Reflation Around the World

By Dr. Duru written for One-Twenty

September 29, 2007

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After the market recovered from 2007's first big swoon, I marveled at how the rest of the world seemed to recover much faster than the U.S. As the S&P 500 and NASDAQ both stretch for new multi-year highs during this recovery from 2007's second swoon, the picture of global recovery is more mixed. I have already noted how all the sectors that the Fed was supposed to save faded within days of the rate-cut-generated pop. But these weak sectors did not also drag down the major indices as I thought would inevitably happen before we hit new highs. Similarly there are a few hot markets who could not care less that fears of recession still percolate in the world's laggard, the United States.

ETFs representing the hot markets of Australia (EWA), Canada (EWC), Latin America (ILF), Hong Kong (EWH), China (FXI), Brazil (EWZ), Singapore (EWS), and of course the emerging markets ETF (EEM) have already made new multi-year highs. In the case of FXI and EWH, new highs were achieved before the Fed even cut. It should also be no surprise to us that indices that play off the ever-shrinking dollar have also made new highs: GDX (gold miners), FXE (Euro currency), FXC (canadian dollar), SLX (steel), and, of course, gold (GLD) and oil (although the USO is nowhere near its 52-week high...).

Right behind these hot indices are a few countries that are testing new highs: Germany (EWG), Spain (EWP), EWM (Malaysia), EWT (Taiwan), South Africa (EZA), Thailand (TTF), EWU (United Kingdom), and South Korea (EWY).

If these performances keep up, we will once again say "what, me worry?" and forget all about sub-prime (is that a new cut of steak?), credit crunches (is that a new exercise fad?), collapsed hedge funds (the landscaper said my hedges needed trimming anyway), and credit default sawps (I didn't know Wall Streeters go to swap meets!).

As I claimed in earlier missives, the post-Fed fade is a tried and true tradition. The evidence also appears to show that the stock market consistently soars higher within a year of dramatic Fed cuts. Chris Ciovacco of Ciovacco Capital Management, LLC conducts the kind of analysis I like to do when I can find the time in his most recent article "Stock Market Behavior Following Fed Rate Cuts." Ciovacco notes that after big cuts the market gives up its post-Fed pop within about 2 weeks before eventually moving higher. The move higher also becomes permanent in short order. This could be an important lesson for bears to note as well. Gold may be the best place for the bears to keep growling for now. We can always say "this time is different," but I think following the trends should work better as we approach the stronger season for stocks, November - April.

Be careful out there!

P.S. As you kick back and watch to see whether your portfolio can reflate faster than the dollar deflates, check out Timothy Sykes in "An American Hedge Fund."

I wrote the following review of the book (Tim has also posted the review to his site): "An American Hedge Fund is an exhilarating and revealing "coming-of-age" story about one kid's quest to take on an entire industry. Sykes not only takes us directly into the hot stock trades that swing him between being rich and feeling poor, but he also exposes the world beyond the trading where the same raw ambition can plant the seeds for stunning success and disappointing failure."

DR. DURU®, 2007