Monday, November 03, 2008


And so the rally begins. Feeling good that the developed markets can manage a multi month rally, with some ups and downs. Draaisma at UBS just went "full house long" which is apparently a positive thing. He says we are at good valuations, we've had capitulation, the ISM is knocked out, etc. Basically, the worst is in the stocks. PE's are at 8x '08 and 14x a projected trough number of '09.

While I like to see these guys come out bullish to support my short term call, I can't buy the longer term outlook. There is alot going for the argument that this recession/debt adjustment period will be longer and deeper than anything since the 30's. Institutions like the IMF have thrown around studies saying that recessions preceded by banking crises have led to market correction of an average of 55%. And a 14 PE on trough EPS sounds good, but that still ain't cheap. In the 70's we had 6 PE's on trough earnings and 6% dividends - both produced by the painful recurrence of an economy in need of viagra.

As the options for readjusting portfolio allocations push managers away from equities, you can make a pretty good argument for a slow, long recovery from this bear market. UBS, that really well managed Ibank that should be bankrupt by now, just announced a $1.5b infrastructure fund targeting 10-13% returns.

That kind of money can buy you some high value deals in electricity generation and water treatment with the right leverage, but you need ten times that number for the serious infrastructure jobs. And the return from those super size deals will be a lot lower - roads and bridges for example. But I'm guessing the institutions will still lap up 9% return with a potential warrant kicker if they can put a shitload of dough to work. Methinks equity is going to get some competition.

On the EM front, we have had a hell of a rally already. I am still positive on Asia - a buyer of not a seller of commodities, great balance sheets, lots of FX reserves. I will buy the ETF country funds for some of these over the next few weeks on selloffs. But the other EM markets look scary - default scary. The EEV looks ripe; it's the double inverse of the EEM which holds alot of oil and resource stocks. I'm gonna look at getting in tonight in the high $80's with an $85 stop. Love the beta, good liquidity and I know my downside.


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