U.S. Markets Ride High and a Lesson in Contrarian Investing

Nicholas Vardy

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

The U.S. market continued its steady rise as the Dow Jones jumped 1.38% and the S&P 500 rose 0.98%. Global markets have had a surprisingly poor run over the past two weeks, with the MCSI Emerging Markets Index down 1.19%.

Your Alpha Investor Letter portfolio also had a strong week. Big gainers included Icahn Enterprises, L.P. (IEP), which soared another 8.00% last week. Google Inc. (GOOG) also rose 2.90% and Visa Inc. (V) added 2.13%. The Market Vectors Biotech ETF (BBH) regained its feet and ended the week 2.02% higher.

It has been an exceptionally strong September and October for both U.S. and global markets. The broad U.S. market is up 8.59% since the start of September, rising 5.19% in October alone.

But it’s also interesting to see how other global markets have performed over the past two months.

First, not a single one of the 39 stock markets I follow are down since Sept. 1. The single-best performer is has been Greece, which has soared 32.12%. Spain is next with a gain of 23.42%, with Turkey just behind, rising 23.13%. India’s gains also breached the  20% level, with a rise of 20.49%.

Second, as it happens, I am personally invested in every single one of these markets, except India. So, how was I so prescient?

Well, I wasn’t. I simply experimented with an informal “media indicator” over the past six months. If I saw exceptionally negative headlines about a stock market, I invested in it. Remember how a few months ago, Greece was about to implode? Spain was set to do the same. Turkey — last year’s top-performing market — was beset by riots, as investors fled in droves.

Of course, my track record is hardly perfect. After all, the Economist ran a negative cover story in India on Aug. 24, almost to the day the market bottomed, and I failed to invest.

tail20131030-economistindia

And I never could quite pull the trigger in Egypt — after all, there was literally “blood in the streets.”

tail20131030-economistEgypt

Yet that market is up 19.50% over the past two months. Ditto for former investment darling Brazil, which is up 19.49%. But in my defense, I did catch Italy (up 19.90%) as well as Thailand (up 19.77%).

The single-worst-performing market over this past two months?

China, which is up a mere 5.3% since Sept. 1. Yet magazine covers continue to heap praise on it.

tail20131030-economistChina

There are two lessons here.

First, it pays to be a contrarian — if you can stomach the wild ride. At the same time, each of these positions is highly volatile and very risky. That’s the reason I don’t include picks like this in the Alpha Investor Letter until they “settle.” Your investment in iShares MSCI Ireland Capped Investable Market Index (EIRL) is a good example of an investment that was ripe enough for inclusion. But I’m willing to bet that many of you were skeptical of that recommendation when I made it in April. Yet it is up over 20% since then. Let’s just say that when (not if) I see Ireland on the cover of the Economist — “The Celtic Tiger Recovers!” — I’ll consider it a sell signal.

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Second, as impressive as these returns are, this too shall pass. In fact, after such a strong run up, I am slightly more cautious about the remainder of the year than I would have been otherwise. After all, I would have expected these kinds of gains on November and December — not two months earlier.

Finally, I hope you enjoyed our quarterly teleconference on Monday, and I always enjoy answering your questions personally. In case you missed it, you can always listen to a recording on my website.

Portfolio Update

Berkshire Hathaway (BRK-B) closed the week flat. When buying a share of Berkshire, you get one of the most successful investors in history to manage your capital: Warren Buffett. BRK-B is a BUY.

Visa Inc. (V) added 2.13% over the past five trading days. Visa will report earnings today, after markets close. V closed yesterday at a new 52-week high as investors pushed the stock upwards in positive anticipation of Visa’s pending earnings report. Baird Equity Research also raised its price target to $220.00 on Monday — a 7.72% move above Tuesday’s close. V is a BUY.

iShares MSCI Ireland Capped Investable Market Index (EIRL) dipped 1.18% last week, following up on a large gain and a new 52-week high the week prior. Ireland will not only be free of the joint European Union/International Monetary Fund’s “Programme of Support” in December, but it also holds the distinction of being the first European country to exit the program. EIRL is a BUY.

iShares MSCI Singapore Small Cap Fund (EWSS) dipped 0.41%. EWSS traded sideways last week, clinging tight to the 50-day moving average (MA). EWSS has recovered almost half of the significant drop it experienced in early October. EWSS is a BUY.

Google Inc. (GOOG) rose 2.90%. Google just announced the addition of a new, and enormous, user base — the U. S. Army. The Army will begin utilizing Google Apps as its new virtual back-end to facilitate internal communications and, more importantly, their massive and ever-increasing mobile footprint. The Army stated that Google’s rich and extensive ecosystem would reduce costs, allow greater communication ability via Google’s Hangouts application, and greatly increase the ability to disseminate information to a global force. The Army also cited huge cost savings due to Google’s ability to work across major platforms, thus eliminating the need for hardware changes (with the exception of their Blackberrys, I’m guessing). The Army went on to say that Google Apps met Army security policy requirements, and cited Google’s 99.5% uptime as a major plus. GOOG is a BUY.

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WisdomTree Japan Hedged Equity (DXJ) dipped 1.20% last week. The recent U.S. government shutdown worries pushed dollar-based currency investors into the safety of the yen, causing a pullback in your currency-hedged position in Japan. DXJ is a BUY.

Guggenheim Spin-Off (CSD) added 1.03% over the past five trading days. CSD hit a new 52-week high last week and appears to be starting a new leg higher. CSD is a BUY.

PowerShares Buyback Achievers (PKW) gained 1.30%. PKW continued its unbroken rise from the 50-day MA last week to a new 52-week high, marking the third winning week in a row for PKW. Stock buyback activity has been in the news as of late, undoubtedly helping this fund maintain momentum and move higher. PKW is a BUY.

First Trust US IPO Index (FPX) was flat last week. The Twitter initial public offering (IPO) continued to captivate investors as news reports pegged next week as the week trading may open. Although many traders will not be able to capture a slice of the “Twitter IPO pie,” many may try to buy shares once trading opens to the masses. FPX is a BUY.

WisdomTree Japan SmallCap Dividend (DFJ) dipped 0.95%. The chief executive at Chicago-based investment firm RMB Capital recently called Japanese small cap stocks the “most undervalued asset class in the world today.” This is great news for your position, especially if he puts a sizeable amount of the $2.7 billion to work in DFJ. DFJ is a BUY.

Vanguard Global ex-US Real Estate ETF (VNQI) lost 1.14% last week. VNQI has not only broken the significant 200-day MA twice recently, but is working mightily to break above its $58 resistance level. VNQI experienced the largest week-over-week share inflow gain last week — adding an additional 2.6 million shares for a 13.0% increase. VNQI is a BUY.

iShares S&P Global Timber & Forestry Index (WOOD) lost 2.73% as it dropped back from its recent new 52-week high. Bad news in the timber markets last week will likely spell good news for your position in WOOD over the coming weeks and months. Lumber prices are soaring due to two large British Colombia lumber producers having to shut down operations as a wood beetle problem is decimating tree populations in their major lumber supply regions. Couple this with already low lumber inventories, lumber mills going down for maintenance during the winter months, and WOOD may see some significant upside in the near future. WOOD is a BUY.

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PowerShares Global Listed Private Equity (PSP) closed the week flat after two weeks of excellent gains. With the Federal Reserve widely expected to hold off on tapering after today’s Fed meeting, expect low interest rates to persist and PSP’s gains to continue. PSP is a BUY.

Market Vectors Biotech ETF (BBH) gained 2.02%. BBH is back up to its $84 resistance level for the third time in six weeks. Asset management firm Brooks MacDonald recently called the sector “under-owned” and noted that due to volatility among individual companies, the well-diversified approach of BBH is the best way to invest in the sector. BBH is a BUY.

ProShares Ultra-Short 20+ Year Treasury (TBT) traded nearly flat over the past week. Any surprises that come out in today’s Federal Reserve monetary policy decision may move TBT quite significantly. The Fed issues its announcement at 2 pm EDT today. TBT is a HOLD.

Icahn Enterprises, L.P. (IEP) gained another 8.00% last week, marking another week of stellar gains for this position in your Alpha Investor Letter portfolio. Carl Icahn is calling on Apple CEO Tim Cook to increase Apple’s already sizeable $100 billion stock buyback program to a whopping $150 billion. Any such move would boost the value of Mr. Icahn’s significant position in Apple’s stock and is a likely motivation. IEP is a BUY.

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