THE QUESTION ON EVERYONE’S LIPS… WHAT HAPPENED?

Nicholas Vardy

Nicholas Vardy has a unique background that has proven his knack for making money in different markets around the world.

Yesterday’s sell-off — the worst since 9/11 — caught the market by surprise. But the fact that it started in China was no surprise to me. I had written several pieces in The Global Guru about the dangers of the China Mania. That a sell-off in far-off Shanghai triggered a sell-off in New York shows how interconnected the world’s markets have become. That mainstream U.S. commentators were surprised by China’s impact shows how they just don’t "get it"… yet.

Despite their dizzying gyrations, the world’s financial markets are in pretty good shape. That doesn’t mean that the current sell-off can’t continue for a while. But it does mean that it is just another hiccup against a fundamentally positive economic backdrop.

MR. MARKET’S MOOD SWINGS

Nobel-prize winning theories about "rational expectations" to the contrary, investors are anything but homo economicus — the perfectly rational actor assumed by mainstream economic theory. Financial markets are much more like Mr. Market — the metaphorical manic depressive who was first described by Ben Graham and popularized by disciple Warren Buffett.

Some days, Mr. Market is euphoric. On other days, he’s very depressed. If you catch him on a euphoric day, he wants a very high price for his shares. If he’s in one of his down moods, he’s willing to sell you his shares for a pittance. This week, Mr. Market is in one of his down moods. Mr. Market highlights the one thing you can predict with certainty about financial markets: investors will always overreact to events — whether positive or negative.

REASONS TO BE CHEERFUL

First, the fundamentals of the global markets are strong. Investor nervousness notwithstanding, developing countries have much higher foreign currency reserves (savings) and they have lower trade deficits. And, much more of the $491 billion investment that they attracted last year is "locked up" in factories rather than in "hot money" that invests in stocks or bonds.

Second, global markets are only trading at a P/E of 12. Markets like India that were trading in the low 20s have been hit the hardest. The market sell-off was sudden, yes. But it’s not like we’ve been partying like its 1999. Things suddenly seem worse simply because they have been so unusually good.

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WHAT TO EXPECT

Global markets have rallied strongly in four prior sell-offs (May 2004, March 2005, October 2005, May 2006), and it was smart to buy into the correction. Mr. Market’s mood swing proved temporary. The hardest hit markets — like India — have risen by more than 50% within a few months. John Kenneth Galbraith’s famous dictum once again has proven correct: "The financial memory is very short." It’ll be a stock picker’s market between now and September, and in October we’ll see the traditional fourth-quarter rally in global bull markets. By then, this correction will be but a distant memory.


STOCK UPDATES

ICICI BANK (IBN)

Despite the recent sell-off, the fundamental prospects that made ICICI a smart investment in the first place haven’t changed. India’s booming middle class is borrowing like never before and corporations are taking out loans to expand their factories, technology parks and power plants to meet new demand. Investing in ICICI is a proxy for India’s economy, which is expanding at about 9% annually.

Here’s some perspective to get you beyond the day-to-day gyrations. ICICI is still only as big as China’s fifth- or sixth-biggest bank. Put another way, the second-biggest bank in Greece — (population: 10.5 million) is 25% bigger in terms of market cap than ICICI, the second-biggest bank in India (population: 1.1 billion). As it happens, both are terrific investments. But it’s hard to argue with ICICI’s greater potential.

AMERICA MOVIL (AMX)

After the recent market correction, the price earnings to growth (PEG) ratio on this global blue chip is now a remarkably cheap .49. Anything less than "1" is screaming buy. No wonder the world’s top hedge funds have filled their coffers with America Movil.

Business Week reported that Carlos Slim, America Movil’s controlling shareholder, now has a net worth estimated at $54 billion. That means Slim, 67, has surpassed #2 Warren Buffett, and is now the world’s richest man after Bill Gates.

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SWEDEN ISHARES ETF (EWD)

Prime Minister Fredrik Reinfeldt is forging ahead with promises to privatize up to 47 companies that may collectively fetch as much as $100 billion.

Meanwhile, Sweden gathered another accolade this month. This time it came from Richard Florida, author of The Flight of the Creative Class, who measured the kind of creativity most useful to business — talent, technology and flexibility. Sweden ranked #1 in the world. (The U.S. was #4).

For more on Sweden and the Nordic countries, see my article "The Nordic Model Undressed" on The Global Guru.

COGNIZANT TECHNOLOGIES (CTSH)

Cognizant Technologies, our outsourcing play in New Jersey, has held up extremely well. In what is a terrific metaphor for globalization, Cognizant’s management will be ringing the NASDAQ opening bell remotely from the company’s Chennai, India, techno-complex on March 5th at 9:30 a.m.

Cognizant and NASDAQ will co-host two celebrations — one in Chennai at Cognizant’s techno-complex and one in New York City at NASDAQ’s MarketSite, 4 Times Square.

UNIBANCO (UBB)

Unibanco announced that 2006 net income rose 20.2% to 2.2 billion Brazilian reals ($1.04 billion). Operating income for the year rose 20.5% to 3.52 billion reals. At a P/E of 8.8, UBB is one of the cheapest banks in the world.

As we noted in last month’s issue, "Brazil… sells off quickly (and steeply) during inevitable hiccups. But investors who have held on during periods of volatility have been richly rewarded." Stick with Unibanco. It’ll be worth it.

HOME INNS & HOTELS (HMIN)

As our most speculative play — a Chinese small cap — Home Inns & Hotels was most affected by yesterday’s sell-off. This remains a terrific growth play on China — a no-brainer as long as management continues to execute on its plan. This entrepreneurial play in a basic industry has the potential to thrive — even while China’s state-owned enterprises are collapsing around it. Another believer? Hedge fund billionaire George Soros recently picked up nearly $6 million worth of the stock.

Exclusive  GLOBAL STOCK INVESTOR HOTLINE UPDATE 5

A QUICK MONEY MANAGEMENT TUTORIAL

Certainly the gyrations in the market can be unnerving. That’s why money management — how much you risk on each position — is so important.

Always calculate the maximum you are willing to risk on each of our picks (the current price minus the recommended stop price). That can be $100 or $1000 or $100,000. It’s all up to you. If the amount you have at risk on any current pick makes you uncomfortable, just reduce the number of shares you hold.

Here’s a word about stops. These are carefully calculated based on the stock’s own risk and volatility characteristics. That’s why we give a stock like Home Inns (HMIN) a lot more room to breathe than a low risk play like Sweden (EWD). The riskier the stock, the greater the price swings. As Global Stock Investor focuses on broad, "top down" themes, I have also made these stops wide — so you won’t get stopped out on the back of a couple of weeks of bad performance. But if we do hit a stop, make sure you sell.

By focusing on how much you are willing to risk on a position, you are applying the same sophisticated money management principles that I use when I manage my own clients’ money. It’s the difference between being an "analyst" and a "money manager." Think of it as the difference between the radio announcer commenting on the baseball game ("easy" — everyone can have an opinion) versus the guy out there swinging the bat ("hard" — and you’ll need to break a sweat). Same game. Very different experience.

The bottom line? If you know how much you have risked ahead of time, you don’t need to be unduly unnerved by gyrations in the market.

 

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