Bottoms...bottoms...and more bottoms...

Today, we have to open our collar and loosen our tie; we see more bottoms than at the Folies Bergeres.

“What do you call it when the stock of the country’s fifth-largest investment bank trades at $50 on a Thursday and at $3 the following Monday?” asks Jim Cramer. “I call it a bottom.”
 
Of course, everyone says he saw the bottom in the U.S. stock market in January...and the bottom in the financials when Bear Stearns owners panicked and agreed to sell the firm for $2 a share...subsequently amended upwards.

And look at the U.S. builders – they seem to have bottomed out too. “It can’t get worse than this,” say industry spokesmen. The index has now turned up.

Meanwhile, look at the Chinese stock market. As predicted in this space – remember, lines of people in Shanghai waiting to open up brokerage accounts? Thousands of new accounts being opened every day? Share prices up 500% in two years? Now, the Chinese stock market has collapsed. The FXI – a kind of Dow Jones Industrial average for the Shanghai market – fell from 220 to 120, a loss of 45%.

It wasn’t the only one. Both Japan and India fell 31%. And Vietnam must have felt as though it had been hit by another Tet Offensive – stocks are down 53% since October. (Colleague Manraaj Singh swears this is a buying opportunity for the Vietnam Fund...more about that some other time.)

But now...all these markets seem to be going back up. Have we seen the bottoms?

And what’s this – gold, our favorite metal went down to $887 or thereabouts, then bounced back over $900. And yesterday, gold added another $9. Have we seen the bottom in the gold market correction too? A lot of people are betting on it...

Look around you; you’ll see bottoms everywhere. Yesterday, prices on just about everything were rebounding. The euro rebounded against the dollar. Asian markets rose. Wheat, soy, rice prices – all on the way back up. The CRB index rose too.

(Even base metals have gotten so precious that a front page report in today’s International Herald Tribune tells us that thieves are stripping the lead off of church roofs in the UK.)

About the only thing that didn’t bounce yesterday was oil – which was off a bit, but still holding over $100. Yes, dear reader, it looks to us as if oil found its bottom at around $100, which is a remarkable thing.

Even in volatility, it looks like a kind of bottom has been found – meaning, volatility is decreasing...markets are calming. As they say on Wall Street...the bottoms are in...

...or are they?

George Soros wonders:

“We had a good bottom,” Soros said yesterday in an interview in New York, referring to the rally in stocks and the dollar after JP Morgan Chase & Co. agreed to buy Bear Stearns Cos. on March 17. “This will probably not prove to be the final bottom,” he said, adding the rebound may last six weeks to three months as the U.S. moves closer to a recession.

*** Soros had a new book released online yesterday: The New Paradigm for Financial Markets (Public Affairs, 2008). He explains the causes of the current meltdown, which he traces to the big turnaround in 1980...when U.S. President Ronald Reagan and U.K. Prime Minister Margaret Thatcher came to power and borrowing ballooned.

Hmmm...sounds familiar. That is what we have been saying too – that people got the wrong idea about the free market. They thought it was a panacea. As long as you reduced taxes and regulation, they believed, you could get away with murder...or at least leverage.

Not so. Capitalism is not a system that makes people rich. It’s a moral system...not really a financial system at all. And like any moral system, it’s fuzzy at the edges and difficult to master. Where does the Atlantic stop and the Jersey shore begin? No one can tell you exactly. And no one can tell you where, exactly, one person’s rights begin and another’s stop.

Does a landowner really have an unencumbered right to enjoy the usufructs of his property...knowing that his ancestor stole the land, even fair and square, from the local natives? Does an airline have the right to fly its jumbo jets into an airport...regardless of the noise pollution it causes to the local householders? Would motorists have the right to drive gas-guzzlers if the planet really were headed for a global climatic disaster? Who knows?

All you can do is do your best...trying to respect other peoples’ property...and other peoples’ freedom to do what they want...and trying to hold people to their agreements and obligations. Some people get rich; some people get poor. Some people lose; some win. But mostly, grosso modo, the free market gives people what they’ve got coming.

*** While George Soros believes the advanced markets of the West will begin heading down again in a few months, he thinks that some emerging markets will continue going up. He’s heavily invested in India, for example, where he believes “the fundamentals remain good.”

In other words, capitalism still works. But the winners in this capitalistic world are not necessarily those who blather on about freedom and market economies.

Soro’s former sidekick, and our old friend, Jim Rogers, says he wouldn’t put a dime in India. He sold all his emerging markets, except China. The Middle Kingdom has very little political freedom. According to the theorists of the Reagan/Thatcher era...China as it is today couldn’t exist. Political freedom was thought to be inseparable from economic freedom. And economic freedom was considered essential to growth and prosperity. But there it is – China! What to make of it?

Jim is so sure that China will be the world’s next super-power, perhaps replacing America as the leading hegemon of the planet, that he has insisted that his daughter learn to speak Mandarin. Practically from the day she was born she’s had a Chinese nanny.

So colleague Manraaj Singh is good company. He has faith in the emerging markets too. His favorite Asian market is Vietnam, also a communist country...the one that booted out U.S. troops 40 years ago and imprisoned America’s candidate for president, John McCain.

But yesterday, Manraaj was not talking about Vietnam. Instead, he had this to say about U.S. Treasury Secretary Paulson’s visit to China:

“In a press conference in Beijing, he said that he emphasised to the Chinese government the benefits of more efficient capital markets as a device that could ensure ordinary citizens received an “adequate” return on their savings...and that’s when I burst out laughing!

“Since the beginning of the decade, the S&P 500 Index has actually fallen by five percent. In China, the benchmark Shanghai A-shares Index is up by 124 per cent – and that’s after falling 43 per cent from its peak in October.

They were up 296 per cent at their peak. I think that Chinese investors have seen an “adequate” return on their savings. U.S. investors, on the other hand, probably wouldn’t think so...and neither would the average British investor... the FTSE is down 11 per cent over the same period.”

Interestingly, Asian markets have been hit hard... not by anything they did wrong, but by the sub-prime crisis, which was 100% made in America. The emerging markets have their troubles and weaknesses, Manraaj concedes, but they are fundamentally in better positions than the US, because they have less debt and cheaper operating costs.

*** We mentioned Icelandic bonds the other day. They’re an intriguing investment because yields are exceptionally high. Obviously, wherever you get high rewards, it is a good idea to look around to find out why; there’s bound to be a reason. Mr. Market never gives our favors without strings attached.

The cord attached to this particular yield leads right to the krona – which fell 22% last year. Even if you can get an inflation adjusted, or real, yield of 5% on Icelandic bonds, another drop like that in the currency would leave you deep in the hole.

We put the question to a team of investment managers from HSBC. Here is their reply:

“There is obviously a chance that all the pessimism over debt and default is over done and that the bonds are a good buy at these prices. HSBC PB (Private Bank) wouldn’t recommend it as a strategy. The main reason is that our view is that the bust in credit will take a long time to correct and has significantly further to go.

The market has to come to a point that it is willing to lend to Icelandic banks again. This is unlikely for the foreseeable future. As I am sure you know the mainstays of the economy are fishing (70% of exports!), aluminum (the country has a developed a large amount of geothermal electricity) and to a small extent tourism - not particularly inspiring given the scale of the problem.

“Rather than re-visiting an old bull market story, such as Iceland, we would prefer to look to the future. That would mean that we would be looking at different sectors which will grow or protect investors money because they are working in high-demand areas. Because the developing economies of Russia, China, Latin America and the Middle East are cash-rich on the back of the commodities boom, we prefer to invest, generally, in those economies.”

*** Finally, speaking of Latin America. We got an update from colleague Horacio Pozzo on what is happening in Argentina.

“Today in Argentina, it’s a holiday, the anniversary of the beginning of the Malvinas War (known in the UK as the Falklands War). But yesterday, I thought for a moment that the holiday had been moved forward. Because my neighborhood bakery and butcher were both closed. The crisis of the countryside has arrived in the city...shortages are beginning to appear.”

The crisis of the country is simple enough to explain: reacting to record grain prices, Argentina’s farmers planted as much as they could. Now, it is autumn in South America...and the crops are being sold. But along comes the government with a tax on grain exports of up to half the proceeds.

Naturally, the farmers were hacked off. And then President Cristina Fernandez de Kirchner made an aggressive speech, which made them even madder. Soon, they had mounted a siege operation against Buenos Aires, blocking 400 roads into the capital, hoping to starve the city into submission.”

It was a showdown that threatened violence and disruption. Too bad for the Argentines, who have been enjoying an economic growth rate only slightly behind that of the Chinese. But no day is ever so sunny that politicians can’t find a way to make it rain. We’ve seen that all over the world...and throughout all history. And now in Argentina.

Daily Reckoning .. 04/04/08