My Own Analyst

Japan Crashes

Japan has been in a bubble of sorts.  Their Nikkei has plunged more than 7% today.  The chart doesn't reflect it, but this should give you perspective. It closed at 14484, -7.3%:

As you can see, it has had a heck of a run.  A year ago, it was about 9000, so it is still up more than 50%!

Now, let's put that rally into context.  Here is a longer-term perspective:

Huge downtrend...

Many people invest through the ETF EWJ.  Keep in mind that the rally has been sparked by a sharp decline in the value of the yen.  EWJ measures the investment in dollar terms, so it's rally has been less ebullient.  This chart does update today's action:

As you an see, this has been extended.  On my price momentum indicator, it was 2.00 last night.  The return to the 50dma leaves it at 0.97.

Now, the real question is:  Does this matter?  I think that this ties into a general profit-taking mode.  As I said yesterday, I am now bearish short-term.  The plunge in Japan follows some weakness in a Chinese number.  It should be easy to find problems to explain profit-taking, as we live in a glass half-empty and half-full world right now.

PSMT Call

PST stock was weak after they reported but up today.  I just caught the call, and there were two key points to a story that remains a great growth play.  First, they raised membership fees in most of their markets in late June - this will be used to lower prices ($30 fee went to $35), which will hopefully drive membership value (and growth).  This was the first hike in 8 years, and it has been accepted on renewals.  Second, there was about .08 of tough EPS comp that was explained.  First, there were real estate gains of .04 a year ago.  Second, there was a swing in currency that cost .04.  On the operating line, there was a big issue with a credit card processor that cost the company almost $1mm to correct a one-time error from over the past four years.  There was also a small amount of cost due to investment in Colombia.

I noted some deceleration of same-store sales, which is a bit cautious, but this is a great story (store openings with good same-store growth).  My target is 79 a year out - it was too expensive in late April but certainly reasonable now (and earlier today).  

Another Tuesday Take-off

Last Tuesday, the year began with a nice gap up.  A week later, we are gapping up again, but this time to more important levels.  As I stated this weekend, the October highs on SPY were 129.42, but the closing high the next day was 128.85.  As I type, we are currently above 129, which I think is the key level that is likely to draw in buyers.

What's really different is that news out of China is rapidly becoming better, which blows a hole in the whole domino theory.  Europe isn't dragging down either side of the food chain, at least not yet.  I have spent the last hour trying to figure out how to get more VWO into Top 20 (to no avail so far), but I think that it stands out for both long-term potential as well as timeliness.  If I could make INTC any smaller, that would work, but I can't.

I also want to share that I have been thinking about selling INTC short of the 27 near-term target to buy GOOG, which is pulling back after MMI was weak for Q4 phone sales, but I am waiting to see signs of a new base.  I think the stock should bottom 615-620 if not from yesterday's 621 low.

How Serious is Italy for our Markets?

Igor wanted me to share my thoughts on Italy, one of the 5 PIIGS.  Of course, this is all serious stuff.  Ultimately, the debt situation here and in Europe can lead to severe credit issues.  We all remember what it's like when the capital markets "freeze up" as they did in 2008.

Italy is scary because it is relevant, while Greece really is an odd-lot.  Greek finances are significantly worse than Italy's - they had to have debt relief.  Italy, on the other hand, has a stable economy and not nearly as big a debt problem.

Italian bonds are losing value, partially because CDO protection was realistically eliminated when it failed to trigger when Greece "restructured" rather than "defaulted".  Another issue is that banks are dumping the debt to avoid higher capital charges.  Clearly the straw that broke the proverbial came's back, though, was the increased margin charges to hold Italian bonds (yesterday).  It is said that Europe doesn't have the ability to bail out Italy, and I believe that is true.  Fortunately, it doesn't need to bail it out.  What is necessary is reduced public spending.  Their debts are big but not piling up rapidly.  Greece was bankrupt, but Italy is not.  Of course, the higher the interest rate, the more challenged their budget becomes.  They have about $400 billion rolling over next year, so each 1% hike in rates costs about $4 billion in extra interest charges. 

Bottom line is that Europe continues to have problems, but they aren't likely to lead to financial contagion. 

Emerging Markets View

Last night, I shared my renewed optimism for emerging markets equities (as  represented by a near-maximum exposure of 18.8% in the Sector Selector ETF model).  Specifically, I cited stronger LT growth due to the emergence of middle classes in these countries, low valuation (it's like 8 or 9 PE) and stronger financial conditions of the countries themselves (which suggests currency gains).

Here is a series of charts that shows not only how volatile the sector has been but also how depressed it has become, though it is now showing positive momentum again:

Download VWO vs SPY

I had noted that 40 is resistance for VWO in my weekly review, and we are right there.  I think that VWO is poised to significantly outperform SPY in the coming weeks...

Interesting Macro

ANR, a coal company, had an ugly pre-announcement today that knocked the trains off the rails, with China (FXI) breaking down too.  I see LT support on FXI at 34, and it seems to be bouncing... 

Bullish News

I am glad I didn't post this earlier, as I don't need to get anyone bullish at the beginning of a day like today, but do be aware that Brazil CUT rates yesterday.  One of the big questions this year would be the potential of the BRICs to step on the brakes too hard.  Emerging Markets rallied on the back of this yesterday and are down just a little today.  I am no expert on this one, but it might make sense to invest in Brazilian debt here - there are funds that do so (or emerging markets in general).  The rates are high and the finances stronger than in the U.S. (seemingly little currency risk in the long-run).

I wouldn't be too discouraged by the action today (I would say I expected it).  While we still have a potential gap to fill, it doesn't have to get filled (though odds are that it does).  I think that it's possible we go to 125.50 or so first.  While I pay attention to the S&P 500 as being more representative than the widely watched Dow 30, it closed up YTD yesterday (barely).  Now it's down a little but up including dividends I think.  In any event, I continue to think that we have a shot at the Hail Mary getting caught (rally to 125.50 and then keep rallying), though the more likely scenario is a test (114-117).  Of course, if it follows 1998, we will make new lows in Sep/Oct, but not by too much.  For now, the 2008 style sell-off seems the least likely still. 

VWO - Nice Bounce

You probably know I have a soft spot for Emerging Markets and continue to believe that investors are underestimating the potential there.  I moved up support to 49 this weekend on VWO, so I was a little disappointed to see the slight penetration in the bad tape yesterday.  This morning, though, it looks to be opening near 49.75 (10 minutes before the open).  It's not out of the woods, but this is a nice recovery.  As I look now, I would probably revise my support level to 48.

 

Emerging Markets Breaking Out

I want to call everyone's attention to VWO (the Vanguard ETF for Emerging Markets Equities), as it is breaking out.  I added this to the Top 20 in February and continue to believe that this is a good trade and a great investment.  Emerging Markets are cheaper and have more growth than ours.  I have noticed a real disconnect between the enthusiam for Industrials (because of their potential growth from EM) and the flattish action of the EM.  These stocks rarely hover near zero for long - they usually flying and sometimes dying, typically more volatile than the S&P 500.

With VWO, we have a good fundamental story and good valuation.  I took a chance with my timing wehn I added it to the model, but now we have a strong chart developing in my view.  My target of 62 a year out could prove very conservative.  I wouldn't be surprised to see that level within 3 months.  Even if you aren't open to the vehicle, we have other ways to ride along:  BEN and PLPC, which are in the Top 20, certainly work.  Dare I say TECUA too?  I can throw out some others too if anyone cares.  One in the CG/B is MPR, which is rapidly beefing up its Latin American sales capabilities.  BDX and BCR, both in CG/B, have been bragging about their exposure to EM recently. 

VWO - Looking Quite Strong

Emerging Markets are an asset class that I currently like.  There are two ETFs that allow investors to quickly and cheaply "own the market".  Both are based on the MSCI Emerging Markets index.  iShares offers EEM, while Vanguard offers VWO.  I prefer the latter, as it is married to a large mutual fund, which gives an advantage in my view in seriously down markets, though that's a remote scenario.  The other reason is that the feel is lower.

Here is VWO over the past two years:

 

Before I get back to the fundamentals, let's look at the technicals.  As you can see, this is a bull in a consolidation.  The blue line near the bottom indicates that it has outperformed the S&P 500 by 29% over the past two years, but over the past year they have been in line.  More recently, it has performed better after hitting a low in relative strength about the time we added it to Top 20.  While the S&P 500 has been in retreat, this thing has been holding steady.  In fact, compared to Friday March 11th, it is currently up (in the pre-market - 46.50 bid).  If it can clear 46.80, the next stop should be 50.

So, why do I care about the Emerging Markets?  Quite simply, more growth for less money.  There has been a lot of hype over the years, and it is true.  The difference now, though, is that there are some concerns and investors have given up.  Maybe it's because there is less need to escape the U.S.  Notice how the VWO is flat since a month after our rally began on Labor Day.  We have seen large outflows from these funds.  Another issue is that several of the countries are trying to slow growth.  I see a big disconnect - U.S. investors continue to pile into Industrials on the hopes that they will export into these markets.  The most likely scenario is continued strong growth and strong currencies (the other way to win here).

Here's the deal though, let me say it again:  More growth, lower valuation.  The index isn't perfect - it has a bunch of big stocks in it like Petrobras, Vale SA, Samsung, Gazprom, Taiwan Semi, China Moblie, and America Movil.  The Top 10 names, though, make up less than 19%.  You get China, Brazil, Korea and Taiwan - everything else is less than 10%.  You can get more info here.  The index has a forward PE of about 11 compared to 13.5 for the S&P 500.  Historically, the index beats us, but its because of growth in earnings, not PE expansion.

This year, I expect PE expansion, though to 13 (and 15 on the S&P 500).  This gets a target of about 62, but we need to remember that emerging markets are very volatile.  Unlike our market, which is huge, they are really much smaller.  When times are good, they can rally 50% or more.  So, my call for 62 is conservative in my view.