“Tis the Season For Emerging Markets”

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 slow week for U.S. markets with the Dow Jones Industrial average up 0.99%, and the S&P 500 essentially flat, rising 0.13%. Thanks largely to the sharp sell-off in Apple, the NASDAQ was down 1.07%. In contrast, the MCSI Emerging Markets Index was up 2.39%, confirming the start of what is always the strongest part of the year for global stock markets.

Your biggest gainer was Bank of Ireland (IRE), which rose 8.13% and is now up 20% in just the last two weeks. The Irish economic recovery is gaining more traction, and Bank of Ireland breaking through the $6.40 level last week is yet another sign of this. I continue to believe that Ireland will turn the corner and that your patience with Bank of Ireland will be rewarded.

On the flip-side, your speculative position in Apple (AAPL) had its lousiest week in recent memory, ending down 8.89% as its recent rebound abruptly ran out of steam. While Apple is currently in the investors’ doghouse, I still expect that to change. Apple’s 2013 Price Earnings (P/E) ratio is now in single digits at 9.24. With the stock so cheap, Apple is all about investor sentiment — whether investors will allow Apple to drop below the psychologically important level of $500. Once those sentiments turn — as I believe they will — there will be huge upside in this position.

This week’s Bull Market Alert pick takes you into the world of fast growth and volatile emerging markets, with a short term 2x leveraged bet on the entire sector through the ProShares Ultra MSCI Emerging Markets (EET).

Here’s why I’m recommending this position for a quick targeted gain of 10% over the next four to six weeks.

First, December and January seasonally are the strongest time of the year for emerging markets. And based on my experience as a mutual fund manager, here’s the “inside scoop” on why this is so. Investment committees at the world’s largest mutual funds are now sitting down at the end of the year to make big-picture, or “top down,” asset-allocation decisions about the global markets they favor for 2013. These funds start moving money into these markets by December, causing a noticeable jump in these relatively illiquid markets between now and about the third week of the New Year.

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Second, if you compare the S&P 500 to the MSCI Emerging Markets Index over the past three months, it’s clear that emerging markets have started to outperform the U.S. market after a long period of under performance. With the seemingly endless threat of the fiscal cliff in the United States, my sources in the London investment community tell me that global investors are starting to cut back their bets on the United States in favor of other global markets with bigger upside. As you can see below, the MSCI Emerging Markets index just broke out to the upside from a three-month trading range — a very positive technical sign.

The best way to take advantage of this strong move upward is with a leveraged bet on emerging markets through ProShares Ultra MSCI Emerging Markets (EET). This is an exchange-traded note (ETN) that corresponds to two times (2x) the daily performance of the MSCI Emerging Markets Index, offering you twice the bang for your speculative buck.

So buy the ProShares Ultra MSCI Emerging Markets (EET) at market today, and place your stop at $71.00.

The options on EET are illiquid. So if you want to place an option bet on this investment thesis, I recommend the February 2013 $43 call options (EEM130216C00043000) on EET’s unleveraged (but much more liquid) cousin — the iShares MSCI Emerging Markets Index (EEM) Exchange Traded Fund.

Portfolio Update

Bank of Ireland (IRE) jumped 8.13% last week, capping a near 20% gain over the past two weeks. IRE passed two important milestones last week. IRE broke through the significant, twice-tested since June, $6.40-price level last week. Staying above this line-in-the-sand is a very positive indicator of future gains. The Fitch Ratings agency also reported Tuesday that IRE will end its reliance on the Eligible Liabilities Guarantee (ELG) funding in June 2013. IRE’s balance sheet will improve as the considerable ELG fees come off the company’s books when this “financial liability insurance” ends. IRE is a BUY.

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National Bank of Greece SA (NBG) traded flat over the past five trading days. As of Sunday night, Greece was reportedly very close to hitting necessary debt-buyback targets. This is a critical next-step in Greece’s quest to obtain new financial aid. NBG is a HOLD.

Michael Kors Holdings Ltd. (KORS) gave back 2.92%, making the past two weeks a wash. KORS continues to elicit higher expectations as Piper Jaffray raised its price target for KORS last Thursday to $65.00 — a hefty 26% above Friday’s closing price. KORS is a HOLD.

United States Natural Gas Fund LP (UNG) ended the week flat. UNG appeared to stabilize last week on positive energy-sector news. The latest Energy Information Administration (EIA) Inventory report listed a 73 billion cubic feet (BCF) decrease in natural gas inventories. That is likely to put upward pressure on prices. UNG is a HOLD.

PowerShares Listed Private Equity (PSP) gained 1.13% over the past five trading days. PSP closed its third winning week in a row last week since bottoming on the 200-day moving average. PSP will challenge its $9.93 52-week high this week. A break above this level is very bullish. PSP is a BUY.

Discover Financial Services (DFS) dipped 1.11% last week after hitting a new 52-week high on Monday. The latest Discover Financial Services’ U.S. Spending Monitor reported that 39% of consumers polled had plans to increase their December spending. Although this is a normal blip for the holiday season, there was a 3% increase in those consumers asked if they were planning to increase their discretionary personal spending. DFS will report earnings on Dec. 20. DFS is a BUY.

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HollyFrontier Corp. (HFC) closed the week down 3.73%. The Street Ratings service reiterated its ‘Buy’ recommendation for HFC last Friday with an “A+” rating. The Street cited multiple positive strengths, including increasing revenue growth and earnings per share growth, as well as its solid financial position. HFC is a BUY.

Apple Inc. (AAPL) lost 8.89% for the week. AAPL continued to suffer at the hands of pundits debating whether Apple can maintain its future earnings growth. With Apple’s fundamentals solid, the stock trading at a single digit P/E ratio and how investors react to AAPL’s $500 price level — the stop price on your position — is really what you need to keep an eye on. If Apple successfully rebounds from the $500 level, you will likely see extended gains in Apple’s share price well into Q1 of 2013. No one ever said “catching a falling knife” was painless. But AAPL is a BUY.

HDFC Bank Ltd. (HDB) closed flat for its first week in your portfolio. HDB traded sideways last week as it prepared to find direction in the days or weeks ahead. Given my bullish stance on emerging markets, I fully expect the stock to break out to the upside. Analysts collectively rate HDB as ‘Overweight.’ HDB is a BUY.

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