Global Markets Catch a Cold

by Jon Markman | August 15, 2008 1:30 am

If the equity ally out of mid-July were a movie, Hollywood might call it "Uncle Buck," as it has been all about the U.S. dollar rebounding from a 30-year slide.

And now both dollar and stock rallies look set to continue, with longtime bears over at brokerage Goldman Sachs (GS[1]) announcing that they think the U.S. currency has embarked on a significant advance.

They don’t think that the greenback is improving because traders are so confident in the U.S. economy; however, but because growth in every other region of the world is growing worse. (See also: "Are Global Markets Headed for a Plunge[2]?")

Goldman says traders are looking at rapidly slowing economic activity in the UK, Scandinavia, Australia, New Zealand and Canada and thinking the barely positive results in America may not be so bad.

The Wall Street Journal points out that gross domestic product in the euro zone contracted 0.2% in the second quarter. It was the first time since the early ’90s that the 15 countries using the euro had seen a joint contraction. That’s a big deal. No wonder oil and other raw material prices are falling off a cliff.

You may have noticed that gold is off 20% from its high last year, but did you know that silver, which has more industrial uses, is off 32%?

Many of the shares of top silver miners have been annihilated, with Apex Silver (SIL[3]) down 80% since October, to $3.38 from $21.33. Big U.S. silver miner Coeur d’Alene (CDE[4]) is down to $1.89 from $5.80 since March alone!

This global weakness has been a shocker to folks who thought that Europe and other countries had strong internal economies that would insulate them from U.S. recessionary trends, as the term "decouple" became a buzzword. So much for that idea.

The giant Brazilian miner Vale do Rio Doce (RIO[5]) has seen shares plunge 45% since May. British super-miner Rio Tinto (RTP[6]) is down 37% since May.

Australian super-miner BHP Billiton (BHP[7]) is down 34%. So as you can see, it’s not one region, it’s a conflagration of value throughout the commodity industry.

While some of these stocks have had similar decline in the past few years, they have always recovered more quickly. As a result, they are all now trading below their 12-month average for the first time since 2003, pushing them into the sort of bear-market territory from which it is much more difficult to recover.

If you are hanging on to any of these big commodity stocks in hopes that they will rebound soon…

…be aware that the big money is poised to sell on every significant rally.

Georgia On My Mind

Meanwhile, over in the Caucasus, we have the incredible spectacle of the United States sending troops to help our allies in Georgia beat down a military threat from Russia.

It kind of seems like these headlines got lost in cyberspace from 20 years ago and randomly floated down into the news wires. But it’s true. We’re looking at Cold War v2 heating up.

My friend Tom McClellan, an ace technical analyst and former U.S. Army helicopter pilot, has been wondering why the stock market isn’t collapsing and commodities raging with international tensions heightened. So he did some digging in history, and provides the following observations:

• The former Soviet Union invaded Czechoslovakia on Aug. 21, 1968, when the DJIA stood at 888.67. That was four days after the start of Phase III of the Tet Offensive in Vietnam. It was also just ahead of the August 26-29 Democratic National Convention in Chicago, and its associated riots, and 2 months before the start of the 1968 Olympic Games in Mexico City. In short, it was a time when the U.S. was pretty fully distracted, so it was a great time to start an invasion. A month later, the DJIA was at 930.45, up 4.7%.
• The former Soviet Union invaded Hungary on Sunday, Nov. 4. 1956, as Americans were caught up in the reelection campaign of President Eisenhower, so it was a great time to start an invasion. The DJIA stood at 490.47 at the close on Nov. 2. The DJIA stumbled a little bit, but managed to regain that same level a month later.
• The former Soviet Union invaded Afghanistan on Dec. 24, 1979, Christmas Eve, after Soviet army advisors had instructed the Afghan army troops to remove the batteries from their tanks for maintenance, thereby facilitating an easier invasion. The DJIA stood at 839.16 at the close on Dec. 24. Afghan president Hafizullah Amin was killed on Dec. 27, and the takeover of Kabul was completed quickly by Soviet airborne troops. This was also during the time when Iranian "students" had taken over the U.S. embassy in Tehran on Nov. 4, 1979, and were holding the embassy staff hostage. That made for a great time to start an invasion. A month later, on Jan. 24, 1980 the DJIA stood at 879.95, 5% higher than the preinvasion close.
• The current situation in the former Soviet republic of Georgia is quite reminiscent of those previous Soviet invasions, commencing just as the 2008 Beijing Olympics were getting under way and the world’s attention was distracted. The U.S. military is also pretty decisively engaged in both Iraq and Afghanistan, and thus not in a great position to make a military response. The invasion of Georgia is more than a little bit upsetting to the collective psyche of the investing public.

The point in raising these historical examples, Tom notes, is to show that past invasions by a Soviet army did not really hurt the stock market, and so we should not automatically assume that the current attempts by Putin and Medvedev to revive old familiar Soviet practices will do so this time.

Next week I will help you understand why Georgia is so important to Russia, and what’s at stake for investors in the conflict. In my Trader’s Advantage[8] letter, we’ve been handling this volatility with both long and short positions in commodities, financials and techs that have panned out with big profits, so this is a good time to check us out. Click here to learn more about a risk-free trial[9].

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