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Michael Gayed: For a Primer on How Melt-Ups Happen, Look to Emerging Markets Now
A broken clock is right twice a day -- but how right matters.
Michael A. Gayed    

Melt-ups happen when stocks overreact to an uncertain future with conviction that the negative narrative is true.

There is no area of the investable landscape that has the potential for a melt-up like emerging markets. Developed equities in Europe, Japan, and the US have strongly outperformed, pricing in reflation which does not exist, as nearly all recent economic data is indicating. One might argue that commodities should rally hard, and indeed they might. While the supercycle led by China investment may be over, cycles still exist that can result in tradable opportunities.

But make no mistake about it: The disconnect between emerging markets and US stocks is ridiculous. One can not make a logical counterargument to the idea that if US stocks were right about economic growth, the supplier to the US (exporting countries) would have to participate. After more than three long years of weakness, only now people are turning bearish? After central bank actions, only now people are pulling their money out? After tremendous bearishness and conviction that those markets will never rally again, only now are investors underweighting emerging economies as the below chart from Merrill Lynch shows?



This is how melt-ups happen -- amid late conviction after weakness has already occurred and for a prolonged period of time. That doesn't mean it has to start today, tomorrow, or next week. Knowing the exact moment where the turn comes is never an easy exercise. However, the setup is there. The iShares FTSE/Xinhua China 25 Index (NYSEARCA:FXI) is finally showing signs of life. The only thing that is holding back the broader theme is Brazil.

Take a look below at the price ratio of the iShares Brazil ETF (NYSEARCA:EWZ) relative to the SPDR S&P 500 (NYSEARCA:SPY). As a reminder, a rising price ratio means the numerator/EWZ is outperforming (up more/down less) the denominator/SPY. Note the utterly unrelenting underperformance the country has had since mid-October last year.



Yes, the relative trend is still down, but any kind of reversal here can result in broader movement into emerging economies. There is a price for everything in markets, and as traders/investors, the only real question that matters is whether price today has underreacted or overreacted. If it has -- as every bit of logical suggests is true -- then the fact that no one else seems to be making the aggressive long case suggests that the payout is high for a reversal trade.

Some say a broken clock is right twice a day. I have continued on the emerging market theme, and my firm, in our mutual fund and separate accounts, tried a few times last year to position in, only to get out following momentum reversal. However, being a broken clock that is right twice a day is the wrong analogy. One must consider just how right that broken clock is after the fact. If indeed a melt-up is on its way, then I'm fine with how I tell time.

Emerge.

Twitter: @pensionpartners
No positions in stocks mentioned.

This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.

Michael Gayed: For a Primer on How Melt-Ups Happen, Look to Emerging Markets Now
A broken clock is right twice a day -- but how right matters.
Michael A. Gayed    

Melt-ups happen when stocks overreact to an uncertain future with conviction that the negative narrative is true.

There is no area of the investable landscape that has the potential for a melt-up like emerging markets. Developed equities in Europe, Japan, and the US have strongly outperformed, pricing in reflation which does not exist, as nearly all recent economic data is indicating. One might argue that commodities should rally hard, and indeed they might. While the supercycle led by China investment may be over, cycles still exist that can result in tradable opportunities.

But make no mistake about it: The disconnect between emerging markets and US stocks is ridiculous. One can not make a logical counterargument to the idea that if US stocks were right about economic growth, the supplier to the US (exporting countries) would have to participate. After more than three long years of weakness, only now people are turning bearish? After central bank actions, only now people are pulling their money out? After tremendous bearishness and conviction that those markets will never rally again, only now are investors underweighting emerging economies as the below chart from Merrill Lynch shows?



This is how melt-ups happen -- amid late conviction after weakness has already occurred and for a prolonged period of time. That doesn't mean it has to start today, tomorrow, or next week. Knowing the exact moment where the turn comes is never an easy exercise. However, the setup is there. The iShares FTSE/Xinhua China 25 Index (NYSEARCA:FXI) is finally showing signs of life. The only thing that is holding back the broader theme is Brazil.

Take a look below at the price ratio of the iShares Brazil ETF (NYSEARCA:EWZ) relative to the SPDR S&P 500 (NYSEARCA:SPY). As a reminder, a rising price ratio means the numerator/EWZ is outperforming (up more/down less) the denominator/SPY. Note the utterly unrelenting underperformance the country has had since mid-October last year.



Yes, the relative trend is still down, but any kind of reversal here can result in broader movement into emerging economies. There is a price for everything in markets, and as traders/investors, the only real question that matters is whether price today has underreacted or overreacted. If it has -- as every bit of logical suggests is true -- then the fact that no one else seems to be making the aggressive long case suggests that the payout is high for a reversal trade.

Some say a broken clock is right twice a day. I have continued on the emerging market theme, and my firm, in our mutual fund and separate accounts, tried a few times last year to position in, only to get out following momentum reversal. However, being a broken clock that is right twice a day is the wrong analogy. One must consider just how right that broken clock is after the fact. If indeed a melt-up is on its way, then I'm fine with how I tell time.

Emerge.

Twitter: @pensionpartners
No positions in stocks mentioned.

This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.

More From Michael A. Gayed
Michael Gayed: For a Primer on How Melt-Ups Happen, Look to Emerging Markets Now
A broken clock is right twice a day -- but how right matters.
Michael A. Gayed    

Melt-ups happen when stocks overreact to an uncertain future with conviction that the negative narrative is true.

There is no area of the investable landscape that has the potential for a melt-up like emerging markets. Developed equities in Europe, Japan, and the US have strongly outperformed, pricing in reflation which does not exist, as nearly all recent economic data is indicating. One might argue that commodities should rally hard, and indeed they might. While the supercycle led by China investment may be over, cycles still exist that can result in tradable opportunities.

But make no mistake about it: The disconnect between emerging markets and US stocks is ridiculous. One can not make a logical counterargument to the idea that if US stocks were right about economic growth, the supplier to the US (exporting countries) would have to participate. After more than three long years of weakness, only now people are turning bearish? After central bank actions, only now people are pulling their money out? After tremendous bearishness and conviction that those markets will never rally again, only now are investors underweighting emerging economies as the below chart from Merrill Lynch shows?



This is how melt-ups happen -- amid late conviction after weakness has already occurred and for a prolonged period of time. That doesn't mean it has to start today, tomorrow, or next week. Knowing the exact moment where the turn comes is never an easy exercise. However, the setup is there. The iShares FTSE/Xinhua China 25 Index (NYSEARCA:FXI) is finally showing signs of life. The only thing that is holding back the broader theme is Brazil.

Take a look below at the price ratio of the iShares Brazil ETF (NYSEARCA:EWZ) relative to the SPDR S&P 500 (NYSEARCA:SPY). As a reminder, a rising price ratio means the numerator/EWZ is outperforming (up more/down less) the denominator/SPY. Note the utterly unrelenting underperformance the country has had since mid-October last year.



Yes, the relative trend is still down, but any kind of reversal here can result in broader movement into emerging economies. There is a price for everything in markets, and as traders/investors, the only real question that matters is whether price today has underreacted or overreacted. If it has -- as every bit of logical suggests is true -- then the fact that no one else seems to be making the aggressive long case suggests that the payout is high for a reversal trade.

Some say a broken clock is right twice a day. I have continued on the emerging market theme, and my firm, in our mutual fund and separate accounts, tried a few times last year to position in, only to get out following momentum reversal. However, being a broken clock that is right twice a day is the wrong analogy. One must consider just how right that broken clock is after the fact. If indeed a melt-up is on its way, then I'm fine with how I tell time.

Emerge.

Twitter: @pensionpartners
No positions in stocks mentioned.

This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.

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