Buy on the Cannons?

07/08/2008 12:00 am EST

Focus: MARKETS

Vivian Lewis

Editor and Publisher, Global Investing

Vivian Lewis, editor of Global Investing, says there’s plenty of gloom around, but markets rarely have two consecutive bad quarters, and we may be poised for a comeback.

The middle of the year is a time for looking back and looking forward. But I wanted to take a moment to cut through the mood of gloom. After a really lousy quarter, such as we have seen, it is unusual for a second lousy quarter to follow. This is shown by historical studies of the Standard & Poor’s which go back a quarter century. After a sell-off, markets bounce back.

Or, to quote the old adage: the time to buy is when there's blood on the streets, attributed to Nathan de Rothschild. Of course, you also want to be sure that there isn't a knife sticking out of your tummy which is the source of the blood. 

So, let us look at the past quarter, which was a bummer by any definition. As always, international proved more resilient than domestic, but we are talking about a lower drop in stock prices, not about any index gains. Depending on which index you favor, the world is down in the low double digits in the first half and the US markets are down marginally more (the Dow Jones Industrial Average vs. the MSCI.EAFE index).

By country the best performers were Latin America and producers of raw materials like Canada, Russia, and Norway, which eked out slight gains. But nothing compared to Saudi Arabia, whose stock market is up 21% since the start of the year, or Brazil—up 14.7%. The BRIC countries which consume raw materials (India and China) have had the worst performing markets this.

One obvious question is whether this can continue. I frankly do not know. But I am pretty sure that the silly political games being played about stopping the speculators will go nowhere. And when the president of the leading Russian oil and gas company forecasts that oil will reach $250 per barrel, he is not expressing an analytical opinion. He is talking his own book.

Meanwhile, other commodities in which you cannot speculate (because there is no market except as contracts between companies) have also seen incredible price rises. Look at iron ore, a major Brazilian export, whose price has been jacked up over 75% in the most recent round of contracts with Asian steel-makers. Consider uranium, which is also becoming more expensive even without a commodities market to speculate in.

The US has a cheap currency, and with a less horrendous bill for energy, we might even resume economic growth stimulated by exports.

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