Now the bad news. Global stocks have been hammered over the last two trading days. With the U.S markets set to open down more than 3% this morning — even after the Fed’s 75 basis point cut in interest rates — you’ll likely be hitting your stops on several of your positions today.
No doubt that you’re frustrated with the challenges of seeing losses in your portfolio. And there is no question that it has been harder to generate the kind of returns we have come to expect. So I’ve spent the last week canvassing the opinions of some of my top “alpha trader” contacts in London.
So how are the “alpha traders” reacting to the uncertainty of global markets? They are shifting out of equities in favor of other asset classes: currencies, commodities, and fixed income instruments to help weather the storm.
Today, you can do the same thing. Thanks to the remarkable development in the type and range of instruments, today you can invest in currencies, commodities, go short in both developed and emerging markets, both leveraged and unleveraged, in ways that were only available to the “alpha traders” a few years back. It’s no surprise then that it is these “new” financial instruments, such as the UltraShort FTSE/Xinhua China 25 ProShares, that are performing the best in your portfolio.
The “Ultimate Defensive Global Bull Market Alert” Portfolio
These new instruments form the basis of what I call the “Ultimate Defensive Global Bull Market Alert” Portfolio. Number #3 and #4 are new recommendations.
1) UltraShort FTSE/Xinhua China 25 ProShares (FXP) is the hero of the day. While the market’s current focus is on the exposure of Chinese banks to U.S. subprime loans, the real issue in Chinese banks is their own bad loans to state-owned enterprises. China is down more than 34% since October — and has a long way to fall.
2) Short the CurrencyShares British Pound Sterling Trust (FXB). With the U.K.’s fundamentals perhaps weaker than the United States, the U.K. currency should continue to weaken over the coming months.
3) Buy the PowerShares DB Agriculture (DBA). I expected your position in the Market Vectors Global Agribusiness ETF (MOO) would move more independently of the market than it has. Sadly, it has not. So, I’m recommending that you cut your losses on this one and swap into DBA. The investment rationale is the same as for MOO, except this ETF invests in some of the most liquid and widely traded agricultural commodities, corn, wheat, soy beans and sugar. That means it will be less prone to sharp sell offs than the stocks of agricultural companies that make up MOO. Buy PowerShares DB Agriculture (DBA) at market today and place your stop at $31.00. If you want to buy the options, I recommend the July $37 calls (DBAGK.X).
4) Buy the Currency Shares Japanese Yen Trust (FXY). The yen zigs when the rest of the market zags. A position in the Yen won’t knock your socks off in terms of performance. But it will hold up well in times of turmoil and appreciate steadily as the “carry trade” unwinds. So buy Currency Shares Japanese Yen Trust (FXY) at market today and place your stop at $87.00. Option players should go for the June $95 call options (FXYFQ.X).
A word of warning: This is “defensive” global portfolio that will hold up the best during periods of negative market sentiment. But understand that this is also the part of the portfolio that will underperform — perhaps significantly — on any “relief rally” in the markets.
PORTFOLIO UPDATE
We stopped out of a trio of our Russian bets since last week, Mechel (MTL) for a gain of 12.58%, Vimpel-Communications (VIP) for a gain of 28.97%, and Mobile Telesystems OJSC (MBT) for a loss. Recall that we had already recorded a couple of triple-digit percentage gains in the MTL and VIP options during December. We were also stopped out of our Brazilian banking bet Banco Bradesco (BBD) at a loss.
Our remaining long position in India, HDFC Bank Ltd. (HDB), is a bet on a rebound in the market. If markets continue to sell off this week, you can expect to get stopped out of this position. If markets rebound, this position will soar 10-15% over the span of three or four trading days. “Relief rallies” tend to be quick and sharp. Recall the period of very strong performance right after the market bottomed on Aug. 16. And with the market throwing the baby out with the bathwater, it is hard to imagine that markets aren’t due for some kind of a bounce.
I recommend that you hold on to these positions and keep an eye on their current stops. If you hit your stops, make sure you sell and put your cash to work in one of our new “defensive” recommendations above.
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