WHILE THE ANTI-GLOBALIZATION
socialists who like todisrupt
World Bank meetings are holding up traffic and littering the sidewalks with flyers, I'm investing money serious money in some of the most troubled areas of the globe. And despite a lack of liquidity, I'm especially long a lot of the Latin American names we first mentioned a few weeksback
. Although I've got my requisitestop orders
in place, I must admit that this is a region in which, for now at least, I'm an unequivocal toro I mean bull.
As we often like to point out, trading is about taking smart risks. And sometimes the riskiest trades have the best payoff odds. One recent example has been Internet stocks, which just this week made the cover of Barron's. Regular readers will recall it's a trend we first highlighted back in November. As the saying goes, there's always a bull market somewhere.
But it's not just the perceived risk that makes many Latin American names appealing. Rather, when it comes to putting money to work in these names, the herd is nowhere to be found. That's a good thing.
Doubt (and not hope) is always an encouraging sign when it comes to stocks. And despite incredibly strong price performance, Merrill Lynch recently downgraded three large Brazilian banks, calling Banco Itau a Neutral and both Banco Bradesco and Unibanco-Uniao de Bancos Brasileiros Sells. From a contrarian's perspective, that's a bullish signal.
See the chart below.
|Doing the Samba|
APPLET PLACEHOLDER: archive= height=400 width=400
|Data from Oct. 11, 2002 to April 11, 2003|
And if the analysts are doubtful, retail investors seem largely absent. Even though the stocks are up in excess of 20% this year, the message boards aren't just quiet they're silent.
But what I like best about many Latin American names right now is their liquidity, or should I say, their lack of it. As we first wrote a few years back, traders profit by adding liquidity to illiquid markets. Generally speaking, I want to be long the most illiquid market possible relative to my account size. The fact that many Latin American stocks are strong, yet remain relatively illiquid, is one indication from my perspective that the real move has yet to be made. So I'm buying now, and hoping that it's just a matter of time before the herd comes stampeding through the door.
Compared to other world markets, U.S. stocks aren't just liquid they're downright soggy. Take a look at how much money is traded in New York compared with exchanges in Latin America. U.S. exchanges routinely trade securities valued in the hundreds of billions. Yet most Latin American markets do barely a fraction of that business.
For example, in late February, the New York Stock Exchange was trading in excess of $700 billion worth of securities a day. Meanwhile, Brazil's Bovespa was trading a mere $100 million. In Mexico, $80 million in daily turnover is a busy session; in Chile, $20 million is considered active. As for Peru, many days the stock market trades less than $1 million in stock. You tell me> where the herd is.
When it comes to actually trading Latin American stocks, the way to go about it is through American depositary receipts, known as ADRs. Simply put, an ADR is a U.S.-listed and dollar-denominated way to own a non-U.S. company. So, for example, instead of going through the expense and hassle of buying Banco de Chile on the Santiago Stock Exchange, one can simply buy the ADR that's listed on the NYSE. (Note: Large institutional investors often arbitrage that is, take advantage of small price discrepancies between the U.S.-listed ADRs and the shares in a particular company's home market.)
And because so much of the world's liquidity is centered in the U.S., it's my belief that many ADRs, especially the thinly traded ones representing shares in Latin American countries, are becoming the primary market for a company's stock. In effect, the tail is wagging the dog. Local shares now seem to be priced off the ADRs' movements, and not the other way around. I see it as an opportunity to be a big fish in a much smaller pond.
Why am I spending hours going through both the J.P. Morgan and Bank of New York ADR Web sites? Because in order to beat the crowd you've got to avoid the herd. And although no investment is without risk, at this point many Latin American names seem to be a risk worth taking. It's just a matter of time before everyone finds out.
Jonathan Hoenig, portfolio manager of Capitalistpig Hedge Fund LLC, owns some of the stocks mentioned in this article.>