Many investors believe banks are the only investment play in Turkey. The sole question for those investors is to hold or not to hold banks. Here’s what we think is a better strategy: Invest in undervalued, diverse, smaller companies that will benefit from a resilient consumer, low unemployment rate and sound government policies.

Among young people, Turkey’s unemployment rate is considerably lower than many countries in Europe, including Spain, Greece, Ireland and Italy. Germany is the only country with a lower unemployment rate than Turkey. This low rate translates to a vibrant, young workforce with rising wealth.

Even though Turkey has a strong domestic market, it often faces a current account deficit, meaning total imports are greater than the country’s total exports. (Turkey’s dependency on energy imports, for example, makes the country vulnerable to oil prices. As the price of oil increases, Turkey’s current account deficit grows, and vice versa.)

This external vulnerability is one of the reasons why Standard & Poor’s recently reaffirmed Turkey’s lira-denominated bond rating of BBB- and its foreign exchange credit rating of BB. In its report, S&P based its view on Turkey’s current account receipts, its modest income levels and risks related to the credit boom of last year. S&P says that Turkey’s GDP growth was “mostly driven by rapid domestic credit expansion, financed mainly by short-term external funding to banks.”

However, S&P explained that the current ratings are supported by its view of Turkey’s “generally effective policymaking and institutions, its moderate and declining public debt burden, and its monetary policy flexibility.”

At the CFA Conference in Chicago attended by our director of research, John Derrick, Sam Zell discussed his key theses on investing in emerging markets. Sam believes one should be invested for a few years before a country becomes investment grade because leaders tend to implement responsible policies in line with rating agencies’ requirements.

To improve its credit rating over the long-term—and to reduce its current account deficit—Turkey has been implementing policies that encourage an increase in the domestic production of goods and makes its exports more competitive to attract capital. For example, Turkish mining law is investment-friendly, as there is little bureaucratic control, an easy permitting process, and lower fees, and allows broader activities for companies involved in mining gold, copper and boron. These policies will likely encourage mining companies to dig up the natural resources under Turkey rather than head to another country.

Case Study: Tale of Two Turkish Stocks
Of those companies that can capitalize on Turkey’s consumer strengths—retailers, glass makers and manufacturers of automobiles, washing machines and refrigerators—we focus on growth-at-a-reasonable-price (GARP) companies. We believe these undervalued companies that have revenues growing faster than GDP, are profitable and are well-run with a focus on building shareholder value are the most attractive investments.

Turkish food manufacturer Ülker (ULKER) fits the bill, trading at 15 times 2012 estimated earnings. Ülker owns the household-name Godiva. The luxury chocolate brand has 275 company-owned and managed specialty boutiques in North America alone, and is sold in more than 80 countries around the world. After reporting that first-quarter profits had more than tripled, the stock rose to all-time highs, during a time other emerging markets stocks were declining.

Other global brands, though they exhibit growth traits, are expensive. Coca-Cola Icecek (CCI) is one of the fastest-growing bottlers among Coca-Cola’s universe, with about 70 percent of its revenue coming from domestic sales, according to Morgan Stanley Research. However, the stock seems pricey, with a 2012 price-to-earnings ratio of 23 times.

The market has begun to recognize Turkey’s strengths this year, especially in the retail sector. As you can see below, Turkish retail equities have rallied significantly since the start of 2012. These stocks have already surged well beyond the 2008 peak and pushed through the 2011 high last month.

Turkey’s Accessible Market
According to Russell Investments, Turkey has the largest and most liquid small-cap market among emerging market countries. Whereas many small caps in emerging countries take a few days to trade, in Turkey, it only takes one day, on average, to build a position. This reduces the liquidity risk inherent in international small companies, and for an active manager, provides flexibility for selling stocks as the market rises and taking advantage of dips on the down days.

Read related posts:

• Eastern Europe Financial House Stronger than Debt-Ridden Neighbors
• See Turkey’s low debt to GDP compared with emerging markets and the developed G-7 countries
• Turkey Gets an Upgrade

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.

Alpha is a measure of performance on a risk-adjusted basis. Alpha takes the volatility (price risk) of a mutual fund and compares its risk-adjusted performance to a benchmark index. The excess return of the fund relative to the return of the benchmark index is a fund’s alpha. The Istanbul Stock Exchange National 100 Index (XU100) is a capitalization-weighted index composed of National Market listed companies in the retail trade industry. None of U.S. Global Investors Funds held any of the securities mentioned as of 3/31/12.

Written by Frank Holmes

Pocket of Strength: Turkey Retail Stocks Rally is an article from:

NEW YORK, May 22 – Financial and housing shares nudged Wall Street higher on Tuesday after U.S. existing home sales rose in April to their highest rate in nearly two years, but gains were capped by investors’ concerns about the global economic outlook.

One of our views has been that if you expect U.S. home prices to rise… buy real estate. If, on the other hand, you expect prices to stabilize then it makes more sense to buy the banks. And by ‘the banks’ we are referring to Wells Fargo .

Just below are three charts of Wells Fargo. The top chart runs from January through October in 2010, the middle chart from January through October in 2011, while the lower chart begins in January of this year.

In 2010 the share price of WFC peaked around 34 early in the second quarter only to decline back to 23 through the second quarter. A reasonable trade would have included selling WFC near 34 and then going back to the long side between 23 and 24 during the late summer.

In 2011 WFC peaked around 34 during the first quarter and bottomed in the 23- 24 range in late summer. For the second time in two years being a seller near 34 and buyer under 24 would have been just about perfect.

So… towards the end of the first quarter in 2012 the share price of WFC once again pushed up towards 34. If history were to repeat this would represent an ideal exit point.

Our problem? On the one hand the charts suggest that it makes sense to leave this one alone until some time in August or September. If our learning curve is anything BUT a flat line then we should accept that money is swinging into an out of the markets in six month intervals.

On the other hand… we have a very hard time believing that the markets will do the same thing three years in a row. Twice in a row is possible but the more obvious an outcome appears the lower the odds that it will come about.

Equity/Bond Markets

Wall Street Journal, May 22, 2012: ‘Evidence of a recovery in the housing market has been piling up since last fall, but there has been a good reason to be skeptical of it: Data from the cold months, when housing activity slows, are a less-than-certain gauge of the market’s health.
But now the U.S. is entering the thick of the home building and selling season. And the data continue to flash recovery.’

Below is a comparison between Wells Fargo and the price spread between 30-year and 10-year Treasury futures.

The argument is that WFC can be at a bottom as long as the 30-10 spread has reached a top. Given that the spread has recently risen to the peak levels from 2009- 11 this actually seems both possible and reasonable.

Next is our comparison between Wells Fargo and Japanese bank Mitsubishi UFJ .

During the final quarter of last year the share price of MTU did not turn upwards until WFC was in the process of making new recovery highs above roughly 27.50. Our thought has been that the laggard banks may remain under a certain amount of pressure until leading financials such as WFC are set to once again make new highs.

Last is a chart of Mitsubishi UFJ and the ratio between Japan’s Nikkei 225 Index and the Japanese 10-year bond futures.

Quickly… the Nikkei only seems to rise when Japanese bond prices are declining. This causes the ratio between the Nikkei and JGBs to ‘whip’ upwards and downwards quite violently. The share price of MTU is almost dead on the Nikkei/JGB ratio. This means that the share price does very nicely when the JGBs are moving lower in price and extremely poorly when bond prices are rising.

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Chart Presentation: The Charm? is an article from:

We are witnessing a few cautionary signs that indicate a radically overbought U.S. equity and bond market.  Stealthily, the precious metals, and mining equities are bottoming.  The strong uptrend in the equity markets since October of 2011 has caused many investors to join the herd in the latest investment fad entitled, “Social Media”.

Take a look at Groupon, Zynga, LinkedIn, etc.  Their vogue will not last forever.  Sentiment for the social media sector may be reaching an euphoric extreme, while the mining stocks have fallen into public disfavor.  The miners are bottoming at historic low valuations while the initial public offering of Facebook is valued at 100 times trailing earnings.  This is an abiding concern of Gold Stock Trades.

This eerily reminds us of the dot-com bubble in 2000.  Recall a company such as “theglobe.com” which made the largest gain in history on the day of its IPO only to be bankrupt two years later.  The CEO was also in his twenties.  The brokers were able to find myriads of buyers beating at their gates.  As the French say, “The more things change, the more they remain the same.”

Fast forward twelve years later and so many lemmings are buying Facebook stock that the marketers happily sold an additional 25% more than originally planned.  Rarely has an IPO gotten such a cascade of hype and busted.  My gut tells me something may be amiss.  When the butcher, baker and the candle stick maker are trying to get in on the Facebook underwriting, it brings to mind Jesse Livermore’s warning that when masses clamor for initial public offerings, red lights are flashing along the investment highway.  Meanwhile as Facebook becomes public, insiders sell and buy the undervalued gold miners.

There is a growing body of evidence that gold has formed a potential double bottom around $1525.  This area in the low $1500’s represents a strong area of support.  There seems to be plenty of buyers on the sidelines as we have witnessed 3 bullish high volume reversals in the miners in the past two weeks.  Our charts may indicate strong accumulation during this bottoming process which represents the transfer of weak hands into strong hands.  Frequently, the bottoming process is accompanied with bearish sentiment as it is now.  When the analysts are universally negative, we are alerted to a potential major turning point.  Silver (SLV) is also showing major support at $27.50.  The average middle class European is converting their Euros into physical gold and silver as fears are rising of a major devaluation in the Euro to pay back the soaring debts of Greece, Italy, Spain and Portugal.

Gold, Silver and The Miners Bottoming While Facebook Is Busting is an article from:

Last November, the IPO deal of the day was Groupon. On the first day of trading, shares rose to a high of $31 from an initial offering price of $20.

By Thanksgiving, the stock had fallen below the IPO price, and only a few months later, uncertainty popped up around the company’s accounting methods and financial controls. The stock fell further, with the market devaluing Groupon by about 50 percent in only six months. How’s that for a group buy?

It’s interesting to note that the value of Groupon’s stock has lost more than $13 billion since the peak on the first trading day through April 30. For comparison, if you look at the total net assets in Lipper’s precious metals mutual fund peer category, assets fell $8.3 billion over the same timeframe. Investors lost more than $5 billion more in one tech stock alone than in all of the precious metals funds combined.

Gold—A Reality Check
Investors have “defriended” gold recently in favor of the dollar, as Greek and French voters rejected austerity measures. Greeks have been responding to their escalating debt issues for a while by steadily pulling money from overnight deposits. I often say, money goes where it is best treated, and these deposits will need to find a safe haven.

It’s not only Greece the market is worried about, says BCA Research. In a special report aptly named, “In Case of Emergency Grexit,” the firm says there’s extra pressure on Spain and Italy, “which imminently needs a large bailout of its banking system.” The 10-year yields for each country have reached 6 percent today, and while there are funds to sufficiently cover Spain, there aren’t enough funds for Italy, too, says BCA.

So if the European Union (EU) stops the flow of bailout funds, Greece, unable to pay wages, would invoke social unrest, according to BCA.

More importantly, without funds from the EU, Greece would default on its bonds. Looking at what the country owes this year alone, $1 to $7.6 billion is due each month, says BCA. The European Central Bank would then most likely stop providing funds to Greek banks, causing more individuals to pull money. “With deposit flight, and no injections from the ECB, the banks would be bust and Greece would be hemorrhaging money,” says BCA.

It’s also important to look at the investors of Greek debt. According to the London Evening Standard earlier this year, French banks are the largest holders of Greek government bonds and private-sector debt in the eurozone, with $47.9 billion exposure to Greece.

In the end, I believe governments in Europe lack the courage to be fiscally disciplined. Earlier this week, I told Aaron Task and Henry Blodget on The Daily Ticker that when push comes to shove, Europe will likely continue to print money. This should be positive for gold.

At the Hard Assets Conference earlier this week, Greg Weldon compared the money printing situation to a sink. In an interview he gave with The Gold Report, Greg said:

“It’s going to be very difficult to see how economies in Europe, the U.S. and Japan can stand on their own two feet without the assistance of central banks debasing currency through debt monetization. I liken it to filling the sink halfway up with water and pulling the plug out of the drain. Of course, the water level will recede unless you turn the faucet on and start more water pouring into the sink. The level of water represents asset prices, the water flowing out of the faucet represents liquidity provided by global central banks and the drain represents the real macro economy, which has not been fixed.

“At the end of the second round of qualitative easing, when the Fed shut off the faucet, the water level (asset prices) started to go down. But now the water is running again—particularly with some of the measures instituted by the European Central Bank, with its three-year loan program, the federal liquidity swaps and the back-ended way that it’s managed to involve the International Monetary Fund.

“The problem with all of this is it does nothing to fix the underlying problem, which is too much debt. This is not sustainable. Central banks turning on the water faucet is good for asset prices. The real solutions of fiscal austerity, which are probably not palatable to most politicians in Europe, are the real struggle as we go forward. This problem is not going to go away.”

So, during times like we’ve had recently, when the dollar is chosen over gold, I apply math. The chart below shows the 60-day percentage change of the gold price and the U.S. dollar. Gold’s recent weakness has triggered a -2.2 sigma event in standard deviation terms. Over the past 10 years, this has happened less than 2 percent of the time. Historically, each time gold has touched the -2 sigma mark, the precious metal has rallied.

This bounce is exactly what we saw on Thursday and Friday this week.

See more slides from my Hard Assets Investment Conference.

While gold may not go up vertically from here—as frequent readers know, the yellow metal historically has fallen in June and July—with the extraordinary events occurring in Europe, I believe investors will soon “friend” gold once more. As we wait for the central banks around the world to act, I encourage investors to consider dollar-cost averaging. It’s a way to stay invested, and more importantly, to avoid making emotional investment decisions.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.

No investment plan can guarantee a profit or protect against a loss in a declining market. Evaluate your financial ability to continue in such a program in view of the possibility that you may need to redeem fund shares in periods of declining share prices as well as in periods of rising prices. Standard deviation is a measure of the dispersion of a set of data from its mean. The more spread apart the data, the higher the deviation. Standard deviation is also known as historical volatility.

Written by Frank Holmes

Gold: The World’s Friend for 5,000 Years is an article from:

On the other hand… the ratio between the S&P 500 Index and U.S. 30-year T-Bond futures is around 8.7:1.

And this is important because…?

Below is a chart of the ratio between the S&P 500 Index and the price of the U.S. 30-year T-Bond futures from late 1997 to the present time frame.

The chart shows that the S&P 500 Index has traded below 8.7 times the price of the TBond on a number of occasions over the past 15 years so this obviously is not a level that associated with major bottoms.

Yet… the message that we took from this chart was that by the time the SPX contracted to around 9 times the price of the TBond the equity markets were either at a bottom or in the midst of some sort of crisis that was leading to a bottom.

The rapid decline in the ratio this year suggests that the markets are shifting right back into a ‘crisis’ state as bond prices soar while equity prices tumble.

The point, we suppose, is that the price of the SPX compared to long-term bond prices has declined to levels that, in the past, have been associated with the final stretches of bear markets or somewhat temporary declines in front of significant rallies .

With the exception of 1998 it would have made sense to hold off on building long positions until the SPX/TBond ratio fell below 8:1. Fair enough. The problem with remaining bearish for too long at current levels is that the world may wake up one of these days to discover that recent weakness was less ‘crisis’ and more capital flows than most imagined.

Equity/Bond Markets

First below is a chart of the S&P 500 Index and U.S. 30-year T-Bond futures from 1987.

The argument is that the SPX extended its gains from May into August once the TBond futures started to essentially move sideways. Once the TBonds returned to a negative trend in August the SPX shifted into a topping process before eventually ‘crashing’.

Second below is a comparison from the current time period between the U.S. 30-year T-Bond futures and the Japanese yen futures.

Our suggestion is that the TBond futures are extending the rising price trend while the Japanese yen futures push upwards. If this is correct then as soon as the yen turns back to the down side we could see the bond market move from a bullish trend back to what might prove to be a dramatically bearish trend.

We were looking for some kind of comparison that might work for the Japanese yen and eventually settled on the TBond futures from 1005- 06. Whether this is ‘fair’ or not is open to debate but we have placed the charts below using the ‘cross over’ by the 50-day e.m.a. line through the 200-day e.m.a. line as our starting point.

In theory the yen is in approximately the same position today that the TBonds were in January of 2006. A break by the yen back below its 50-day e.m.a. line over the next while may indicate that the currency is going to resolve lower into the autumn.

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Chart Presentation: Ratio Thoughts is an article from: