Sunday, October 07, 2007
Emerging markets stocks vs. natural resource stocks
Emerging market stocks have been reaching new highs almost everyday (see this article in the Economist magazine), and the natural resource sector has been on a tear as well. Given the giddy valuations of both sectors, which one is a better relative buy at this point? For those of you who have been following the IGE-EEM spread that I proposed before, its value is at an all-time-low these days -- it was at -6.77 standard deviations. Given their historical cointegration, I wouldn't be surprised if it will revert to a more sane value in the near future.
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A while back I mentioned that the Dollar and the stock market seemed to be perfectly inversely correlated. Market can't go up, unless dollar goes down. You thought it was just coincidence..Still think so? Seems likely now that dollar depreciation is the reason this market is going up with no end in sight....
My view (which carries no authority since I am not a macro-economist) is that the emerging markets are going up because people realize they have much higher growth rates than the developed markets, yet they don't suffer from the housing market / subprime meltdown that is afflicting many developed markets. On the other hand, dollar is going down largely because of the unsustainable federal as well as trade deficits, as well as the slow down of the US consumer market. The two trends are somewhat related as people are selling dollar assets to buy emerging market assets, but I do not think that the US market goes up because dollar is depreciating. In fact, I believe the opposite will happen, as increasing outflow from dollar assets will cause US stocks (at least those which derive their revenue domestically) to suffer a continuing decline relative to international stocks in the future.
Yes but in August when the subprime mess started and the stock market fell, the US dollar rallied. That leads one to believe that the US dollar drop is more due to loose monetary policy, massive overspending and running the printing presses running overnight. Otherwise, the dollar wouldve lost ground during that whole debacle, no?
As soon as signs of credit contraction were in, the dollar rallied..So really it is no the dollar drop causing the market rallying but monetary policy is moving both.
Thus no growth without artificial loose spending = no growth without dollar drop..
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The problem I found with spreads at my own expense is that there are no guarantees that they will come back anytime soon.
They can have huge blowouts and I know many people who have ben wiped out by these harsh moves.
There was a time when with certain spreads you could put the spread on, if it went against you you would double up until it came back.
These days with many many more people trading spreads the chances of getting good edge seem to be over.
Just my opinion.
OnlineFXTrading
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