Today’s Log Entry: On Tech and Emerging Markets

Thought I’d share today’s entry to our internal market log:

is selling off markedly this morning, which makes perfect sense if we’re indeed
entering a seasonal rough patch. Tech has had a huge year, leaving our higher conviction 2018 picks (financials, industrials and materials) in the dust — relatively speaking.
momentum of late has come from very good earnings (although our top picks
have posted exceptional earnings results as well) and a political backdrop that, for now, has spared finished consumer
tech products from the trade skirmishes. This sets up a virtual no-chance
scenario for tech to continue to dominate for much longer from here, for two

1.   Should
the trade war abate, which it should,
tech is bound to give way (in terms of relative performance) to a surge in the
notably cheaper, globally-exposed sectors that have been sorely
under-appreciated so far in 2018.

2. Should
Trump make good on his threats to go after another $200 billion of Chinese
imports, and beyond, I see no avenue for tech to extend its lead, as the odds
of China folding, as opposed to aggressively retaliating, are minimal. In fact,
on the first hint that the U.S. and/or China will target finished consumer
electronics, I see tech selling off in dramatic fashion.

As I
type, the Nasdaq is down 1.45% (our core tech ETF is down 1.66%), while the
S&P 500 and the Dow are down .49% and .03% respectively (with our core
financials, materials and industrials ETFs up .34%, up .38% and up .39%
The headline topic of the day is emerging markets: The combination of the “trade war” and a
stronger dollar – plus issues unique to Turkey and Argentina (for examples) — has
capital exiting EM en masse. Harkens
back to the 1998 emerging market crisis for some. While that (’98 redux) is a
legitimate concern, the combination of today’s free-floating exchange rates,
trade flow dynamics and resoundingly greater foreign reserve balances for most
of the EM space make a ’98 scenario (which saw the U.S. market down 20%
briefly) a relatively low probability, for
last sentence said, while, for the time being, general conditions –
particularly in the U.S. – are substantially positive, I absolutely see a bear
market scenario ultimately occurring sooner than
it otherwise should
if indeed the trade war becomes a much larger,
protracted affair.
for our present foreign exposure (which we lightened up on earlier in the year), assuming cooler heads prevail on trade
and given the generally still decent global
economic setup (and the attractive relative valuations [given this year’s
drubbing]) – the stage is set for a strong year-end rally in the space. Of course in a protracted trade war scenario all bets are off here as well…


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