The Big Picture for the Week of May 16, 2010

The crew at ETF Database posted a useful topic yesterday pointing out three country funds that have low correlations to the S&P 500. The three ETFs were iShares Malaysia (EWM) with a 0.76 correlation to the S&P 500, the iShares Thailand (THD) 0.75 and the iShares Chile (ECH) 0.69. If those funds' correlations are lower than other country funds I will take their word for it but they don't seem to be that lowly correlated. BTW a few clients own ECH and I also have a couple of shares.

This is a good reason to revisit something I wrote more about a couple of years ago as things were really hitting the fan. The ETF Database article correctly, IMO, points out that most markets are highly correlated. I would say the funds isolated in the article are merely less highly correlated.

Unfortunately I think many market participants have unrealistic expectations about decoupling. We have seen first hand, a couple of times, in the last few years that most markets go down together even if the magnitudes are different. The context I have been writing about from the start has been that countries with different economic attributes are usually at different points in their respective economic cycles which gives them a chance, I say a chance, of being at different points in their respective stock market cycles.

Of the foreign markets I write about I think this three year chart comparing the IPSA in Chile and the Bovespa in Brazil to the S&P 500 is a good way to show the effect.

Brazil kept going up for months after the US peaked, as did Norway BTW. The Bovespa did drop more than the SPX peak to trough but is currently 11% below its all time high. Chile rolled over in lock step with the US but only went down for about half the time resulting in a much smaller peak to trough decline and the IPSA is higher than where it was before the financial crisis started.

Several times over the last couple of years I have mentioned that for some countries this has been much closer to just being a cyclical event as opposed to secular or structural and while that is obviously the case with Chile I believe it is also the case with Brazil.

While living in the moment is important in life a longer term view with regard to investing probably makes more sense. For the last decade Brazil was up 301%, Chile was up 194% and the S&P 500 was down 24%. First, these countries were worthy of more study for being commodity based. Then it was obvious that they were both on much firmer ground than the US and I believe still are. To revisit a point I make often is it really that difficult to figure out that Europe has some big problems? Of course not. Ditto Japan. And I am telling you it was just as easy to see Europe's problems a couple of years ago too.