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Middle Eastern Slump, Emerging Markets Roar? MoneyNews
Dear MoneyNews Reader, It's been a couple of rather interesting weeks in the markets since I shared with you my observation about declining German bond prices. I used the German government bond market to clearly illustrate a "wedge" formation that would likely send global yields higher still. I showed you a chart indicating where prices were likely to go. This week, I'm updating you on that trade. Had anyone put that observation into action using the extremely liquid futures market for German bonds, the resulting move from that day to last week's low point would have grossed them $1,447.
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Here in the U.S., 10-year yields peaked at around 4.8% as the employment data was released for February. This week, low inflation data and a report from a respected research company conspired to undo some of this bearish sentiment. Yields fell back to 4.66%. The dollar lost ground this week and declined against the euro as interest rate expectations unwound. Editor's Note: You don't have to sit back and watch as the value of your money disintegrates, SectorTrade recently recommended an ETF that can protect you from the dollar's crash, while picking up big gains as well.Read more about it. Arab Stallions You often hear people say that there is always a bull market somewhere. I wonder if the same can be said of bear markets. With one eye on domestic markets this week, I'm keeping the other on an area that I don't often pay too much attention to. In London on Tuesday, March 14, Euromoney magazine hosted an investment conference that began by focusing on the subject "Egypt: A Commitment to Reform." According to the International Herald Tribune, a major question asked at the meeting was: "Is the bubble about to burst?" Egypt's prime minister and several other key ministers from that country were in attendance, trying to help shore up investor confidence – since the Cairo Stock Index has declined by around one-quarter since 2006 began. Two key reasons that Middle Eastern stocks have blossomed in recent years are the rising oil price and stricter U.S. capital controls. The latter has persuaded the Arab world to keep more money invested at home than abroad. In 2005, stocks in the Arab region were valued at $1.3 trillion. Taking a look at the Middle Eastern market, I discovered that the slide in popular share prices continued this week, amidst calls from Saudi Arabian politicians demanding state action to stem the slide. It's an abrupt end to a three-year rally across regional stock markets – one driven by greed and the unsurprising emergence of day trading. Saudi Arabia's stock market makes up 60% of the value of Persian Gulf equity markets. That fact has prompted fears that the 24% decline in the local Tadawul Stock Index will cause the withdrawal of Saudi money from neighboring markets. The huge run-up in stocks has seen stellar rallies in bourses across the region. Five large markets representing Qatar, Saudi Arabia, the UAE, Kuwait and Egypt have gained an average 120% since the start of 2005.
The biggest winner is the UAE, where stocks have soared 192% from the beginning of last year. Egyptian stocks have risen 137% while Saudi stocks are up 97%. In Kuwait, equity markets are up 83% and represent the laggard. The wealth of the Arab world has been climbing steadily as they trade their vast oil resources for dollars. Remember that every four out of ten barrels of oil used around the world is produced by the OPEC cartel. Add that growing revenue to established wealth and you have a recipe for a speculative frenzy as individual investors pile more cash into the markets, chasing the easy money. In a Jan. 5 article, respected British magazine The Economist noted that "share prices have risen to a giddy 40 times earnings. Some 3 million Saudis, close to half the adult male population, now hold local equities. Sober financial minds fear that if the bubble were to burst, the middle classes would get hit." The following month, a Forbes columnist followed the fortunes of a local man who sought change in his life by following twin codes. First, he would earn enough in the stock market in Jeddah to live comfortably in the future, and secondly he'd resume his study and practice of Islam. In the previous six months, he'd made $300,000 by day-trading those volatile Jeddah stocks.
As public interest attracts cash into stocks, where even fools can make a fortune, companies flood the market in the warm waters with initial public offerings (IPOs). Some investors are liquidating their existing stocks in order to get in on potentially more lucrative IPOs today. Other IPOs have been cancelled before the ink on the prospectus is even dry. When Abu Dhabi-based Dana Gas floated its stock in September 2005, an alleged 33,000 Saudis crossed the border to the United Arab Emirates in order to buy it. At the same time, Dubai's Gulf News reported that would-be investors destroyed furniture and beat up security guards as they attempted to storm at least one bank in the desperate melee to become shareholders. In 2005, Cairo's benchmark index gained 77%, giving Egypt the best-performing index of any country in the world. Shares there peaked on Feb. 1 this year. As with any extended bull market, the established trend can continue over time even though fundamentals no longer support investors' rationale for continuing to buy at higher and higher prices. Here's a reality check: Remember back as far as 1998, when you could have bought shares in Amazon.com for only $11 each? Within six months those same shares had not only doubled and doubled again, but they'd doubled once more, hitting $88. By April, those $11 Amazon.com shares had added a further $90 to the sale price and traded at $101 apiece. So it's not just some crazy Third-World exuberance we're seeing here. The Arab stock experience, in what is a highly developed and affluent society, is large as life and subject to those same bubble laws that you and I experienced at the turn of the millennium. Accompanying any bubble are spectacular rises in valuation, which seem to be continually justified. On March 2, Saudi stocks traded at 38.6 times estimated earnings. Egypt's stocks were trading at 18.6 times earnings, while a key value of emerging markets – as measured by the Morgan Stanley Capital International Emerging Markets Index – was far more conservatively priced at 12.7 times. Note that the S&P 500 index trades today at a forward price earnings ratio of 15.4 times. As more money poured into the Arabic-speaking exchanges, investors seemed prepared to pay even higher premiums in order to earn a dollar of earnings. The price-to-earnings ratio of many of these stock indices has become vastly overvalued and has resulted in crashing stocks – as investors all bail out using the same tiny doorway through which they entered. But the damage is huge. By most historical standards, a 20% decline signals a bear market. Using that measure, as of early this week, only Kuwait's market has yet been spared the ravages of the bear claw. Its stocks have fallen just 17% since peaking in November 2005. But share prices in Qatar, Saudi and Egypt have lost about one-quarter of their value since they hit their peaks. In the case of Qatar, the decline has spanned six months, while in both Saudi and Egypt, stocks have fallen off a cliff since as recently as February. As this news broke Tuesday morning, there was little reaction from major Western bourses in fear of global contagion. America's markets marched ahead in the face of rising oil prices. I wonder if it's because the valuation here is less heady?
Editor's Note:Triple Edge Alert, Andrew's options trading service, is designed to capitalize on volatile markets everywhere. Check it out here. Commodity Corner
One of my central themes here at MoneyNews.com is that commodities in general will continue rising, while the dollar will resume its decline. The big winners are likely to be precious metals – of which the most commonly followed is gold. Last week I took a shine to silver, and this week I thought I'd update you on both precious metals. The silver market really has the bit between its teeth right now.This week, May silver futures put in a new high at $10.46 per ounce for this current bull market. Gold, on the other hand, was unable to improve on its $571.25 high from March 2. Even if it vaults that hurdle, it has to crack the next one at $575.35.
That's another way of saying that the ratio between the two metals is narrowing – it takes less silver to buy an ounce of gold. As I spelled out last week, that's probably because silver is becoming less "precious" and more industrial, as there seems to be no shortage of uses for the metal. I noted that silver could trade up 10% by the time May rolls around. But it's clear that silver is taking a lead role as the metals market blasts off. In the above chart, you will see that as the ratio falls, less silver is required to buy gold. Since May 2003, silver has come back into fashion. Looking back between 1991 and 1998, the same trend emerged – as silver appreciated relative to gold. That trend continued until the ratio stood at a value of around 46 times.
Assuming that gold stalls at its February high ($575.35) and silver appreciates to the 1998 ratio low (46.5 times), we'll see silver trading at $12.37 per ounce.
Editor's Note:The bull market in commodities is far from over. Find out what the top-5 locked-in profit trends are. Go here now.
Andrew Wilkinson P.S. Warren Buffett is so convinced we'll see a steady downward spiral to the value of the dollar in 2006, he's placed a $16.5 billion dollar bet to back it up. Discover how to cash in on his big bet now in our FREE MoneyNews special report. Go here now.
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