The Global Stock Market Washout

Nicholas Vardy

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

Last week, I discussed how BRIC investing went bust.

Well, as it turns out, I may have unfairly picked on the BRICs.

After all, investors everywhere on the planet are having a rough time.

In the past, it has been true that “there is always a bull market somewhere.”

But in today’s interconnected world where both information and lousy market sentiment pass at light speed, there has been no place to hide.

The Global State of Play

I follow 47 global stock markets that U.S investors can invest in on a daily basis at my firm, Global Guru CapitalNOTE: Global Guru Capital is a Securities and Exchange Commission-registered investment adviser and is not affiliated with Eagle Financial Publications.

And the news is pretty grim…

Not a single stock market has gained over the last month. Only a single market is up during the last three months. And that’s the iShares MSCI Ireland Capped (EIRL) by a hairsbreadth.

Zooming further out, nine markets out of 47 are up in 2015, with Ireland and iShares MSCI Denmark Capped (EDEN) leading the way with gains of 15.75% and 15.01%, respectively. iShares MSCI Israel Capped (EIS), iShares MSCI Italy Capped (EWI) and Market Vectors Russia ETF (RSX) round out the top five with gains of 8.97%, 7.15 and 5.17%.

Perhaps most surprisingly, there are only four markets out of 47 that have generated positive returns over the past 12 months.

I cannot recall ever seeing such a sea of red since the financial crisis of 2008.

At the top of that heap stands the much-reviled domestic Chinese A-Shares through the Deutsche X-trackers Harvest CSI300 CHN A (ASHR), up 17.4%. It is followed by Ireland, Denmark and Israel — none of which are likely to make up core positions in your portfolio.

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Now, of course, these markets could turn on a dime. It doesn’t take much shift in sentiment to see these markets rally 10% or more between now and the end of the year. But even that would leave 26 markets out of this group of 47 underwater for 2015.

Where the Smart Money is Going

And don’t think the smart-money investors are immune from the downturn.

Warren Buffett’s Berkshire Hathaway (BRK-B) is down 6.02% over the past year. Activist investor Carl Icahn’s Icahn Enterprises, L.P. (IEP) — he likes to boast he has a much better track record than Buffett — is down 31.78% over the same period

At the same time, extremes are where money is made. So it’s worth looking at what the smart money is doing at times like this.

I. Commodities

Low commodity prices are good news for the construction and manufacturing sectors.  The plummeting price of oil may mean that a gallon of gasoline may slip below $2.00. That’s the equivalent of 33 cents a gallon in 1970.

The smart money today is betting that commodities won’t stay down forever. Carl Icahn recently took an 8.5% position in copper miner Freeport-McMoRan (FCX) — a gutsy move. Warren Buffett just placed a $4.5 billion bet on the price of oil by upping his stake in Philips 66 (PSX) to 10% of the company. Private equity firms are looking for deals in the sector, arguing the commodity price crash is temporary and that bets placed today will look smart in 24 to 36 months.

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The question is timing. The JPMorgan Chase & Co. Global Manufacturing PMI has fallen 4.5% since its peak in February 2014, signaling that commodity prices might still trade lower. But sometimes investment gains on these bets come quick and fast. On the day Carl Icahn revealed his stake in Freeport-McMoRan, shares soared almost 30%.

II. Gold

Gold dances to its own tune. From a financial valuation standpoint, it is more a religion than an investment and trades more on sentiment than intrinsic value. There is no textbook financial formula for valuing gold.

That doesn’t keep gold from becoming the favorite of speculators. Former Soros Chief Investment Officer Stan Druckenmiller has reportedly placed a $323 million bet on gold. That make the yellow metal his single largest position. This even is as gold flirts with falling below $1,000 per ounce — a level that another former Soros associate, Jim Rogers, predicted it would never see again.

At the same time, there may be some fundamentals behind gold’s future rebound. Swiss precious metals refiner Valcambi has estimated demand for gold might rise to 950 tons by the end of 2015. That’s up 6.6% from 891 tons in 2014.

III. Emerging Markets

Making a bullish case for emerging markets is much like the story of the boy who cried wolf. Investors have been disappointed with emerging markets’ performance for so long that the investment case for emerging markets is falling on deaf ears. Collapsing commodity prices, a slowdown in China and the threat of rising interest rates in the United States makes emerging markets the ultimate contrarian bet.

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No wonder investors have yanked $40 billion from emerging market stocks this year — a record pace.

At the same time, emerging markets as a whole are now valued at a discount of 40% compared to the United States. But few investors seem to care.

Morgan Stanley recently suggested emerging markets might have bottomed in August. That’s less based on fundamentals than reading the tea leaves of technical analysis. By Morgan Stanley’s reading, emerging markets are tracking a similar price action as in 1995, 2002 and 2011, after which emerging markets rallied strongly. That’s a tenuous hook to hang your investment hat on.

Truth be told, few smart money investors are buying the emerging markets value story.

Or if they are, they are doing so very, very selectively.

Yes, emerging markets are now hated and relatively cheap.

But you’ve got to be a dyed-in-the-wool contrarian to bet on the near-term prospects of emerging markets anytime soon.

In case you missed it, I encourage you to read my e-letter column from last week about the fall of BRIC investing. I also invite you to comment in the space provided below my commentary.

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