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8/8/2005
A Strange Incongruence, by Victor Niederhoffer

Note the congruence of various market performances over the year, as it is well known that there is a master market personage above who doesn't like one market to get too much out of line with the others. Alternately, there is a high coterminous average correlation between any randomly selected pair of markets, and when during the year one diverges from the predicted relation, it is profitable to play for a movement back to the mean. Alternately, there is a gravitational attraction that all markets show and when one gets out of line it is pulled by the force of gravity back toward the others. But note how the US market continues to lag all the other markets this year. Indeed, except for the rare birds like Venezuela, Brazil and Costa Rica, we seem to be bringing up the rear. Here are some approximate returns, year to date:

Canada 14%          Spain 10%           Philippines 8%
Mexico 12%          Switzerland 16%     New Zealand 9%
Argentina 10%       Italy 7%            Indonesia 17%
Brazil 1%           Netherlands 12%     China -10%
Chile 20%           Norway 16%          Taiwan 4%
UK 10%              Japan 2%            Australia 8%
Europe500 12%       Hong Kong 6%        India 17%
Germany 13%         Korea 21%           Singapore 13%
France 16%          Pakistan 19%        Malaysia 4%

The US markets range from -2% for the Dow, to 1% for the S&P, to 7% for the Midcap.

I conjecture that such a divergence in the middle of the year is bullish for the big laggards. But it must be tested.

George Zachar responds:

In bondland, folks are being urged to pile into paper issued by "emerging market" nations who happen to be oil producers. In the course of equities counting/testing, I would suggest examining the proportion of each nation's bourse that is clearly petrol-oriented, to see if that is a factor that needs to be isolated before drawing conclusions.

As an aside, for all the hype surrounding "emerging market" debt, their credit default swaps (complex puts) are putting in new recent highs, unlike swaps on high-yield and investment-grade paper.

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