Sunday, August 24, 2008

Emerging Markets

in my former life as a metals broker I would often ask prospects this question, 'how are you hedged against a downturn in the economy and a devaluation of the Dollar?' eight times out of ten the prospect's answer would be, 'oh, I'm hedged alright, I'm in a lot of foreign stocks, you Know, emerging markets and stuff.' then I would proceed to explain to the fellow that far from being a hedge, foreign equities -- and emerging markets in particular -- were in fact a 'beta' to our domestic markets so don't expect them to hold up when our markets start to go south. 'uh, what's a beta?' or 'how would you Know?' were the typical responses. as you might imagine, I was never exactly a top salesman....

EEM is the popular broadly allocated emerging markets ETF. here's the price chart of the last few years:



you can see that it hasn't been holding up very well the last couple months. then here's EEM relative to the S&P500 ETF, SPY:



it's even started to under-perform the US market. notice that we're just now getting a bearish cross on those moving averages.

but of most interest to me is the standing of EEM relative to the price of Gold. here's a point and figure chart of the EEM/GLD ratio that captures the situation:



I'm 92% confident that a major break below that neckline's coming. sure the ratio may move in favor of EEM some more first. sure it might take a while for the pattern to get fulfilled, might be another year for all I Know. or maybe next month. but the course of action for holders of third-world paper should be clear: sell stocks on bounces and buy Gold on dips.

if you are of a different view on this, feel free to share. just send me an email.