The Fed Puts the Santa Claus Rally on Hold

With stock markets across the globe down over the past five trading days, this year’s Santa Claus rally is taking its time, choosing to await the outcome of this week’s Fed meeting. Over the past five days, the S&P 500 was down 1.20% and NASDAQ dropped 0.91%. Global stock markets also continued to belie my expectations of a December rally, and the MCSI Emerging Markets Index was down 2.76%

The big gainers in your Alpha Investor Letter portfolio included Visa Inc. (V), which soared 6.93%, and this month’s recommendation, The Blackstone Group (BX), which added 2.48% for its first week in your portfolio.

Two positions — Berkshire Hathaway (BRK-B) and the iShares S&P Global Timber & Forestry Index (WOOD) — dropped below their 50-day moving averages and are now a HOLD.

Global stock markets are clearly being held hostage by the outcome of this year’s final Federal Open Market Committee (FOMC) meeting scheduled for yesterday and today. With the U.S. economy picking up steam, according to a broad range of measures, market bulls are worried that the Fed might begin to taper the pace of its $85 billion monthly bond-buying program.

Echoing the view of Goldman Sachs, I believe the Fed will hold off from tapering until next year for three reasons.

First, although the trend rate of U.S. payroll growth rose to the 200,000 per month level, headline inflation has fallen near historical low levels, and below the Fed’s 2% target. That gives the Fed breathing room to continue to buy bonds.

Second, the Fed has explicitly announced that interest rates would remain near zero until unemployment fell to at least 6.5%. It is now only 7%.

Third, any taper would come as a hawkish surprise to markets. With mortgage rates and the 10-year yield up 30 basis points since the October meeting, interest rates already are on the rise. The Fed wants to avoid another negative market reaction like May 22.

Finally, there is the selfish issue of Fed Chairman Ben Bernanke and his reputation. The last thing the outgoing Fed chairman wants to do is tank the market and taint his legacy.

The Fed’s holding off on tapering, combined with oversold markets and strong seasonality, bodes well for the stock market between now and the end of the year. And your Alpha Investor Letter portfolio is well positioned to profit.

Portfolio Update

Berkshire Hathaway (BRK-B) dipped 1.71% last week. Berkshire Hathaway completed another insurance company acquisition last week as subsidiary Columbia Insurance Co. purchased Hartford Life International Limited. The sale was valued at $285 million and brought nearly $1.7 billion in assets under BRK-B’s umbrella. BRK-B moved below its 50-day moving average (MA) early last week and is now a HOLD.

Visa Inc. (V) had a tremendous week, jumping 6.93%. Bank of America reiterated its “Buy” rating for Visa on Monday and raised its price target to $235.00 — 10% above Tuesday’s close. V is a BUY.

iShares MSCI Ireland Capped Investable Market Index (EIRL) closed the week flat. EIRL has been trading sideways for several weeks now as it consolidates gains from previous months. EIRL’s rising 50-day MA is directly below the current price level and is likely to be a strong catalyst to push this exchange-traded fund (ETF) higher. EIRL is a BUY.

iShares MSCI Singapore Small Cap Fund (EWSS) dipped 1.49%. EWSS traded down early last week to come within $0.15 of our stop price, but managed a bounce later in the week. Although the outlook on Singapore remains positive, higher small-cap volatility, coupled with the dismal 2013 performance of emerging markets, has been a drag on this position. EWSS is a HOLD.

Google Inc. (GOOG) fell 1.36%. Janney Capital Markets (JCM) raised its Google price target to $1,220 last week — representing a 14% jump from Tuesday’s close. The catalyst for JCM’s upbeat rating is the growth of Google’s “Google Shopping” service. With more than one billion product offerings just a mouse-click away, and visitor traffic more than doubling so far this shopping season, JCM sees Google Shopping as a growing disruptive force in the e-commerce arena. GOOG is a BUY.

WisdomTree Japan Hedged Equity (DXJ) lost 2.17% over the past five trading days. DXJ has pulled back from its recent six-month high and hit the $48.50 support level it tested just two weeks ago. DXJ may turn higher as the rising 50-day MA stands below, ready to nudge this Japanese yen hedged-equity fund higher. DXJ is a BUY.

Guggenheim Spin-Off (CSD) dipped 1.07%. CSD suffered a minor correction two weeks ago and fell back to the 50-day MA. A look at CSD’s two-year chart reveals a long respect for the 50-day MA. Although CSD has dipped slightly below on a few occasions, every occurrence has turned out to be a magnificent buying opportunity. Pending any dire Fed news today or tomorrow, I suspect this may be the case yet again. CSD is a BUY.

PowerShares Buyback Achievers (PKW) gave back 1.03%. I recently highlighted the concept of “Smart Beta” funds in my weekly e-letter, The Global Guru. In essence, specialty funds like PKW employ advanced “smarter” alternative index-linked strategies to outperform the market. PKW is currently consolidating in a sideways trading pattern, readying to move higher. PKW is a BUY.

First Trust US IPO Index (FPX) added 1.44% last week to hit a new 52-week high. FPX is another of the “Smart Beta” plays in your portfolio, and its 18% gain since my July recommendation illustrates the positive impact this investment type can have on a portfolio. FPX is a BUY.

WisdomTree Japan SmallCap Dividend (DFJ) gave back 1.52%. The NIKKEI index rallied 2% last night on rumors that Prime Minister Shinzo Abe may discuss further economic reforms at an upcoming speech later this week. Any positive developments should boost DFJ. DFJ is a HOLD.

Vanguard Global ex-US Real Estate ETF (VNQI) lost 2.13% over the past week. Both domestic and global real estate funds have suffered over recent months. However, VNQI’s 4.70% dividend yield serves as a good cushion against such moves. VNQI is a HOLD.

iShares S&P Global Timber & Forestry Index (WOOD) dipped 0.97% last week. Forecasts for U.S. housing starts suggest an increase from 900,000, up to 1.5 million, through 2015. Lumber demand in the behemoth China housing market is on the rise as well. A Canadian pest-induced tree shortage is adding to supply pressure, helping to boost prices even more. WOOD dipped below the 50-day MA to become a HOLD.

Market Vectors Biotech ETF (BBH) lost 3.37%. The Federal Reserve’s decision on tapering may create quite a bit of turbulence in the markets this week. However, due to biotech’s heavy focus on the successful development of new blockbuster drugs, BBH may be a safe haven should market volatility spike higher. BBH is a BUY.

ProShares Ultra-Short 20+ Year Treasury (TBT) rose 1.03% last week. TBT has remained relatively quiet in your portfolio over the past few weeks. However, this may change considerably tomorrow if Federal Reserve Chairman Ben Bernanke decides it is time to pull back on the reins of economic stimulus. TBT remains a BUY.

Icahn Enterprises, L.P. (IEP) lost 8.79%, after Icahn reduced his own position in IEP. Carl Icahn has been beating his activist investor drum quite a bit lately, and his latest comments have been quite effective regarding his position in Herbalife. A recent positive Herbalife audit helped as well. This activity likely adds up to another win for Mr. Icahn. IEP is a BUY.

Global X Guru Index ETF (GURU) inched 0.89% lower last week as it pulled back from a recent new 52-week high. GURU is another “Smart Beta” play in your portfolio. One striking commonality between all of these positions is their remarkable respect for the 50-day MA. Looking at GURU’s chart, one can see a long pattern of dips below the 50-day MA signaling great opportunities to buy more. Trading above its 50-day MA, GURU is a BUY.

The Blackstone Group (BX) added 2.48% for its first week in your Alpha Investor Letter portfolio. Analysts at Credit Suisse see a bright future for private equity over the coming year, and BX is one of the names on the investment firm’s hot list. BX is a BUY.

Special Note: To celebrate Christmas, I will be spending time with my family next week. As a result, watch for your next hotline the week of Dec. 30. I wish you and your family happy holidays.

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