Montreal, Canada

Buy when there's Blood in the Streets…

A recent study courtesy of Montreal-based Bank Credit Analyst (BCA) suggests that previous credit crises followed by International Monetary Fund (IMF) rescues have accorded investors big gains in local stock markets.

BCA examined several rescues in the 1990s with Mexico, Russia, South Korea and Indonesia as case studies. In all examples, stocks posted huge double-digit gains within 12-18 months of the IMF rescue packages.

In Moscow, the RTS Index has gained more than thirty-fold since hitting a low in late 1998 after the ruble was devalued and Russia defaulted on its GKO bonds or foreign-issued bonds. That year also marked the trough for crude oil prices, which briefly crashed to about $10 a barrel before forming a secular bear market low. Russia, a major net dumper of raw materials in the 1990s, has been a huge beneficiary of the ongoing post-2002 commodities bull market.

South Korean stocks followed a similar trajectory amid the Asian financial crisis of 1997-1998, which smashed local currencies and stocks. Stocks in Seoul have gained a cumulative 500% since hitting a low in 1998. The same is true for other regional bourses in late 1998. If an investor purchased Asian stocks (excluding Japan) in late 1998 the profits 12 years later would be enormous.

In the United States, stocks hit a 12-year low in March 2009 and have since rebounded about 80%, according to the S&P 500 Index. The worst credit shock and collapse since the 1930s drove many stocks to absurdly low levels – especially banks.

But the jury is still out on whether the S&P 500 Index really hit a bottom in this cycle at 676 or just an intermittent low in the context of a cyclical bear market. I tend to believe this remains a bear market rally within the confines of a cyclical bull market. The financial and tax landscape in the United States starting in 2011 won't necessarily support a bull market in stocks as tax rates rise, the Fed finally starts hiking interest rates and an avalanche of refinancing hits speculative-grade companies. This is not 1981 or the Reagan Revolution. Obama is not an investor's friend.

The point is, however, that bottom-fishing amid a crisis can pay-off.

With the European Central Bank (ECB) and the IMF effectively bailing out Greece and trying to deter speculators from attacking other weaker peripheral EMU countries, the notion that Europe is "dead" and wrought with nothing but currency failure is unconstructive. Many large-cap European companies will benefit from a sharply weaker EUR and are worth nibbling at these levels. The Club Med belt, including Greece, Spain, Portugal and Italy harbor some good companies that have been massacred over the last several weeks.

To be sure, Europe is not out of the woods by a long shot. EU and IMF-imposed austerity measures won't result in a boom for a long time as spending is severely curtailed and deficits reduced to comply with loan disbursements. Yet if history is any guide, it can pay to buy into distress following IMF intervention.