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Published: November 5, 2010
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
(NYSE: 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.
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: 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.
-- Jon D. Markman
Contributing Editor
Money Morning
Note: This article originally appeared on
Money Morning |
