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Commentary Topic from greenfaucet

Add Latvia To The List

Iceland was the first government to get tossed out in the financial crisis and now the ruling coalition in Latvia is out. Latvia’s troubles seem to focus on maintaining a peg to the euro and the extraordinary and costly efforts to keep the peg in place. It has recently exhausted 25% of its reserves maintaining the peg. The deterioration of the economy (GDP contraction and unemployment each headed toward 12%) has also lead to an IMF bailout which Nouriel Roubini said was a bad deal for Latvia, due primarily to the tremendous work being done to keep the currency, the lat, at an overvalued level.

Latvia has been in trouble for a while. In fact many countries in Eastern Europe, like Romania and the rest of the Balkans, have been having problems for a long time now. In the last couple of weeks trouble in Poland and Hungary has popped up which has dominoed into a threat for Austria.

I am a huge advocate of learning about these types of countries, following them and when the time is right, investing in them. Just as the time cannot always be right it cannot always be wrong either. I have not invested in these countries in the last few years and am not sure when I would. Trying to figure when to invest here is probably a waste of time. At some point these types of markets become compelling; it makes more sense to stick with them (in terms of following the news and the fundamentals) and then if they do become investment worthy, go in with a moderate exposure.

The path of the Latvia OMXR Index paints a picture of a market in trouble but also shows that the problems unfolded slowly over a period of many months. If you invest in these types of countries, 60-80% declines will come along rarely and you need to keep this in mind. Success does not have to come from getting out at the top or buying at the bottom. When these markets go up they go up a lot. If you catch a move like this you need to manage the position actively. If you buy Cyprus (Bank of Cyprus can be accessed in the US--never owned it though) and you get 50 or 75% then you need to take some money out of the stock.  If it starts to rollover then maybe take a little more out. Buying and never selling will be the wrong strategy the vast majority of the time.

Perhaps this mentality needs to be applied to US stocks as well but this is not new for emerging and frontier markets.