How I’m Playing Mr. Market’s Moodswings

Global markets rebounded this week, with the Dow Jones rising 1.30% and the S&P 500 up 1.58%. Even the MSCI Emerging Markets Index joined the party, ending the week 1.16% higher.

Big gainers in your Alpha Investor Letter portfolio included iShares MSCI Ireland Capped Investable Market Index (EIRL), jumping 2.47%; Visa Inc (V), up 2.42%; and Google Inc. (GOOG), rising 2.37%. Japan also started to make a recovery, with WisdomTree Japan Hedged Equity (DXJ) bouncing 2.13%.

PowerShares Global Listed Private Equity Portfolio ETF (PSP) rose 1.31%. Sneaking back above its 50-day moving average, PSP is now a BUY.

Today, global markets are anxiously awaiting clarity about the U.S. Federal Reserve’s next policy step. Much depends on how the market perceives the Fed’s policy statement about the timing to exit quantitative-easing part II (QE2), due at 2:00 p.m. EDT today — and Fed Chairman Ben Bernanke’s comments half an hour later.

Whatever the outcome, I believe the current uncertainty has provided brave investors with one of the best buying opportunities of the year.

And here’s how I’m playing that belief.

For all of his emphasis on the fundamentals of businesses he invests in, Warren Buffett also understands market psychology profoundly well. As he has said, “Be fearful when others are greedy, and greedy when others are fearful.” And Buffett certainly puts this into practice.

Remember August of 2011, when U.S. markets tumbled more than 16% over fears surrounding the U.S. budget and downgrade by ratings agency S&P? Buffett was out there buying like crazy, with Aug. 8 — the day the market bottomed — his single-biggest day for stock purchases in all of 2011. I wrote a Global Guru that week as well, suggesting that you do the same.

In that same spirit, I have been buying stocks this past week, based on my belief that the current pullback is overdone.

I’ve been focusing in particular on the most oversold — and therefore cheapest — stocks and exchange-traded funds (ETFs).

Among the current Alpha Investor Letter recommendations that I added to in my own portfolio over the past week or so are PowerShares Global Listed Private Equity Portfolio ETF (PSP); S&P Global Timber & Forestry Index Fund (WOOD); iShares MSCI Ireland Capped Investable Market Index (EIRL); iShares MSCI Singapore Small Cap Fund (EWSS); and the WisdomTree Japan Hedged Equity (DXJ). I also have related option and leveraged positions that will profit from rises in emerging markets and Google.

This is a fairly risky move on my part, and not one that I am necessarily recommending for you. My bets may not come good immediately. After all, summer is a choppy part of the year. And no one can really predict how the Fed’s action will be perceived by “Mr. Market.” That said, whatever I am buying now I am getting at a 5% to 20% discount compared to where it was trading a month ago.

And I like a good bargain.

Portfolio Update

Berkshire Hathaway (BRK-B) gained 1.46% for the week. Ratings firm A.M. Best reaffirmed its ratings on its core collection of Berkshire Hathaway insurance companies with an “A++ (Superior)” financial strength rating, as well as an “aa+” issuer credit rating. A.M. Best cited a stable outlook, sturdy risk-adjusted capital levels and strong operating profitability as positives. BRK-B is a BUY.

Visa Inc. (V) gained 2.42%. Morgan Stanley initiated coverage on Visa Inc. yesterday with an “Overweight” rating and a whopping $215 price target — a 17% move higher from yesterday’s close. V is a BUY.

PowerShares Global Listed Private Equity Portfolio ETF (PSP) rose 1.31% over the past five trading days. As the Federal Reserve begins the discussion on slowing its stimulus activities, private equity firms may increase their investment activities over the coming months in an effort to lock-in low borrowing rates. This may push PSP even higher. As of yesterday, PSP was one cent above the 50-day moving average, moving PSP back to a BUY.

S&P Global Timber & Forestry Index Fund (WOOD) rose 0.97% last week. A closer look at WOOD’s chart reveals a very positive technical chart pattern called a short-term double-bottom. In essence, WOOD has tested the $45.70 price level twice in the past two weeks and now appears poised for a longer-term uptrend. WOOD is a HOLD for the moment.

iShares MSCI Ireland Capped Investable Market Index (EIRL) gained 2.47%. EIRL is up nearly 19% for the year, and the gains show no sign of slowing. Projections show Ireland closing out 2013 and 2014 with the third-highest gross domestic product (GDP) growth in all of Europe. The International Monetary Fund (IMF) also predicts annual growth rates of 1.1%, 2.2% and 2.7% for the next three years running. EIRL is a BUY.

iShares MSCI Singapore Small Cap Fund (EWSS) added 0.35%. In yesterday’s edition of The Global Guru, I outlined my positive outlook for emerging markets in general and small caps in particular. EWSS covers both of these themes. EWSS is a BUY.

WisdomTree Japan Hedged Equity (DXJ) gained 2.13% last week. Although DXJ has seen its share of volatility during the past few weeks, a sideways “consolidation” pattern is emerging. The Japanese recovery should continue, and May’s large correction affords you a chance at a great opportunity to profit from the bounce. DXJ is a BUY.

Google Inc. (GOOG) rose 2.37% for its first week in your portfolio, spurred higher by enthusiasm that the Federal Reserve will not change its stance on stimulus and risk a loss of momentum in the U.S. economic recovery. Google also hit the $900 level yesterday — a price not seen since May, when it hit a $920 high. Expect GOOG to test this level this week and then move higher. GOOG is a BUY.

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