A Bit of “Chile” and Spice…

Recall that the sell-off in many emerging markets was triggered more by a “flight to quality” and a collapse in commodity prices rather than by their own subprime problems. Most emerging stock markets across the globe are now up well over 20% from their bottom, meaning that the current run has met the technical definition of a bull market. This week’s Global Bull Market Alert pick, the iShares MSCI Chile Investable Mkt Idx (ECH), increases your bet on this shift in sentiment.

Here’s why I think the Chilean ETF will continue to perform strongly over at least the next six weeks.

First, Chile’s fundamentals make the economic ne’er-do-wells of the world green with envy. During the commodity boom of 2002-2007, Chile’s conservative economic policies were criticized for stifling growth. But thanks to its fiscal prudence, its lack of a domestic housing bubble, and its sizeable wealth reserves, Chile has weathered the current global economic meltdown better than most countries. While other Central and South American countries spent the bulk of the massive inflow of wealth to the region during the commodities boom, Chile built up a US$19.5 billion “stabilization fund.” This large cash reserve meant policy makers were never forced to search for financing in a difficult market. And because it never had engaged in risky lending practices, Chile never had to de-lever. Policy responses were aggressive, too. At its policy meetings in January, February and March, the Central Bank slashed interest rates by a total of 600 basis points — actions the chief Latin American economist at Merrill Lynch called "one of the most aggressive monetary policy responses in this global crisis."

Second, a bet on Chile is a highly leveraged bet on any upturn in the global economy. As the world’s largest producer and exporter of copper, Chile relies on exports for 43% of its GDP. And copper prices — as you know from your position in the iPath DJ AIG Copper TR Sub-Idx ETN (JJC) — is a proxy for global economic growth and have jumped nearly 30% this year alone. Although the Chilean ETF’s holdings themselves rely little on copper, the impact of the metal’s strong performance will be felt throughout Chile’s economy.

Third, the Chilean ETF bottomed on Dec. 5 — and has been on a more or less steady, upward path ever since. And just last week, it crossed its 200-day average — perhaps the only emerging stock market in the world that is trading above this key technical level.

So buy the iShares MSCI Chile Investable Market Index ETF (ECH) and place your stop at $29.50.

Portfolio Update

The iShares MSCI BRIC Index ETF (BKF) got off to a strong start, soaring 7.8% as sentiment in global markets continued to improve. BKF is a BUY.

The Market Vectors Double Short Euro ETN (DRR) also jumped 5.09% this week. With its upward trend re-established, I am moving it back to a BUY.

The CurrencyShares British Pound Sterling Trust (FXB) resumed its downward trend this week, ever so slightly. But with economic news improving out of the United Kingdom, I am keeping your short position in the FXB at a HOLD.

With demand for safe-haven assets like the SPDR Gold Shares ETF (GLD) and the PowerShares DB Gold Double Long ETN (DGP) ebbing, I am keeping both of these positions at a HOLD.

Your position in the iShares iBoxx $ High Yield Corporate Bond (HYG) hit the $72.55 level on Thursday. As high-yield debt continues to be underpriced, HYG remains a BUY.

The iPath DJ AIG Copper TR Sub-Idx ETN (JJC) was up another 5.3% last week. Dr. Copper remains a BUY.

Your Rydex Inverse Government Long Bond Strategy Inverse (RYJUX) was up 1.3% this week, as the threat of inflation, ballooning government deficits, and exploding money supply continues to be bullish for this position. RJYUX remains a BUY.

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