Betting on a Bounce, Part 2

Nicholas Vardy

Nicholas Vardy has a unique background that has proven his knack for making money in different markets around the world.

It was another rough week in global stock markets last week. You were stopped out of your positions in the iShares MSCI Chile Investable Mkt Idx (ECH) and the iShares MSCI Israel Cap Invest Mkt Index (EIS), with gains of 56.87% and 33.14%, respectively. You were also stopped out of ICICI Bank (IBN) and China Yuchai International Limited (CYD) at losses.

As a result, you have been stopped out of all but one of your stock positions over the past two weeks — a serious shift in the structure of the portfolio. Note that Vimpel-Communications (VIP) came within two cents of its stop price as well.

On the other hand, your two non-stock bets — the UltraShort Euro ProShares (EUO) and iPath DJ AIG Sugar TR Sub-Idx ETN (SGG) — rose 3.8% and 3.0% on the week, respectively, showing that diversification, as difficult as it is to find in today’s highly linked financial markets, does exist.

This week’s Global Bull Market Alert pick, the National Bank of Greece (NBG), is yet another bet that global stock markets — and Greece, in particular — are set for a bounce. Here’s why I think NBG can do very well over the coming weeks, once global markets settle.

First, sentiment and confidence are very fickle in nature. As quickly as it turned south on Jan. 19, sentiment could turn on a dime, even without any obvious catalyst. Certainly, things today look no worse than they did early in the year. The global economy has successfully avoided a financial Armageddon. The IMF is continually revising its growth estimates for the global economy in 2010 upward, most recently to 3.9%. And the U.S economy has just recorded a better than expected jump in GDP of 5.6% in Q4.

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Second, despite the headlines screaming a potential economic meltdown in Greece, the problems faced by the Greek economy are hardly unparalleled. Let’s put this into perspective. Greece’s present deficit of 12.7% of the GDP is virtually identical to that of the United States last year. But unlike the United States, the Greek government has launched a program to reduce its deficit to 9.1% of GDP by the end of this year and 3% by 2012. Contrast that with the Obama administration’s $3.8-trillion budget for fiscal year 2011, which predicts a $1.6-trillion deficit, representing a deficit of more than 10% of GDP in 2009. By this measure, the United States is a bigger economic basket case than Greece.

You can see why Greece’s Finance Minister Giorgos Papakonstantinou has expressed frustration that Greece is being used as a scapegoat for Europe’s more serious economic problems. Indeed, the business press is unfairly putting Greece in the same category as Venezuela or Argentina. And unlike Venezuela’s Hugo Chavez, Papakonstantinou, an articulate Ph.D. holder from the London School of Economics who sounds a lot more credible than his U.S. counterpart Treasury Secretary Tim Geithner ever did, has committed that "Greece will do whatever it takes to bring the deficit down through cuts in spending and increased revenue.” No ‘ifs,’ ‘ands’ or ‘buts.’

Finally, there is also a “flavor of the month” quality to the Greek crisis, which is likely to ebb as the next media-fanned “crisis” takes its place. Once sentiment turns positive, markets can improve very quickly.

So buy the National Bank of Greece (NBG) at market today and place your stop at $3.50. There are no options on this one.

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I want to emphasize that this is a highly speculative pick, so you might want to start off with a smaller position than usual. It will also be very volatile, both on the up and downside. That said, since I believe it is highly unlikely that Greece “will go bankrupt,” this is a position I would be willing to recommend as a long-term “buy and hold” candidate as well. It is also a position that I hold on behalf of my clients at Global Guru Capital.

Portfolio Update

UltraShort Euro ProShares (EUO) rose another 3.8% this past week. With the euro now close to a monthly low, and the U.S. dollar strengthening, I am keeping this at a BUY. Tighten your stop to $18.80.

Mechel (MTL), last week’s speculative play on the bounce, fell back this week, as the market failed to turn around. That said, this has the potential to soar 7-8% in a single day’s trading on any shift in sentiment. I’m keeping this at a speculative BUY. But make sure you stick to your (tight) stop of $18.50.

iPath DJ AIG Sugar TR Sub-Idx ETN (SGG) closed near a record high of $83.11 on Friday, ending the week up 3% higher. With the sugar crisis still in full force, sugar remains a BUY. Tighten your stop to $78.80.

Vimpel-Communications (VIP) dropped back slightly this week, and came within two cents of its stop price on Friday. I am moving this bet on Russian telecoms to a HOLD.

P.S. I’ve scheduled a special private meeting for my subscribers of Global Stock Investor and Global Bull Market Alert on Friday, Feb. 5, at this year’s MoneyShow in Orlando, where I’ll reveal special techniques and "tricks of the trade" that I use in investing. This is the kind of hands-on training that I can only offer you in person. I’ll also discuss my secret technique for choosing customized exit prices, as well as an easy-to-implement formula on how much of each pick to buy to maximize your returns. I’ll also discuss where I think the biggest returns for 2010 will be found. Please join me at the Orlando Money Show, Destin room, on Friday, Feb. 5, from 3:30 to 4:30 p.m. by registering here.

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P.P.S. If you want to keep up with my latest insights on developments in fast-paced global markets, you can now follow me on Twitter on @NickVardy.

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What a difference a week makes. Just since Wednesday, global stocks have entered their sharpest decline since the June and October 2009 corrections.

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