European Troubles Holding Back a Rally

Nicholas Vardy

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

 

Markets ended the past five days lower with the S&P 500 Index falling 1.41% and emerging markets down 3.69%. Despite posting gains for five of the last six weeks, the S&P 500 is flat for the year and currently trapped in a narrow trading range.
 
Markets have remained choppy through November, consolidating their sharp move up from a rip-roaring October. Every time markets build some momentum, they pull back on bad news out of Europe. This leaves us struggling to find any kind of an edge in this whippy, twisting market.
 
This week is a perfect example. On Monday, there was a wave of bad news out of Europe and yields on five-year Italian bonds spiked to new euro-era highs. Industrial output in the euro zone fell 2% in September — the most since early 2009. In a Jimmy Carter moment, German Chancellor Angela Merkel said Europe faces its toughest challenge since World War II. But by Tuesday, European stocks rallied, boosted by the swift formation of a new Italian government and better-than-expected reports on the U.S. economy.
 
The big news in your Alpha Investor Letter portfolio was your position in Berkshire Hathaway (BRK-B). Warren Buffett revealed that since March, he had purchased $11 billion of IBM’s stock for Berkshire Hathaway, marking his first purchase of a technology company ever. With the markets pulling back last week, your short position in ProShares UltraShort FTSE China 25 (FXP) hedged the portfolio somewhat and ended the week 5.37% higher. FXP remains a HOLD. All other positions ended the week lower. Both FBT and PSP fell beneath their 50-day moving averages and are now HOLDs. All of your other names remain BUYs.
 
Since the S&P 500 hit 1,250 on Oct 24, it has gone nowhere — closing yesterday at 1,257. Technical analysts are pointing to a short-term “wedge” chart pattern as the breadth of the swings from 1,250 has been decreasing. This often suggests that the” pressure-cooker” is about to burst and finally give this market a defined direction. The traditional year-end rally may be starting very soon — especially if Europe can finally get its act together. Having increased the number of your positions in your portfolio over the past few weeks, you are well-positioned to profit.
 

Portfolio Update

WisdomTree Japan SmallCap Dividend Fund (DFJ) ended the week nearly even, falling just 0.36%. DFJ has been moving sideways over the past few weeks, even as Japan’s gross domestic product (GDP) rose 1.5% during Q3, from the previous quarter — equal to an annualized growth rate of 6%. DFJ is a HOLD.
 
Las Vegas Sands Corp. (LVS) had a volatile week, posting a 1.02% loss. News of hedge fund Lone Pine Capital’s new purchases, totaling 7.4 million shares, helped steady LVS’s share price this week, as the stock rose on heavy volume over the last three days. LVS is currently a BUY.
 
ProShares UltraShort FTSE China 25 (FXP) jumped 5.37%. FXP’s double-short bias worked well for your portfolio last week as broader markets sold off. FXP is currently a HOLD.
 
MSCI South Korea Index (EWY) fell 3.61% over the past five trading days. EWY is currently down nearly 8.5% for the year. Contrast this to the IndexIQ South Korea Small-Cap ETF, which is up slightly for the same period. As the emerging market recovery continues, EWY has plenty of room to run as it “catches up." EWY is a BUY.
 
MSCI Malaysia Index (EWM) dropped 2.38% last week. The emerging-market sector has spent the past few weeks pausing after its recent run off of the early October lows. Holding on above its 50-day moving average, EWY is readying for its next upward move. EWM is a BUY.
 
First Trust NYSE Arca Biotech Index (FBT) gave back 2.09% over the past week. FBT has built an extremely strong support level at $32.00, and spent the past week bouncing right on this price. Watch this position closely for another run up through its 50-day moving average, as this move has been quite abrupt two times before. FBT is a HOLD.
 
Market Vectors Russia ETF (RSX) lost 3.94%. With the price of oil spiking, the prospects for RSX are improving. Buy RSX as it dips to its 50-day moving average, as this mark has been acting as a strong support level. RSX is a BUY.
 
iShares JPMorgan USD Emerg Markets Bond (EMB) dipped 1.14% last week even as EMB attracted a $109.4 million inflow. That is an impressive 3.4% jump in outstanding units on a week-over-week basis. EMB is a BUY.
 
Market Vectors Indonesia Index ETF (IDX) fell 1.81%. One of IDX’s top holdings is Astra International, Indonesia’s largest auto distributor. Astra’s reported net income recently increased 30%, and its reach into the domestic auto sales sector is growing rapidly. Astra now earns $1.5 billion in profits every quarter, making this a significant company even by global standards. IDX is a BUY.
 
Gold Miners ETF (GDX) moved 1.87% lower over the past week. Gold has made an excellent comeback since its September collapse, and demand for the yellow metal is still increasing. On Monday, Turkey’s central bank announced it will increase the amount of reserve funds banks can hold in gold to 10%. This could lead to the purchase of an additional 55 tons of gold in Turkey alone. GDX is a BUY
 
iShares Singapore ETF (EWS) dropped 3.33%. EWS is resting directly on its 50-day moving average, at $11.90, and has excellent support at $10.50. In addition, EWS could very well make its way back to its $14.50 high within the next few months, and will pay you a 4% dividend while you wait. EWS is a BUY.
 
iShares Taiwan ETF (EWT) dipped 2.64% last week. EWT is a BUY. Also sporting a CD-stomping 2.2% dividend, EWT provides its own downside protection, as well. EWT is a BUY.
 
Berkshire Hathaway (BRK-B) fell 2.85%, even as Buffett’s large purchase of IBM was revealed this week. Buying Buffett has proven to be a profitable venture for many decades. Note that when buying this stock, its symbol may appear as “BRK/B” or “BRK.B” within your brokerage account. BRK-B is a BUY.
 
Listed Private Equity ETF (PSP) was flat on the week. This unique ETF gives you exposure to publicly traded private equity firms, offering you easy access to an asset class that would otherwise be difficult to tap into. Trading below its 50-day moving average, PSP is a HOLD
 
iShares MSCI Hong Kong Index (EWH) closed the week slightly lower, as it traded in line with other Asian markets. Until Asian markets regain their momentum, this bet on the Chinese City state remains a HOLD.
 
Freeport McMoRan Copper & Gold Inc. (FCX) ended the week slightly higher as the price of copper continued to rally. Stuck below its 50-day moving average, FCX remains a HOLD.
 
 

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You have two positions in European banks, Bank of Ireland (IRE) and National Bank of Greece (NBG). I always have noted that these positions are best treated as “options without expiration.” If Europe gets its act together, these positions have the potential to be big winners.
 
As it stands today, of the two banks, I think that Ireland is the better bet. The Irish economy is now the second-fastest growing economy in Eu

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