Markets Rumble on, as Japan Soars

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 third solid week in a row for global stock markets. The Dow Jones jumped 2.22%, the S&P 500 rose 1.36% and the NASDAQ gained 1.30%. MCSI Emerging Markets Index continued to lag and was up only 0.77%.

Big gainers in your Alpha Investor Letter portfolio included the WisdomTree Japan Hedged Equity ETF (DXJ), which jumped 8.41%; Skyworks Solutions Inc. (SWKS), which added 8.26%; and the KraneShares CSI China Internet ETF (KWEB), which rose 3.47%.

Several positions also hit new 52-week highs. They included the WisdomTree Japan Hedged Equity ETF (DXJ), Market Vectors Biotech ETF (BBH), ICICI Bank Ltd. (IBN), Markel Corp. (MKL), PowerShares DB US Dollar Bullish ETF (UUP) and Skyworks Solutions Inc. (SWKS).

Several of your other positions rose back above their 50-day moving averages and moved to a “buy.” These include the Wisdom Tree Japan Hedged Equity ETF (DXJ), the Guggenheim Spin-Off (CSD), the Vanguard Global ex-US Real Estate ETF (VNQI), the Global X Guru Index ETF (GURU) and KraneShares CSI China Internet ETF (KWEB).

The big news this past week came from Japan. This is particularly relevant, as your current Alpha Investor Letter portfolio boasts two Japanese-related recommendations, the Wisdom Tree Japan Hedged Equity ETF (DXJ) and the WisdomTree Japan SmallCap Dividend Fund (DFJ).

In the very same week that the U.S. Federal Reserve shut down what was effectively “QE4,” with its announcement on Wednesday that its bond-buying program had ended, the Bank of Japan (BoJ) announced that it was turning up its printing presses.

In a surprise announcement, Japanese policymakers announced that the BoJ’s annual target for expanding the monetary base would rise to 80 trillion yen ($724 billion), up from 60-70 trillion yen.

Reaction to the BoJ’s move pushed the yen to a six-year low and sparked a rally in the Japanese stock market.

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Japan’s Government Pension Investment Fund, the world’s largest pension fund, holding about $1.1 trillion in assets, also increased its allocation to stocks. Japanese and overseas stocks will now have a 25% weighting each, up from 12%.

This move, too, puts upward pressure on the Japanese stock market, especially over the long term.

As a result of these developments, I am recommending that you sell the WisdomTree Japan SmallCap Dividend Fund (DFJ) this week to roughly break even.

While this may seem counterintuitive, this is simply due to the impact of currency depreciation.

You see, the WisdomTree Japan SmallCap Dividend Fund (DFJ) does not hedge against the depreciation of the Japanese yen. That means any gains in the underlying stocks are not translated into U.S. dollar gains.

You already see these in the widespread performance of the two bets over time. DXJ is up 22.64% since last June, while DFJ is flat since last July. Almost all of the difference is due to the fact that DXJ hedged out the currency risk.

If you like the Japan story (as I do, as discussed in detail in yesterday’s edition of the Global Guru), you may want to reinvest the cash from your DFJ sale into DXJ.

Portfolio Update

Berkshire Hathaway (BRK-B) added 1.22% last week, stopping just short of a new 52-week high. Wells Fargo and Freddie Mac stand amongst Warren Buffett’s greatest investments, returning 9,417% and 1,525%, respectively. However, one mid-sized textile company, purchased in 1965, turned out to be his greatest win, making him a cool 1,745,300% total return. The name of this company is, of course, Berkshire Hathaway. BRK-B is a BUY.

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WisdomTree Japan Hedged Equity (DXJ) jumped 8.41%, and hit a new 52-week high, on news that the Bank of Japan launched another round of quantitative easing, raising its purchases of government bonds. This sent a wide range of Japanese-based investment sectors soaring higher. DXJ moved above the 50-day moving average (MA) and is now a BUY.

Vanguard Global ex-US Real Estate ETF (VNQI) gained 2.45%. VNQI gives your portfolio diversified exposure to real estate securities in 35 countries, outside of the United States. VNQI also invests roughly 17% of its holdings in emerging markets. And, VNQI provides this at the lowest costs for this class of exchange-traded fund (ETF). VNQI moved from a HOLD to a BUY.

iShares S&P Global Timber & Forestry Index (WOOD) continued on its recent gains, adding 2.10% last week. WOOD has experienced a sharp recovery over the past three weeks, jumping nearly 12% since bottoming in mid-October. WOOD is once again closing in on its significant $53 resistance level — a high point this ETF may finally conquer. WOOD is a BUY.

Vanguard Russell 2000 Index ETF (VTWO) rose 1.49% over the last five trading days. VTWO tracks the performance of the Russell 2000 Index. This index is an excellent way to capture diversified gains in the small-cap sector and is somewhat overweighted to financial services, technology and healthcare. VTWO is a BUY.

ICICI Bank Ltd. (IBN) rose 2.36% and hit a new 52-week high just yesterday. IBN reported a strong quarter last Thursday, with net profit at $439 million, up 15.2% year-over-year. IBN also reported higher net interest income and fee income. Loan balances increased, as did deposit balances, pushing IBN into a much stronger position. IBN is a BUY.

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Markel Corp. (MKL) gained 0.38% last week and hit a new 52-week high. Markel has been on the rise the past few weeks, making new 52-week highs consistently since taking off in mid-October. MKL will report earnings today after markets close. MKL remains a BUY.

PowerShares DB US Dollar Bullish ETF (UUP) rose 2.03% and hit a new 52-week high. The U.S. dollar jumped last week after consolidating over previous weeks, making your recent entry point well timed. The dollar is benefiting from a “perfect storm” as of late, as several of the major global currencies continue to weaken against it. Global Central Bank activity is also causing a strong tailwind for the U.S. dollar’s bullish move. UUP is a BUY.

Skyworks Solutions Inc. (SWKS) added another 8.26% last week, making your re-entry into this position pay off with a quick gain of nearly 25%. SWKS is also at a new 52-week high, as of yesterday. Skyworks will report earnings tomorrow, after markets close. SWKS is a BUY.

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Just when you thought the financial world would take a much-needed break from quantitative easing (QE), the Land of the Rising Sun comes in and juices up the markets with more QE.

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