Escape the U.S. Fiscal Cliff by Playing the Japan Rally

Nicholas Vardy

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

With the threat of a U.S. fiscal cliff dominating the financial headlines, the U.S. Santa Claus rally looks to be a “no show” in 2012. Since Friday, Dec. 21, the Dow Jones has dropped 1.92%, and the S&P 500 has fallen by 1.94%. In contrast, investors continued to favor global stock markets, with the MCSI Emerging Markets Index rising 0.99% over the same period.

You’ve seen that strong performance in global markets with your recent leveraged bets on the ProShares Ultra MSCI Emerging Markets (EET) jumping 2.07%, and ProShares Ultra FTSE China 25 (XPP) rising 1.93%.

With the resolution of the U.S. fiscal cliff still unclear, I expect investors will continue to shift their attention to overseas markets during the coming weeks. At the same time, should there be a last-minute resolution of the fiscal cliff, you can expect your U.S.-based positions to rebound strongly. Given the high level of uncertainty, however, I am reluctant to make additional recommendations in the U.S. stock market.

That’s why this week’s Bull Market Alert recommendation ups your exposure to rallying Asian markets by taking yet another leveraged position in Japan through the ProShares Ultra MSCI Japan (EZJ) exchange-traded fund (ETF).

Here’s why I think the Japanese stock market is a good bet over the next month or two.

First, the Nikkei 225, Japan’s benchmark equity index has surged almost 9% in the past month as investors expect newly elected Prime Minister Shinzo Abe to implement some substantive economic reforms in the world’s third-largest economy. Prime Minister Abe has promised to revitalize the long-stagnating Japanese economy through a combination of a 2% inflation target by the Bank of Japan and a $120 billion infrastructure program. The number of false starts in the Japanese market revival over the past 20 years are too many to mention. But Prime Minister Abe’s energetic start has certainly captured investors’ attention.

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Second, the Japanese yen has been the worst-performing developed market currency in the world this year, and is currently trading near 21-month lows against the U.S. dollar. A depreciating yen is a double-edged sword in terms of investment. On the one hand, the depreciation of the yen impairs your dollar-denominated returns in Japan. On the other, it is a boon for the Japanese economy — and exporters in particular. Overall, there is little doubt that a cheaper yen would benefit the Japanese economy enormously. And Prime Minister Abe’s 2% inflation target would do just that.

Finally, the Japanese market recently has broken out of a technical trading range to the upside. More and larger institutional investors are increasing their 2013 allocations to Japan in the coming months, which will continue to exert upward pressure on the Japanese stock market.

So, buy the ProShares Ultra MSCI Japan (EZJ) and set a stop price of $53.50. This ETF corresponds to two times (2x) the daily performance of its big brother, the MSCI Japan Index Fund (EWJ).

If you want to play options on the Japanese market revival, I recommend the March $10 call options, EWJ130316C00010000, on EWJ.

Portfolio Update

Bank of Ireland (IRE) ended the week flat. IRE recently reported it exceeded its 2012 “small and medium-sized enterprise” (SME) lending target of 3.5 billion euros. This target is a 16% year-over-year increase and the result of rising demand in several recovering Irish economic sectors. IRE is a BUY.

National Bank of Greece SA (NBG) dipped 1.63% over the past four trading days. Standard & Poor’s recently raised its Greek long- and short-term credit rating from “SD – Selective Default” to “B-/B”. Standard & Poors also re-affirmed its “CCC/C” long/short term credit rating for NBG. NBG is a HOLD.

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Michael Kors Holdings Ltd. (KORS) gave back 8.06% last week. KORS’ shares suffered last week as Citigroup lowered its KORS price target to $60.00. Nevertheless, Citigroup maintained a ‘Buy’ rating on the stock. Note that the new price target is still a hefty 22% jump above Friday’s closing price. With KORS touching both its 200-day moving average and $48 short-term support level, the current level may represent a good buying point. KORS is below the 50-day moving average and rates as a HOLD.

United States Natural Gas Fund LP (UNG) closed flat for the week. The future appears to be “heating up” for natural gas as the recent natural gas inventories report reflected a 72 billion cubic feet (BCF) drop. This is particularly good news when coupled with the recent sell-off in natural gas, the solid support UNG has at the 200-day moving average, and the coming colder weather. UNG is a HOLD.

PowerShares Listed Private Equity (PSP) dipped 0.90% over the past four trading days. PSP’s recent correction and stabilization at the $10.00 price level reflects the uncertainty surrounding Washington’s inability to solve the “fiscal cliff. Once a resolution is found, I expect this position to rebound strongly. PSP remains a BUY.

Discover Financial Services (DFS) lost 1.32% last week as earnings of $1.07 per share came in below estimates of $1.13. DFS’ credit card portfolio did increase 6.4% for the quarter to $49.6 billion. Several analysts have also either maintained or increased their rating on DFS since the earnings report. DFS is a HOLD.

HollyFrontier Corp. (HFC) fell 4.95%. A recent report reflected distillate inventories 20% below their five-year average. This is bullish news for HFC. HFC is a BUY.

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Apple Inc. (AAPL) lost 1.88% for the week. AAPL remained near its recent low, but continued to hold the $500 support level. Large recent call option bets on the Technology Select Sector SPDR Fund (XLF), a bellwether technology fund, reflect growing sentiment that technology is due for a 2013 rebound to levels not seen since October 2012. AAPL is a BUY.

HDFC Bank Ltd. (HDB) closed the week down just 0.75%. A check of the one-year HDB chart shows the recent pullback in the solid uptrend this stock has been enjoying since June 2012. If HDB continues this long-standing trading pattern, HDB should break past $45.00 in the coming weeks. HDB is a BUY.

ProShares Ultra MSCI Emerging Markets (EET) gained 2.07%. Emerging markets dipped slightly two weeks ago, but recovered quickly over the holiday-shortened week. This quick recovery to the $83.50 price level is a bullish sign that investors want more. EET posted a new high last week and is a BUY.

ProShares Ultra FTSE China 25 (XPP) gained 1.93% for its first two weeks in your portfolio. The recent rise in the China Consumer Price Index (CPI) coupled with rising consumer demand are both good signs for the market in the weeks ahead. XPP is a BUY.

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With President Obama and Congress running out of time to act against the fiscal cliff, global markets seem bound and determined not to react too strongly.

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