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March 27, 2012, 11:00 a.m. EDT
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Jon D. Markman writes the "Speculations" column for MarketWatch. He is an investment adviser, money management consultant and best-selling author in Seattle. Readers are invited to try a free, two-week trial to his daily Strategic Advantage newsletter on growth stocks, ETFs and global investing. Markman also publishes Trader's Advantage on swing-trading high-beta stocks and options; Gemini 252 on S&P 500 E-mini and Treasury bond futures timing; and Gemini SGX on gold and silver futures timing. He is a former MSN Money managing editor; Los Angeles Times financial columnist; winner of the Gerald Loeb Award for Distinguished Financial Journalism; and senior investment strategist at a stat arb hedge fund. He is also author of five books on investing, including most recently an annotated edition of "Reminiscences of a Stock Operator." His Twitter feed is @jdmarkman.
By Jon D. Markman
Stocks trotted briskly higher on Monday after Federal Reserve chief Ben Bernanke said the economy was not as strong as it looked and would require extra time in the intensive care unit.
If you don't understand why such a morose statement gunned the market by 1%-plus, then you lost your secret Fed-speak decoder ring in the sofa while watching college hoops over the weekend.
In a nutshell, the Bernank's downcast tone was taken as a sign that he is likely to keep cheap money flowing to support businesses, and might even throw another round of quantitative easing on the table. Futures markets had been speculating that the Fed's promise to keep U.S. rates low through 2014 would actually end in 2013. His remarks messed up that bet big time.
Yes it was one of those "bad news is good news" sessions "” a classic example of the way capitalism has been transformed into corporate socialism in the past few years. We're at a moment when the comments of a government or central bank leader is worth a thousand earnings reports. We are all comrades now.
Mexico
Two new stocks on the one-year-high list that caught my eye Monday were Coca-Cola Femsa /quotes/zigman/131472/quotes/nls/kof KOF -0.75% and Fomento Economico Mexicano /quotes/zigman/220109/quotes/nls/fmx FMX -0.98% "” soft drink makers and leaders of the Mexican stock market. You may recall that I noted iShares Mexico /quotes/zigman/260604/quotes/nls/eww EWW -0.61% might make an good play two weeks ago ( link ) after reading a speech by Dallas Fed President Richard Fisher noting the country's economy is in great shape if you don't mind a little narco-terrorism on the edges.
The Mexican stock market is now actually one of the closest of any major exchanges in the world to making a new all-time high -- and quite deserving. (Actually Thailand is already at a new high, but it's small.)
In addition to KOF and FMX, other Mexican jumping beans to consider for your own trading are steel maker Grupo Simec /quotes/zigman/201666/quotes/nls/sim SIM -0.64% , cement maker Cemex /quotes/zigman/216063/quotes/nls/cx CX -0.89% , airport owner Grupo Aeroportuario del Sureste /quotes/zigman/268028/quotes/nls/asr ASR -1.38% and engineering giant Empresas ICA /quotes/zigman/400588/quotes/nls/ica ICA -1.60% .
They are all up 25% to 65% this year, but still cheap. For momentum, go with KOF or ASR. If you are more patient, for value with terrific long-term potential, go with CX or ICA.
MONDAY NOTES
Last week I was saying that stocks might be driven sharply higher through the rest of the month by fund managers who had not bought into the first-quarter rally. Those managers' expectations were stymied in part by the incredible liquidity that has flooded into the global financial system by central banks that were worried about the widening recession in Europe and slowdown in China. Central banks' largesse is supposed to kick-start the economy via loans by commercial banks to the private sector. But there is always a long lag time as bankers determine the most deserving borrowers. Plus, they are being extra cautious due to the fact that they are being watch-dogged by zealous regulators who are ready to criminalize ordinary misjudgment. So we are currently in a state where economies around the world are recovering very sluggishly because it is taking a long time for credit to be dispersed, and yet there is an ocean of money sloshing around. So what do you think the result is? Well, just look at what happened Monday. Excess money tends to find its way into the most speculative channels, and that is why we are seeing the world's stock markets rally at a time when there does not seem to be much to celebrate in the fundamental growth of individual companies. I'm not kidding: One of my sources in the hedge fund community told me Monday afternoon that his research team of PhDs had scoured the world for positive corporate news, but found very little. He says companies in the last two years have squeezed out earnings gains by cutting labor costs to the bone, but have very little left to cut and actually now need to hire. He says margins in the current quarter will disappoint. And yet markets are rallying anyway. The reason: In the short term, values are driven by herd behavior, and right now one of the largest parts of the herd "” hedge fund managers "” have collectively determined that they were fighting the wrong battle the last six months. Bloomberg reported Monday that hedge fund returns are badly trailing the S&P 500 since October because they have been battling the advance by selling stocks short. They are now giving up on those bearish bets, the Bloomberg data shows, and buying stocks at the fastest rate in two years. When bears are converted to bulls, holders of stocks win in two ways. First, the bears have to buy stocks to cover their wrong-way bets, and then they need to buy twice as many stocks to make up for the ground that they lost. Bears are thus bulls' best friends, as they provide a pool of desperate buyers who will chase shares higher. In summary, stocks are being pushed higher by a combination of the liquidity flood, the frantic covering of wrong-way short sales and the conversion of former skeptics into new bulls. Overseas markets with excellent growth profiles and cheap stocks, like Mexico, are benefiting even more than Wall Street. There will undoubtedly come a time when it makes sense to pull back from a positive stance and take profits, but for now every dip has been a buying opportunity as shown in the chart above. Stocks are very overbought now, and are likely to pull back a bit into the end of the week. But you must make hay while the sun shines, because there will be long stretches "” as we saw last year "” when good returns will be a lot harder to come by.
Tomorrow I will tell you all about a publicly held private equity company "” kind of an oxymoron "” that has been a rare bird: both a terrific yield producer as well as a strong stock.
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BREAKING
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