I will be looking to move out of our emerging market stock market bets over the coming weeks, and diversify into some commodity and currency plays. Asian markets, in particular, have been dragging, so I am looking to lighten up in that region. Hong Kong’s Hang Seng Index broke down through the 21,000 level, so I am recommending that you SELL your remaining position in the iShares MSCI Hong Kong Index (EWH). I also expect to recommend strategic exits from a number of your higher-risk stock positions, including Mechel (MTL), whose stop I have tightened to $18.75, as well as India’s ICICI Bank (IBN). In the meantime, I have moved both of these positions to a HOLD.
This week’s Global Bull Market Alert pick, a bet on sugar through the iPath DJ AIG Sugar TR Sub-Idx ETN (SGG), is your first bet on a global commodity since your highly profitable trade in copper earlier this year.
Right now, sugar is caught in a perfect storm, its price driven by both fundamental factors and speculative fervor. On a fundamental level, sugar prices are soaring because the world is consuming more sugar than farmers are producing. Estimates on global production for the 2009-10 season are continually being revised down, almost on a weekly basis. Both Brazil and India, the world’s two largest producers, have suffered from poor weather, which has curtailed their production considerably. Production in Russia, Mexico, China and the EU has also fallen, as the EU has swung from exporter to importer this past year.
At the same time, global sugar inventories are close to record lows and food companies are scrambling to secure ever-tightening supplies. According to the International Sugar Organization, world demand for sugar may exceed supply by 5 million tons in 2009-2010, after a record deficit of 7.8 million tons in 2008. And when production falls short of consumption for two years in a row, inventories become seriously depleted and the price of sugar tends to soar.
The result? U.S. sugar supplies are set to drop 43% from today’s levels by September 2010. The U.S. government estimates that sugar stocks will end next fiscal year, September 2010, with about 24 days’ supply, compared with 63 days in 2007. Recently, Kraft Foods, General Mills, Hershey and Mars all warned of a severe shortage of sugar used in chocolate bars, breakfast cereal, cookies and chewing gum. In London, the prices of candy bars have risen from 59 to 69 pence just in the last month.
Sugar is clearly a momentum play. Last week, raw sugar futures for March delivery rose 4.4% to 25.92 cents a pound in New York. The most active contract hit 26.15 cents — the highest price since February 1981. Yet, sugar is still 60% below its all-time high of 66 cents in 1974. And adjusted for inflation, sugar would have to hit a mind-boggling $2.75 — an 11x increase from its current levels.
So BUY iPath DJ AIG Sugar TR Sub-Idx ETN (SGG) at market today and place your initial stop at $61.40. There are no options on this one. As a momentum play on commodities, you can expect considerable volatility in this position.
Portfolio Update
The iShares MSCI BRIC Index ETF (BKF) fell back last week, as the big four BRIC markets — Brazil, Russia, China, and India – all pulled back. With its large Chinese and Indian exposure, I am moving BKF to a HOLD.
Market Vectors Brazil Small-Cap ETF (BRF) pulled back sharply this week. Brazil’s economy is expected to expand this quarter at an annualized rate of 9%, with unemployment falling and income on the rise. The booming economy has given rise to a burgeoning middle-class — over the last four years, Brazil’s middle-class has grown by 24% — and the country is becoming one of the world’s premier consumers of luxury goods. Your bet on Brazilian consumers remains a BUY. Raise your stop to $39.80.
The iShares MSCI Chile Investable Market Index (ECH) hit yet another high of $54.39 on Friday. Chile’s central bank said on Tuesday it held its benchmark interest rate steady at 0.50% for a fifth month. The bank reiterated that it would hold the rate steady at the “minimum” level until at least the second quarter of 2010. ECH remains a BUY.
The iShares MSCI Israel Cap Invest Mkt Index (EIS) fell back last week. But with the blue-chip Tel Aviv-25 closing up 0.9% overnight, Israel remains a BUY.
SPDR S&P Emerging Markets Small Cap ETF (EWX) fell back this week, along with emerging markets in general. Given its unusually large exposure to Asia, I am temporarily moving EWX to a HOLD.
ICICI Bank Ltd. (IBN) fell this week, completing its steepest weekly slide in four weeks. ICICI Bank, India’s second-largest lender, lost 2% after the Basel Committee on Banking Supervision said banks should increase the quality of the capital they hold by the end of 2012 to cope with losses. I’ll be looking for a good exit point on this position on any bounce. IBN is now a HOLD.
Mechel (MTL) soared 9.2% this past week, as it recovered from its highly oversold position. I’m getting edgy about the technical behavior of this stock. Raise your stop to $18.75 and expect to get stopped out unless the stock really takes off. MTL is a HOLD.
Trina Solar Ltd. (TSL) jumped 6.7% the first week in the portfolio in spite of the fact that its rival competitor LDK solar revealed liquidity concerns. TSL remains a BUY. Raise your stop to $41.50.
Vimpel-Communications (VIP) jumped 7.1% this week, bouncing back from its highly oversold position. Shareholders also approved a payment of approximately $0.32 per American Depositary Share (ADS) last week. With Renaissance Capital maintaining its $31 price target on the stock, VIP remains a BUY.
P.S. With the help of global financial stimulus, a number of global markets have rallied from their lows of 2008, providing investors who were invested in the right markets at the right time with healthy returns. Although the question remains — how do you become one of those investors? For an answer, I encourage you to attend The World MoneyShow in Orlando, February 3-6, 2010, at The Gaylord Palms Hotel and Convention Center, to hear more than 60 leading experts. They will be on hand to provide you with insights and recommendations to help you identify emerging opportunities around the globe. I hope that you will join me there! Visit The World MoneyShow Orlando to register FREE today!
P.P.S. If you want to keep up with my latest insights on developments in fast-paced global markets, you can now follow me on Twitter on @NickVardy.
