A Value Investor Goes Macro

 | Sep 05, 2012 | 4:30 PM EDT
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Occasionally, I take my head out of the paper pile and take a more macro look at the world markets and market sectors. This has led me to some solid investments over the years and even a few trading opportunities.

Just a few months ago, I noted that Spain and Italy looked like they were pretty close to the point of maximum pessimism, and both have lifted nicely since then: The iShares MSCI Italy ETF (EWI) is up 17%, and the iShares MSCI Spain ETF (EWP) is up more than 20%.

The weakness we saw earlier this year in natural gas stocks has also led to some strong long-term opportunities for investors. I am not a macro guy, but I look for unusual weakness.

When I look at index returns, the worst two for the past year have been China and India, as measured by the returns of the index iShares. Hong Kong and Shanghai have both turned in dismal performances over the past 52 weeks. They are at the point where I may ordinarily begin to be interested, especially the MSCI China small-cap indices, which are all down more than 25%. However, although I recognize China's rising influence on the world's economic stage, I will not touch its markets, and I view all information out of China as suspect. I track the country's economic performance in terms of cash paid to U.S. and European corporations for products and services. By that measure, the Chinese economy is weakening.

Latin America remains weak as well. The Brazilian markets have seen the decline slow somewhat, but the iShares for that nation are still off more than 17% in the past year. The Brazilian central bank has been aggressively lowering interest rates, and that could eventually push some local capital into the equity markets in search of higher returns. Although economic growth remains weak, the Brazilian finance minister recently said that he expects the growth rate to grow at an annualized 4% by the end of the year. Brazil's largest export market is China, so that could be a tough objective to reach, but the market certainly appears cheap, given the rapidly falling interest rates and tax rates. Earlier this year, real estate vulture investor Sam Zell called Brazil one of the more attractive markets in the world, and it is worth the time to do some bargain-hunting in that region.

Zell also spoke favorably of Colombia, a market that has fallen by more than 14% so far this year. I am intrigued by the idea of buying shares of Banco Latinoamerican de Comercio Exterior (BLX), a Panama-based trade finance bank. The shares are listed on the New York Stock Exchange, trade right at book value and pay a healthy 4.75% dividend. Latin America may be struggling a bit economically right now, but I believe it will eventually resume its upward trajectory and grow faster than the rest of the world in a global recovery.

Here in the U.S., my very occasional macro and technical check shows me that in the short-term, my key indicator, the high-low index, is approaching the level where markets have gotten toppy. The intermediate-term picture as measured by the bullish percent indicator is approaching overbought but not yet grievously. Add this to the slowly rising put/call ratio, and I would say that this market could push its way higher before we get any kind of real selloff. I am not a buyer of much here, but I am not in any big rush to sell anything I already own either.

The real interesting observation from studying the domestic market is that while restaurants and some retail stocks seem to reflect a recovering economy, stocks of companies such as U.S. Steel (X), Cleveland Cliffs (CLF) and others are predicting a severe recession and are trading back to the 2009 lows. The worst-performing group is the coal-mining industry, as changes in the regulatory environment and weak global demand have just crushed pricing and margins. The stocks may appear cheap, but none of them have respectable credit scores, and if you must play the group, debt securities are the way to go.

In spite of all the news and fury coming from the media's talking heads, the macro picture is very boring at the moment. Nothing is maximum-pessimism cheap at this time, as hopes for stimulus from the U.S. and European Central Bank have propped up prices around the globe. The market continues to be one of waiting for opportunities and holding what you own, for now.

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