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Escape Route From US Bear Market Leads to Chile

By    |   Thursday, 26 Aug 2010 12:19 PM

I’m on a trek through South America to find investment opportunities.

My long-term philosophy, and the theme of my upcoming book “The Great Cycle,” is that the U.S. market is stuck in a long-term trading range.

These ranges have occurred before — from 1901-1921, 1929-1949 and 1966-1982 — when the stock market has done nothing over a long period of time. Such stretches tend to be 15-to-20 years in duration. With the market about 10 years into this trading range, or secular bear market, we probably still have about 5 to 10 years left.

Therefore, the key to make money in the coming years is with investments outside the mainstream.

One way is with gold. I became so bullish on gold, longer term, that I started a newsletter with Newsmax about gold stocks.

Get David Skarica's Gold Stock Adviser — Click Here Now!

However, another opportunity is emerging markets. It seems that many countries, which struggled with communism, corruption and poverty, have now opened their borders.

One country which was ahead of the curve is Chile.

In 1974, Milton Friedman came down to Chile to visit Augusto Pinochet and recommend free-market measures to get the economy out of the hyperinflation and socialist leanings that were destroying it at the time.

These were instituted in the 1980s by a group named “The Chicago Boys,” a group of Chilean economists who had free-market leanings after studying at Chicago’s School of Business. Since then, Chile has outperformed the rest of South America and now has one of the highest standards of living in South America.

When coming to Santiago, you shake off all of the stereotypes about the Third World and South America.

Looking out the window of my hotel in Las Condes (an upscale suburb of Santiago), I see the beautiful Andes in the background and a skyline as modern and developed as any in North America.

Chile is the world’s largest copper producer, so the peso (which trades at about 500 to the dollar) tends to trade with the price of copper. When copper prices are strong, so usually is the Chilean economy. Chile has one of the lowest government debt levels in the world, with debt to GDP well below 10 percent.

We all know the 8.8 earthquake ravaged the city of Conception, south of Santiago. However, here in Santiago, you wouldn’t know that a monster earthquake shook the city just six short months ago. The building standards are of top extreme.

However, the reconstruction of Conception and other areas hit hard by the earthquake has caused things to become a bit overheated in the stock market.

There is a term known as “creative destruction,” where you can create wealth by simply rebuilding something that is broken. Well, that is going on in Chile. Reconstruction is causing demand for steel, concrete, cranes, copper, etc. It is also adding to GDP (last quarter, the economy grew at a buoyant 6.5 percent).

So, the stock market has become overheated. The price-earnings ratio of the Chilean market is well above 20 and the dividend yield has dropped to near 2 percent. Stocks are not cheap. Many Chilean stocks have rallied 30 to 40 percent since the spring. However, I think this is short-term bump from the increase in activity resulting from the earthquakes. I see a sharp pullback coming in the Chilean stock market.

However, I do not see this as a major bubble. Housing is not out of control and there is no sense of a mass bubble, like tech stocks in 1999 in the United States. Therefore, when a correction comes, I see Chilean stocks offering a great buying opportunity as the long-term growth in this economy continues.

Next week, I will be in Peru. The following week, I will be in Panama and Honduras so I will give reports from those locations.

About the Author: David Skarica
David Skarica is a member of the Moneynews Financial Brain Trust. Click Here to read more of his articles. He also writes the Gold Stock Adviser. Discover more by Clicking Here Now.

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I m on a trek through South America to find investment opportunities. My long-term philosophy, and the theme of my upcoming book The Great Cycle, is that the U.S. market is stuck in a long-term trading range. These ranges have occurred before from 1901-1921, 1929-1949...
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2010-19-26
Thursday, 26 Aug 2010 12:19 PM
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