S&P Woes

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The Greatest Story Never Told
November 9, 2007

Halloween came. Bernanke cut rates. Markets responded.

The world’s “benchmark” index fell off the cliff. The S&P has fallen 6.2% in less than two weeks:

Consequently, stock returns look more like bond returns. The S&P limps along at 4.51% year to date. In euro terms, the world’s “benchmark” bleeds red. Returns are down 6.18% on the year.

Foreigners aren’t stupid. Lower rates mean more dollars. More dollars mean more depreciation.

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Since the Fed cut the discount interest rate on Aug. 17, the dollar index has lost over six points. At some point, you’d expect to see a healthy contrarian rally…but there’s nothing stopping this cliff dive:

Now everyone from supermodels to Arab construction workers want nothing more to do with Uncle Sam’s ultimate promise. And why should you?

That’s one of the principal reasons we espouse companies that derive a majority of their earnings in foreign currencies.

Take a look at the 10-year returns on the 20 most established world markets in dollar terms:

A simple $10,000 investment in the S&P in 1996 would be worth $15,769.11 today. That same $10,000 invested in Finland would be worth $48,688.11.

Meaning by focusing just on the U.S. and U.S. exchanges, we’re limiting ourselves to less than 50% of the investing opportunities in the world.

Meanwhile, our friends in Germany, Hong Kong and Singapore are getting ahead. And they’re achieving this feat at your expense.

But the CNBC crowd seemingly couldn’t care less. Larry Kudlow points out that solid third-quarter GDP growth here at home adds another chapter to the greatest story never told. Growth relative to what, we ask?

Regardless, we harbor no ill will toward Mr. Kudlow or CNBC. In many respects, we agree. The greatest story isn’t being told…

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The emerging markets around the Pacific Rim accounted for more than half world GDP last year alone. They now churn out 43% of the world’s exports and hold roughly 70% of the world’s foreign exchange reserves.

And while real wages in the developed West are either flat or falling, wages among the up-and-coming nations of Southeast Asia continue growing.

In our opinion, that’s the greatest story never told. 

So as we said last week…the next time your broker assures you he can beat the S&P, you may want to listen. It shouldn’t be that hard. The trick: Buy just about any other developed market index but the S&P.

Until next time,
Christopher Hancock

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