My final metric for evaluating a contrarian market...

Editor's note: The majority of the S&A Digest team is still in the Bahamas for our annual Spring Editors Conference, so we're continuing our multi-part series from the March issue of the S&A Global Contrarian. So far, editor Kim Iskyan has explained why he was afraid to visit Iran recently... and two things he considers before investing in any contrarian market. Today, he shares his final metric. We hope you enjoy.

 

 

 The final thing I look at when evaluating a contrarian market is a catalyst... What could happen to jumpstart this market and make us money?

 

Iran has the mother of all catalysts: The sanctions that have crippled the Iranian economy will probably be lifted a lot sooner than most people think. And when this happens, Iran will experience one of the greatest economic booms in recent global economic history.

 

 Sanctions on Iran were eased in late November when the country promised to reduce its uranium-enrichment activities (the rest of the world fears these activities could help create nuclear weapons) for six months.

 

The eased terms expire in July, and Iran will have to go back to the negotiation table with the so-called P5+1 (the United States, Russia, China, United Kingdom, and France plus Germany). This could be when sanctions are lifted for good.

 

Most people look at the lifting of sanctions as a political question – will Iran's government do what it has to in order to convince everyone that its nuclear ambitions are peaceful? I think the political issue is missing the point.

 

It will ultimately come down to economics. To figure out the future of sanctions on Iran, you have to look at who benefits from keeping Iran's economy in the dark and who would benefit from it joining the global economic system.

 

 I'm not a conspiracy theorist, but I do believe economic motivations are a central cause of much of what happens in the world.

 

Right now, Iran can export a limited amount of oil. The common assumption in Iran is that much of the revenue from these sales goes straight into the pockets of Iranian rulers.

 

A Reuters investigation late last year found that Iran's supreme leader, Ali Khamenei, controls a business empire worth $95 billion. Iran's supreme leader is a unique mix of holy leader and authoritarian boss-for-life. He is more powerful than the elected president. Khamenei is the successor to Ayatollah Khomeini, who ushered in the revolution in 1979.

 

So some Iranian leaders might not want sanctions to be lifted... It would be a lot more difficult for them to steal billions of dollars from the Iranian people.

 

 But sanctions hurt ordinary Iranians the most. And no government can ignore its constituents indefinitely. Iran's neighborhood has seen a lot of violent uprisings in recent years... in Egypt, Libya, Tunisia, and Yemen. Iran's supreme leader ignores the wishes of his people at his own peril.

 

That said, plenty of Iranians want to limit external influences on Iran... there is still a large conservative demographic in the country. It is, after all, the Islamic Republic... and a lot of people don't want it to change.

 

As I said, Western influences are limited. Women sit at the back of the bus, separated by a steel bar from the men in the front. Even the female mannequins in store windows wear headscarves. Alcohol is a big no-no. And although I didn't meet any, some people still subscribe to anti-American sentiments.

 

 The Iranian leadership also fears the potential influence of foreign money. A partner at a law firm in Dubai, who has been in the region for upwards of 15 years, explained it to me like this...

 

The Iranian government is paranoid about foreign influence in the financial arena... They remember George Soros speculating against the Malaysian ringgit in 1997 [in 1997, Soros shorted the ringgit and the Thai baht. The Malaysian prime minister blamed this for the Asian financial crisis the same year]. They're afraid that economic instability could lead to political instability... And I don't think they're far off, either.

 

 But as far as I can tell, a lot more Iranians want to experience the benefits of joining the world community. One young engineer I met in Isfahan – a city about 300 miles from Tehran – wants more than anything to design cars... but there's no domestic auto industry in Iran, and no way for him to leave the country. I'm sure there are millions of similar stories out there.

 

 Big businesses in Iran know how much sanctions are costing them. In Tehran, I met with one of the country's wealthiest businessmen. That morning, he was on the front page of the newspaper for overseeing the signing of a major trade deal with China.

 

But he's immensely frustrated by sanctions and the politicians who are standing in the way of private-sector wealth creation. Chinese and Russian companies have invested in Iran, but they don't have the technology (like cutting-edge oil-drilling techniques) that Iran badly needs to grow.

 

Iran's president is stuck in the middle – between the will of most of the people and the supreme leader.

 

He seems to understand that Iranians will suffer for only so long... so he has pushed for some reforms and changes – sometimes going head-to-head with the conservatives who don't want change.

 

 In February, the state broadcaster blocked his live speech to the nation for an hour... but when Rouhani used Twitter to protest, the broadcaster put his speech on the air. That's how deep the split in Iran is.

 

(Twitter, along with Facebook and thousands of websites, is blocked in Iran... but most people access them with virtual private networks. These allow Internet users to disguise what country they're accessing the Internet from... and let them cruise the web without government interference.)

 

However, the president can go only so far. He can't alienate the conservative wing of the Iranian government or the supreme leader... or he'll find himself out of a job (or worse).

 

 

Editor's note: In tomorrow's Digest, the final installment of Kim's stories from Iran, he'll explain why energy companies might not want sanctions lifted... and how he looks for investment opportunities in contrarian markets. You can learn more about a subscription to the S&A Global Contrarian by clicking here.

 

 

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 Our e-mail inbox is flooded with reader feedback about investing in Iran. It turns out not everybody thinks we're morally bankrupt or evil for scoping it out. Send your thoughts to feedback@stansberryresearch.com.

 

 "As an investor you should keep an open mind about any place on earth, information never hurts. I welcome the info on any place your people may travel. As far a corruption is concerned take a look as Washington and never mind they have the best propaganda machine in the world." – Paid-up subscriber Gordon S.

 

 "Nice info on Iran. Thanks for that. The uber-patriots that are yelling at you for being immoral apparently only get their info from the mainstream media and the politicians who like to make noise by tossing tantrums in Iran's direction. These folks fail to remember that the only country to ever drop a nuclear/atomic bomb on any country is the good ole USA. They also apparently don't pay attention to all the warmongering that our government is currently undertaking around the globe.

 

"If these do-gooders are not interested in investing in immorality, they better pull their investments out of American companies as well. Of course they will tell you that one needs to separate business from politics, which it seems like you are doing in Iran, where you have come across many folks just interested in undertaking capitalism outside of government influence. Thanks again for bringing us interesting ideas from around the world." – Paid-up subscriber Al D.

 

 "I for one see absolutely nothing wrong with Stansberry's or anyone else's analyzing Iran or any other country, nor with their recommendation to invest or not invest there. This is a free country and, certainly, Stansberry is as entitled to freedom of speech as anyone else. I would no more want to invest in Iran than the next American but I will adamantly defend the right of Stansberry to report on investment opportunities in Iran and everywhere else. Stansberry's job is to analyze investment opportunities. It is my decision whether or not I want to pursue any of them.

 

"Stansberry's responsibility is professional investment advice, my responsibility is to make sensible choices that are based on all relevant considerations including ethics and moral values. These are my choices, not Stansberry's. I would resent it if Stansberry told me what is and what is not ethical or moral. That is not Stansberry's job!" – Paid-up subscriber Goetz Oertel

 

 "I was of the opinion that S&A readers and subscribers are more knowledgeable and informed than most investors. By reading the visceral comments from S&A readers on Kim's writings on Iran as a future investment opportunity I feel alarmed about the American investors' naivety and their hatred for a country that has done nothing against them. They talk about morality with respect to Iran while their own country stocks enough nuclear weapons to destroy the world 40 times over.

 

"They live in the only country that has used nuclear weapons to decimate cities and evaporate humans in Japan. Today, their drones kill hundreds of innocent 'collaterals' around the globe. And they invest hand over fist in this country. As they should. Investment has nothing to do with morality, otherwise there would be no sin industries. The money made from such investments can be channeled to more altruistic ventures, if one is so inclined." – Paid-up subscriber Mike S.

 

Regards,

 

Kim Iskyan and Sean Goldsmith

Nassau, Bahamas

April 24, 2014

 

 

While U.S. stocks are near all-time highs, other countries sport dirt-cheap valuations.

 

In today's Digest Premium, fund manager and author Meb Faber shares which companies are the cheapest in the world today...

 

To subscribe to Digest Premium and receive a free hardback copy of Jim Rogers' latest book, click here.

Editor's note: We continue our weeklong Digest Premium series with more analysis from Cambria Funds founder and Chief Investment Officer Meb Faber.

 

Yesterday, he explained why the White House press secretary's recent words could lead to a bottom in Russian stocks. Today, he shares which countries are the cheapest in the world right now...

 

 

 In our Cambria Global Value Fund (GVAL), we own a lot of Eastern Europe – the Czech Republic, Hungary, Austria. Greece and Russia are two of the cheapest markets in the world right now.

 

Diversifying across a basket of 11 countries with single-digit cyclically adjusted price-to-earnings ("CAPE") ratios instead of betting the farm on Greece or Russia is a much more sensible thing to do. That said, Greece, Russia, and Eastern Europe are all incredibly attractive.

 

 We only invest in the biggest and best-known companies in every country. We look at the top 30 stocks by market cap, then take the best 10 based on valuation metrics and dividend yield. We come up with the best of the best (or the cheapest of the cheap).

 

Across the board, GVAL holds dirt-cheap companies. But it's all quantitative... We're not making any sort of qualitative judgments on what are the best companies within the countries. It's all computerized screening.

 

 We're big believers in momentum and trend. And when we decided to launch a deep-value fund as a publicly traded fund, we wanted to offer pure exposure to these countries. We give you the ability to buy the 11 cheapest countries in the world as a basket. There aren't any other funds doing this.

 

We believe being at the intersection of value and momentum or value and trend is the best place you can be.

 

On an individual level, we firmly believe in using trend-following (and stop losses) as a way to reduce volatility and drawdowns. It won't increase returns, but it will reduce risk. We didn't do this in GVAL because we wanted to offer pure exposure and because these global markets are so incredibly cheap today.

 

Based on average valuations, some of these companies are the cheapest they've been since the early 1980s. And in that type of environment, you want the long exposure. You don't necessarily want to have a heavy reliance on stops as you would when markets are universally expensive.

 

One additional way that we combat that is that we avoid overpaying for these countries when everything is expensive. We do that by looking at absolute valuation metrics. So if countries don't pass a certain valuation metric, we'll start to move part of the portfolio to cash. That will help limit volatility and drawdown.

 

– Meb Faber

 

While U.S. stocks are near all-time highs, other countries sport dirt-cheap valuations.

 

In today's Digest Premium, fund manager and author Meb Faber shares which companies are the cheapest in the world today...

 

To continue reading, scroll down or click here.

 

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