Saturday, October 20, 2007

Can Emerging Markets Survive....Again

EM for the past 2-3 years has been like Hulk Hogan rising from the mat when you thought he was about to lose a match. But has anyone seen Hulk the last few months? It think maybe Hulk Hogan and the EM world have risen from the canvas for the last time.

Well lets start with my last post. I talked about how the trend continues and how I was continuing to ride that trend. Both true. But now I look back on the week and am thankful that I have survived......So Far......

You see as I left the office on Friday my P/L for the week was basically flat. This mainly because EM, for the most part,has been incredibly bullet proof. But this, in my opinion, will not last. Think Sub-Prime. For months we heard about this Sub-Prime problem lurking in the market but didn't see any effects of it and then one day (or at least it seemed that way to me) POOF short date cash started to get tight and the market was in a panic about rates being to high. I think that EM is in for a similar situation. Let's remember I am and have been the leader of the Yield Monkey's for 2 years now. I currently still hold the positions that I wrote about last week. This will change on Monday morning. I will exit these positions by 12 noon New York Time (if I write it I have to do it). All I have heard for weeks/months is that the U.S. is not the engine of the world like it used to be. Their problems will not effect us in the same way. True, but we will have an effect. We have to we are much to big not to. Walking to work everyday I see many store front windows empty. This in mid town New York City. Oil is going through the roof. Layoffs at the big investment houses has started (small now a few hundred here and there, but it has started). Housing is in real trouble and I see no sign of it bottoming anytime soon. Face it the U.S. economy is definitely slowing down, recession slow I do not know, but we are definitely slowing and as such it will effect the other economies. It has to, maybe not as much as in past cycles, but to some degree definitely.

So let's look at a few countries and see where the biggest effect's should come. In Asia, I think India and the Philippines will move the most in the least amount of time. Both of these currencies have benefited from the most stock speculation, and there was talk this week from the Indian finance minister that regulation aimed at slowing forgein speculation was being considered. In Latin America, Colombia, Brazil and Argentina. They all have some real upside potential. Currently I have no spot exposure in this region (really no spot exposure at all) but plenty of interest rate exposure. On Wednesday the Brazilian CB decided for the first time in 2 years not to cut rates. This one trade (lower Brl rates) has been the single biggest trend in the market the last 2 years, now it seems it has come to an end. I have been around these markets for a long time and although I think things have changed I still remember July-August of this year when there was little chance to get out of risk.

So as I wrote above I will get out of my Brazil, Mexico and Singapore (I was paid for some back end rates and haven't taken them back yet) risk on Monday morning. I will not go short dollars against any EM currencies for the short term. I will look for an appropriate way to exit my Argentinian risk. This position will be the trickiest as it has the least liquidity and the highest yields.

As far as opportunities, look toward the UK and Europe (I have posted about this one in the past) to start talking less hawkish. Possible Aud and Nzd also. Canada has been on a tear for a while now and I think that the currency is abit to strong. Wait for a turn before entering those markets, but definitely keep an eye on them.

Let me know what you are thinking.

Good Luck and Good Forex Trading.

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