Monday Madness

Bespoke put up an interesting chart today.

It's a study of total returns by country since March of 2003, when the MSCI World Index bottomed out at 550.  That index doubled up to more than 1,100 last summer and has since fallen back about a third, so far making a neat retracement of the recent gains IF it can consolidate along this line. 

Last week I said I think we have an investable bottom over in China and it's interesting to note that China's total returns since March '03 have now collapsed to one of the worst levels of the countries measured – all the way down to 79.43% and STILL 2.41% BETTER than the total returns from the US market.  Only Japan has a worse return than the US over the past 5.5 years with a 68.66% vs. our 77.02%.  Brazil is the top gainer with a 427% return, India 2nd at 409%, our neighbors in Mexico returned 408% while our other neighbors in Canada made 142% so you can't say we're in a bad neighborhood can you? 

Are we too big?  Well Germany returned 187% over that time and Hong Kong pulled in 180%, and that's AFTER the big pullback they've had this year.  Russia is rolling more than tanks as their market has returned 274% and even South Africa has been killing us with a 308% return.  Is it time for some global rotation to US equities or have our disastrous economic policies put us in the permanent back seat of the global economy?   This is not our Political Post of the Week so I'll leave it at that…

So the whole World has been having a party to which we were not invited.  Barron's had a cover this weekend and called it "required reading before you vote" and indicates that Obama's proposed policy would be a disaster for our economy, urging readers to vote McCain and stay the course.  That course, according to the Bespoke study, has placed the US second to last in global growth and we are losing ground to Japan even as we speak.  We can expect this election to hinge on economic issues, which 66% of the voters say is their main concern and we can expect the markets to move up and down with the polls – it's going to be a rough campaign season so strap in for some fun!

Hong Kong had a party this morning with a 712% gain (3.5% on the button) and the Nikkei was feeling chipper with a 212-point run, still under 13,000 but a nice 1.7% on the day.  The Shanghai Composite was dead flat as the Olympics wound down and it was banks that led the Asian rally while falling oil prices boosted most industry (steel remained down in the dumps though).  Continued strong dollar led to a 4% jump in HMC and SNE and Sumitom Mitsui Financial added 4.24%, which is a pretty strong statement for the group that is looking to buy LEH, indicating the markets are really seeing a bargain in our beaten-down financials.

We talked about the EU economy in the weekend post and London is closed today for a holiday so volume is think and flat today.  Oil stocks are the leading decliners as crude hovers right around $115 in European trading.  Russia is still in Georgia and France is calling for a summit while Russia's Parliament is calling for President Medvedev to officially recognize the separatist provinces (since 1990) of South Ossetia and Abkhazia. "Today we must fulfill what is I think our historic mission — to defend small countries from aggressors," Federation Council member Boris Spiegel told Associated Press Television before the vote.

Now that the facts are in, the WSJ has changed their tune, characterizing the action as such: "After Georgia tried to retake South Ossetia by force Aug. 7, Russian troops overwhelmed the Georgians, and for nearly two weeks occupied positions deep within Georgia. Most of those forces withdrew Friday, although some Russia troops continue to operate near the Black Sea port of Poti and in Georgia outside the boundaries of the breakaway regions."  This is strikingly different than the Russian agression we heard about for the past two weeks…  Nonetheless, Bush sent humanitarian aid to Batumi – IN A DESTROYER!

"The population of Georgia will feel more safe from today from the Russian aggression," Georgian Defense Minister David Kezerashvili said on the aft missile deck of the USS McFaul after greeting U.S. Navy officers on shore.  "They will feel safe not because the destroyer is here but because they will feel they are not alone facing the Russian aggression," he added.

So tensions are still high and we can expect the oil bulls to continue to lean on the situation to excuse support above the critical $110 line.  Last week's action demonstrated that the market has virtually no tolerance for higher oil prices so we will be placing our bets accordingly.  None of this is bullish for the global economy as tensions are exacerbating EU stagflation, which is now damaging the mining industry as runaway costs are eating into record revenues, similar to what's going on in the oil industry which will really begin to hurt if oil drops below $100 a barrel. 

Our pre-markets are not looking good ahead of the Existing Home Sales report at 10am.  Oil is up over $115 despite a strong dollar and that's not helping but the pre-market sell-off (8:45) seems a bit much since nothing bad actually happened this weekend.  PDS is buying GW for $2Bn, about 1/2 cash and 1/2 stock and a very nice premium over GW's Friday close at $8.59 although PDS is flying down pre-market and GW shareholders needs to recognize $20.95 a share on the stock portion of the transaction.  There is a limited all cash option.  This is boosting the E&P sector as well as oil but it shouldn't – it's been in the pipeline for a while and is more of a merger than a purchase. 

LEH is giving back all of Friday's gains as a Korean regulator urged caution regarding Korea Development Bank's interest in that company.  Russian steelmaker Severstal is buying America's PBS Coal for $1.3Bn, another indication of our administrations "talk strongly but carry no stick" approach to dealing with Russia.  Since Severstal is going to be using the coal for their own manufacturing and not witholding it to drive up commodity prices, the company plans to double PBS production in the short to medium term…

Generally we ignore action on Mondays and this whole, pre-holiday week is going to be highly suspect so we'll concentrate on oil, the dollar, gold and copper while we see what levels hold up (or don't) in what promises to be a thinly traded week.