Invest in Fear


Invest in fear when the thundering herd stampedes.

There has been a great deal of stock market synchronicity this year.  Three charts tell the tale.  This is the S&P 500 index performance.

stock-chart

S&P Index performance from Google Finance. Click on photo to enlarge. See link to entire chart below

The Morgan Stanley Capital Index (MSCI) World Index has moved in a very similar way.

The MSCI World is a stock market index of over 6,000  world stocks maintained by MSCI Inc.  This is a common benchmark for ‘world’ or ‘global’ stock funds but does not include emerging markets.

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The MSCI Emerging Market Index is moving downwards short term as well.

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The MSCI Emerging Markets Index measures 21 emerging market indices: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey.

When there is this much correlation… especially on the downside… extra value is created somewhere amidst the fall.

A note from a reader about the emergence of  the next major 15 year bull cycle shows how to use fear and long term cycles to cash in one extra value created by short term fear.

The reader wrote in response to an article at this site that predicts we are at the darkest hour near the beginning of the next major boom and said:   Hi Gary  – have you taken into account that the baby boomer generation is now taking more money out for retirement than they have been putting in while they were working and this trend will continue until 2020 when there will be more people putting money into savings for retirement during the working years and the bull market should resume.   The baby boomers were responsible for the great bull markets that came before but now are taking the money out for retirement. thanks.

Well, this could be a misunderstanding of money.  We need to remember the fact that money is always somewhere.   Money in the bank is not sitting in piles of unused cash.  Money is a circular social agreement and the essence of money is freedom of flow.  Freedom of flow is good.  Restriction of flow is bad.  Balanced flow is best.

If boomers put money into savings… then that money is redirected into businesses.  This can have an upwards impact on stock markets that creates bad value.  However if boomers (or any significant market sector) put all their money into savings and do not spend… then businesses will feel the pinch.  They cannot repay their loans nor earn profits which create downward  pressures on shares.

What boomers do is only one very small part of how stock markets around the world react.    This can certainly have an impact… but with balance… and in an ideal world, boomers will now be spending more of their savings to employ younger generations who will increase their savings with part of their earnings.

This is one small force in an increasingly complex global economic formula of up and down pressures.

This will have some middle of the road influence but what is more important to getting good profits are the really short term distortions that create long term value.

The major 15 year cycle is one dependable long term indicator… though it has fluctuated by three or four years.

This major trend combined with the very short term fear cycles can be used to spot times when values are enhanced.

When fear is correlated in markets, as it is now… good values are easier to find.

When all the indicators are correlated… down… this is a good indication that fear permeates the market.

These are good times to get value because markets overreact when fear dominates.   The stampede reaction has proven itself as the most powerful force in herds again and again.  Markets fall faster than they rise.  Fear predominates greed… the other driving force is the other emotion that drives most investors.  Hopefully readers of this site invest with a purpose instead and they look at the deeper reality of value.

Our friends at Jyske Global Asset Management agree about fear in the market and wrote in their November 16, 2012 Market Update.

Mounting fear is dominating
 
This week the sentiment turned sour. The risk willingness in the global markets has become more hesitant due to the mounting numbers of risk elements that require eminent action from the global policymakers. An overall lack of faith in global leaders ability to problem-solve have reduce the appetite for risk.
 
This week it came to a military confrontation between Israel and Hamas in the Gaza Strip. Oil prices reacted immediately on concern that the Middle East tension would disrupt supplies.
 
In Europe, the eurozone GDP data for the third quarter was released on Thursday confirming that the common currency region now officially is in recession. Just a few hours up to the GDP release, optimism spurred as better than expected GDP numbers out of Germany and France sparked hopes that the expected eurozone recession could be avoided. However, the positive numbers from Germany and France only reduced the rate of the decline. The euroarea economy is expected to contract by 0.6% in 2012 as a whole.
 
Further to Europe, labor unions in Spain, Portugal, Greece, Italy and France this week staged strikes against the eurozone’s demanding austerity policy, as unemployment in both Greece and Spain has reached above 25%. Greece’s economic downturn, now in its 5th year, has been exacerbated by the austerity demands imposed by the European union and the International Monetary Fund. Wednesday, the GDP data out of Greece revealed a deepening recession, as the economy contracted at a faster pace than prior quarter by 7.2% compared to 3rd quarter last year.     
 
In the US, the market participants worry about the policymakers’ inability to find a solution to the Fiscal Cliff in time before year end. If a solution is not found, then automatic spending cuts take effect from fiscal year 2013 through fiscal year 2021.

What to Do

Here are three ways to take advantage of fear.

#1: Use an investment manager abroad. Merri and I use Jyske.

US Investors with $100,000 or more can use Jyske Global Asset management to invest and if they choose leverage their investments (non leveraged investors require $200,000 minimum).  JGAM will create and manage a portfolio of global shares, bonds, cash and alternatives… leveraged or not.

Investors with $500,000 or more can build and manage their own portfolio if they prefer with JGAM’s advice.

Learn more from JGAM by contacting Sr. Vice President Thomas Fischer at fischer@jgam.com

Non US readers should contact Jyske’s René Mathys at mathys@jbpb.dk

#2: Build your own global value portfolio using US brokers who can buy global investments.

Michael McDonald at Aegis Investments can explain more. Contact him at mmcdonald@aegiscap.com

#3: The simplest approach is to invest in ETFs that invests in the MSCI World Index or the MSCI Emerging Market Index.

One such ETF is iShares MSCI World (symbol URTH)

This ETF replicates the MSCI World Index. The index measures the performance of equity securities in the top 85% of equity market capitalization and the ETF invests in nearly 6,000 shares globally.

If you prefer Emerging Markets, take a look at the iShares MSCI Emerging Markst ETF (symbol EEM).  This ETF invests at least 90% of assets in the securities of the MSCI Emerging Markets index that is designed to measure equity market performance in the global emerging markets.

etf

Geographical distribution of holdings in EEM as of November 16, 2012.

Learn more about ETFs from Morgan Hatfield at Ruggie Wealth at mhatfield@ruggiewealth.com

There are plenty of short term hitches in the world’s economic giddyup to create fear right now.  For those who can hold on through the down times and have the patience and discipline to wait, this is a good time to find value now.

Learn how to make multi currency investments… how and when.

Gary

S&P Index chart at Google.com

MCSI World Index at Bloomberg.com

MSCI Emerging Markets Index at Bloomberg.com


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