Reading Emerging Market Tea Leaves

 | Mar 11, 2014 | 11:30 AM EDT
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I'm traveling now, on a short vacation to Asheville, N. C. You know how it is when you travel. Sure, you can pull up quotes on your phone (I happen to have Bloomberg) but it is hard to really keep up with things unless you are at your desk, in front of your screens.

All I know is that my portfolio has really gotten flushed the last two trading days, and it hasn't been fun.

Not only am I wrong, I'm really wrong. Since the New Year, I've gotten really bullish on commodities and emerging markets. And commodities and EM just keep getting worse and worse. In the last two days, copper was down six percent and China put in new lows on bad export data (though admittedly, there seems to be more to the story). So being bullish commodities and EM has been the wrong trade.

I own Freeport-McMoran Copper (FCX). It has a sizable valuation margin for error, so I am not considering selling it. But FCX, oil and gas acquisitions notwithstanding, is very leveraged to copper prices, and copper prices, rightly or wrongly, are very leveraged to what is going on in China. But I think that the market has a view of China that is about 10 years out of date -- the days of Chinese infrastructure spending and the resulting commodities boom are in the past. They now are focused on consumption rather than investment. But that doesn't mean that copper isn't a buy -- especially in the two handle.

What I am looking for is a return of the inflation trade, where real assets outperform financial assets. Gold, ags, emerging markets, all went up -- for years. Then, there were some financial excesses in emerging markets (Brazil is admittedly a mess) and for the last three years, developed markets have done better. But if I am a global investor, as I look around the world, emerging markets have no debt and still lots of growth. Developed markets have unsustainable debt and no growth. This is an easy one, folks.

Emerging markets have reached historically cheap valuations. What if I told you that all of Russia was trading at 0.5x book? Weak property rights or not, I will take my chances at 0.5x book, especially when the first thing Russia does after the Crimea incursion is to raise rates 150 basis points. Who, in the West, is raising rates?

There are all kinds of ways to skin the investing cat. But one proven way to succeed is to buy cheap assets and hang onto them over time, until they become more fairly valued.

I am not above chasing growth stocks around. But for the core of the portfolio, I like value -- with that margin for error. I can be wrong on Russia (RSX) or FCX for a while and not get myself into too much trouble. In each case, I am getting paid to wait, with hefty dividends. I wish my timing were a little better, but you can't win 'em all.

I have a feeling the EM/commodities trade is going to be heavy sledding for awhile. That's okay. A former boss once called me "long-term greedy." I couldn't agree more.

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