Global markets spent this past week consolidating. Since bouncing sharply after the sell-off in January, you have been re-entering the market gradually. You now are almost fully invested and well-positioned to profit from further market rallies.
We still are in one of those rare phases where U.S. markets are outperforming global markets — much of it due to the appreciating U.S. dollar.
In my view, there are two developments to look out for.
First, the din of those calling China a bubble is growing. Just today, a former member of super hedge fund Long Term Capital Management called China “The greatest bubble in history.” And China itself is getting more and more prickly as it raises its profile on the world stage. With the U.S. government dancing on a tightrope — calling for revaluation of the yuan, selling arms to Taiwan, implicitly supporting Google in its probable exit from China — things aren’t as hunky dory as they used to be. There are a lot of untold downsides to the “China Miracle.”
Second, Europe’s implicit bailout of Greece is challenging both the euro as currency and the institutional framework that supports it. The danger here is not the impact on the “real” economy. After all, Greece is only 2% of Europe’s GDP. The real problem is the potential for financial contagion. Once the financial fires start, they are difficult to contain.
Both of these issues, and how the respective authorities handle them, are key to markets as they move ahead. As always, keep an eye on your stops.
You only have one position left on your watch list, the iShares MSCI Taiwan Index (EWT).
Portfolio Update
Market Vectors Brazil Small-Cap ETF (BRF) ended the first week in the portfolio slightly lower. The atmosphere in Brazil remains electric. Here is a partial text of an email I just received from a banker in Brazil: “Am in San Paulo at present — incredible amount of activity (foreign investment and local opportunities capitalizing on growing middle class). BRF remains a BUY.
The WisdomTree Dreyfus Chinese Yuan Fund (CYB) fell slightly this past week. At a press conference on Sunday, Chinese Premier Wen Jiabao dismissed the possibility of a yuan revaluation in the near term, noting concern over the "the unsteady, uncoordinated and unstable development of the Chinese economy.” CYB remains a HOLD.
UltraShort Euro ProShares (EUO) fell below the $20 mark this week, as S&P did not downgrade Greece. Euro still faces long-term structural issues, which threaten its status as a global currency. When this pops, it will do so quickly. EUO remains a BUY.
iShares MSCI South Korea Index Fund (EWY) was down slightly this week. But South Korean shares rose overnight, helped by the U.S. Federal Reserve’s pledge to hold interest rates near zero. Korea Life made a strong trading debut, rising 8%. EWY is a BUY.
Freeport-McMoRan Copper & Gold Inc. (FCX) rose another 3% this week. The stock is still nearly $8 below its January high of $90.55 a share. This could be telling us that copper demand is not as strong as it has been in the past year. Nevertheless, with momentum firmly behind it, FCX remains a BUY.
Market Vectors Indonesia ETF (IDX) rose slightly this week. With Indonesia’s Stock Exchange above 2,700 points — its highest position in more than two years, IDX remains a BUY.
Arcelor Mittal (MT) rose 1.4% since we re-entered it last week. ArcelorMittal Kriviy Rih, Ukraine-based subsidiary of ArcelorMittal, plans in 2010 to increase its steel product output by about 22.6% year on year. The company is also looking at opportunities in Iraq. It remains a BUY.
Market Vectors Russia ETF (RSX) rose 1.6% this week. As a proxy for increasing global risk appetite, RSX is a BUY.
iShares MSCI Turkey Invest Mkt Index (TUR) rose 2.3% this past week as the news of the alleged 2003 coup plot fades into distant memory. With the Turkish lira hitting a three-week high on Wednesday, and the finance minister commenting that economic growth will exceed the government’s 3.5% forecast this year, TUR remains a BUY.
VALE S.A. (VALE) ended the week slightly higher, as confidence in Brazil and global commodities returns. VALE is a BUY.
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