GM: thanks for the great article:
"Euroland banks have fully $425.7 billion of total exposure to emerging markets in Asia, Latin America, Eastern Europe, the Middle East, and Africa, combined; that's nearly three times the $117.0 billion exposure of US banks. Euroland's emerging market banking exposure is the equivalent of about 6.9% of the region's GDP; by contrast, the ratio in the US amounts to only about 1.4% of American GDP. Within the emerging market universe, the disparity between Euro and US exposure is staggering: For Latin America, Euroland banks have $133.6 billion in such loans versus $63.4 billion in the US; for non-Japan Asia, the comparison is $132.4 billion for Euroland and $29.4 billion for the US; and for Eastern Europe, it's $84.8 billion for Euroland banks and just $10.5 billion in the US."
I would have assumed that U.S. banks' exposure to Latin America was greater, but apparently they have only half as many loans at risk, compared to the Europeans. Good for us, bad for them. Since many of those U.S. banks have seen their stocks chopped in half recently, a big writeoff of debt is probably already priced in. And it hasn't caused a market selloff, just a sector rotation.
The big question is whether U.S. consumption is going to be sustained, going into 1999. A series of big bank failures in Europe, and a credit squeeze, just as the Euro replaces national currencies, will probably result in sharply lower European consumption. If that happens, where is the 16%/year increase in the PC market (that Mr. Dell bravely predicts) going to come from? If PC sales are flat, how long is it going to take to soak up all the excess DRAM and other semi capacity? Not from Japan, not from emerging markets, and now not from Europe. The U.S. can't consume the world's output all by itself.
The rally in the U.S. equity markets in the last few weeks has been on low volume and narrow breadth. None of the problems that drove the Dow to 7400 have been solved, or even realistically addressed:
1)U.S. companies profits and margins, and forward projections, continue to decline.
2) Russia, Japan, Indonesia, etc. continue in political paralysis, which makes taking the hard economic restructuring reforms impossible.
3) The emerging markets that began all this in July 1997 (Malaysia,etc.) are gradually retreating from the global economy: importing less, exporting less, increasing state controls and intervention in capital/equity markets. They look at the countries that are most insulated from global market discipline (India, China), and see that they have suffered less. This response is exactly what the IMF was supposed to prevent, and the IMF has failed.
The only good news is that the Fed will ease. That alone is not going to counterbalance everything I said above.
My response: Sell the rallies. Buy cautiously (semi-equips, medical equipment, banks, drillers) using value criteria. I'm going to sell all my INTC, half my portfolio, soon. This will eliminate all my margin, and leave me about 30% in cash. I'm thinking of buying a lot of Micron 30s April puts. I'm looking for other put candidates. |
