Markets Pull Back but Start to Settle

Nicholas Vardy

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

With yesterday’s sharp sell-off, global stock markets ended the week on a down note.

For the week, the Dow Jones Industrial fell 1.62%, the S&P 500 dropped 1.79% and the NASDAQ tumbled 2.14%. The MSCI Emerging Markets Index ended the week 1.75% lower.

No positions in your Alpha Investor Letter portfolio gained this past week.

Google Inc. (GOOGL) dropped below its 50-day moving average and became a HOLD.

It now has been almost exactly a month since the strong sell-off in global financial markets on Aug. 24.

Although markets ended the week lower, markets are settling down as we close out the month of September. You see, this is a general measure of market sentiment like the CNN Fear and Greed Index, which stood at 29 at the close of the markets yesterday.

That is still in the “fear” range. But it is much improved compared to the level of 5 it hit a month ago — or even 16 a week ago. By this measure, the market has not been this “fear-free” since the middle of the summer.

As I have been suggesting in previous updates, the extreme and sustained fear we experienced over the past two months suggests that market sentiment will eventually “revert to the mean” and return to normal. That process looks to have started. Just note how the Greek crisis and the collapse of the Chinese stock market have disappeared from the headlines.

In addition, as I pointed out in yesterday’s issue of The Global Guru, prominent investors and analysts including Warren Buffett, Nouriel Roubini and Jim Rogers have been relatively relaxed about the recent market pullback — though their opinions range from indifference (Buffett) to “best house in the bad neighborhood” (Rogers).

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Looking ahead, the seasonally strong part of the investing year — November through May — starts about five weeks from now.

I expect markets may be relatively unsettled until then, after which markets may rebound at least back to levels we last saw in the summer.

Portfolio Update

Berkshire Hathaway (BRK-B) fell 2.24% over the last five trading days. Through this investment vehicle, Buffett holds a wide-ranging and well-diversified portfolio of nearly 90 companies. While the majority of these holdings perform quite well (as one would expect), it is the “float” provided by Berkshire Hathaway’s core property insurance and casualty insurance businesses that has allowed Mr. Buffett to continue to fund the expansion of his empire. BRK-B is a HOLD.

Cambria Global Value ETF (GVAL) lost 3.29%. GVAL holds value positions in 11 countries with weighting ranging between 6% and 10% of the fund. With the collapse of the Chinese stock market weighing on most (all) of the world’s markets as of late, GVAL’s approach of buying the cheapest markets is spot on. With MSCI Emerging Markets Index (EEM) down over 10% during the last 30 days, GVAL’s 7% drop makes GVAL a defensive HOLD.

Google Inc. (GOOGL) dipped 1.78%. Google announced its plan to restructure under the new corporate moniker of “Alphabet” several weeks ago, sending Wall Street analysts into a frenzy trying to determine what it all means for Google. Analysts at JMP believe that GOOGL could move upwards to $847 (30% above yesterday’s close!) with an operating margin falling within the 47% to 53% range. GOOGL has been climbing steadily up along the 50-day moving average (MA) since the market-wide pullback in mid-August but dipped below this level yesterday to become a HOLD.

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The Walt Disney Company (DIS) gave back 0.91% last week. Disney recently led a $65 million Series C investment round in start-up company Jaunt. Jaunt is working on a new virtual reality camera system and produces next-generation virtual reality content for outside companies. Disney is partnered with several other big names in the Jaunt investment including Google, China Media Capital, Evolution Media Partners, TPG Growth, Participant Media, Redpoint Ventures and Highland Capital. DIS is a HOLD.

PayPal Holdings (PYPL), the latest addition to your Alpha Investor Letter portfolio, dipped 0.33%. Since my recent recommendation, Stifel Nicolaus upgraded PYPL from a “Hold” to a “Buy” and set a price target of $40 — a potential 20% move above yesterday’s close. PYPL is a BUY.

Nicholas Vardy

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