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Macro Musings

Tim Melvin

I try to ignore the white noise of short-term market movements. I keep the financial networks on in my office, but for the most part I find them more humorous than useful. Making investment decisions based on market gyrations or news flow has always ended badly for me, so I generally eschew that type of behavior. I am trying to buy decent businesses at very cheap prices and own them for the long term. Short-term events do not factor into my decisions unless they provide better price points -- and even that is determined by individual company value and stock price evaluations.

Once or twice a year, though, I do find it helpful to consider the bigger picture. I am not looking for trends or trying to make predictions as much as I am looking for potential cheap assets and sectors I may have overlooked. I push aside the stack of 10-Qs and 10-Ks, temporarily return my copies of Security Analysis and Baseball Prospectus to the bookshelf (or according to my wife, the top of the stack on the floor) and focus on charts of the world.

I start with global stock markets and currencies. I will look at the sector and industry charts from various markets. I even break out the commodity charts to see what physical and financial assets are trading at multiple-year lows and may lead to safe and cheap investing opportunities.

I started that process this morning by looking at global stock market performance over the past year. We have seen a coordinated global stimulus program inflate many asset prices and keep some markets from collapsing in the aftermath of the credit crisis. It has worked for the U.S., as markets are up 10% year-to-date and stock prices have doubled in the past three years. A quick look at global stock prices shows that most indices are up year-to-date (Spain and Italy being the most notable exceptions).

But the year-to-date figures mask a much greater long-term weakness in stock prices. When I look at the past 52 weeks, most stock markets are still solidly in the red. Over the past three years, very few markets have had a price recovery anything close to what we have experienced here in the U.S. Many markets -- including China, which many consider key to full recovery -- are still trading near the 2009 lows. Japan has improved over the past three years but not nearly as much as the United States. Only India has had returns approaching those of the U.S. domestic stock market. I have no interest in anything China, but the relative weakness of Japan may be worth investigating for potential safe and cheap stock opportunities. I am already long some major Japanese banks (Mitsubishi UFJ Financial MTU and Mizuho Financial MFG and am not opposed to buying more stocks in the Land of the Rising Sun.

It will come as no surprise that Europe is where the real stock pain is centered. Most of the major European markets are down over the past 52 weeks. Spain and Italy are two of the major concerns on the continent these days, and their markets reflect that fact. Both are down year to date and over the past 52 weeks, and they're showing negative returns over the past three years. Although Spanish and Italian bond yields are rising, I don't think we have reached the point of maximum pessimism in those two troubled nations yet. It is worth the time to check out some of the major companies in those nations, stocks like Telefonica SA TEF or Telecom Italia TI that may become bargains as maximum pessimism moves closer to reality. I am also tracking the major Spanish banks, such as Banco Santander STD , but they have a ways to fall before reaching that 40%-of-book-value level I consider a good entry for distressed banks.

There are pockets of drastic underperformance in the world markets that are worth further exploration. I am not an index buyer, but I will spend some time looking for net cash and other super-cheap situations in Japan, Italy and Spain that might also fit my standards for safe and worth buying. If I find any, I will share them here on Real Money.