Buy the 'PITS' for Big Profits!
By Staff News & Analysis - April 05, 2011

Investing in Smaller Emerging Markets … It's a stat that could lead many investors to do a double take: The stock market of Sri Lanka soared 91 percent last year … Analysts are particularly high now on four "emerging" emerging economies. Indonesia's economy was estimated to have grown by about 6 percent in 2010, and analysts think it will grow faster this year (its stock market was up 46 percent last year). Sri Lanka has seen a surge in trade-related traffic as a gateway to both India and the rest of Southeast Asia. On the other side of the continent, Turkey has benefited from several years of political stability and investment by large multinational firms. Finally, Peru's economy has surged (it was up an estimated 9 percent in 2010), thanks to China's seemingly insatiable demand for minerals. – Smart Money

Dominant Social Theme: Money is a restless game. You need to take risks. Follow the hot money flows and let them lead you to retirement Nirvana. Sri Lanka? … Don't know what the heck it is, never mind where? Get a map and start buying!

Free-Market Analysis: The analysts at Goldman Sachs are always coming up with acronyms that receive worldwide play. (Imagine being introduced at cocktail parties as the person who came up with this or that globally recognized acronym. What an icebreaker.) Anyway, why should they have all the fun? Though we are not in any sense Masters of the Universe, we always figured if given the chance we could come up with an acronym too. Well, now it appears we have that chance, and we are seizing upon it.

All thanks to Smart Money for providing us with this opportunity. If you read the excerpt above, dear reader, you will notice it suggests that there are four new "hot spots" where investors can lose … er, place their funds in hoping of garnering a good return. The countries are Peru, Indonesia, Turkey and Sri Lanka. Put the first letters of each of these countries together and what do you get? P-I-T-S … See! A new nadir … er, international investment promise. Smart Money is suggesting, along with Wall Street's top analysts, that you invest in "the PITS!"

Of course Smart Money won't tell you the PITS are a monetary phenomena. Pre-Internet in fact such revelations may have sounded better. Educated about money flows and central bank stimulations, it's a little bit difficult to take seriously the idea that the PITS, in aggregate, have suddenly discovered the virtues of capitalism. Presumably, we are supposed to believe that these countries have been working hard for decades, with the help of the wise men at the IMF and the UN, to turn their third-world economies into first-world powerhouses (or so the story is suppose to go). Now Smart Money has been tipped off to this top-secret evolution and you – along with a million other readers – are privy to this most important money making secret. Think PITS!

Say, haven't we heard this story before? In the 1980s, Japan was set to take over the world. Today, poor Japan is suddenly faced with troubles it may take a generation to overcome. The Asian Tigers roared like lions for a while. But that fiat-money-pumping-party ended with government agents going door-to-door in Korea and demanding people's gold jewelry because the European banks were refusing to take Korea's worthless paper money. In Europe, the PIGS – especially Ireland – were all the rage. But the Celtic miracle disappeared some time ago and all that is left are endless negotiations on lowering interest rate payments on a recent bailout. Presumably this will allow Ireland to go broke slowly instead of swiftly.

Forget all of that! The PITS are different, Smart Money informs us. "While all the attention, and most of the money, keeps going to the so-called BRIC countries (Brazil, Russia, India and China) … strategists are turning to other parts of the world for growth." Is this a difficult research process? Not at all. "They don't have to look very hard. Countries in both hemispheres have seen their economies surge along with their stock markets."

And why are economies surging? Could it be because Ben Bernanke and other central banks over the past two years have printed and injected some US$20-$US50 TRILLION into the larger world's economy? This does not seem to figure into the article. In fact, the inconvenient issue of monetary stimulation is firmly avoided. Instead, we learn that "Part of this strong performance can be attributed to a surge in demand worldwide for the commodities found in some of these nations. And part of it is simply a result of the global economic recovery."

See how simple that is? As the world "recovers," commodity prices inevitably go up due to "demand." Pakistan in particular is a beneficiary of this cycle. Now it is true, that Pakistan has some internal problems. It just had a flood that left millions homeless and starving. The US keeps lobbing drone missiles at the Southern part of Pakistan and killing "Al Qaeda" along with the odd woman, child and elder.

The Pakistan Taliban keeps blowing up buildings and killing dozens. The ISI (Pakistan's CIA) is deeply suspicious of the country's politicians – and the US too (from where it receives a goodly amount of funding); the politicians are deeply terrorized by Pakistan's seething, impoverished masses and are subject to random assassinations; the Pakistani Pashtuns still harbor the dream of a greater Pashtun that would deprive Pakistan of one third of its land mass; the five or so wealthy families (clans) that run Pakistan are focused myopically on ensuring that the Afghan war next door doesn't end until Pakistan has a strong voice in the "peace process."

Into this maelstrom of dysfunction enter Wall Street's analysts, assuring us, according to Smart Money, that Pakistan (and other such "economies") have "rebounded from a disastrous two years." And what is the "best" news for investors when it comes to the glorious opportunities the PITS offer? "… While there might be corrections, even sharp ones, these nations have good prospects, according to some pros." Good opportunities? Pakistan? "There's a multitude of opportunities in these non-BRIC markets," says Nick Chamie, global head of emerging markets research at RBC Capital Markets.

Wow. Mr. Chamie, you go! Anyone who can recommend Pakistan as an "opportunity" is a world-class stretcher of truth in our opinion. The article's author (who shall remain nameless) does have the grace to offer a disclaimer at this point: "Of course, investing in these smaller nations brings a whole set of risks that even some of the BRIC countries usually don't face. Inflation could have a greater impact on these nations than on bigger countries because energy and, especially, food prices have a huge impact on their citizens. The recent events in Egypt and Tunisia show how political unrest can strike many developing nations."

Gee, thanks for the reminder. Yes, the developing world tends to be an unstable place, especially when the US government through its youth movements and CIA "boots on the ground" is actively working to foment revolutions. But let's leave that aside. The good news is that Pakistan's stock index rose 28 percent last year. (Of course who knows how many days it was actually open, or how many companies make up this index. What does an American-style Pakistani company look like anyway?)

Don't ask questions. Smart Money has done the homework when it comes to the PITS. "Everyone wants to get into this positive story," says Lupin Rahman, senior vice president on the emerging-markets portfolio-management team at Pimco. Adds Smart Money: "With new country-specific exchange-traded funds having started in the past couple of years and with [others] on the way—Global X Funds plans to launch one of the first Pakistan ETFs this year—it's becoming easier for investors to get direct exposure to these smaller emerging markets."

Oh, boy. Direct exposure to Pakistan, Indonesia, Turkey and Sri Lanka. Indonesia, we don't know much about except that it tends to stumble from one authoritarian regime to the next; Turkey is always positioned as an up-and-coming economy, but its leaders are desperately seeking to join the EU, so how smart can THEY be; Sri Lanka, well … we were just talking about Sri Lanka the other day. We were telling a "friend" when it comes to investing, there are only two words you need to know: "Sri" and "Lanka." As of today, we would rephrase the tip. Think PITS, we would tell him. It's the next BRIC.

After Thoughts

We suppose that Smart Money editors believe they are being smart by introducing investors to the PITS. But how long can they play this game in the 21st century? Unlike the 20th century, anyone with a pair of eyes and a spare buck has been on the Internet reading up on how Bernanke has inflated the world's economy with his inveterate stimulating. Does it not occur to most, then, that the "promise" of the PITS is mostly a monetary one? Can people not add? Smart Money must not think so.