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En Peligro


The rest of the world has more choices to invest their capital every day and the US becomes less appealing every night...

I have been a long time, and still am a long-term, bull on emerging markets. I agree that the trust and wealth born from the US stock market is unrivaled but like any other empire its very success slowly replaces motivation with expectations. We worked hard and long, and now we want to be taken care of. Great place to live, but I like investing in the inverse.

The rest of the world has more choices to invest their capital every day and the US becomes less appealing every night, in my view. I take that view down a much different path than many others who then become bearish on the US (I am not – actually rather bullish all summer). I think you have to pick your spots and work on trading, instead of digging in your heels and believing.

I have found other markets more appealing than the US for quite some time. Forget the US' trade deficit (hold the e-mail disagreeing until the end so you can add another topic), it exported capitalism and it worked. If the US had a surplus we would know it didn't work. I prefer the former. Of course America has new problems and painful losses because ferocious competition is the other way we know it's working.

The US is home to about half of the world's equity investments, compared to over 100 other stock markets dividing the other half. My opinion is that this is the least sustainable of all the imbalances we often debate here, and the one that is least likely to last.

That concentrated dominance will, and I believe should, melt for the rest of my lifetime. Signposts are on every corner I drive past as a dad, and around every corner I see as a money manager. I recently watched a myopic debate among candidates to be the next governor of Texas (a recent step to the White House you may not want to be reminded of). One of the favorites could not even name the new president of Mexico despite her promises to work with them on immigration, her voters' #1 concern. Remarkable.

By most accounts, US investors are still stuck in a fishbowl, as I have called it for years, which everybody in our business congregates around – fascinated by our domestic successes and failures, staring at this bowl instead of viewing how small (and getting smaller) it is, often ignoring many of the countries where the other 95% of the world happens to live. According to Hewitt, only 5% of 401(k) balances are invested outside the US I have disagreed that the perceived "risk" of owning many of those international markets is higher than the US' (often I feel it's just the opposite). Compared to most allocations my firm has been dramatically overweight international markets with over one-third of our portfolio. I could never figure out why 95% of anything is considered foreign in the first place.


There are times to trade against your best ideas, if the price is right. To name one of many examples, look just a few miles to my south at the performance of the Mexican stock market. Look at the EWW, the iShares ETF for Mexico. Its sponsor, Barclays (BCS) gets headlines for a possible buyout this week and big US banks make big news events in our market every week when it is up or down a point. Yet, how many reading those fish-wraps realize the EWW is up 500% in just over 3 years?!?!

Yet...I also openly wonder how many that are invested in emerging markets like Mexico are acknowledging the current risks, given these prices? That's the debate my firm is having right now. Our long-term story is still intact, and we put some of these positions on with decades in mind, not points. But the short-term rally has been remarkable and quick – perhaps too much so in each case. At the end of one of those recent wrestling matches here, "El Oso" won the best of seven over "El Toro" (Boo and Hoofy's hermanos, respectively). So we're going to do some selective selling, recently letting go of long-time favorite of my firm Cemex (CX) and more could follow.

Just as a few years ago I did not think the health of other countries was being reflected in some stocks' prices, now I think the opposite may be true. I don't think the risk is being reflected, especially considering some of the healthy fights brewing. Anybody watch footage of the ceremonial swearing in of Mexico's new President? His name is Felipe Calderon. Not a figurative wrestling match, a real one ensued, complete with Schwarzenegger in the balcony who was quoted as saying "That's good action." He was speaking of fist fights only upstaged by flying chairs aimed at the heads of state. The election is being protested and there are many others to our south that are posing extreme risks to the story of emerging markets actually developing. Mexico is one of a few that – as much as we believe in the potential – presents far more risk than 500% would lead most to believe. Many of these countries south of the US' border are not moving forward as consistently as an investor might assume looking that those eye-popping returns. Monitoring them separately is required now more than ever given these rallies; some have more risks than Wall Street is currently pricing.

I sat and visited with an illegal immigrant last night for two hours at my favorite restaurant. She outworks any of my neighbors, and risked everything just to be able to go to two jobs per day that many of them depend on. I have tremendous respect for her. Hearing about what she escaped and the stories of what she left behind that traders are perhaps all too willing to send 500% higher in a few short years, gave me reason to pause. Pause to think about how much we have to learn in this country (and how well a flat tax would work), pause to realize how good we have it, and pause to take some trading profits off my table and put a bigger tip on hers. At some point "good action" becomes at risk – en peligro in some countries.
No positions in stocks mentioned.
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