subject: Daniel Frishberg Provides Some Informative Views on The Current Stock Market [print this page] Dan "The Money Man" Frishberg's Views Dan "The Money Man" Frishberg's Views
Strategic Analysis --- Short Term:
After an increasingly likely minor pullback, U.S. stocks, particularly mid-caps, appear poised to continue higher, coming close to or exceeding the highpoint of April of this year. Enthusiasm will grow. Remember when many experts said earlier in the year that a sustained rally would be impossible because they couldn't see a catalyst? I've probably heard it a hundred times in the past couple of years, by well-known market analysts who have the ears of the public.
No real world catalyst is necessary to move markets.
We would like to reframe the question. We know the question asked refers to the U.S. market.
What was a novel idea, when we pointed it out in this forum last year, is now more widely discussed. It is no less true, and is still not incorporated into the thinking of most investors, certainly in the U.S.
For an investor, there is no meaningful U.S. economy, U.S. stock market, or U.S. currency.
I credit my friend John Rutledge for the comparison of simple thermodynamics to the workings of the global economy. A feather pillow is a poor conductor, and can be warm on one side and cool on the other. On the other hand, if you run hot water into a bathtub the heat quickly spreads throughout and the temperature quickly becomes the same throughout.
In the same way, markets and economies around the world have merged, because of the improved communication and the online connections.
There really is one economy that matters, and it will be growing, as an aggregate in the range of 6% for as far as the eye can see. At any given time, the U.S. may be growing at 1%, while Indonesia may be growing at 10%, but the opportunities are there for all of us, wherever we are and the opportunities and problems are gradually converging. -Dan Frishberg
U.S. stock performance cannot be explained by U.S. investor behavior. Money pours in from Europe and Asia , affecting the metrics and confusing experts who continue to try to use metrics they developed ten years ago. Whatever the origin, investors are beginning to believe in the rally. New money may arrive, as investors start to worry about missing the train as it leaves the station.
Then, ironically, just in time to confront this rising euphoria, our economic forecast for the next couple of months actually calls for further slowing. The euphoria and the disappearance of the fears of "double dip" will be replaced by new signs of fears. We will watch carefully for a possible change in character for the U.S. stock market, as it could be in for a significant round of profit taking.
It is highly possible that these new signs of the slowing economy are already discounted by the extended correction that has gone on since April. That new weaker data will be the chance for the stock market to end its upward climb. If sellers are not motivated by the economic weakness, the stock market could go substantially higher, as the middle of the third year is when the politicians in Washington start actually caring about how people feel. They always start to flood the economy with money in the second half of year 3 and this year 23 will be no different. Whether this is a good idea or not in the long run, the stock market will love it. Any big sell-off in raw materials and the companies that provide them will be a gift. A significant multi-week correction that occurs at the end of 2010 or early 2011 should be met by buying.
We have now confined our equity holdings to those that are directly related to the creation and development of the new global middle class.
This means investments in Indonesia , Malaysia , Colombia , Chile , with the next generation to be Viet Nam , followed in a few years by Africa . We are also accumulating stock in the materials that serve as the building blocks for those societies duplicating what we did in the U.S. in the previous generation. An example of these is Cliff Natural Resources, which provides steel pellets for manufacture of steel, and has now acquired metallurgical coal, giving them valuable vertical integration.
Also fascinating is the outperformance in stock price of the Colombian oil company Ecopetrol vs. Exxon Mobil. We don't believe EC is a better company, but that is where the capital is flowing.
We also expect equity-like returns from investments in sovereign bonds of some of these same increasingly credit worthy countries. This sector is increasingly available to investors, though such ETFs as EMB, a portfolio managed by J.P.Morgan.
The equity like returns are attributable to the following:
1. The bonds yield better than 7%, compared to between 1% and 2% for U.S. equivalents.
2. It will eventually matter that these countries are managing their economies more effectively, have strong balance whets, are not drowning in debt, and have excellent rates of economic growth that we think are sustainable.
3. As we see further convergence, the U.S. rates will work their way higher, while the emerging market bond yields will work their way lower, with prices rising. Already, we've seen significant appreciation over the past quarter, and we expect this to continue.
