Vietnam has delivered one of the top performing stock markets so far in 2012. Take a look at the Market Vectors Vietnam ETF (VNM). The venture invests in companies that get 50% or more of their earnings from that country, with an anticipated 37% exposure in finance, and 19% in energy. This will get you easily tradable exposure in the country where China does its offshoring.

Vietnam was also one of the top performing stock markets in 2009. It was a real basket case in 2008, when zero growth and a 25% inflation rate took the main stock market index down 78%, from 1,160 to 250. This is definitely your E-ticket ride.

Vietnam is a classic emerging market play with a turbocharger. It offers lower labor costs than China, a growing middle class, and has been the target of large scale foreign direct investment. General Electric (GE) recently built a wind turbine factory there. You always want to follow the big, smart money. Its new membership in the World Trade Organization is definitely going to be a help. As my old friend, Carl Van Horn, the head of investment at JP Morgan taught me, watch direct investment, because the stock markets always follow.

It also helps a lot that the country has one of the world?s more favorable demographic pyramids. That means it has a high percentage of young, free spending workers and relatively few older social service demanding retirees. That is partially because we killed so many off during 1960-1972.
I still set off metal detectors and my scars itch at night when the weather is turning, thanks to my last encounter with the Vietnamese, so it is with some trepidation that I revisit this enigmatic country. Throw this one into the hopper of ten year long plays you only buy on big dips, and go there on a long vacation. If we get a summer swoon in global risk assets as I expect, this would be a good name to pick up.

The green shoots are real. But watch out for the old land mines.

 

 

 

Pass Me a ?BUY? Ticket Please

It would be easy to ignore what is happening on the other side of the world, especially when they involve the French. But to do so today in this interconnected and interdependent world would be extremely hazardous to your wealth. When a butterfly flaps its wings in Brazil, the tsunami hits Japan.

That is exactly the extreme sort of weather event we are witnessing today with the French presidential election results. This is how they came out:

Socialist Fran?ois Hollande? 28%
Conservative Nicolas Sarkozy? 26%
Right wing Marine Le Pen 18%
Communist Jean-Luc M?lenchon 11%
Other parties and uncommitted? 17%

To say this is a disaster for Sarkozy is an understatement of the highest order. It is the first time in more than 50 years that a sitting president lost in the first round. The odds of the socialists winning again in two weeks have moved from 50:50 to more like 80:20. For Sarkozy to pull things out of the fire from here would require nothing less than a miracle.

The socialist economic policies will require an increase in government spending, growing budget deficits, an extended retirement age, and a far heavier reliance on sovereign borrowing by France. It makes a complete hash of the careful progress made by German chancellor, Angela Merkel, made towards steering Europe to live within its means. More debt issuance means higher interest rates, falling stock markets, and a continuation of the European crisis. Message: bombs away for risk assets.

The only way that Sarkozy could keep his job is to do some sort of a deal with the right wing National Front to create a coalition government. And what would be their price for such an arrangement? The immediate withdrawal of France from the Euro to recover national pride and sovereignty. Message: more bombs away for risk assets.

Needless to say, this is all hugely positive for the dollar (UUP), the yen (FXY), and US Treasury bonds (TLT), and very negative for US stocks (IWM), the Euro (FXE), oil (USO), copper (CU), gold (GLD), and silver (SLV). That house you think you recently bought at the bottom just fell in value by 5%. If you have been reading this letter in recent weeks, you already have all of the right positions and are sitting pretty. If you don?t, you better start reading.

As a long time analyst of the American political scene, I have to laugh at the results broken out by prefecture on the map below. The conservatives dominate the cities, while the socialists control the countryside, which is the complete opposite found in US election outcomes. Similarly, college grads vote conservative while the uneducated vote liberal, which again is the polar opposite of American results. No wonder I have such a hard time digesting frog legs.

 

 

 

The Next Prime Minister of France?

My Apple April $450-$480 call spread expired deep in the money at the close on Friday. Legally, these expire at midnight on Saturday night, so your broker won?t take these off your statement until the following Monday. The position should be zeroed out and you should receive a cash credit. You will also find that the margin requirement has disappeared.

Your net profit on this position should be $1,855, or? $1.86% for the notional $100,000 portfolio. Well done. Here is how the profit is calculated in detail:

Execution

March $450 call cost?????... $97.60
March $480 call premium earned?-$70.25

Net Cost???????.........?. $27.35

Profit Calculation at Expiration

Expiration value???????..$30.00
Purchase cost ?..??????. . $27.35

Net Profit????????.??.$2.65

Total profit = ($2.65 X 100 X 7) = $1,855 = $1.86% for the notional $100,000 portfolio.

I will go back into another position like this in the future, but only after a substantial dip in the share price. I still think that Apple will continue on its march to $1,000 a share. Coming down the road we have Apple TV and the iPhone 5. Of far greater importance will be the adoption of Apple standards by corporate America, which has long avoided Steve Jobs? creations. This is going on everywhere, and is being hastened by the demise of Blackberry (RIMM). But it is a trip that will take years, not weeks or months.

 

 

Thanks, Steve

 

After spending all of this year ignoring the fiscal disaster that the US is facing at the end of 2012, markets are finally taking off the blinders. That might explain why the S&P 500 has dropped 4.3% so far from its April 1 peak and why it may have more to come.

Remember the debt ceiling crisis of the summer of 2011? You know, the one that triggered a 25% collapse in US stock prices? The compromise that was struck required major progress in deficit reduction by November, or drastic measures would automatically kick in.

Well guess what? Zero progress has been made. None can be expected until after the November 6 election as long as both parties expect to win. That allows just eight weeks for the president and congress to repair some of the most serious fiscal damage ever to strike the country, three of which will be vacation weeks.

Add up the numbers and the potential impact on the economy is particularly grim. If congress takes no action by year end, a series of tax increases and spending cuts will automatically take effect that will squeeze the life out of the economy. Think Austerity with a capital ?A?. Think Spain with a capital ?S?. Even Federal Reserve Chairman, Ben Bernanke, a man normally disposed to making cautious, taciturn statements has described the problem as ?A massive fiscal cliff?.

Here is the forbidding breakdown in terms of their effect on annual GDP growth:

-0.2%? Expiration of unemployment benefits
-0.8%? Automatic spending cuts required by sequestration
-0.8%? Expiration of payroll tax cuts
-1.0%? Expiration of Bush tax cuts

-2.8%? Total

The big problem is that the economy doesn?t have much economic growth to give away. My own forecast for GDP for 2012 is still at 2%. But that is based on the assumption that corporate earnings would bring in 5% growth, down from last year?s torrid 15% growth. My calculator tells me that 2% -2.8% = recession. Danger! Danger! Current stock prices are not reflecting this reality.

It gets worse. The 15% of companies that have reported Q1, 2012 earnings so far have delivered a much more modest 1% growth, well below my own minimal expectations. That is with the earnings cycle front loaded with the most profitable companies in technology. It also reflects a lot of business pulled forward into Q1 from Q2 and Q3 by the warm winter. Yikes!

It?s hard to see how this ends happily for the stock market. The best case scenario would be for a lame duck president and congress, no longer worried about reelection, to cobble together a deal in December. Some sort of resuscitation of the ?grand bargain? that was on the table last summer, but suffocated in its crib by the Tea Party because it included tax increases, might work. Alternatively, if one party or the other sweeps the election, it could ram through something. But that outcome is unlikely. A divided country gets the dysfunctional government it deserves.

The headache for equity investors and risk investors in general is that even the mere discussion of the weighty matters triggers a huge ?RISK OFF? trade. Confidence withers, business and consumer spending slows, and the economic data takes a hit. That?s what happened last summer, when the markets discounted a full blown double dip recession that never actually happened. It?s a given that our representatives in congress don?t understand this.

 

 

Is This Our Fiscal Policy?