The Global Perspective - Market Leading Commentary On The World Economy

CNN International Tonight

I'll be on CNN International this evening, at 7.20 p.m. EST, discussing Asian markets.

Also, you can go to TheStreet to read my daily Asia market wrap.

Emerging Market Hedge

This morning I'm reporting on Thai economic growth over at TheStreet.com, and how amazingly, in the global liquidity crunch, it's managed to trend upwards -- and fairly fast, too:

In August, year-over-year exports in Thailand rose 17.9% vs. a rise of 5.9% in July, while the country's trade surplus rose to $770 million from $211 million. And at the end of September, the Ministry of Finance revised economic growth for the year up 50 basis points to 4.5%, and at 31.64 vs. the dollar, the baht is climbing its way back up to its July levels.

The scenario is a far cry from 1997, when the baht dropped 30% overnight vs. the dollar and Thailand was thrown into a cash crisis.

Now, contrast this scenario with the U.S. economic outlook:

As of Friday, Thomson Financial pegged overall third-quarter earnings growth for the S&P 500 at an anemic 1.4% rate. Should that come to pass, it would be the worst performance since the second quarter of 2002, when earnings rose by the same amount.

Analysts note that a weaker U.S. dollar, which continually set record lows against the euro during the third quarter, undoubtedly aided some export-heavy sectors. Unfortunately, the belief is that housing woes and a slowdown to the U.S. economy will sabotage profit growth for many.

"Downward estimate revisions have already come in from the banking sector, consumer finance, and mortgage companies," notes John Butters, research analyst with Thomson Financial.

And -- most fascinating -- on a rate cut conspiracy theory in Thailand:

The argument goes that consumer price inflation was down on the year to 1.1% in August from 1.7% in July, creating the right conditions for a rate cut alongside relative weakness in Thai securities, which have yet to feel the effects of positive economic growth in the country.

The rate cut would most positively impact home builders and financial stocks, giving what many say is a long-overdue boost to the Thai stock exchange (SET) in general. In the last year, the SET has advanced 37% to 847.93, much less than other regional stock exchanges: in the same period, the Hang Seng has gained 65% to 27,066, the Korean Kopsi is up 54% to 2003.60 and the Shanghai Composite Index has soared 217% to 5552.3

It's going to be an interesting week. I have a feeling that you'll see the SET take off amid all the positive spin on the Thai economy after the BoT meets on Wednesday -- even if it doesn't cut rates (great time to get some exotic SET index futures right now). Wednesday also happens to be the day the official transcripts of the Fed Reserve meting last week is out, which is not going to be as pretty, unfortunately. After last week's uptrend in the Dow, expect some mild nausea from the prop desks in NY. This could be a good time to purchase some put options on the Dow, alongside those SET index futures, and create almost a mirror-image opposite hedge of the one many were playing with back in July 1997.

It's a good emerging market hedge for the following reasons: it concerns two rate-slashing, tame  inflation markets (unlike, say, China or Brazil), one is an export-led economy and the other is an import-led economy, and it takes advantage of all the emerging market growth around. Let's see if you would have been in the green on Friday.

Chasing Beta: Bernanke & Greenspan

Here is a very well-written article about the current US market scenario. Despite my recent bullishness, I have to concede that the Fed's 50 b.p. cut in interest rates was sheer lunacy. The only defense I can think of to support such a cut is that it is just so completely mad that it might actually work. As several commentators have pointed out already, the Fed now has nowhere to go if the going gets tough again. While it's still too early to tell whether this will be the case, it is impossible not to agree with the logic behind Peter Bookvar's (Miller Tabak) statement :

'You don't have a multi-year credit bubble that is over in a couple of months; why the market thinks that is beyond me.'

It's also interesting to see everyone hammering Greenspan right now for having kept rates so low for so long in the 1990's -- as if he is personally responsible for the current volatility. If Greenspan was foolish, then Ben Bernanke looks like a circus jester: giving markets not only a multi-billion cash-fuel throughout the summer, but then topping it all off with a giant, unprecedented rate cut. This is not to criticize Bernanke per se; in many cases he has helped stimulate markets out of a recession which could have been especially difficult to shake off. However, the fact remains, there is always a cost where there is a benefit, and when you stimulate an economy so quickly out of a recession, you get lot of hasty money.

On a further note, it will be interesting to see the consequences if the market does hold up. As I pointed out recently, one potential effect is that speculators increasingly look overseas to the heady emerging markets for record gains:

This recent action in South Asia's derivatives markets looks interesting alongside the ruminations of the supposed global credit crunch. For if there really is a shortage of global liquidity, then why are funds buying ultra high-risk emerging market equity derivatives?

... What appears to be the case is that given the European and U.S. authorities' enormous cash fuels to domestic banks, these banks and funds have started to look for the same kind of gains they were getting from speculating on sub-prime. After all, there is still demand from the hundreds of event-driven funds out there. An obvious contender is emerging market derivatives, which are volatile, but extremely high return. And with emerging market growth soaring this year, the equities possibly look like a good bet.

This would give us almost a mirror-image picture of the 1990's again -- where funds couldn't resist over buying emerging market securities and in turn over-stimulating their currencies, until the whole global system temporarily collapsed. In that instance, it will be much easier to draw parallels between Bernanke and Greenspan than critics of the former chairman of the Federal Reserve may like to admit.

Macro/Micro

Contrary to my comments the other day, it seems that if you have been reading this blog since the beginning of the year, you'd actually have made some decent money (LINK):

And for what it's worth, here's what happens next. The current US economic and market strength will continue at a bullish pace right up until about September/October, when a spew of economic data will show how in Q2 we got just a little ahead ourselves. This, combined with some instability created by a looming election, will prompt some of the big pension funds to throw money back into gold, and it will have a natural, short-term correcting effect for markets (which in all probability probably won't be needed so it's a time to buy then). However, because of this overreaction, we'll probably see that growth re-bound in the final quarter of the year as Q3 fundamentals show everyone that things are actually still in pretty good shape.

And while the Japanese may raise rates, as might China, don't expect too much discipline from the governments of these economies. When Asia has a run, she's usually more afraid of stopping that run too quickly than she is of letting it overheat, so though she might put in a quarter-percent rate hike here or there for show, it's not in keeping with the general ethos of the region, which tends to get a little overexcited about its own economic prospects (usually as a result of knock-on growth from the European region and the U.S.A.) In other words, right now, you want to be buying Japan.

The Nikkei shot up to over 18,000 after that comment was made. Japanese equities look good again right now, with the Nikkei up more than 10% on the month to 16,845.96, and the yen seems to have regained regional stability. And - surprise, surprise - the Dow is back to an all-time high (I said that HERE recently too).

One of the side-effects of globalization is that everyone seems to use Macro- data to judge what are, in effect, Micro- situations, like market movements. It's an information overload problem, and it's not always an accurate way of trying to gauge where stocks are headed.

The Global Report

Every day I'll be putting together a global finance report delivered by e-mail. It will broadly cover between 5 and 10 topics of interest from around the world, ex-USA. This is not necessarily the type of thing I would be blogging about, but rather more data-oriented material with a view at the end. Some will end up on the blog anyway, but most of it is for private consumption.

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