As I write this on Wednesday afternoon, the Dow is down about 200 points. The NASDAQ is down 50, and emerging market currencies are cratering.
On the flip side, natural gas prices are shooting up above $5, the ten-year T-bill is falling fast, and gold, that barbarous relic, is up 1.14%.
You Have to Love This Market…
Yesterday, the Fed decided to taper another $10 billion.
This has caused problems in emerging markets for two reasons: one, it strengthens the dollar; two, it means an end to the carry trade.
The yield carry trade is where portly Wall Street felines get cheap money from the Fed at near-zero interest rates and then invest it in places like Turkey that pay 10% interest rates. It’s like free money!
This is all well and good until the Turkish lira falls 20% — then the free money starts becoming rather expensive. At that point, the money comes flowing out of places like Indonesia, Thailand, and Russia and back into the good ole U.S. of A.
And when it comes back, it goes into cash or money market funds because it’s a panic move, not a re-allocation. This, in turn, drives down the yield on T-bills.
The yield on the 10-year Treasury is down 28 basis points this month to 2.67. This drives down mortgage rates, which are now at 4.35% and falling…
And of course, cheap mortgage rates mean people buy houses.
This situation, coupled with data out Tuesday that home prices rose by the most in eight years, means home builders are again pushing all-time highs.
One way to play this is to go downstream and bet on companies that do well when housing does well. This is why Warren Buffett now owns 30% of USG — a drywall company.
In Crisis and Opportunity, I’ve been buying beaten-down furniture companies on the cheap.
Sold at the Top
Granted, it helps that I saw this emerging market meltdown coming. We were able to lock in gains such as 42% from the National Bank of Greece and 46% on Africa Oil.
Now we are adding money to some select uranium companies, which have big upside now that Japan is restarting 20% of its nuclear power plants and the commodity bust of the past five years has dramatically reduced supply.
I’m also betting big on hydrogen fuel cell technology. After selling Plug Power for 131% in a month, we bought it back on Friday. It was up 20% yesterday alone. There is a lot of upside in this sector, as it is just hitting its tipping point for mass acceptance.
As far as emerging markets go, there is nothing like a good panic to set the stage for massive gains. At this point, it’s time to hoard some cash and build your grubstake. When the time comes, there will be some great buying opportunities in places like Brazil and Thailand.
One of the best years I ever had was 1998, when I was buying Indonesian stocks. Indonesian Telecom (NYSE: TLK) went from $2 to $48.
Like I said, I love this market.
Good hunting,
Christian DeHaemer
Check us out on YouTube!Christian is the founder of Bull and Bust Report and an editor at Energy and Capital. For more on Christian, see his editor’s page.
