Global Markets Crumble as Oil Continues to Plummet

Nicholas Vardy

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

Last week was a lousy one for stock markets across the board. The Dow Jones fell 4.11%, the S&P 500 dropped 4.23% and NASDAQ tumbled 4.59%. The MCSI Emerging Markets Index fared the worst, plummeting 5.44%.

None of your Alpha Investor Letter positions posted gains this week. But your defensive bet on the PowerShares DB US Dollar Bullish ETF (UUP) lost just 1.02% and Skyworks Solutions Inc. (SWKS) dipped just 1.59%. That’s not bad for last week’s market rout.

You were, however, stopped out of a number of your positions for which we had recently tightened stops. These include the WisdomTree Japan Hedged Equity (DXJ) for a 20% gain and ICICI Bank Ltd. (IBN) bank for a 30% gain. You were also stopped out of Google Inc. (GOOGL) for a 15.89% gain.

Several of your positions fell below their 50-day moving averages and moved to a HOLD. These include the Guggenheim Spin-Off (CSD), Vanguard Global ex-US Real Estate ETF (VNQI), iShares S&P Global Timber & Forestry Index (WOOD), Global X Guru Index ETF (GURU), Vanguard Russell 2000 Index ETF (VTWO), Markel Corp. (MKL) and Union Pacific Corporation (UNP).

The markets have been spooked by two factors.

First, there is the plummeting price of oil. Oil has not seen a similar rout since 1986 and 2008. And if this sell-off is anything like those, oil has yet to see its bottom. The irony is that plummeting oil is good for the U.S. economy. The rule of thumb has been always that a $10 drop in crude oil prices adds about 0.25% to U.S. gross domestic product (GDP). With oil dropping from $115 in June to $59 in December, that’s a heckuva tailwind. JP Morgan expects global oil prices to boost global GDP by 0.4% in 2014.

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Second, there is the continuing — and related — collapse of the Russian economy. With oil prices down and capital flight up, the Russian ruble is collapsing. At one point on Tuesday, the Russian ruble dropped more than 22% before recovering slightly. That was a day after falling over 10% on Monday.

Those with long emerging market memories, including yours truly, can’t fail to recall how Russia unleashed the emerging markets crisis of 1998. So far, we don’t know that anybody has bet so big on the Russian ruble that it could bring down the whole system as did Long Term Capital Management.

As it always is in such market sell-offs, investors are throwing out the baby with the bathwater. Market sentiment today is back to “extreme fear.”

The bottom line? You’ve taken some solid gains on your global positions in India and Japan this past week. Otherwise, your exposure in international markets is now limited to your deep value play in Cambria Global Value ETF (GVAL).

So just stick to your pre-determined stops. And remember that we may re-enter some of these positions when markets settle once more.

Finally, I want to wish you and your family happy holidays. I’ll be back with your weekly hotline in two weeks, after spending next week with my family.

Portfolio Update

iShares S&P Global Timber & Forestry Index (WOOD) fell 3.07%. This bet on timber moved lower last week, along with the entire commodities sector, falling below its mighty 200-day moving average (MA). Although commodities have been on a long-term downward spiral as a whole (take oil as a case in point), WOOD has remained remarkably positive. WOOD also closed Friday just one cent below its 50-day MA to move to a HOLD.

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Market Vectors Biotech ETF (BBH) lost 6.74% over the past five trading days. Even the strength of the raging biotech bull market was stopped cold last week as one of the Alpha Investor Letter portfolio’s biggest winners pulled back in the market storm. BBH is up over 42% in your portfolio and remains a BUY.

Vanguard Russell 2000 Index ETF (VTWO) gave back 4.06%. This small-cap play showed remarkable stability last week, as well as over the previous several weeks, holding within its recent multi-month price range. Volume has also been quite stable, even showing a pop yesterday while traders traded shares at nearly double the usual rate as VTWO straddled its 50-day MA. VTWO fell just below this Buy/Hold line-in-the-sand to become a HOLD.

Markel Corp. (MKL) lost 2.94% last week. MKL took last week’s market rout in stride, holding up well within the selling storm. Despite being the “Baby Berkshire” in the portfolio, this holding actually beat Mr. Buffett’s Berkshire Hathaway position, which fell 3.44% last week. MKL moved below the 50-day MA last Friday to become a HOLD.

Skyworks Solutions Inc. (SWKS) dipped just 1.59% to close the week relatively flat in lieu of the broader market’s significant losses. In fact, SWKS hit a new 52-week high last Thursday. SWKS stands as a 40% gainer in your portfolio, amongst the top three winning holdings, alongside Warren Buffett and biotech. SWKS remains a BUY.

PowerShares DB US Dollar Bullish ETF (UUP) lost 1.02%. Even the mighty run of the dollar was stopped recently by the powerful market forces. However, with the wide-ranging pain that many non-U.S. markets are agonizing over due to the significant drop in oil prices and their oil-based revenues, expect the dollar to continue its domination over world currencies. UUP is a BUY.

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Cambria Global Value ETF (GVAL) fell 3.93% for its first week in your portfolio. Notably, it was quite a difficult week to join the Alpha Investor Letter portfolio, but GVAL fared relatively well. Continue to “hold your nose” just a bit longer on this position until markets stabilize. GVAL is a BUY.

Latest Special Report

As a courtesy, I want to bring to your attention the newest version of The Top 12 Stocks for 2015, which features three of my top investment recommendations, as well as bonus picks from each of my fellow investment newsletter editors at Eagle. This report and others are available FREE on my website to you.

Nicholas Vardy

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