As for the international markets, there's a reason European equities are about as cheap as they ever get relative to the U.S. markets. That reason is the $1.55 U.S. dollar exchange rate to the euro. While I'm currently bullish on the U.S. greenback, the expensive euro should leave the European economy “muddling” for quite some time.

Consequently, I continue to avoid investing in Europe except for select special situations. By far my favorite country for investment has been, and remains, Brazil. And while I would like to embrace Russia due to its natural resources, I've wrongly avoided investing there. My concerns center on the fact that Russia has confiscated, with minimal restitution, assets that were built with Western capital and engineering prowess. Further, Russia has a demographics problem. The birth rate in Russia is so low that by the middle of this century their population will be less than Yemen’s!

As Herb Meyer notes, “Russia has one-sixth of the earth’s land surface and much of its oil. You can’t control that much area with such a small population. Immediately to the south, you have China with 70 million unmarried men, a real potential nightmare scenario for Russia.” Ergo, I continue to avoid Russia in favor of other emerging countries, many of which have had substantial price corrections year-to-date. Fortunately, I entered the new year weary of most international markets, having rebalanced (read: sold partial positions) my foreign investments late last year. Now, however, given their outsized declines, I recommend gradual reaccumulation. My favorite way to employ this strategy is by purchasing MFS’s International Diversification Fund (MDIDX).

Asset allocation, and sector selection, continue to be the drivers of overall portfolio performance. To this point, I remain under-weighted technology, consumer discretionary, and financials. While many pundits are screaming that financials are “cheap,” I just don’t see it that way. For previously stated reasons, I think the financial sector will remain under pressure for years; and would note, the KBW Bank Index (BKX) “tagged” a new five-year closing low last week. At its peak the financial sector contributed 31% of the S&P 500’s earnings. For comparison, in the 1980 energy bubble, energy-related companies contributed 26% to earnings, while at the tech bubble’s peak tech accounted for 16% of earnings. With reregulation of financial institutions coming, the result should be lower earnings with and attendant P/E multiple compression for the financials. On a market capitalization preference, mid-caps seem to have held up better during the recent stock market decline. And I continue to invest accordingly.
 

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The call for this week: “Sell in May and go away,” is an old stock market “saw” whose long-term track record is compelling.

To wit, starting in 1950 investing $10,000 in the SPX every May 1st and liquidating on October 31st compounds to a shockingly small $10,026 today. Conversely, buying the SPX every November 1st and selling every May 1st compounds to $372,890 (according to Ned Davis Research). Yet we have learned the hard way that markets can do anything.

For example, if you sold in May 2003 you missed a 30% rally into year-end. With near-term stronger than expected economic statistics, increasing risk appetites, and commodities normalizing (read: declining, which should be bullish for equities), I think we could be in the middle of the envisioned “W-shaped” economic pattern. If so, the perception will be that the worst is behind us and stocks could continue to levitate until we enter the backside of the “W” where a rise in interest rates should ameliorate any robust economic recovery.

Consequently, I'm currently “out” of trading positions and focusing on investment positions, preferably ones with a yield. Previously mentioned names for your consideration include: 6.6%-yielding Alaska Communication (ALSK); 11%-yielding LINN Energy (LINE/$22.67/Outperform); Schering Plough’s 7.6%-yielding convertible preferred “B” shares (SGP+B/$196.00), whose terms and details should be checked before purchase; and, 5.8%- yielding Embarq (EQ/$47.32/Strong Buy).

Addendum: My caution centers on the belief that all of the U.S.' economic problems are not behind us, the Dow Theory “sell signal” of November 21, 2007, the double-top chart configuration in the SPX at 1560 – 1570, and “The Snake;” except in this case I'm not referring to Kenny “The Snake” Stabler, but rather the 20-month moving average (MMA) (aka “The Snake”) that has often represented the demarcation line of bull and bear markets. As can be seen in the nearby chart, the 20-MMA tends to mark the difference between the “bull” and the “bear.” When the SPX is above its 20-MMA stocks are in an “up” phase. Even when “the snake” is marginally violated to the downside, but then quickly recaptured to the upside, the bull trend remains in force. However, when it is violated decisively to the downside, and stays there, caution is warranted.


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