Playing (Profitable) Defense… Until the Dust Settles

Nicholas Vardy

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

The year 2008 has gotten off to the rockiest start in recent financial memory. Global stocks fell 7.7% in January — the worst start to a year since MSCI began publishing data in the 1970s. The S&P 500 fell 6.1% — its worst January since 1990. Global markets fared even worse with the Eurofirst 300 — a broad European index — shedding 11.7%, and the Emerging Markets MSCI Index dropping 12%.

Yet after seeming to fall off a cliff in the first three weeks of the year, the S&P 500 gained back 4.87% last week for its best weekly performance in nearly five years. Most other global markets bounced strongly as well. Only Asia had a bad week, with Hong Kong down 4% and Shanghai hitting a six-month low, though both had very strong relief rallies overnight to start this trading week.

All this action is typical of bear markets: Hair-raising drops for a few weeks and then short, sharp rebounds. Recall that Global Bull Market Alert had one of its strongest periods ever during the rebound from the Aug. 16 lows until early October.

You’ve made some big shifts in your Global Bull Market Alert portfolio during the past few weeks. And every one of your defensive positions, with the exception of last week’s pick Yamana Gold Inc. (AUY), is now profitable — if only slightly. That is no mean feat in the current market environment. So now is a good time to review how your portfolio is positioned as we look ahead to the coming months.

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1) UltraShort FTSE/Xinhua China 25 Proshare (FXP). Thanks to both the roller coaster nature of Chinese stocks, and the 2x leverage component, this position has been an incredibly volatile ride. But with China down 29% from its peak, and firmly in a downtrend, this is one position you’ll be happy to hold.

2) Short the CurrencyShares British Pound Sterling Trust (FXB). Since touching an eye-popping $2.11 back in December, the British pound fell 7%, rebounded slightly, and then resumed its downtrend. With interest-rate cuts on tap from the Bank of England, the British Pound Sterling should continue to weaken during the coming months.

3) PowerShares DB Agriculture (DBA). Agricultural commodities, corn, wheat, soy beans and sugar continue to hit record highs — and they remain one of the top investment themes of 2008. This position is going to be a steady performer throughout the foreseeable future. Your position is up 5.82% just during the past two weeks.

4) CurrencyShares Japanese Yen Trust (FXY). Your bet on the unwinding of the carry trade is heading in the right direction as the dollar hit record lows against the yen last week. This position is now slightly in the black.

5) Canada’s Yamana Gold Inc. (AUY) is your leveraged bet on the continuation of the bull market in the gold price. The equation is simple. Greater uncertainty means a higher gold price. And a higher gold price means a higher stock price for Yamana. Indeed, Yamana soared last week, as gold again hit record highs, before correcting on Friday. With production peaking and a panoply of analysts predicting $1,000 gold prices — Yamana Gold will do very well during times of global uncertainty.

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6) India’s HFDC Bank (HDB). This is our only “traditional” pick in the current Global Bull Market Alert portfolio. HDB, whose earnings have been growing at a whopping 40%+ for the past three years, remains a fundamentally compelling story. You can expect this position to soar when global markets bounce. But in the current market environment, it will test your patience.

So there you have it. You should feel comfortable that your Global Bull Market Alert portfolio is positioned defensively and that it will hold up well during periods of the stock market turmoil. As I have noted, your picks will lag the market during the inevitable “relief rallies” that characterize bear markets. But when the markets turn for real, and they will, we’ll be ready to jump back into the market quickly.

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Scan across your Global Stock Investor portfolio, and you'll see it awash in an unfamiliar color: green. Every single one of your positions was up for the week -- including double-digit percentage gains in Potash (POT), up 17.29%, as well as in Barrick Gold (ABX) and Millicom (MICC), each rising more than 10%. The iShares MSCI Brazil Index ETF (EWZ), Veolia (VE) and Arcelor Mittal (MT) each also rallied about 8% this week.

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