectors). Consult the Portfolio tables for details.

• China (Consumer, Insurance, Banks, machinery, port, coal, e-commerce)
• Hong Kong (real estate, banking)
• Russia (energy, telecommunications)
• India (pharmaceuticals)
• Taiwan (telecommunications)
• Japan (banking)
• Philippines (telecommunications)
• Indonesia (Telecom)
• Singapore (Industrial)
• Vietnam (ETF)
• Cambodia (casino/hotels)
• Macau (casino/hotels)