Maybe you've noticed that many of the stocks rising through the ranks of the broader market lately have a foreign accent.
The Claymore/AlphaShares China Small Cap exchange-traded fund (ETF) (NYSE: HAO), MV MarketVectors Indonesia Index ETF (IDX), and the PowerShares Emerging Markets Sovereign Debt ETF (NYSE: PCY) are just a few of the ETFs I've recommended in the past that are leading the market higher.
Similarly, Swiss instrument maker Mettler-Toledo International Inc. (NYSE: MTD) and Chilean fertilizer maker Sociedad Quimica y Minera (NYSE: SQM) have helped carry our Strategic Advantage "StrataGem" portfolio higher.
The main reason for this is that the Group of 20 (G-20) meeting in South Korea ended last week with finance chiefs of the 20 largest countries agreeing not to engage in a currency war. That was pretty much a green light for traders to push down the value of the U.S. dollar, which has the effect of lifting the value of commodities and markets denominated in other currencies.
The only major new economic release in the past week came off the real estate wire, where we learned of a surprise 10% month-over-month increase in U.S. home sales, which rose to 4.53 million in September from 4.12 million in August. This seems like good news, but it is largely meaningless. Sorry to spoil the good vibes, but the real story was described well by analysts at Capital Economics.
CapEcon noted that the sharp increase in home sales was due to fading downward distortion in the aftermath of expiration of the homebuyer tax credit in the spring. As a result it is unlikely to signal the start of a real recovery, which now may be further delayed by the foreclosure crisis.
The big improvement in sales last month was only possible, in short, because sales had fallen so far in the summer after the tax credit ran out. Current sales levels are still 22% below April's peak of 5.79 million homes. The freezing of some foreclosure activity may depress sales in October too, as 35%, or 1.6 million, of September's sales were foreclosed properties.
Even if sales on just 15% of foreclosed homes fall through, that may mean 240,000 fewer foreclosed homes are sold in October. That's why this impressive number is probably not going to be repeated.
More generally, the sour economy and decline in the desire to own a house will all weigh on existing home sales for at least three years, CapEcon analysts estimate. There was a surplus of roughly 1.5 million homes up for sale in September relative to demand.
Prices will remain under downward pressure until demand moves back in line with supply. That's going to take years, rather than months.
This environment is going to be very tough on U.S. regional banks and money center banks alike, which still have a lot of toxic home loans on their books. Those loans will have to be written off against future earnings. To cope, banks are simply writing fewer mortgages, despite crazy-low rates.
The bottom line is that transactions and revenues at banks, home builders, materials suppliers, home furnishing stores and the like are probably going to remain under pressure for some time, keeping their shares in check. The builders' stocks will rise before business actually improves, but looking back at past cycles it looks like this could take another six to 18 months at the very least.
To get a quick understanding of the difference now between U.S. banks and foreign banks, here's an example: ICICI Bank Ltd. (NYSE ADR: IBN) is one of the largest financial institutions in India. Shares are up 735% since mid-2003 as it has grown serving the needs of this emerging market. In that time, shares of Wells Fargo & Co. (NYSE: WFC) are up just 26% and shares of Bank of America Corp. (NYSE: BAC) are down 62%.
This is no time to be contrarian and imagine the relationship is going to suddenly reverse. This differential is more likely to expand, not contract, as India and other Southern Asian countries – unburdened by heavy debts – grow much faster than the over-leveraged United States. Stick with emerging market ETFs for a large part of your risk capital.
[Editor's Note: Money Morning Contributing Writer Jon D. Markman has a unique view of both the world economy and the global financial markets. With uncertainty the watchword and volatility the norm in today's markets, low-risk/high-profit investments will be tougher than ever to find.
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