Currency Bets Paying Off; Global Stocks Remain Range Bound

Nicholas Vardy

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

Wall Street lore has it that as goes January, so goes the stock market. Nevertheless, with sentiment so negative, global markets are due for a solid, technical bounce. It is a shame that a bounce is such a long time in coming. And with most Asian and European stock markets sharply lower, it’s unlikely that today is that day.

Ironically, your stock-related positions — iShares MSCI Emerging Markets Index (EEM) and Millicom International Cellular S.A. (MICC) — jumped as much as 10% through Wednesday before correcting on Friday. In a range-bound market like this one, it is tough to make money in stock markets. As I have noted before, the Global Bull Market Alert strategy is to balance your portfolio broadly equally between bullish and bearish positions — and adding in asset classes such as currencies, commodities and bonds which move independently from global stock markets.

In this regard, last week’s recommendation — the Market Vectors Double Short Euro ETN (DRR) — got off to a solid start — jumping over 5.2% in its first week in the portfolio. The iShares iBoxx $ High Yield Corporate Bond (HYG) also jumped over 2% — and I continue to think it is a low-risk way to play a recovery in the markets.

Negative headlines notwithstanding, there are bits of good news emerging. The contraction in the U.S. economy in Q4 2008 wasn’t as bad as expected — although inventories did rise substantially, taking some of the shine off of the numbers. Global stock markets are still locked in a trading range. But they have not penetrated their October lows, suggesting that the market may be forming a bottom. And the number of potential buyers for flats in my neighborhood in West London has increased markedly over the past few weeks. That suggests that London’s “half off” sale in real estate — at least as far as U.S. dollar and euro investors are concerned — may be kick-starting an otherwise moribund property market.

Portfolio Update

The PowerShares DB Commodity Double Short ETN (DEE) was broadly flat in the portfolio. Look for this position to spike sharply on the next big sell-off in oil. This position continues to have a key role in the portfolio as a hedge against market downturns.

Market Vectors Double Short Euro ETN (DRR) got off to a strong start and was up a solid 5.2% for the week. With the European Central Bank expected to hold interest rates this week, expect the euro to continue to weaken. If the currency breaks through the $1.25 per euro level, you may see it trade down to the $1.15 level quite quickly.

iShares MSCI Emerging Markets Index (EEM) ended flat for the week, correcting from a nice rally into Wednesday. Emerging markets still are range bound, but look for them to soar on any shift toward positive sentiment.

Your short position in the CurrencyShares British Pound Sterling Trust (FXB) fought back strongly last week after George Soros said he stopped shorting the pound at $1.40. His former investment partner Jim Rogers disagrees and predicts the pound won’t stop before it hits parity with the U.S dollar. The pound is already weakening substantially in this morning’s trading.

Your short position in the iShares MSCI United Kingdom Index (EWU) corrected last week. But with this index heavily weighted in the United Kingdom’s crumbling financial stocks, expect this position to resume its downward trend soon.

The iShares iBoxx $ High Yield Corporate Bond (HYG) ended the week up just over 2%. Credit markets are the place that the smart money is looking for any recovery to start. It certainly has proven more resilient on the downside than pure equity plays. This is the safest, least volatile way to play any market bounce in your current portfolio.

Millicom International Cellular S.A. (MICC) ended the week flat, after jumping as much as 10% within the span of three trading days. This volatile stock is consistently one of the biggest movers on the Nasdaq.

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Your Global Stock Investor portfolio had a solid week, with most of your positions either flat or rising.


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