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The Foreign Market Rally is No Bubble

by: Roger Nusbaum May 04, 2006 | about stocks: ADRA / ADRD / ADRE / ADRU / EWZ / QQQQ / SPY    

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Roger Nusbaum submits: Geoff Considine has an article down below that questions foreign investing and likens the outperformance in foreign to the dot com stocks of days gone by.

I believe he and I could look at the same sky and see different colors.

The article is particularly cautious about the Nasdaq BLDRs funds ADRE, ADRD, ADRU and ADRA. I own ADRE personally and for some clients.

It seems like for all of these papers he writes, he uses three years of data -- which I think is way too short a timeframe for the type of work he is doing. (I open myself up to criticism by acknowledging that I did not read all several thousand words.)

Geoff uses a table that notes ADRE is 55% in one year and up an average of 46% per year for the last three years. That sounds like alot, but 'bubble like'? I think not. Infospace went up by 5000% from its IPO in late 1998 through March 10, 2000. In the same time period CMGI went up over 1000%. ADRE has come just short of tripling in the last three years. Is that up alot? Could it correct severely? Yes to both, but those are not bubble numbers.

True bubbles do not occur so close together in time. People ask about a housing bubble. A nationwide price decline of 20%, which has never happened, would be far from the 75% the Nasdaq dropped.

A lot of Geoff's work in this paper notes that foreign/emerging has similar beta and R squared as the dot com/tech sector. To me this is looking at the sectors in a vacuum and ignores too many factors.

This chart compares Brazil to an Internet index [IIX]:

They may have the same beta and same R squared and some other academic stats but they each respond to demand for completely different things. Brazil is likely to do well for as long as the commodity boom lasts. When commodities turn down, it makes sense to think that Brazil will then struggle.

I believe blending lowly correlated assets is very important and Geoff's piece seems to ignore the point. To take an extreme example: If, for the time period in the chart, you put 50% in EWZ and 50% in this Internet index and did no other trade (so you are blending two investments with a very low correlation to each other) you would be up about 40% (see below for my math). In the same time frame the S&P 500 is down about 15%.

I think focusing on the volatility of the components misses the forest for the trees. The volatility of the portfolio makes much more sense to me.

My example is extreme and not a trade I would do, but I think makes the point.

As for my math, the chart starts in July 2000. If you put $100,000 into each product back then you would have $30,000 in the IIX and $250,000 in EWZ today for a total of $280,000, which by rough math gets you to 40%.

I urge you to decide for yourself what makes sense.

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This article has 1 comment:

  •  
    May 05 10:15 AM
    Geoff, apologies if I got a couple of the details upside down. So foreign and emerging is or is not a bubble in your opinion? If you think bubble i still vehemently disagree. It would be easy to make an argument for them being over extended and would not disagree. But bubble is just flat out wrong.
    Reply
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