Monday, January 24, 2011

The World's Best Emerging Market: Probably Not What You Think

The World’s Best Emerging Market:
Probably Not What You Think

January 24, 2011. The markets have improved, the economy has improved and the pain of the great bear-cession is starting to tone down to a dull throb. So, ponder this, what is the world’s best emerging market, based on market capitalization growth from March 9, 2009 to January 21, 2011? To provide some perspective, gold was $923.75 an ounce on March 9, 2009 and was $1,342.50 on January 21, 2011, so my calculation is that’s about a 45% increase over 21 ½ months, not bad. The S&P 500 did quite a bit better, up about 88% from that dark day of March ‘09.

So, what’s your guess? If I use ETFs as a proxy (I use those because you can use an ETF to actually invest in a country basket of stocks), let’s round up some of the normal suspects: China? Nope. The FXI was actually up less than the U.S. SPY(S&P 500), 83%, still good. Must be Brazil! Nope. Brazil (EWZ) was up 127%, which is great in anyone’s book. Close, but no cigar. India? Up 137%. Must be Russia! Up 227%, which is incredible for a little over 21 months. Well, that covers the BRICs, what about Indonesia? Up 243% (IDX). By country, Turkey (TKF) was up the most, a whopping 294%. But I think there was an emerging market a little better, like about a 17 times bigger change in capitalization than the S&P 500, and 5 times better than the best country return, Turkey.

How does a 1,566% increase in stock value sound? The market cap of this region went from $8.5B on 03/09/09 to $142.1B on 01/21/11, and still has room to grow. How about unemployment? The U.S. national unemployment rate is actually 0.8 % higher now than it was in March of ‘09, but this region has actually reduced its unemployment rate by 3.1 percent. (I smile as I write about unemployment numbers, because the reduction could mean that a bunch of people dropped out of the job market). Real estate? This region was suffering -11.94% declines in its real estate, and still is, but down to -3.7%.

Where’s this miracle market? DETROIT! I took a dozen Michigan-based stocks (AXL, ARM, BWA, C (Chrysler, not Citigroup), DPH, FDML, F, GM, LEA, PAG, TWI and VC) and compared what they were worth on March 9, 2009 and January 21, 2011. To be sure, some were in bankruptcy, on total life support, or had no public stock. Ford was $1.74, Arvin Meritor was 35 cents and American Axle was 29 cents! GM and Chrysler we know about: they went to zero. Chrysler still hasn’t issued stock, but probably will. But the fact is the traded market capitalization of those stocks has increased over fifteen hundred percent in a little over 21 months.

What does it mean? Remonetization. Stocks are like money, but better. They can go up, and can pay dividends. Take the employees and all those collaterally affected by the auto industry in 2009. Their 401(k)s were down (to 201(k)s), their house values were down, their stocks were either worthless or almost worthless. Employment looked bleak. Stock Options were so far underwater that you needed a submarine to see their negative value. You probably couldn’t find a nastier spot than Detroit. And from declines come gains. GM is back to a traded stock and has new product, Lear is out of bankruptcy, Chrysler will be out soon, Tower reissued stock, Visteon just had an IPO. All the employees and executives now have a new form of money. Ford stock options from 2003 are in the money. A massive amount of stock market wealth disappeared in the 2008-09 decline in the auto industry. But at least $133B of it returned.

Should we all run out and buy car stocks? NO. But recognize that economic growth takes place when jobs and wealth are created. Detroit plunged into the abyss in the bear-cession. And now it’s coming back and bringing with it collateral jobs and increases in wealth in the form of stock and value. The rumors of the death of Detroit are greatly exaggerated. In fact, $133B of wealth was created in the Motor City.


Leon C. LaBrecque JD, CPA, CFP®, CFA is Chief Executive Officer at the fee-only, independent wealth management firm of LJPR, LLC. Started in 1989, LJPR manages about $400 million of client assets. The data in the article were determined using closing prices on the respective dates. LJPR is not making recommendation on any particular stock or ETF. LJPR reduces uncertainly in the lives of its clients by applying creative wealth management solutions in tax, financial planning, retirement planning and estate planning. For a consultation on your personal financial matters, contact us or call at 248-641-7400. Also visit our website