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Global Markets Recover Higher

Written By Brian Hicks

Posted December 10, 2007

When global markets endure a hit like they did in the month of November, it’s tough to think of the upside. Wall Street led the lemmings as sub-prime write-downs galore triggered selling based on sound reasoning that big banks don’t seem to know what the heck they’re doing.

And as with every correction in the past year, non-U.S. markets dipped with the Dow.

But major indicators of risk aversion, like the Chicago Board of Options Volatility Index, are retreating from last month’s levels (though the VIX is still maintaining a 100% increase over the past year), and look what’s happening to foreign markets like Brazil:


Chicago Board of Options Exchange Volatility Index


Chicago Board of Options Exchange Volatility Index vs. iShares MSCI Brazil Index ETF (NYSE:EWZ)

We’ve seen this time and again, with global benchmarks and shares separating quickly once Wall Street’s jitters calm down. Should Wall Street rest easy? Of course not, what with Swiss banking giant UBS announcing another $10 billion in the write-down melt-down rooted in putrid American credit issues as Monday began.

Investors may be optimistic about a Fed cut, but making money a little easier to come by won’t lighten the blow at the top (where billions in Fed discount window injections have created an air of relief at big lenders), nor will it do a thing to cushion retail investors.

If you drive drunk at 90 miles per hour, at a certain point it doesn’t matter how many airbags you have. This U.S. market is reckless, and the VIX/EWZ trend is just the tip of the iceberg when it comes to the new international investment epiphany:

The U.S. can be a bane as well as a boon to world markets.

The Wrong Number on the World Market Hotline

Last Thursday, President Bush stood confidently in the White House with Treasury Secretary Hank Paulson at his side. Glancing at the notes on his lectern, he delivered hope to American homeowners in the throes of the mortgage crisis, about to be rate-adjusted out from under their own roofs.

"I have a message for every homeowner worried about rising mortgage payments: the best you can do for your family is to call 1-800-995-HOPE," he said.

That, of course, was not the best a household head could do, because the number was actually 1-888-995-HOPE. The one in Mr. Bush’s announcement led to a confused school secretary in Texas. Whoops.

It’s no wonder, then, that overseas-based investors and an increasing number of knowledgeable Americans aren’t calling anymore, using lulls in volatility to divert their exposure from the real risk–the declining dollar and rotten credit markets–towards what have traditionally been thought of as "high-risk" emerging nations.

Not only are shares in Brazilian companies like Petrobras (the Brazilian national oil company, NYSE:PBR, whose shares are already up over 48% since my recommendation to Orbus Investor subscribers in September) soaring, but so are shares in the market itself.

Shares of Bovespa Holding SA, owner of Brazil’s Sao Paulo Stock Exchange, rose by 47% in their late-October trading debut. The Brazilian market is maturing quickly, instilling confidence in the market’s efficiency and in the ability of the market administrator to function as a profitable enterprise during Brazil’s sustained growth period.

There’s no reason to get left out on this upswing in world markets. Intelligent investors will be using the reality of a rate cut not to invest in the illusion of American market returns, but instead to turn to real gains in emerging markets.

In fact, my colleague Ian Cooper over at the Small Cap Trading Pit has been monitoring market movements for years, and he doesn’t have the international focus I do. But to Ian and other technical analysts, the trend is clear. "Money is flowing into emerging markets as smart investors escape the U.S. slowdown," Ian tells me.

Ian and I have an eye on the BLDRS Emerging Markets 50 ADR index (NASDAQ:ADRE) and broader iShares MSCI Emerging Markets index (NYSE:EEM), both of which have weathered troughs this year as Wall Street sagged, only to bounce back vigorously with a drop in the volatility index.


Now is a great time to buy either of these ETFs and ride a worldwide wave up, up, and away from Wall Street myopia.


Sam Hopkins