The Other Shoe Dropping?

Nicholas Vardy

Nicholas Vardy has a unique background that has proven his knack for making money in different markets around the world.
Well, the sharp pullback I’ve been expecting happened yesterday, with almost all global markets dropping more than 1% for the first time since December 2011. All three major U.S. averages suffered losses of more than 1% — the biggest one-day drop of the year. The Dow Jones Industrial Average slumped 1.6%. The S&P 500 and the Nasdaq lost 1.5% and 1.4%, respectively. In doing so, the markets ended one of their most remarkable streaks in recent history.
That said, the markets’ behavior was puzzling. On the one hand, investors fretted over the possibility of a messy default for Greece, which faces a Thursday bond swap deadline and might not get enough creditors to sign up. On the other, the Greek stock market was the only market that actually rose. Go figure.
Now, one bad day does not a bear market make. European markets are trading higher as I write this update. And my very short term technical indicators are already screaming “oversold.” There is no need to panic and take your substantial profits right now.
That said, there is every reason to believe that we could endure a more sustained 3-8% pullback in the markets before they resume an upward march. In fact, I would deem any such pullback healthy.
So, here is my strategy going forward. Rather than try to call a short-term “market top,” I’ve tried to set your stops wide enough on your positions so that you don’t get whipsawed in and out of your holdings. And although I have strict rules for how I calculate these stops, it is as much an art as it is a science. As the economist John Maynard Keynes observed, “It is better to be approximately right than exactly wrong.”
Otherwise, it was a tale of two markets for your Alpha Investor Letter portfolio. Many of your positions hit 52-week highs over the past week. Yet, after yesterday’s sell-off, each position ended the week lower. As a reminder, our rule of thumb is that when a position drops below its 50-day moving average, I move it to a HOLD. Based on that, I’ve moved Berkshire Hathaway (BRK-B)Freeport McMoRan Copper & Gold Inc. (FCX) and Ford Motor Co. (F) positions to a HOLD. I’ve also tightened the stops on Visa Inc. (V). Las Vegas Sands (LVS) and Market Vectors Russia ETF (RSX). These have been your strongest performers in your portfolio, and I want to make sure you lock in some gains if markets turn sharply against us.

Portfolio Update

WisdomTree Japan SmallCap Dividend Fund (DFJ) lost 2.97% over the past week. Although dipping slightly during Tuesday’s widespread market pullback, DFJ did not stray far from the $44 price level it has been straddling the past month. Japanese small caps remain a good value, as their price-to-book ratio is currently 0.66 compared to the S&P 500’s 2.25. DFJ is a BUY.
Las Vegas Sands Corp. (LVS) fell 3.35%. LVS pulled back over the past three trading sessions after nearing the $58 price level and hitting a new 52-week high. Any significant dip in share price is likely an opportunity as Credit Suisse just raised its price target to $64. LVS will pay a $0.25 dividend on March 16. LVS is a BUY. Raise your stop to $47.50.
MSCI South Korea Index (EWY) gave back 2.19%. EWY saw some bullish action early last week and hit a new 52-week high as North Korea announced a halt to its nuclear testing and uranium enrichment activities. Repeating a long-term pattern of rewarding “bad boy” North Korea for any good behavior, the United States sent North Korea 240,000 tons of food as little “thank you” gift. EWY is a BUY.
MSCI Malaysia Index (EWM) was flat for the week, losing just 0.28%. EWM had a strong rise last week and managed a new 52-week high Monday before dipping on Tuesday’s global pullback. EWM’s hit its all-time high of $16.13 back in early 1997.  Ending the week at $14.49, a new high seems within striking distance once again. EWM is a BUY.
Market Vectors Russia ETF (RSX) gave back 6.05% last week. Although RSX was up nearly 23% for 2012 alone, the no-surprise presidential win by Vladimir Putin, coupled with the widespread meltdown, were too much for RSX yesterday. However, with oil prices rising and the Russian economy on firmer footing than many other emerging markets, this dip will likely bring a good entry point for RSX. RSX is a BUY. Raise your stop to $28.00.
iShares JPMorgan USD Emerg Markets Bond (EMB) pulled back slightly, losing just 0.45%. EMB boasts a 12.81% return over the past year, and its role in your Alpha Investor Letter portfolio is to provide an anchor of stability during market sell-offs. With a 3.64% gain logged year-to-date, 2012 is on track for another winning year. EMB is a BUY.
Market Vectors Indonesia Index ETF (IDX) gave back 1.46%. IDX tested its long-term $28 support level once again after an attempt less than two weeks ago. IDX has managed to stay above $28 nearly every trading day, despite testing it over seven times since October 2011. Tuesday’s downward move occurred on extremely heavy volume, nearly five times the average volume, but $28 endured. This chart action is strong proof of support at this level. IDX is a HOLD.
Listed Private Equity ETF (PSP) lost 5.10% over the past five trading days. PSP holds between 40 and 60 private equity firms, each of which deploys its capital in a wide range of investments. In addition, PSP has a 27% allocation in U.S.-listed companies, and even larger allocations in the United Kingdom, France and Sweden. As it has been said many times, “Diversification is the only free lunch.” PSP does an excellent job providing this measure of safety. PSP is a BUY.
iShares Singapore ETF (EWS) lost 3.59%. Like most emerging market investments, EWS did not escape Tuesday’s big downward move. However, Singapore continues to rank as one of the top emerging markets, and its per capita GDP of over $50,000 makes your average Singaporean wealthier than his U.S. counterpart. EWS is a BUY.
Berkshire Hathaway (BRK-B) fell 1.22%. BRK-B continued its battle between the 50-day moving average and the $80 price level. Warren Buffett recently commented on his $11 billion position in IBM and IBM’s five-year plan to buy back as much as $50 billion of its own stock. As IBM buys up shares and reduces the amount outstanding, Buffett’s ownership percentage automatically increases and translates into a big bump in Berkshire profits. Dropping just below its 50-day moving average, BRK-B is a HOLD.
iShares MSCI Hong Kong Index (EWH) lost 4.01% last week, swept up in the global sell-off. With the local market falling below the crucial 21,000 level overnight, look for the current pullback will continue. EWH is a BUY.
Freeport McMoRan Copper & Gold Inc. (FCX) dropped 9.67%. Gold has had a particularly tough time lately and FCX has suffered, as well. Federal Reserve Chairman Ben Bernanke‘s comments last week gave investors the impression that additional stimulus was not coming anytime soon. This sent gold plummeting — taking FCX with it. FCX is now a HOLD.
Visa Inc. (V) fell 3.46% over the past week. Both Visa and MasterCard (MA) have announced that they plan to update their credit cards to the chip-and-PIN format, which is already widely spread around Europe. That upgrade means that instead of signing for your card, you can just punch in your PIN. Actually, my U.S.-based Visa card already has that feature. Too bad it doesn’t work on this side of the Atlantic in London where I live. Nevertheless, V is a BUY. Raise your stop to $103.00.
Ford Motor Co. (F) dipped 1.31%. Ford reported its sales in China rose 28% for the year. Breaking that number down, sales climbed 11% at Changan Ford Mazda Automotive Ltd. and 48% at Jiangling Motors Corp. F is a HOLD.
Yum! Brands, Inc. (YUM) lost just 0.73% last week. Despite stores in the news lately about the “China slowdown,” YUM! continues to gain traction in China. YUM!-owned Kentucky Fried Chicken is the #1 fast-food brand in China and has 3,500 restaurants in over 700 cities. YUM! boasts a whopping 40% market share and is opening a new location in China every 18 hours. That’s some “finger-licking good” news. YUM! is a BUY

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