Stanley Druckenmiller, a former chief investment officer of Soros Fund Management, once said that his boss George Soros, the granddaddy of all Alpha Traders, taught him that the key to successfully managing a hedge fund was the “preservation of capital and hitting home runs.” With risk aversion increasing and the de-leveraging of the global economy picking up, even former safe havens such as gold and commodities have entered a bear market territory. And with the takeover of Merrill Lynch by Bank of America, Lehman Brothers’ bankruptcy and the government bailout of AIG this week, this is one of those times when you need to step back from home plate, and focus instead on preserving your capital.
His own sage advice notwithstanding, even George Soros, the “Babe Ruth” of the hedge fund world, is having a remarkably tough time under current market conditions. Consider that Soros had his biggest (22%-plus) stake in Brazil’s Petrobras (PBR), as well as a substantial stake in Lehman Brothers (LEH). How did these trades work out? Petrobras’ stock price plummeted 49% from its May 21 peak and Lehman Brothers’ bankruptcy could have cost Soros as much as $380 million. Like Babe Ruth, Soros swung for the fences and struck out. Like you, Soros certainly cut his losses in Petrobras at some point. Nevertheless, Soros’ big bets going awry highlight the difficulty of forecasting market movements in the current environment.
Currency bets are the only safe havens in times like these. Although the dollar was down sharply this morning on the news from Wall Street, the upward trend of the U.S. dollar and the Chinese yuan is one of a very few sustainable bullish themes in global markets. Your holding in the Market Vectors Double Short Euro ETN (DRR) and the WisdomTree Dreyfus Chinese Yuan Fund (CYB) performed as advertised, and held up well in spite of the turmoil. This should give you comfort in adding to these positions.
You were stopped out of Indian banking giant ICICI Bank Ltd. (IBN) and Millicom International Cellular (MICC), though both closed back up over their stop prices. NII Holdings (NIHD) also fell, but rallied sharply after hitting an intraday low of $44.50 in yesterday’s trading. Sticking to your stops is a difficult but necessary discipline. You only need to ignore one stop to wipe out a year of profits. Consider that every single one of your big winners from earlier this year, including Potash (POT) and the iShares MSCI Brazil Index (EWZ), today are significantly below where they were when you stopped out of them a few months ago.
With the uncertainty in the markets, I am moving NII Holdings (NIHD) to a HOLD. Our currency recommendations, Market Vectors Double Short Euro ETN (DRR) and WisdomTree Chinese Yuan Fund (CYB), remain strong BUYs.
Look for a new currency recommendation in the next edition of Global Stock Investor — one that actually rose during the last two tumultuous trading days.
PORTFOLIO UPDATE
WisdomTree Dreyfus Chinese Yuan Fund (CYB) held steady this week. With the Shanghai stock market now down more than 68% since its peak in October, your position in the Chinese yuan is the #1 Chinese investment of 2008. CYB is a BUY.
Market Vectors Double Short Euro ETN (DRR) closed at a record high of $48.71 last Thursday, before enduring a sharp sell off on “Black Monday.” The good news is that the dollar rallied back strongly in yesterday’s trading. This brief correction won’t impair the long-term downtrend in the euro. DRR is a strong BUY.
NII Holdings (NIHD) fell this week, but fortunately not far enough to hit our stop price. Because of the overall uncertainty in the market, I am moving NIHD to a HOLD.
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