The Global Perspective (Archive Edition)

Dreaming of U.S. October Payrolls

Around 1964, Paul McCartney dreamed the entire melody of the hit song "Yesterday" while sleeping over at his then-girlfriend Jane Asher's Wimpole Street, London apartment.

Sometime last week, I was sleeping over at my girlfriend's apartment just off Amsterdam Avenue, in Manhattan, and I had a dream: about U.S. October payrolls. (I confess, this may seem somewhat sad to the average reader).

I dreamed they were much better than expected, shrinking around 30,000 - 35,000 (that compares with 159,000 job losses in September). I think the exact number was 33,500. I also recall dreaming that the market surged on the announcement, though I can't remember by exactly how much.

Let's see.

Sign Of The Times

Mostly, I'm pro words over pretty pictures. This however, points out well how out of touch the McCain campaign (and Sarah Palin in particular) is with current events:

Understandably, most Americans just don't care about terrorism right now - and neither does the world. (For the record, I do not care for "terror-talk" much, either, but I never have done). They want a leader -- any leader -- who can show some kind of firm grasp on economic affairs.

There are more of these cartoons over at Cagle

Morgan Stanley: When Asian-style rumor mongering comes to Wall Street

After a ban on short-selling was lifted at around midnight last night, Morgan Stanley is off around 16% in late-morning trading Thursday. Rumors are swirling around New York dealing desks, and they range form the most bearish spectrum to the most bullish. One rumor has it that Mitsubishi UFJ may have pulled out of its $9 billion investment in Morgan Stanley (despite official protestations to the contrary by both parties), to the Japanese bank wanting to nab the whole pie at $12 a share.

Welcome to the world of Asian banking. Largely colorful, and dominated by a constant rumor-flow, share prices can often swing wildly in the space of hours. That's unlike in the U.S., where rumors do exist (obviously), but in a much more toned-down fashion. The problem is that when Asian-style rumors take hold of a U.S.-scale market, the consequences are potentially magnified enormously. And so it is for Morgan Stanley.

Because much of the information coming out of news rooms and dealing floors in New York tends to be pretty accurate by global standards, market participants and financial journalists in the west are unprepared when someone says that, for instance, Mitsubishi has pulled out of buying an ailing U.S. bank. Japan is a long, long way away. If you've ever tried getting through to someone at a bank over there, you'll know how tough it is just getting the right person on the other end of the line, let alone getting any kind of statement. Zip-lock doesn't even describe the banking culture. This makes garnering any meaningful information or comment doubly frustrating.

All the above is having an adverse impact on Morgan Stanley's share price this morning. Instead of buying (or selling, as the case might be) into the current rumor-flow however, investors should think like their Asian counterparts in such situations: with a little dose of critical pragmatism.

First of all, Mitsubishi has taken the extraordinary step of announcing its intention to purchase Morgan Stanley. Again, if you know Japanese banks, you realize just how unusual this is. Secondly, as I've pointed out before, this deal makes a lot of sense for Mitsubishi: there's little reason why they'd want to abandon it (especially at such a late hour).

Finally, the U.S. federal government has announced its intention to potentially buy shares of banks, a la its British counterparts. Presumably, Morgan Stanley qualifies in this respect. That can only be a positive thing for the stock price.

Simply put, short-selling Morgan Stanley right now is not only illogical, it could be really dangerous. This is a bank that too many parties are too heavily vested in right now to see it fail.

iBank 2.0

If you could get front-row seats to see anything south of Houston Street, one of the top picks would have to be watching equity salesman on Wall Street come up with new, devious ways to sell debt-ridden investment banks. After all, it can't be easy getting the slimy paper of Lehman's or Merrill Lynch or even the more reputable stuff like Morgan Stanley or Goldman Sachs off your books. If only the federal government could come up with some kind of repackaging scheme -- such as the way developing countries did 20 years ago, by re-branding themselves "emerging markets."

Welcome to iBank 2.0! iBank 2.0 is my suggested re-branding method for all investment-oriented banks (let's get real: "bank holding company" somehow doesn't sound quite so sexy when you're trying to offload multi-million share packages of your stock to anyone but a lone billionaire value investor or your government).

If you're an equity salesperson looking to unload stock of perilous investment banks, here's a quick Q&A which you should feel free to copy and paste as you like:

Q: What is an iBank 2.0? It sounds kind of like the same thing as before, but with a cutesy software-package sounding name?

A: On the contrary. We know the name sounds sexy, but it's much more than that! iBank 2.0's are the next generation of investment banks, with added features. These features include:

Government Ownership: While you may have heard a lot of bad press recently about investment banks being "bailed out" by sleepy government officials, we fully expect iBank 2.0's to benefit hugely from the new, aggressive interest of international governments in this next generation of banking! Imagine all the kinds of Carlyle Group-style defense deals the iBank 2.0 is now exposed to, compared with before, just by being so close to the federal government. Also, governments have consistently shown themselves to be long-term holders of stock, meaning there's extra protection to the extent of your downside. This is a pure upside play!

Limits on short-selling: Because of the government vested interest scheme described above, we fully expect iBank 2.0's to benefit from official intervention in market trading if greedy short-sellers decide to pound your stock! Another limit on your downside!

iBank 2.0's take deposits!: One of the most frustrating things about the traditional investment banking model was that it was constrained from taking deposits, meaning less money for high-risk bets that earn you as an equity holder big gains. Now that's all changed! The iBank 2.0 can take as many consumer deposits as it wants, thus giving it extra ammunition in the increasingly competitive global investment arena. However, because of this feature, your deposits may not actually be as safe as they previously were (just like pre-Glass Steagall). Therefore we recommend getting any spare cash you have sitting on a stable interest-paying deposit account and instead loading up for maximum advantage in iBank 2.0 stock.

Asian bank ownership: With the growth of China and India, it's increasingly important these days to be close to the ground in the booming Asian region! That's why iBank 2.0's are nearly all at least 5% owned by a major Chinese or Japanese bank.

Q: Sounds good. But I've heard that these new entities are going to suffer a slower growth rate than the old investment banks, because of increased regulatory oversight.

A: First of all, they're not just "entities," they're iBank 2.0's! But let us explain. Whenever an industry is in transition, there's always talk of more regulation leading to slower growth. However, in practice this never really happens at all. Instead companies find all sorts of creative ways to take the high-risk stuff offshore, away from the wandering eyes of those regulators! In the case of iBank 2.0's, the offshore location is the crazy, debauched city of Tokyo! That's the very reason why Asian bank ownership is an in-built feature of the iBank 2.0 -- that way, the high risk stuff can all be offshored to these semi-parent entities.

Q: OK, I see. But then there is the question of management. I've heard that the most important aspect of a company is its management. Is the lousy management that ran traditional investment banks going to remain the same in these iBank 2.0's?

A: No! The best part is that they've all been fired, and that the government is putting up roadblocks on the ironclad severance packages they had previously negotiated, meaning iBank 2.0's should probably not have to pay for the previous generation of investment banks' mistakes!

Q: I like the sound of these iBank 2.0's, and I'm becoming convinced, but I have one last question. When I look at the balance sheets of these things, they still look like ailing investment banks that have been bailed out in a recessive and vulnerable economy. That's not where I want to put my money, is it?

A: A balance sheet is at best a snapshot of a company last quarter. Because iBank 2.0's are SO NEW (i.e. created in the last few days) you can't accurately see them yet on a balance sheet. That's why it's crucial to get in now, before all the other investors see the above. But there's also the issue of creative destruction at play here. Creative destruction was a theory developed by Harvard economist Joseph Schumpeter. Creative destruction is the process whereby an industry is overhauled as a result of new, improved product (and operational) performance of competitors. What we are witnessing now is the "creative destruction" of the investment banking industry, whereby the new iBank 2.0's will prevail as the global winners in the investment arena.

U.S. Financial Crisis May Serve Japan's Banks Well

For global investors, a glint of hope in the recent U.S. financial sector crisis may come in the form of a long-awaited boon for Japan’s “megabanks”.

For many years, banks such as Mizuho Financial, Mitsubishi UFJ and Sumitomo Mitsui Financial have been stuck in a stagnant domestic growth cycle that has limited the extent to which they have been able to compete at the aggressive level of their U.S. counterparts. Many employees at Japan’s Nomura talk of a stifling, hierarchical culture that has so far led to a disproportionate number of that investment bank’s biggest rainmakers seeking out jobs at higher-paying hedge funds.

Thanks to the financial sector crisis in the U.S., some of those problems may be about to change. What’s more, investors willing to take the risks may be able to get in what amounts to the ground floor of the next boom in the Japanese investment banking industry.

In recent years, growth has been sluggish at Japan’s megabanks. At around $8, ADRs in Mitsui UFJ are going for the same price they were back in the summer of 2004; Mizuho is trading around half its 2004 valuation; after a brief lift-off, ADRs in Nomura are back at 5-year lows.

Some of this is due to perceived hostility to foreign investment among Japanese companies, at the same time as China’s big banks have opened the floodgates to American and European fund managers looking to get a slice of the Asian growth equation.

That may be about to change. In recent days Japanese banks have shown uncharacteristic savvy and aggression in competing for the U.S. assets of their market counterparties. Making the headlines was Mitsubishi UFJ’s $8.4 billion acquisition of around 20% of Morgan Stanley. That makes Mitsubishi look decidedly savvier than China’s private sovereign fund (earlier in the year, China Investment Corporation, a $200 billion acquisition giant, snapped up 10% of the bank for around $5.5 billion).

Nomura is picking at slices of Lehman Brothers, days after Barclays looked like it was the only international investment bank in the bidding, with a $1.75 billion offer for the U.S. business. Sumitomo Mitsui Financial, which invested $901 million in Barclays in July, is also said to be sniffing around the Lehman carcass.

Mizuho Financial is strengthening ties with the new Merrill-BoA conglomerate, after having invested $1.2 billion in Merrill in January this year.

SPREADING YOUR RISK IN JAPAN

A basket of four or five Japanese banks – at valuations close to, or at 5-year lows – looks like a savvy buy right now, for this may be the only safe and effective way for U.S. financial institutions to get a spread of risk in an ultra high-growth regional economy.

Japanese banks have benefited from increasing synergy with their U.S. competitors, while they arguably understand the risk management side of the business better than anyone else today.

With the last two U.S. investment banks, Morgan Stanley and Goldman Sachs, now wrapped up in increasing regulation as a result of becoming bank holding companies, Japanese counterparty banks may be the ideal proxy in which U.S. banks can get a footing in the higher risk-reward return environment that has traditionally provided for the huge bonuses that keep them competitive on the global stage.

The Future of The House Of Morgan

"There's no reason a Goldman Sachs or a Morgan Stanley should be forced to sell themselves in a shotgun wedding if they've got economic models that work, and they do." - David Katz, Matrix Asset Advisors

The 4% rise in shares of Morgan Stanley at Thursday's market close will come as small consolation to the shareholders who have so far lost close to 60% of their money in the blue-blooded investment bank this year. But for all the talk of a potential buy-out, the investment arm of the House of Morgan may just remain independent. And despite speculation to the contrary, a buy-out by a purely commercial bank such as Wachovia is more unlikely than it appears.

Partly this is thanks to  federal policymakers, who are waking up to the fact that much of Morgan Stanley's -- and by extension the market's -- woes are due to short speculators rather than any sort of genuine liquidation. That's a situation which stands in stark contrast to around this time last year, when funds were unloading shares in order to repay subprime-spurred losses on defaults of mortgage-back securities.

But it's also that the math doesn't add up. Morgan Stanley's valuation, at around $25 billion, is less than the value of the total assets the bank manages. That's much more of an investment banking style trade than it is one a commercial bank understands, or pursues. In other words, if anyone snaps up Morgan Stanley, it's much more likely to be Citigroup than Wachovia.

Stephen Grocer at the Wall Street Journal adds:

That aside, Salmon has reservations about the deal, among them whether Wachovia is big enough to save Morgan Stanley.

Indeed, what may keep Morgan Stanley from being swallowed up at all is the bidding likely to ensue for the firm, which in turn, would result in a temporary run on its stock. Already this morning there was speculation than China investment Corporation, a $200 billion acquisition giant which owns a 9% stake in the bank, may snap up a larger slice.

It's worth remembering too that Morgan Stanley -- like its nemesis Goldman Sachs -- has not been without its share of problems in the past. The difference between Morgan Stanley and Goldman Sachs however (which investors are ignoring right now) is that Morgan Stanley has weathered it's woes as a public company before, whereas the latter has not.

Whatever the outcome, it's certainly worth buying into any dips in Morgan Stanley over the next couple days, because the chase to acquire it will be much more aggressive than for smaller siblings Lehman Brothers and Merrill Lynch. And if Morgan Stanley manages to remain independent, it's a long-term win-win for everyone.

Breaking The Glass-Steagall

OP-ED

If you work for a federal regulator right now, or you are in any way whatsoever connected with fiscal policy in the United States, here's a piece of advice: turn off your television, pack your bags, leave your laptop at home, and go spend the next week with a pile of unread Grisham novels on a beach in the Mediterranean (the weather is great at this time of year).

The crisis begun on September 15 on Wall Street has finally entered its lunacy phase, and it would be best for everyone - federal regulators especially - to take no notice. Sadly, that's unlikely to happen, and the mess we find ourselves in now is only likely to intensify over the long-term. The reason: an old, seemingly forgotten act called Glass-Steagall.

BRIEF HISTORY AND INTENT OF GLASS-STEAGALL

Glass-Steagall is a law that essentially mandates the separation of commercial and investment banking activities. Presciently, it was introduced in 1933 in order to control the effects of stock market activities on everyday consumers. Specifically, it prevents a "deposit-taking" bank (such as your local Bank of America) from engaging in speculation activities (such as buying mortgage-back securities).

As a law, it makes sense: after all, it's difficult to imagine anyone wanting to harbor their savings in a bank which is making butterfly-spread crack oil trades that only a very select few people understand (or think they understand, as the case might be). As piercing as that logic might be to anyone, in November 1999, Congress killed the act when it approved the acquisition of Salomon Brothers (an investment bank) by Citigroup (then a pure deposit-taker).

Fast-forward another nine years, and investment banks and commercial banks are being handed out free doses of Viagra before they've even thought about getting into bed together. Monday, federal regulators all but arranged a $50 billion (in stock) buy-out of Merrill Lynch by Bank of America. Meanwhile, Barclays is being shown the red carpet to Lehman Brothers.

IMPLICATIONS

The irony surely cannot be lost on anyone: Glass-Steagall was implemented as a response to the 1929 Wall Street crash, where banks lost millions of dollars, and with it, much of their depositors' savings. Seventy-nine years on, and federal regulators have unsurprisingly found that the only companies around with enough cash to buy ailing investment banks are the ones looking after consumer deposits. That, of course, is proof of the success of Glass-Steagall.

Federal policy in recent days is like using your kid's trust fund to pay off last year's gambling debts, while using still more to double-down on the next Yankee's game in the hope that this time they finally beat the Sox.

From an investor's perspective, it's a wonderful thing, short, even medium-term, just as the kid's trust fund money is for any down-on-his-luck Major League Baseball spread-betting aficionado. It's why I suggest that everyone right now should pile into BoA stock. To extend the analogy, by buying Bank of America at its now greatly reduced price -- with a sizeable increase in the risk component of the bank -- you essentially get a wad of free money to play a whole host of MLB games, which, for a certain period of time, will turn out trumps-up (the Yankees have to beat the Sox sometimes).

But what happens the next time the bets turn sour?

FURTHER DEVELOPMENTS

Worryingly, less than a full day after announcing better-than-expected earnings, Morgan Stanley is plummeting 30%; Goldman Sachs is down 20%. As federal regulators reward the investment banks that have least efficiently managed their risk portfolios with injections of retail banking fresh cash, those that have been fairly responsible in doing so are getting punished by investors. If that scenario continues, then the banks that have been responsible face no option other than to be acquired by commercial banks, thus expounding the level of risk within the financial system.

Left to their own devices, time has shown that stocks with healthy balance sheets and operating systems recover efficiently, and so it would be for Morgan Stanley and Goldman Sachs, the last two independent U.S. investment banks standing. When regulators impose unnecessary artificial stimulae on the financial system however, the risk aspects of that system mutate, often with dramatic long-term social consequences.

It seems the millennium bug many feared would lead to Armageddon eight years ago may not be in the technology of our financial systems, but rather in its Ecosphere. Federal regulators need a holiday before they completely dial back Wall Street's clock one hundred years. 

Black Monday II?

"How did this mess get so big?" – Steve Levy

“The tectonic plates beneath the world financial system are shifting, and there is going to be a new financial world order that will be born of this.” – Peter Kenny, Knight Capital

SUMMARY

How fitting that we are barely a month away from the anniversary of October 19, 1987; it’s quite probably fair to label today Black Monday the Second. With the Dow Jones plummeting 4.4%, to 10,917.51, wiping out over  $300 billion of market value in the United States, Monday September 15, 2008, is up there with the worst of them.

Only Bank of America came riding in on a white horse this morning with a $50 billion offer for Merrill Lynch. Even then, the market showed little signs of gratitude: Bank of America had lost 21% of its valuation by the final bell. At the grand old age of one hundred and fifty-eight years old, Lehman Brothers was laid to rest.

SAYONARA SPECULATION

Now the talk is turning back to speculation that the world’s largest economy is facing an early 1990’s Japanese-style debacle. This was a story I broke back in March this year at TheStreet.com, under the title “Fed Playbook Looks Familiar to Japan.” From the article:

The theory, which has gained popularity over the past week, originated in a trading note that has been passed around dealing floors in Hong Kong and Japan. The note, titled "Is Bernanke making the same mistake as Japan?," was issued last Wednesday by Gavin Parry, a director of Hong Kong-based Helmsman Global Trading, a Japanese and Asian trading specialist for U.S.-based hedge funds. So far, it has inspired broad appeal.

"There are two basic options in front of the Fed," goes the argument. The first is "a quick cleansing of the system," such as dramatic interest rate cuts and subsidies to bail out the financial markets. The downside, Parry argues, would have dramatic social consequences however, such as high unemployment and consumer price inflation.

"Alternatively the Fed can copy the Japanese strategy and put everything on life support and spread the pain over a longer period," writes Parry. This, some argue, is exactly the strategy that Bernanke is pursuing now, which raises the question of whether America will one day begin to look like Japan.

This weekend, Tony Tan, deputy chairman of GIC, Singapore’s $100 billion sovereign wealth fund, made similar remarks in Geneva. More here, here, and here.

SEPARATING SPECULATION FROM SPENDING

What is most surprising about the Lehman’s debacle is that there were no sovereign wealth funds around looking to pick up a slice of the American Pie on the cheap. With dwindling oil fortunes, this would have been a great long-term diversification opportunity for many a foreign investor. It’s difficult not to speculate that perhaps some of those sovereign wealth funds being touted as harbingers of the world’s capital are a little poorer than previously thought. There is, however, another possibility no one is stepping in to buy Lehman’s: investors are confusing market value with fundamental economic value right now (it’s a surprisingly common mistake, even -- or maybe especially -- among those with Harvard PhD’s).

The distinction between market value and economic value in an economy is key to successful investing. In fact, it’s precisely why investors such as Warren Buffet have made so much money. Singapore's Tan is too, quite possibly confusing the two concepts.

In a nutshell, the key difference between the two value concepts is that market value is the price speculators are willing to pay for something (such as a stock), whereas economic value is the price consumers are willing to pay for something (such as a Coke). When there is damage in the latter camp, the effects are long-lasting, and felt in every household. On the other hand, damage to market value is much more instantaneous and headline-grabbing, but tends to pass much faster too. What we are witnessing today is damage to market value, not economic value in the U.S. 

Many readers express surprised at how bullish I remain on the economy overall. But critics miss the point -- even IF the U.S. is headed toward a Japanese style financial tsunami, for most investors days like today (and you can be sure, tomorrow and the next day, too) offer wonderful buying opportunities. All of a sudden, Bank of America wields enormous power in the world of the U.S. consumer, shadowing rival JP Morgan Chase. For sure, there’s a ton of work to be done in synergizing such a gigantic corporate monolith (not to mention lots of IF’s over whether such synergies will work at the operating level), but, assuming the deal passes, BoA all of a sudden has a disproportionate slice of U.S. economic growth, and hence, global growth.

Even companies unrelated to Wall Street’s risk-management massacre are suffering. For example, Google, China Mobile, and Coca-Cola are all sitting at or near 52-week lows. Granted, there are stock-specific reasons, such as China’s telecom shake-up, and Coke’s battle vs. the rising dollar. Still, none of these companies manufacture or provide products that consumers stop purchasing or using in times of recessive activity, if such activity exists at all.

Sensible investors will differentiate today’s one-off market wipe-out with actual economic performance. With such a dramatic fall in equity prices, and heady inflation figures, it’s sheer foolishness to be sitting in cash right now.

*UPDATE*: Here's some characteristically straight-talking commentary on the Lehman Bros fiasco from Eddy Elfenbein over at Crossing Wall Street:

I’m going to go on the idea that the reason there wasn’t a deal for Lehman is that no one wanted one. If someone wanted, it would have happened. Novel thinking I know. But it tells us that the Street is hardly concerned about counterparty risk. JPM was concerned about with Bear because it was mostly their risk.

I heard Hank Paulson talk about bringing stability to the markets. Yeah, right. That’s basically like the flea giving orders to the dog. The Fed and the Treasury do not have this thing contained. If the housing market recovers, then the problem goes away. It’s as simple as that.

Uncertainty: Where Economic Fallacy Meets Political Analogy

Global markets are shaping up to look a little like the U.S. election in recent weeks, bearing out a one-hundred and eighty degree turn. While oil is staging an Olympic dive from its $147-a-barrel mid-summer high, the U.S. dollar is in the midst of an almighty rally vs. the Euro and other major currencies; gold is being punished on renewed optimism over slowing inflation. (Since the Republican National Convention at the beginning of the month, GOP Presidential nominee Senator John McCain has been enjoying a surprise about-turn in the electoral polls, largely thanks to his campaign’s savvy in picking a female running-mate, Sarah Palin).

Investors can be forgiven for their confusion over why equities are not responding more aggressively. For sure, there are problems: after Lehman Brothers announced a further $3.9 billion write-down in the third quarter, prompting a 76% tumble in the stock price, buyers willing to pick up the check for the bank’s colossal risk management failures look scare. The federal takeover of Fannie Mae and her little bro Freddie Mac hardly inspires confidence, either. 

But equities are trading at low valuations, while at the same time macroeconomic conditions are finally starting to look like they might lend a hand to market bulls. This scenario stands in direct contrast to earlier this year, when the argument went that valuations were still too high, while energy and food costs stood in the way of sustainable growth. So what’s standing in the way of equities now? Well, pretty much the same thing that is holding up Senator Obama’s previously certain ascension to holder of the world’s top job -- uncertainty.

It’s often the case in both economic and political reality that just when the water looks calm, you find it’s a leap year and the full moon came early, bringing with it choppy tides again. In the case of the global economy, that reemerging nocturnal crater comes in the guise of the bankruptcy of a 158-year old American financial institution; for Obama, it’s a pretty-in-lipstick “hockey Mom” (pitbull or pig – you decide).

Both Obama’s woes, and those of equity holders the world over, have been brought about by the unexpected. While one of those factors was cunningly strategic (the McCain Palin ticket) and the other was anything but (Freddie, Fannie, and the Lehman risk wonks), both have the same effect in their own universes: the creation of uncertainty.   

The question is, will the uncertainty last long enough to drag the world’s largest economy into recession, and to cause lasting damage to Obama’s bid for the Presidency? As usual, while the pundits say yay, the numbers say nay.

With close to $2.5 trillion swirling around the world economy, two full consecutive quarters away until a recession can officially be called, plunging energy prices and a strengthening dollar (along with a weakening Japanese yen and a steadyish Chinese yuan), there’s a lot of room for maneuver monetarily speaking. (In fact, in the case of the U.S. and Japan, one can marvel at the way a substantial economic downturn has been averted this year by those countries’ currencies: just when the U.S. needed its exports most, the dollar remained near an all-time low, while Japan’s yen may have weakened just in time to avert its own woes). 

Similarly, McCain may have peaked at just the wrong time. With another two months until voters hit the ballot box, the Obama campaign has plenty of time to deal with the “shock” of Palin’s appointment and effectively employ Senator Hillary Clinton to the battlefield, while showing they intend to inject her into their proposed government with a meaningful policy role to play. (The fact the democrat party failed to see that America wants a woman in power, is a lesson they should have learned hard by now).

Furthermore, if you’d listened to analysts or pollsters this year when placing your bets, you’d have lost a pile of money. From predictions of a first-quarter U.S. recession, to $150 oil prices -- both concepts I vehemently argued against at the time -- the boys at Goldman Sachs and others look as clumsy as their risk managers. Political analysts -- I confess, myself included -- foresaw a sweeping Clinton victory at the democrat primaries.

Right now, uncertainty is rocking the fiscal and political fronts, stalling the obvious. Don’t get swept in; instead prepare for a big, bullish rush in equities at year-end, an eventual $45 oil price, and the first black President of the United States in history. Then make your mind up about how you’re going to play the next five years. 

Emerging Market Hedge

This morning I'm reporting on Thai economic growth over at TheStreet.com, and how amazingly, in the global liquidity crunch, it's managed to trend upwards -- and fairly fast, too:

In August, year-over-year exports in Thailand rose 17.9% vs. a rise of 5.9% in July, while the country's trade surplus rose to $770 million from $211 million. And at the end of September, the Ministry of Finance revised economic growth for the year up 50 basis points to 4.5%, and at 31.64 vs. the dollar, the baht is climbing its way back up to its July levels.

The scenario is a far cry from 1997, when the baht dropped 30% overnight vs. the dollar and Thailand was thrown into a cash crisis.

Now, contrast this scenario with the U.S. economic outlook:

As of Friday, Thomson Financial pegged overall third-quarter earnings growth for the S&P 500 at an anemic 1.4% rate. Should that come to pass, it would be the worst performance since the second quarter of 2002, when earnings rose by the same amount.

Analysts note that a weaker U.S. dollar, which continually set record lows against the euro during the third quarter, undoubtedly aided some export-heavy sectors. Unfortunately, the belief is that housing woes and a slowdown to the U.S. economy will sabotage profit growth for many.

"Downward estimate revisions have already come in from the banking sector, consumer finance, and mortgage companies," notes John Butters, research analyst with Thomson Financial.

And -- most fascinating -- on a rate cut conspiracy theory in Thailand:

The argument goes that consumer price inflation was down on the year to 1.1% in August from 1.7% in July, creating the right conditions for a rate cut alongside relative weakness in Thai securities, which have yet to feel the effects of positive economic growth in the country.

The rate cut would most positively impact home builders and financial stocks, giving what many say is a long-overdue boost to the Thai stock exchange (SET) in general. In the last year, the SET has advanced 37% to 847.93, much less than other regional stock exchanges: in the same period, the Hang Seng has gained 65% to 27,066, the Korean Kopsi is up 54% to 2003.60 and the Shanghai Composite Index has soared 217% to 5552.3

It's going to be an interesting week. I have a feeling that you'll see the SET take off amid all the positive spin on the Thai economy after the BoT meets on Wednesday -- even if it doesn't cut rates (great time to get some exotic SET index futures right now). Wednesday also happens to be the day the official transcripts of the Fed Reserve meting last week is out, which is not going to be as pretty, unfortunately. After last week's uptrend in the Dow, expect some mild nausea from the prop desks in NY. This could be a good time to purchase some put options on the Dow, alongside those SET index futures, and create almost a mirror-image opposite hedge of the one many were playing with back in July 1997.

It's a good emerging market hedge for the following reasons: it concerns two rate-slashing, tame  inflation markets (unlike, say, China or Brazil), one is an export-led economy and the other is an import-led economy, and it takes advantage of all the emerging market growth around. Let's see if you would have been in the green on Friday.