Riding out the Market Pullback

Nicholas Vardy

Nicholas Vardy has a unique background that has proven his knack for making money in different markets around the world.
It was a rough week for global financial markets. The Dow Jones dropped 3.32%, while S&P 500 was down 2.87%. The MCSI Emerging Markets Index fell 2.15%.


In your Alpha Investor Letter portfolio, only homebuilder Lennar Corp (LEN) managed to eke out a gain, ending the week 1.15% higher. All of your other positions were down — though none of them hit their stops.

Several of your positions also slipped below their 50-day moving averages (MA) and moved to a HOLD. These include Berkshire Hathaway (BRK-B), iShares Nasdaq Biotechnology (IBB), iShares Singapore Index ETF (EWS), Statoil ASA (STO), iShares MSCI South Korea Index Fund ETF (EWY) and Stratasys (SSYS).

There’s been a quite a bit of selling pressure in the markets recently. In fact, it has been so “bad” that it may be “good.”


According to www.sentimentrader.com, market technician Richard Arms’ indicator, known as the TRIN (TRadingINdex), has reached a rarely-seen extreme.

Yesterday, the relatively heavy selling pressure pushed the Arms Index above 2.5. That essentially means that sellers were 2.5 times more aggressive than buyers. The same thing happened on Friday, too. It is very unusual to see such an extreme Arms Index reading so soon after another one. And when this has happened in the past, three months later, the S&P sported a median return of an impressive +10.5%, with only one negative occurrence. Coupling this insight with the strong seasonality of Q4 gives me reason to be optimistic about the U.S. market in the months ahead.

In addition, I am seeing evidence of improving sentiment toward emerging markets — Asia in particular. These markets have (very uncharacteristically) underperformed the United States over the past year and a half. But once sentiment turns, look out, as these markets can shoot up quickly. With five positions based in Asia, your Alpha Investor Letter portfolio is well-positioned to benefit from this bounce.

On a personal note, I had a chance to spend a few days in Germany over this past weekend, where I had studied for a semester at the University of Heidelberg. I am always impressed by the remarkable order and efficiency of Germany. That’s why this country of 82 million can export as much as China does — without the tailwind of an undervalued currency. I also found Germans to be remarkably well informed. When I handed over my Florida driver’s license to the guy at a bike shop in Heidelberg, he said, in perfect English: “Ah, so you’re the guy from Florida who is going to decide the U.S. election!” His counterpart in Spain this summer didn’t even speak English, let alone know that Florida was a swing state in the U.S. presidential election. The German bike shop guy added, “The problem with Obama is that he is a lawyer. And lawyers in Germany also always want to tell you how to run your business!”


On a related note, I wanted to share with you a link to Mitt Romney’s very amusing speech at last week’s Alfred E. Smith Memorial Foundation" dinner, where he shared the podium with President Barack Obama. It reveals that Romney is a very funny guy, with both a self-deprecating sense of humor and a rapier sharp wit.

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Portfolio Update

MSCI Malaysia Index (EWM) lost 0.74% over the past five trading days. Palm oil is also Malaysia’s number one agricultural commodity, and a large portion of Malaysian exports. EWM is weighted heavily in palm oil subsidiaries that will benefit from its significant use as a biofuel energy alternative and export commodity. EWM is a BUY.

iShares JPMorgan USD Emerg Markets Bond (EMB) dipped 0.65%. EMB gives you excellent exposure to emerging market bonds, while shielding you in the safety of the U.S. dollar, while paying a 4.38% yield. EMB is a BUY.

Berkshire Hathaway (BRK-B) lost 3.31%. BRK-B pulled back from its 52-week high last week and dipped slightly below its 50-day moving average (MA) to drop to a “Hold” in your portfolio. However, BRK-B has managed to stay above the 50-day MA since the beginning of June, and I expect this will be the case once again soon. BRK-B is a HOLD.


Visa Inc. (V) gave back 3.20%, making the past two weeks a wash. Visa and mobile money platform partner Fundamo released the results of a joint report that found that the majority of 2,500 consumers surveyed in six developing countries were “highly aware” of mobile-based money services, and that 90% were interested in the ability to use these services. The mobile money revolution is just beginning, and Visa is in on the ground floor. V is a BUY.

The TJX Companies (TJX) dipped 1.21% over the past five trading days. TJX touched the 200-day moving average Monday and managed a significant bounce yesterday — a signal that the pullback may be ending soon. Deutsche Bank maintained its “Buy” rating on TJX last week and raised its price target to $50.00 — 17.5% above yesterday’s close. TJX is scheduled to report earnings on Nov. 13 and will pay a $0.115 dividend on Nov. 6. TJX is a HOLD.

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iShares Nasdaq Biotechnology (IBB) fell 5.46%. The pullback in broader markets was quite significant last week, and healthcare stocks took their fair share of the hit. IBB was no exception, falling below its 50-day moving average and moving to a HOLD.

WisdomTree Japan SmallCap Dividend ETF (DFJ) dipped 0.93% over the past week. The Japanese government ramped up pressure on the Bank of Japan (BOJ) last week as the BOJ prepared to report its actions at the upcoming Oct. 30 meeting. Sources believe that the BOJ is leaning towards an easing stance, which should have a positive effect on the Japanese market and DFJ. DFJ is a HOLD.

Market Vectors Indonesia Index ETF (IDX) lost 1.83% last week. The iShares Global chief investment strategist issued a report last week highlighting that emerging markets are 20% undervalued compared to developed markets. The report also cited Indonesia as one of its top investment prospects. IDX is a BUY.

PowerShares Global Listed Private Equity Portfolio ETF (PSP) slipped 0.83%. Governor Mitt Romney, a self-made private equity multi-millionaire, is enjoying a huge bump in popularity due to his strong showing in the previous debates. Should Gov. Romney take the White House at the upcoming election, private equity funds such as PSP may experience a significant post-election bump. PSP is a BUY.


iShares Singapore Index ETF (EWS) lost 1.48% over the past five trading days. EWS has a near perfect record of holding the 50-day moving average since late June. Even the recent market dip seems unable to keep EWS below this line with any conviction. EWS is proving to be a good safe haven as U.S. markets suffer through this October haircut. EWS is now a HOLD.

Statoil ASA (STO) fell 5.25% last week. Statoil announced Thursday that it expects to recover ten million barrels of oil from the company’s Fram oil field in the North Sea, starting in the summer of 2013. Statoil also announced participation in an oil field “swap” with Germany’s BASF AG oil company, in which Statoil will collect a $1.35 billion payment in addition to the properties gained. Statoil is scheduled to report earnings on Oct. 26. Falling below its 50-day moving average, STO is now a HOLD.

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Lennar Corp (LEN) managed to escape the brutal pullback in the markets this week, adding 1.15%. The U. S. Commerce Department announced Wednesday that domestic home construction hit a four-year high after soaring 15% in September. Construction permits also jumped 12%, for a whopping 94% gain year-over-year. This is the largest increase in nearly 20 years. It would appear that the long-awaited housing recovery is truly taking hold. LEN is a BUY.

iShares MSCI South Korea Index Fund ETF (EWY) gave back 3.25%. I recently mentioned a benchmark index shift that will affect superfund Vanguard Emerging Markets ETF (VWO) and result in a significant reallocation of South Korean investment exposure. In an effort to smooth out any potential market waves, regulators will create a “transitional index” designed to bring more order to the market during this period. Falling below its 50-day MA, EWY is now a HOLD.

iShares MSCI Mexico Investable Market Index (EWW) dipped 2.19%. When President Bill Clinton (a candidate who is popular among Latino voters) won election in 1997, EWW jumped nearly 9% over the quarter that followed. Just four years later, EWW had gained nearly 33%. If President Obama (again, popular among Latinos) wins a second term, EWW may have another four-year run in its future. EWW is a BUY.

Sociedad Quimica y Minera de Chile S.A. (Chemical & Mining Company of Chile) (SQM) lost 3.53%. SQM dipped below its 200-day moving average yesterday as the broader market continued to struggle. The good news is that the selling volume appears to be waning as overall volume took a slight dip this week. SQM is a HOLD.

Vanguard Global ex-U.S. Real Estate Index Fund (VNQI) gave back 1.44% over the past five trading days. VNQI is diversified around the globe as it holds real estate in countless countries, via 440 different holdings. VNQI is a BUY.

Stratasys (SSYS) fell 4.06% last week. SSYS announced Monday that it would release its third quarter 2012 earnings report on Nov. 2. Dipping slightly below the 50-day moving average, SSYS is now a HOLD.

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Apple (AAPL) lost 5.61%. Apple showed the world its latest creations on Oct. 23 as it unveiled the “iPad Mini,” among other new Apple products. Although consumers may have been impressed, investors pulled the stock back down to its recent lows. AAPL will report earnings on Thursday after the market’s close. AAPL remains a HOLD.


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