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Warren Buffett Stumbles

Written by Nicholas Vardy, CFA.

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Warren Buffett's investment vehicle Berkshire Hathaway (BRK-B) is having a terrific year.

Berkshire Hathaway is up 17.69% year to date, compared with 6.21% for the S&P 500. And it is also trouncing U.S. small-cap stocks, which I still expect will outperform Berkshire over the next 10 years. I was so convinced of this that I bet $25,000 on it.

Yet, these impressive returns belie that several of Berkshire Hathaway's higher-profile public investments have fallen out of bed recently.

And the "Oracle of Omaha" has endured several billion dollars in paper losses as a result.

Although the problems are specific to each company, there is an overarching and worrying trend. Moats or barriers to entry that seemed to be so secure only a few years ago don't seem as wide as they once were.

Or even worse, competitors aren't even bothering to try to cross them.

Buffett's Three Recent Stumbles

Let's take each of Buffett's stumbles, one by one.

First, Buffett's investment in Tesco (TSCO.L), the "Walmart of the U.K.," has tumbled by over 50% in the past year, costing Berkshire about $700 million so far. In early October, Buffett publicly admitted he had made a "huge mistake" betting on Tesco. Berkshire has started to reduce its stake in the company even as Tesco is trading near an 11-year low.

Second, there is Buffett's first foray into technology investing, International Business Machines Corporation (IBM). Buffett is a famous technophobe who often boasted that he doesn't understand — and therefore would never invest in — technology companies. He broke his own rule in 2011, when he bought IBM. And he's probably already kicking himself for doing so.

IBM recently reported falling sales for the 10th quarter in a row and a dip in profits. The shares sank by 7%, wiping another $1 billion off of the value of Buffett's holdings, even as "Big Blue's" stock is down 16.73% over the past three months. IBM also had to pay a chipmaker $1.5 billion to take its chip-making business off of its hands.

Third, even Buffett's iconic investment, The Coca-Cola Company (KO), which he has held since 1988, is starting to fray at the edges. Coca Cola's profit margins have tumbled in recent years. Its Q3 results revealed that global volume grew at just 1% year over year and revenue remained flat. Earnings per share dropped 13%, hit hard by currency movements. That bit of bad news cost Buffett another $1 billion.

With these losses adding up to a little over 1% of Berkshire's market cap, Buffett's baby is hardly on the ropes.

But it does suggest that some cracks are appearing in Buffett's "buy and hold forever" investment philosophy.

Buffett's 'Moats' Under Fire

Buffett's tried-and-true strategy has been to buy great firms with long-term competitive advantages selling at reasonable prices.

Both Berkshire's public and private investments focus on profitable companies with moats that boast a nearly invulnerable market position, sustainable profit margins and returns on invested capital, and superior earnings growth.

But as the recent stumbles in Tesco, IBM and Coca Cola show, even that strategy has a weakness. To extend Buffett's metaphor, having a moat to protect your castle assumes that no other companies want to attack that castle and want what's inside.

But that also presumes a level of stability that you can't take for granted in today's world. Many traditional industries are facing massive disruption. Every sector from oil (shale) to the taxi industry (Uber) is experiencing transformations that are overturning long-established business models.

Sure, the companies' "moats" may still be there. But it matters little if no one wants your stuff. Overnight, your moat can become your biggest handicap.

Buffett's Disrupted Investments

Let's take Buffett's recent flops one by one.

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Why I Expect the Stock Market to Rally in Q4

Written by Nicholas Vardy, CFA.

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For all the handwringing about the recent stock market gyrations, the U.S. market hasn't budged much at all in 2014.

As of yesterday's close, the S&P 500 is up 3.04% and the Dow Jones is down 1.1%.

With the S&P 500 nudging the mighty 200-day moving average from below, the "doom-and-gloom" crowd is out in full force, proclaiming that "the End is Nigh."

While I think that makes for entertaining TV commentary, I disagree wholeheartedly.

Below are four reasons I expect the market to rally between now and the end of the year.

I. Lousy Market Sentiment

Unlike bell-bottoms or frizzy hair, pessimism about the U.S. market never seems to go out of fashion.

Broad measures of market sentiment, such as the CNN Money Fear & Greed Index, actually hit zero briefly last week. That Index is now up to five.

More generally, Americans haven't been this pessimistic about their country since Jimmy Carter's malaise years. According to a recent POLITICO poll, 64% of respondents believe things in the United States feel "out of control" right now. And 50% said the country was on "the wrong track."

A few years ago, at least China was going to take over the world and gold was the only safe-haven asset. Today, even these pillars of investment stability are gone.

In fact, the best way to attract the wrath of commentators is to dare to say something positive about the U.S. economy.

Goldman Sachs came out with a bullish piece on the United States recently, citing "American exceptionalism" and recommending that investors own stocks with high domestic sales. Goldman was mocked and flamed mercilessly for its bullishness on U.S. economic growth. One blog urged readers to re-read the report "as many times as necessary until you pass out from laughter..."

As a contrarian, you could hardly ask for more.

II. U.S. Economy is the Best of the Global Bunch

Look beyond the snide remarks, and the numbers from the U.S. economy are hardly apocalyptic.

The U.S. economy grew at 4.6% in Q2, and it's expected to grow 3% in Q3. The headline unemployment rate hasn't been as low as 5.9% since, well, before the financial crash. Housing starts are recovering after a brief stumble. Lower oil prices are acting as their own form of quantitative easing and are putting billions back into consumers' pockets.

Sure, you can argue that there is a vast left- (or right-) wing conspiracy about how government statistics are tracked. But even so, you'd be hard pressed to argue that Japan, Europe and the BRICs (Brazil, Russia, India and China) taken together are in better shape than Uncle Sam.

You don't need to look at the world with rose-tinted glasses to see that in the United States, you have a steadily growing economy and falling unemployment — boosted by zero-percent interest rates. And that's bullish for U.S. stocks.

III. 'Tis the Season for a Market Rally

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Staying Afloat in a Global Sea of Red

Written by Nicholas Vardy, CFA.

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If you've been invested in a stock market anywhere in the world over the past month, then I feel your pain.

That's because no one who's been invested in the market (myself included) has made any money in their long stock positions, particularly over the past four weeks.

Indeed, even the past three months have been a tough slog for most stock markets around the world.

To give you a sense of just how rough the equity market seas have been of late, consider that of the 46 global stock markets I monitor daily at my firm Global Guru Capital — not a single one is in positive territory for the past month.

The absence of a single global stock market in positive territory over the past month is quite rare, as is the paucity of global stock market gains over the past three months.

Here my global market tracking data shows that only four global equity market exchange-traded funds (ETFs) are in the green since July. They are the Market Vectors Gulf States ETF (MES), Market Vectors Egypt ETF (EGPT), Market Vectors Vietnam (VNM) and iShares MSCI Thailand Capped (THD).

The underperformance of global stock markets has accelerated in recent months. While they recorded solid gains in the first six months of the year, only 17 of the 46 global ETFs I monitor are in positive territory year to date, as of yesterday's close.

The World's Best...

On top of the global performance pyramid in 2014 is India via the WisdomTree India Earnings ETF (EPI), with an enviable 27.15% total year-to-date return. Second on the list is Egypt via Market Vectors Egypt ETF (EGPT), with a robust 25.67% year-to-date gain.

Regular readers of this column, as well as subscribers to my Triple Digit Trader service and subscribers to The Alpha Investor Letter, have benefitted handsomely from India's bull market in 2014.

Still, aside from India, Egypt, the Gulf States, Thailand, the Philippines, Vietnam and Indonesia, there hasn't been any market that's scored a double-digit percentage gain year to date.

And the Worst...

Bringing up the rear in my list of 46 global stock markets are a few you might expect — and a couple that might leave you scratching your head.

The absolute worst-performing market so far in 2014 is Russia, as measured by the Market Vectors Russia ETF (RSX). RSX is down more than 25% since the beginning of the year. Investors who followed the Rothchilds' advice of buying when there's "blood in the streets" have yet to be rewarded for their contrarian instincts.

With actual blood in the streets running in Crimea and the Eastern half of Ukraine — thanks to bellicose incursions by Russia — it'll take a while for these daring bets to become good.

Greek stocks, as measured by the Global X FTSE Greece 20 ETF (GREK), are the second-worst performers in 2014, down 22.86%. Greece's economic and debt-laden woes should come as no surprise. But the performance of the iShares MSCI Austria Capped (EWO) — whose capital Vienna is consistently ranked as one of the world's most livable cities — down 20.79% year to date, is not something you'd expect.

The Global X FTSE Portugal 20 ETF (PGAL), down 20.79% year to date, is the fourth-worst performer of the year.

The biggest surprise is the demise of the once-mighty German equity market.

Down 17.35% year to date, the iShares MSCI Germany (EWG) is the fifth-worst-performing stock market that I monitor.

That decline comes in stark contrast to the very strong showing in German stocks in 2013 and 2012, where EWG was up 30.8% and 32.4%, respectively, each year.

The German equity market's struggle in 2014 reflects the general weakness in the European economy, as even Europe's famed economic engine and global export champion begins to sputter.

Uncle Sam, the Safe Haven?

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Thoughts on the Buck’s Bull Market

Written by Nicholas Vardy, CFA.

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The greenback is on the march higher.

Last Friday, the U.S. Dollar Index (which tracks the greenback against a basket of major trading partners' currencies, including the euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc) leapt to a four-year high.

The Dollar Index has spiked over 7% in just the third quarter alone. Just look at how the closely related PowerShares DB US Dollar Bullish ETF (UUP) — an exchange-traded fund that tracks the Deutsche Bank Long US Dollar Futures index — has performed over the past three months.

UUP_100714

The dollar's move has been particularly strong against the euro, as well as against the yen. The greenback now is at a six-year high vs. Japan's once-mighty currency.

To put things in perspective on just how strong the buck's boom has been, consider that the recent rise over the past 11 weeks represents a record-setting performance not seen since the era of floating currencies began in the early 1970s.

What's Driving the Dollar's Run?

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GLOBAL GURU CAPITAL – MONTHLY UPDATE

Written by Nicholas Vardy, CFA.

Untitled Document

GLOBAL GURU CAPITAL – MONTHLY UPDATE

September  2014

The "Ivy Plus" Investment Program lost 3.99% for the month.
The "Global Gains" Investment Program fell 4.62% for the month.
The "Double Your Dividends" Investment Program lost 3.78% for the month.
The "American Alpha" Investment Program dipped 2.68% for the month.
The “Masters of the Universe” Investment Program fell 3.80% for the month.

THE "IVY PLUS" INVESTMENT PROGRAM
TOUGH MONTH ACROSS ALMOST ALL ASSET CLASSES


The "Ivy Plus" Investment Program lost 3.99% for the month. The program is up 1.66% year-to-date, through September 30.

September was a very tough month for the “Ivy Plus” Investment Program, with every asset class falling for the month, with the exception of managed futures. That niche asset class was well-positioned to gain from the rally in the U.S. dollar and actually ended the month 3.30% higher.

Both emerging markets and commodities suffered a big downdraft, tumbling 7.18% and 7.32%, respectively.  US real estate, global real estate, private equity, and small cap stocks- both U.S. and foreign- all fell by at least 5%.

The pullback was focused on risky assets. Large cap dividend paying U.S. stocks held up surprisingly well, ending the month essentially flat

The “Ivy Plus” investment program positions performed as follows:

 

Monthly Gain

YTD Gain

Equities

 

 

 

 

 

US Large Cap

-2.10%

6.93%

US Mid Cap

-3.19%

6.65%

US Small Cap

-5.34%

0.63%

Developed Large Cap

-4.16%

-1.95%

Developed Small Cap

-5.40%

-3.81%

Emerging Markets

-7.18%

3.70%

Emerging Markets Small Cap

-6.08%

2.69%

Emerging Markets – Low Volatility

-4.49%

3.86%

Private Equity

-5.50%

-6.05%

Business Development Companies (BDCs)

-5.07%

-4.76%

S&P 500 Equal Weight

-2.58%

7.54%

S&P 500 Dividend Payers

-0.06%

6.37%

Initial Public Offerings (IPOs)

-2.69%

6.60%

Corporate Spin-offs

-2.88%

0.24%

 

 

 

Fixed Income

 

 

 

 

 

US Treasuries

-0.57%

4.13%

Foreign Bonds

-4.45%

0.00%

Inflation Protected

-2.59%

3.59%

High Yield Bonds

-4.21%

2.11%

 

 

 

Real Assets

 

 

 

 

 

US Real Estate

-6.04%

14.11%

International Real Estate

-6.58%

1.44%

Commodities

-7.23%

-9.51%

Timber

-4.80%

-5.62%

Agriculture

-4.18%

-1.04%

 

 

 

Hedge Funds

 

 

 

 

 

Global Macro

-2.46%

-0.27%

Hedge Fund Long/Short

-1.14%

6.08%

Managed Futures

3.30%

5.10%

Hedge Fund Managers

-1.38%

2.75%

THE "GLOBAL GAINS" INVESTMENT PROGRAM
LOUSY MONTH FOR GLOBAL STOCKS


The "Global Gains" Investment Program fell 4.62% for the month. The program is up 1.59% year-to-date, through September 30.

Global stock had their worst month in 2014, as investors dumped risk assets across the board. Emerging markets, and emerging market small cap stocks all tumbled at by at least 5%. Developed international markets did scarcely better as there were few places to hide.

The irony is that it was the riskiest, pre-emerging frontier markets that held up the best, ending the month down only 0.79%. Frontier markets still benefit from having weightings in the Gulf State markets, which are the top performing markets in the world in 2014.

The “Global Gains” investment program positions performed as follows:

@NickVardy