Oct

22

SeedlingAre you having a bad week? Judging by the Dow and the S&P averages the market was really bad this week. Both are down more than 3% over the last five days. But that is only part of the picture.

The QQQQ is nearly unchanged over the last five days. The cubes (or quads) consist of the 100 big cap Nasdaq stocks and are tech-laden. The Nasdaq index overall is following suit and is down only a little for the same period.

We appear to be in a phase transition. Risky loans are out. Much of the value stock and dividend stock performance of the last few years has been fueled by the ability to borrow cheaply and reinvest in somewhat higher yielding equity value and asset plays. As long as the dividend covered the borrowing costs, it was a safe form of the carry trade. This sort of trade was epitomized by the private equity firms.

Those days are gone. Now it is no longer possible to generate growth through leveraged magic. The market is now favoring companies which have real businesses that are growing. Growth is back.

Samuel Eisenstadt writes:

Amen. Since the beginning of 2007, growth has been in the driver's seat, as evidenced by the superb performance of Value Line's Timeliness Ranking System. The System is having its best performance in years. As Value Line readers are aware, the system is largely driven by earnings growth, momentum and earnings surprise, attributes largely ignored in recent years when "value" was the best game in town.

You might be interested in Mark Hulbert's article Value Line Profits from Patience in MarketWatch.com for October 23.

James Tar suggests:

A simpler expression: Nasdaq stocks have balance sheets that are virtually debt-free. No credit risk equals safety.

We can expand the divergence concept. Now could be an ideal time to consider going long Emerging countries that possess current account surpluses while shorting Emerging countries that have current account deficits.

Emerging countries with either a surplus or deficit have all been scorching higher on the inflationary/liquidity/carry trade going on all over the place the last several years. I suspect this is going to change.


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