Will it be a game of 2 halves for stock markets?

As the celebrations in Madrid die down this week and Spaniards wrestle with their hangovers after their one goal win over Germany in Euro 2008, equity investors have less to cheer about. Unless you had a good position in commodities or commodity stocks, there has been little in the year-to-date performance of most equity markets to get excited about.

Robin Griffiths from Cazenove Capital ran through charts on the FTSE and the Toronto exchange this morning and explained why the developed markets will continue to underperform, while the commodity and emerging market indices will generate better returns. For a buy-and-hold investor, markets like the Dow have been a disaster – the DJIA is now back to levels it reached in 1999. Robin says we began a secular bear market in 2000 and that bear will stay with us until 2016...possibly even 2020. Could this be the start of a nearly two-decade trough for developed world indices? The precedent in recent history is 1966-1982 – a 16-year period where the buy-and-hold investor went nowhere for 16 years. Robin says emerging markets are in a secular bull market currently experiencing a cyclical bear – he would prefer to buy in India rather than China – arguing that the outlook for the latter is still confused by the question of political uncertainty for the communist government.

Philip Manduca, our guest host this morning, believes the outlook for markets for the rest of the year will depend on the policy announcements from western governments. He thinks governments will have to step in to the credit crisis to arrest the continued deterioration in credit quality. We continue to see a slow-motion capitulation in capital-dependent companies as one after another they seek refinancing on what 12 months ago would seem like quite punitive terms. Only this morning UK property company Taylor Wimpey announced a £660 million ($1.3 billion) writedown of its land portfolio and said they are looking for new funds from existing investors. Ouch! As we pointed out this morning on the show, this is now going to put the spotlight on the portfolios of every other UK listed developer, with negative consequences.

Finally, we talked about investing in CIS agriculture. Kingsmill Bond from Troika Dialog made the case for companies that are exposed to farming in the CIS. His picks are: Kernel, Astarta Holding, Razgulai Group and Cherkizovo Group in the processing field. Among the fertilizer companies he likes Uralki and Silvinit, both listed in Russia. Kingsmill says despite the CIS having 13 percent of the world’s arable land, it only grows 6 percent of its crops and farms just 3 percent of the world’s meat. The region has still not seen the major yield improvements technology has brought elsewhere. As that starts to happen, these companies are poised to benefit. He challenged the view that agricultural prices are rising because of population growth and insists they are instead being driven by the biofuel-led quest for oil substitutes.

From here the macro backdrop for equities still looks poor whilst oil and food prices continue to weaken the outlook for corporate profits. With capital preservation the goal, investors will need to play a better defensive game than the Germans achieved in Vienna over the weekend.

A Reader Writes

Your article on 25 June 2008, Fear the RBI and the BOC, not the FEDreads, in part:

1. The markets have worked themselves into a frenzy.

2. Investors are collectively worried.

3. What are the markets scared of?

4. Why (should) the market buy into more jawboning.

5. The markets are trying to decide whether they have been had.

Trying to decide whether they have been had?

I believe that the U.S. financial system lacks public confidence and corporations frequently practice financial deceit. The savings-and-loan debacle in the 80s and 90s (that cost U.S. taxpayers more that $160 billion), the dot-com fiasco in the early 2000s which cost investors uncalculated billions, and the still-evolving subprime lending catastrophe provides evidence of corporate corruption and financial irresponsibility.

The collapse of Bear Stearns,one of the largest global investment banks and brokerage firms in the world,is not a landmark case. It is one in a series of corporate failures which evidences a fault which is embedded in our institutions. How can these institutions be managed by the most brilliant financial minds in the country and then embarrass themselves through failure? Why is the investing public, like myself, repeatedly assured that our financial structures and corporations are sound and "good investments over time" concurrent to major business failures?

I smell deceit in the air!

At the federal government level, the country is about to hit a 50-year high for debt as a percent of the economy (gross domestic product). We have an eye-popping $9 trillion gross national debt. Congress is spending taxpayer money as if there is no limit. Parochial pork barrel projects do not serve our nation’s interests. Fiscal irresponsibility appears to be the Washington standard.

I’m an average investor from Scranton, PA. I do not have a financial background, but I can sense financial corrosion at a reasonable distance from Wall Street and Washington.

Charles A. Seland

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