Winter Olympics and Contrarian Trades

 | Feb 06, 2014 | 11:30 AM EST
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It's been an interesting start to the year. I'll tell you about a small mistake I made -- I got very bullish on emerging markets towards the end of 2012.

I didn't get long Brazil or Turkey, mind you, but Russia, which at 5x earnings looked very attractive. I knew about Putin and the poor investment climate, but at five times -- for crying out loud, I'll take my chances. I bought Market Vectors Russia ETF (RSX).

The results were great initially. I bought RSX around $25 and it quickly traded up to $30, but in the emerging-markets meltdown it has drifted back down to my cost basis.

Now, we have the Winter Olympics going on, and anyone who likes Farmers Almanac stock market trades will tell you that the local equity market usually peaks a month before the event. Beijing 2008 was the best example of that and Athens in 2004, I'm not sure what Sydney did in 2000, but you get the point.

I'm not sure the Olympics contrarian trade works this time around. First, nobody likes these Olympics. They are getting all kinds of bad press. There is the $50 billion boondoggle and the rounding up of stray dogs and the hotels and spray-painting grass. Then there is the Kabuki theatre of releasing Pussy Riot and Khodorkovskiy. People are very bearish on these Olympics. I don't think this is a top at all. I think it is a bottom.

I like RSX and I am holding onto it. I have been through my share of EM crises and it is worth pointing out that usually they start when someone doesn't pay their bills. This is the first one I've seen that is getting blamed on the Federal Reserve. It's a liquidity crunch, not a default or a balance-of-payments crisis (except for Turkey). Argentina should not even be considered emerging at this point, and could probably be excluded from the discussion.

Maybe I am suffering from bias, but as I look across the investment landscape, I would rather invest in something creditworthy. Even Turkey has practically no debt. I think the anti-austerity crowd was somewhat successful in discrediting Reinhart and Rogoff because of a spreadsheet cell. That is too bad, because we have stopped having the discussion about debt and deficits.

Yet we have a controlled experiment playing out before our eyes, where Ireland embraces austerity (and enjoys record-low bond yields), and France rejects it -- and they are falling apart. People never seem to learn.

I'm afraid being an emerging-market investor means more than just buying IShares MSCI Emerging Markets (EEM)  or Vanguard FTSE Emerging Markets (VWO) and forgetting about it -- it all used to be the same story but it is very idiosyncratic now. I prefer single-country ETFs. I like RSX, and I own it. I also believe the problems in China have been blown way out of proportion. Look at iShares China Large-Cap (FXI).

I believe this entire episode is the result of a liquidity crunch and is an opportunity. The trading aspect of it is trickier. There is nothing worse than buying too soon.



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