Great Expectations for Earnings Season

Nicholas Vardy

Nicholas Vardy has a unique background that has proven his knack for making money in different markets around the world.
The U.S. markets continued their rally into the second week of 2012. The S&P 500 Index broke above its 200-day moving average on the first trading day of 2012 and managed to rise 1.18% over the past five days. The Dow Jones industrial Average lagged somewhat, but managed a 0.53% gain last week, as well. This performance is in contrast to some of the major global indices like the MSCI EAFE Index and the MSCI Emerging Markets Index, which have been less robust and are still trading far below their 200-day moving average. This situation is consistent with my expectation that the U.S. market will outperform global markets in the coming months.
Earnings season officially kicked off this week with aluminum producer Alcoa Inc. (AA) announcing its fourth-quarter earnings results. Alcoa essentially matched the Street’s reduced earnings expectations, setting a positive tone for the beginning of the 2012 earnings season. If earnings reports remain positive, and news on the European economic situation continues in moderation, markets may maintain their rally into 2012.
Overall, your Alpha Investor Letter portfolio ended the week flat. Most of your positions averaged roughly a 1% gain or loss for the week. Notable exceptions were Freeport McMoRan Copper & Gold Inc. (FCX) and Market Vectors Russia ETF (RSX), which gained 2.78% and 1.70%, respectively. Your positions in ProShares UltraShort FTSE China 25 (FXP) and Visa Inc. (V) were the weakest performers. The MSCI South Korea Index (EWY) moved to a HOLD.
With the U.S. markets looking overbought, the S&P 500 may pull back and test its 200-day moving average once again in the coming week or so. After that, however, I expect the U.S. markets to resume their rally, next testing the 1,340 level.

Portfolio Update

WisdomTree Japan SmallCap Dividend Fund (DFJ) fell 1.06% last week. DFJ unsuccessfully tested its 200-day moving average last week and fell to its 50-day moving average. Probably the single best value play in developed stock markets today, DFJ remains a BUY.
Las Vegas Sands Corp. (LVS) dipped 1.57% over the past five trading days. Casino stocks collectively took a little hit last week as JPMorgan downgraded Boyd Gaming (BYD) to underperform. LVS will report earnings on Feb 2. LVS is just below its 50-day moving average and is a HOLD.
ProShares UltraShort FTSE China 25 (FXP) dropped 4.81%. Recent optimism in the broader markets is having a negative effect on your FXP position. However, China’s troubles still loom large and are not going away any time soon. Any pullback in the markets will push FXP higher over the coming weeks. FXP is a HOLD
MSCI South Korea Index (EWY) fell 2.06% last week. Citibank recently named South Korea among its favorite emerging market picks, citing continuing stability with the new North Korean regime. EWY is a HOLD.
MSCI Malaysia Index (EWM) moved up 1.25%, and has gained 6.5% in the past three weeks. The Malaysian economy is expected to grow at 5% this year. Trading above its 50-day moving average, EWM is a BUY.
Market Vectors Russia ETF (RSX) gained 1.70% last week. Tracking the performance of the largest companies doing business in Russia, RSX is just below its 50-day moving average, and is a HOLD
iShares JPMorgan USD Emerging Markets Bond (EMB) dipped 0.49% over the past five trading days, thanks to a recent spike in the dollar. A steady performer in the face of market volatility, EMB is currently a HOLD.
Market Vectors Indonesia Index ETF (IDX) rose 1.62% last week. Recently, the three major credit rating agencies have all advanced Indonesia back to “investment grade.” Credit rating agency Fitch highlighted the country’s strong and resilient growth, declining public debt ratios, strengthened external liquidity, and a prudent overall macro-policy framework. One of the top-performing stock markets in the world two years running, IDX is a BUY.
iShares Singapore ETF (EWS) rose 0.80%. The 2012 forecast by Singapore’s Ministry of Trade and Industry expects Singapore’s gross domestic product to grow by 5%. Inflation projections now show 3.1%, down from a previously forecasted 5.1%. EWS is a HOLD.
Berkshire Hathaway (BRK-B) was flat last week, losing 0.33%. Berkshire Hathaway and two other private equity firms ended talks with Citigroup last week regarding the purchase of Citigroup’s OneMain consumer lending unit. A broad-based bet on a U.S. economic recovery, BRK-B is a BUY.
Listed Private Equity ETF (PSP) was flat as well, falling just 0.61% over the past five trading days. Accounting giant Ernst & Young is optimistic that the coming year will be characterized by improved financing conditions and more stable equity markets. PSP is a BUY.
iShares MSCI Hong Kong Index (EWH) was flat this week. Overnight, the Hang Seng Index rose to its highest close in a month on speculation that China’s government will loosen monetary policy, and as European leaders stepped up efforts to tackle the region’s debt crisis. Moving up slowly off a strong $15 support level, EWH is a BUY.
Freeport McMoRan Copper & Gold Inc. (FCX) rose another 2.78%. FCX and several other mining stocks rallied Tuesday, sparked by a good earnings report from aluminum maker Alcoa (AA). FCX will pay a $0.25 dividend on Feb 11. FCX will report earnings on Jan 19. FCX is a BUY
Visa Inc. (V) lost 3.10% last week. Visa announced a new partnership Tuesday with ATM technology provider Better ATM Services. Visa gift cards will now be available for purchase via ATM’s through a pilot program with three Arizona credit unions. V will report earnings on Feb 2. V is a BUY.

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