Don Dion’s Weekly ETF Blog Wrap
This week on RealMoney, Don Dion blogged on his bullish outlook, Goldman Sachs and emerging-market ETFs.
In the Dip-Buying Camp
Posted 8/27/2009 2:19 p.m. EDT
Doug Kass’ excellent article yesterday continues to generate interest. I don’t foresee a market top here, but if Kass’ call is right, I place myself in the dip-buying camp with Jim Cramer.
Kass says the market has topped for the year, but I’m bullish for the next 12 to 18 months and a dip sometime in the next four months would make me more bullish due to attractive valuations.
Low interest rates and Federal Reserve policies already healed much of the credit market and the Fed remains committed to its low interest rate policy. We’re seeing a surge in home-buying as first-time buyers take advantage of the tax credit, the same way we saw a surge in auto sales. This will accelerate the drawdown of existing housing inventory and lay the ground for a solid recovery.
From speaking with clients and other business owners, the inventory need is real. Panic on Wall Street spread to Main Street and many businesses battened down their hatches. They didn’t just deal with the tough economy; they anticipated the next shoe to drop. As they restock, we’ll see fourth- and first-quarter earnings improvements. Favorable year-over-year earnings comparisons will build confidence and lead to a sustained recovery.
Consumers also increased their savings in anticipation of a worse situation and we’re seeing consumer confidence improve. Savings in the bank are good for confidence and the move to higher savings rates will not move in the almost straight line we’ve seen in the past year, but adjust over years.
Finally, I’d say that if Kass is right about the top, should the ensuing selloff be significant enough to scare the public, concerns over health care and energy bills (and possibly even the deficit) are misplaced. There will be no significant legislation passed by the Democrats because they will face the prospect of losing control of the House of Representatives.
By this time next year, pundits will be discussing a political shift on the scale of 1994. That will either force Obama to the right, as we saw with Clinton, or it will pave the way for a total reversal of the 2006-2008 electoral pattern in 2012.
Recall that in the early 1990s, there were deficit projections as far as the eye could see, but following the Republican takeover, a political stalemate led to balanced budgets. Today’s huge deficits will not materialize because the American people are even more anti-deficit today than they were when Ross Perot received 20% of the vote.
Kass nails all the concerns and trends as they stand today, but I’m looking out to next year and I see a different picture emerging. It takes time for the facts on the ground to work their way into economic statistics and political realignments, and if he’s right on the market, I see it as reinforcing longer-term positive trends, not derailing them.
Goldman Sachs’ Unwanted Attention
8/24/2009 11:12 a.m. EDT
Goldman Sachs(GS) may rue the day it got into bed with the U.S. government if trends in public opinion continue to develop. From a Rolling Stone expose to political pundits and concerns about high-frequency trading, Goldman Sachs’ name keeps turning up.
Now The Wall Street Journal is asking questions about its “trading huddle” where analysts and traders discuss thoughts on the market and, in at least one case, offered meeting advice that differed from a published report.
On the surface, it doesn’t appear that Goldman did anything illegal nor is there clear evidence of unethical behavior. The meetings were focused on short-term trading ideas, not long-term ones found in analyst reports. Furthermore, one might ask why an investor or trader would be a client of Goldman Sachs if it didn’t deliver an edge.
Instead of focusing on this specific incident, which doesn’t show evidence of clear wrong-doing, I’d ask why the Journal ran this story on the front page. I believe the answer is that the public is not happy with financial institutions in general, and certainly not with firms that have benefited directly from cash infusions or indirectly through the selective bankruptcy of the competition and cash infusions that passed through other firms. In addition, Goldman’s close ties to the federal government raise the ire of taxpayers miffed about huge deficits.
The end-result is likely to be tougher-than-expected regulations. As much as corporations are able to lobby Congress for favorable outcomes, they are almost powerless against widespread negative public opinion. Politicians who might normally favor less-stringent changes will not step in front of a runaway train.
President Obama and the Democrats are already looking at large losses in 2010 due to their botched efforts at health care reform. Deficits, climate change, bailouts and the stimulus are all losers for the party heading into next year as things stand today. Financial regulation could be an easy win because Republicans won’t want to be seen as defending financial institutions.
ETF investors need to consider potential new regulations as part of their long-term planning. Commodity and leveraged ETFs have come under attack and regulation could eventually change the way investors access these asset classes. Financial regulation will be even more far-reaching, affecting everything from insurance to mortgages. Public sentiment suggests the industry is about to land in the government’s crosshairs.
Turkish ETF Runs Ahead of the Field
8/25/2009 4:28 p.m. EDT
While several emerging-market ETFs have seen their returns wane in recent weeks, iShares Turkey(TUR) advanced to higher ground.
In the past month, developed markets were some of the best-performing ETFs, with iShares Austria(EWO) up 19.38%, iShares Australia(EWA) up 10.73%, and iShares Belgium(EWK) and iShares Sweden(EWD) close behind.
Market Vectors Russia(RSX) was a strong emerging-market performer, up 8.66%, while iShares Brazil(EWZ) gained 7.29%.
TUR’s 17.28% rally left these funds in the dust. I could cite some economic data, but the Turkish story is not so compelling that it necessitates such a large level of outperformance.
Year to date, TUR is up 86%, right behind RSX’s 87% return, but RSX is up only 11% in the past three months, compared with 40% for TUR.
TUR has strong momentum and will rally as long as current trends persist, but the next closest emerging-market fund over the past three months — with the exception of another outlier, Market Vectors Indonesia(IDX), up 33% — is iShares Thailand(THD), up 21%. That suggests Turkey may have run ahead of itself.
