Monday, October 20, 2008

Yes I Want to Invest for the Long Term

[For a list of this trader's long term investment ideas, scroll down several paragraphs. Otherwise feel free to sludge through why I will merely trade and not invest in US stocks for the foreseeable future.]

I won't deny that the extreme price action lately has created long term value. Much like Buffett, I think this is the first legitimate opportunity for long term investing in quite some time. But unlike the old man, I'm not especially keen on guessing where in the US market that longer term value exists, or if it exists yet at all. Rome wasn't rebuilt in a day, right?

The US is a mature economy which, following years of various bubbles, accomodative, easy money from the Fed, smoke-and-mirror shenanigans from every direction, has finally peaked. Housing prices, a key component to the economic morass, remain high relative to comparative income levels and incomes will decline for an indeterminate amount of time now as the net-number of jobs decline in the coming months.

I could drag this thesis on, flash my platinum-penciled econometric Mr. Magoo Model-T Model, paint myself as cynical and unpatriotic, but instead let's just admit that we don't know at this time how far US stocks will decline and whether we ultimately make higher highs or not. We could gamble either way, but we don't know.

Now obviously, US economic growth in the long term may turn out to be reasonable, but growth prospects remain suspect and unless we really see things lance pessimistic, the degree of growth going forward should not be spectacular (and growth is what drives markets higher). I need to see much lower-lows, coincident with far, far less enthusiasm about stocks before considering putting long-term money to work in the US. I need to see a consensus of disgust for stocks, a prolonged apathy, nuclear bombs flying, riots in the streets, asteroids colliding, mom's apple pie going uneaten...I need to know that the majority of the public never wants to own a stock again.

I'll trade this market long (or short), but buy the US for the long term? No way. We've ended the most spectacular bull market in the history of bull markets, dating back to 1982 when we finally broke through Dow 1000; after something like 16 years of trying.

I'm not predicting we're on our way to Dow 1000 again and I don't want this to happen, but it is not out of the question either. And given the fact that we have a mature economy, the upside-reward potential just doesn't justify socking money away in US stocks. Not yet, not at these levels...not for me at least.

Yes I Want to Invest for the Long Term:

But hey, for the first time in more than 10 years I am investing long-term money. In recent, dramatic down days in the markets I've begun scaling into Asia; mostly Shanghai, but also Taiwan, Singapore and Hong Kong.

Shanghai is down 70% from the highs in October 2007. While the economy there has certainly slowed, it is still growing. A year ago Chinese officials were attacking their market with tight money, high short-term interest rates, new restrictive policies regarding investing in stocks, etc. Recently however they have begun stimulating - lowering interest rates and adding liquidity. We certainly might go lower from here, but growth prospects for mainland China are considerable and like Buffett points out for the US, the market prices there will be sufficiently higher before that new growth is obvious. If we do go lower, I'll just keep buying. I don't intend to sell for many years.

This may be 1907 for the Chinese economy, which means a long-term investor stands to gain 1000% or more by buying and holding. It's possible that China will not become the World's largest economy in the next generation; it's possible that the US decline will pull all the World's economies beyond the event horizon and no economic-light will escape; it's possible that the world will come to an end as we know it...

Still, I'm a buyer at the end of the World.

Asian plays from the US:

Opening a brokerage account in China is a little complicated and I don't want to commit long term money (on this forum at least) to individual companies, but here is a list of index plays for Asia which I have been scaling long term money into (these are all traded on either the AMEX or NYSE in the US)...

PGJ - ETF corresponding to the Halter USX China Index of 32 companies (Yield = 3.3%)
FXI - ETF corresponding to the FTSE Xinhua China 25 Index (Yield = 4%)
CAF - Closed-end fund investing in Shanghai and Shenzhen-listed companies (Yield = .7%)
EWT - ETF corresponding to the MSCI Taiwan Index (Yield = none)
EWH - ETF corresponding to the MSCI Hong Kong Index (Yield = 4.4%)
EWS - ETF corresponding to the MSCI Singapore Index (Yield = 3.4%)

I am also trading short the ETF FXP, which is a double-short on the FTSE Xinhua China 25 index.

That's me - the long term investor. Good trading!

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