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Emerging markets have had a tough run this year. Headlines tell the story: slowing economic growth in China, protests in Brazil, unrest in Turkey, a coup in Egypt (oh wait, the military says it wasn't a coup). You can understand why the Emerging Markets Index has decoupled from the S&P 500.

New York Times bestselling author Larry MacDonald wrote a book on Lehman, "A Colossal Failure of Common Sense," and now runs strategy at Newedge. MacDonald highlights the breakdown between EEM and SPY in this morning's note. He argues for long iShares MSCI Emerging Markets ETF (EEM) vs short SPDR S&P 500 ETF Trust (SPY), since the spread between them has reached a record 2.67 standard deviations -- Wall Street lingo for "really crazy".

Historical relationships break down because of structural change or misunderstanding. So, to better understand EEM, we offer the following observations. First, four countries account for about half the index:

Second, earnings growth and valuation within these top four is all over the map:

South Korea's KOSPI (the S&P 500 equivalent) is trading at 10.3x this year's estimated earnings, which are growing 76 percent. Standard deviations aside, I can't think of anywhere else in the world with this growth at this valuation, especially for a "western" economy. The South Korean ETF is iShares MSCI South Korea Capped ETF (EWY) and is comprised of 23 percent semiconductor producers, 11 percent banks and 10 percent automakers. It trades 2 million shares per day and, like the EEM, has historically traded in line with the SPX. I like EWY here.

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