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2015: How to Make Money in this Lousy Year

Written by Nicholas Vardy, CFA.

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It is turning out to be a tough 2015 for stock market investors.

The U.S. S&P 500 is trading where it was back on March 31. Fundstrat's Thomas Lee recently noted that this has been only the second time since 1904 (!) that the S&P 500 has closed the first two quarters of the year with 0% gains. The one strategy that has made diversification look bad over the past five years — staying "dumb and long" in the U.S. stock market — has also run out of steam.

There seem to be few other alternatives.

After all, the Chinese market crashed, just as I predicted. And who knows how low it would really be if most of the stocks on the Shanghai exchange were actually trading. And back in the United States, even formerly red-hot bullish sectors like biotechnology and cybersecurity have petered out.

So What's Worked in this Market?

I follow a lot of different investment strategies, often through various "smart beta" strategies I invest in both personally and on behalf of my clients.

Among these strategies, only a few have generated satisfying returns. The First Trust US IPO ETF (FPX) is up 9.34% in 2015. And that's thanks largely to the strong performance of Facebook (FB), up 20.7% this year, in which FPX has an 11.86% weighting. The AlphaClone Alternative Alpha ETF (ALFA) has also performed reasonably well, up 6.47%.

Among asset classes, private equity is having a solid year, with PowerShares Global Listed Private Equity ETF (PSP) up by 10.28%, boosted by its 8.56% yield.

Tough Time for Hedge Funds

The smart money across the globe is faring no better.

As an average, hedge funds aren't having a terrible year. But it's nothing to write home about. The average hedge fund has been up 3.36%, according to Barclay Hedge, while the S&P 500 was up 3.25% over the same time period.

But that average hides a multitude of poor performances among the biggest names in the business.

Although not technically managing a hedge fund, Carl Icahn, hailed in 2013 as Wall Street's richest investor, has seen shares in Icahn Enterprises (IEP) tumble 12.7% this year.

Hedge funds in my neighborhood of Mayfair in London are having a tough time, as well. Odey Asset Management, one of the few remaining "old style" non-institutionalized hedge funds, is down 14.8% after a handful of concentrated bets in small-cap stocks have gone south.

The dirty little secret of hedge funds is that most of today's trading is done by computer. The algorithms of the rocket scientists have squeezed out every last bit of alpha, or superior risk-adjusted returns, in the market. You see that in the performance of trend-following hedge funds, also known as managed futures or commodity-trading advisors, which just suffered their worst month since July 2008 by falling 2.4%.

In my view, the only way to make money in this market is "the old fashioned way": bet big, swing for the fences and hit the lottery (to mix not just two but three metaphors).

And that recalls one of my favorite quotes about old style hedge fund investors:

"Some people are born smart. Some people are born lucky. Some are born smart enough to be lucky."

And in today's market, it's better to be lucky than smart.

Buffett's Lousy Year

While the latest round of articles predicting Berkshire Hathaway's imminent demise have yet to appear, Warren Buffett is having a lousy year, with Berkshire shares down 6.28% in 2015. That trails the Standard & Poor's 500 index, which has gained a mere 1.55%.

All of this has analysts scratching their heads. After all, Berkshire trades for less than 1.5x its book value. Barclays has a price target of $259,500 on the stock — 22% above current levels. And after all, Buffett has a reported $16 billion profit on the Heinz and Kraft private equity deals during the last two years.

So why the lack of love for the stock?

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The ‘Soft Power’ of Donald Trump

Written by Nicholas Vardy, CFA.

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Throughout the country's history, Americans have been always fretting about the decline of the United States. And the theme of the imminent collapse of the United States is a never-ending topic in the global media.

Whether it's the Brits comparing the United States to the decline of the Roman Empire, or the Germans condemning "Amerikanische Verhaltnisse," it seems that even America's closest allies are constantly predicting (or hoping for) its impending collapse.

The United States: Always in Decline

Recently, I saw Joseph Nye of Harvard University's John F. Kennedy School of Government speak on this topic at Chatham House — The Royal Institute of Economic Affairs — in London. He was over in the United Kingdom to discuss his new book, "Is the American Century Over?"

In his book, Nye cites recent polls that 15 out of 22 countries surveyed showed that China will replace or has already replaced the United States as the world's leading power.

Broadly speaking, Nye rejects this argument, warning against the knee-jerk American reaction of underestimating the United States' "soft" power.

Nye coined the phrase "soft power" back in 1990. It is the idea that "soft" values like culture and a country's ability to attract and persuade supporters are a better measure of its power than hard power tactics such as coercion ("sticks") or payments ("carrots").

As Nye himself put it, "A country may obtain the outcomes it wants in world politics because other countries — admiring its values, emulating its example, aspiring to its level of prosperity and openness — want to follow it. In this sense, it is also important to set the agenda and attract others in world politics, and not only to force them to change by threatening military force or economic sanctions. This soft power — getting others to want the outcomes that you want — co-opts people rather than coerces them."

The United States' Secret Weapon

The United States has been in decline as long as I can remember.

I grew up reading Time magazine in the late 1970s and I vividly recall it was chock full of graphs and illustrations confirming how the Soviets were on the verge of overrunning vastly overmatched NATO forces in the Fulda Gap of Germany during the Cold War.

By the time I got to law school at Harvard, the shelves in my dorm room were creaking under the weight of books like "The Enigma of Japanese Power" even as all my friends in business school were studying Japanese. (Donald Trump's "The Art of the Deal" was on that bookshelf as well. But more on that below.)

Of course, neither the Soviet or Japanese threats lived up to their billing.

As Nye points out, it's tougher to measure "soft power" than it is to measure, say, the number of aircraft carriers a country has or even its level of "global competitiveness."

But whenever you do try to measure "soft power," the United States consistently comes out at or near the top.

The 2014 Monocle Soft Power Survey found that the United States holds the top spot in soft power, followed by Germany in second place. The top 10 is rounded out by the United Kingdom, Japan, France, Switzerland, Australia, Sweden, Denmark and Canada.

A recent survey by the London-based Portland communications and public affairs consultancy had a slightly different outcome, with the United States ranking third, after both the United Kingdom and Germany.

The U.S. ranking was dragged down by (surprise!) a poor score for government — where the United States ranked a mere #24. Revealingly, the government ranking was below famously corrupt Italy and former Communist countries such as Poland and the Czech Republic.

Still, the United States retained its #1 ranking in three out of the six categories — "Digital," "Culture" and "Education."

Silicon Valley, Hollywood and Harvard still dominate the world.

More interesting about the Portland study is the countries that didn't make it in the list.

Russia and India — two of the so-called BRIC (Brazil, Russia, India and China) nations — were completely absent.

And for all the talk about this being the Chinese century, the Middle Kingdom was dead last among the list of the top 30.

The Soft Power of Donald Trump

My favorite story of U.S. "soft power" involves the now-ubiquitous Donald Trump of a very different era. This goes back more than 25 years — long before "The Apprentice" and before the media's obsession with The Donald's hair.

After graduating from Stanford University in 1987, I spent a year as one of the very first group of Fulbright Scholars behind the Iron Curtain. I was a student at the then-Karl Marx University of Economics in Budapest, Hungary. We used to take pictures of ourselves in front of the Karl Marx statue in the main hall after stuffing its fist full of U.S. dollars.

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The Global Market First-Half Scorecard

Written by Nicholas Vardy, CFA.

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We are now just past the halfway mark of 2015.

And as the French say: "plus ça change, plus c'est la même chose."

Loosely translated, this means "the more things change, the more things stay the same."

And looking at the performance of global stock markets in the first six months of the year, the French saying has never been more approprié.

At the start of the year, I wrote about the performance of the 46 global markets that I monitor daily at my firm, Global Guru Capital. NOTE: Global Guru Capital is a Securities and Exchange Commission-registered investment adviser and is not affiliated with Eagle Financial Publications.

In that edition of the Global Guru, I reported that only nine of those 46 markets generated double-digit percentage gains in 2014. That also was by far the lowest number of big gainers since 2011.

The scorecard for 2015 looks a little different.

So far this year, 10 global markets have recorded double-digit percentage gains. Another four have managed to log gains of about 9%.

That's better than 2014 as a whole. But the number of big gainers remains elusive.

And the top performers of 2015 are a very different group compared to the top performers of 2014.

Most notably, the U.S. stock market (#8 in 2014) has essentially flatlined in 2015, while formerly battered markets such as Russia (#46 in 2014) have soared.

A Cold War Script Flip

Last year, the U.S. equity market, as measured by the Vanguard Total Stock Market ETF (VTI), finished eighth in the global market standings with a 12.54% total return.

Through the first half of 2015, VTI is up just 3.59% as of yesterday's close.

That's not exactly a rip-roaring performance. It also puts VTI in the middle of the performance pack in 22nd place.

By contrast, Russia, the stock market that everyone loves to hate, has seen its stock market vault to the top of the first-half scorecard.

The Market Vectors Russia ETF (RSX) has logged a most impressive total return of 21.46%. That's a major rewriting of the 2014 script for RSX, which was a cellar dweller last year with a negative total return of 47.22%.

The 2014 torching of the market in Russia was something that I thought was way overcooked.

I was even mocked for my views on Russia on an appearance on Fox Business almost exactly a year ago.

In November, I received my #1 contrarian indicator signaling a potential turn in the Russian market — a cover story on Russia's wounded economy in The Economist.

Sure enough, Russian stocks turned upward, pretty much as I expected.

The Best of the First Half

So, which markets joined Russia to make up the rest of the top 10 performers year to date in 2015?

In a close second place is the iShares MSCI Denmark (EDEN) with a gain of 20.71% so far this year, followed in third place by the iShares MSCI Ireland (EIRL), which came in with a stellar 17.07% gain.

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Investing in the Jewel of Southeast Asia

Written by Nicholas Vardy, CFA.

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I can't say what made me fall in love with Vietnam — that a woman's voice can drug you; that everything is so intense. The colors, the taste, even the rain. Nothing like the filthy rain in London.

–Graham Greene, "The Quiet American"

In his poetic and cautionary anti-war novel, "The Quiet American," Graham Greene writes of the seductive nature of Vietnam. The smells that promise, "Everything in exchange for your soul," and the sweltering heat that overcomes you so intensely, "You can hardly remember your name, or what you came to escape from."

For Americans, the dark cloud of history continues to waft over the very concept of "Vietnam." War, loss, failure and geopolitical folly all invade our thoughts.

To this day, some 40-plus years after the fall of Saigon, most Americans still have yet to really appreciate this Southeast Asian country for what it is today.

And what it is today is, among other things, an increasingly smart place for global investors to risk their capital.

Foreign Owners Now Welcome

Over the past three months, the Market Vectors Vietnam ETF (VNM) has quietly entered a major uptrend.

Even as the U.S. stock market is locked in a grinding trading range, the benchmark measure of the Vietnamese equity markets has soared 17.5% since April 7. The bullish action over the past week has sent VNM above key resistance at the 200-day moving average for the first time since November.

The chart below shows the concerted move off of the April lows, as well as the late June/early July spike.

vnm_0707

So what's the reason behind this latest surge by VNM?

On June 26, Vietnam's Prime Minister Nguyễn Tấn Dũng signed a decree abolishing the foreign ownership limit of 49% for publicly traded companies, beginning Sept. 1.

The relaxing of Vietnamese corporate ownership rules means international investors can fully own domestic listed firms, except those in sectors deemed "sensitive" by the government.

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GLOBAL GURU CAPITAL – MONTHLY UPDATE

Written by Nicholas Vardy, CFA.

Untitled Document

GLOBAL GURU CAPITAL – MONTHLY UPDATE

June 2015

The "Ivy Plus" Investment Program lost 2.61% for the month.
The "Global Gains" Investment Program declined 2.42% for the month.
The "Double Your Dividends" Investment Program fell 3.15% for the month.
The "American Alpha" Investment Program tumbled 2.29% for the month.
The “Masters of the Universe” Investment Program lost 2.43% for the month

THE "IVY PLUS" INVESTMENT PROGRAM
BABY GOES OUT WITH THE BATHWATER


The "Ivy Plus" Investment Program lost 2.61% for the month. The program is up 2.29% year-to-date, through June 30. Twenty out of 26 positions have posted gains for the year.

There was nowhere to hide this past month as every asset class in the “Ivy Plus” Investment Program pulled back in the month of June.

Initial Public Offerings came the closest to eking out gains. U.S small caps also exhibited solid relative strength compared to other assets as did foreign bonds.

Both Developed Small Caps and Private Equity have both still generated double-digit gains of 10.49% and 11.15%, respectively in 2015.

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

 

Monthly Gain

YTD Gain

Equities

 

 

 

 

 

US Large Cap

-1.67%

1.88%

US Mid Cap

-1.70%

3.15%

US Small Cap

-0.82%

4.17%

Developed Large Cap

-2.91%

6.46%

Developed Small Cap

-1.64%

10.49%

Emerging Markets

-2.54%

3.29%

Emerging Markets Small Cap

-3.84%

1.40%

Emerging Markets – Low Volatility

-2.99%

2.90%

Private Equity

-1.91%

11.15%

Business Development Companies (BDCs)

-3.26%

1.51%

S&P 500 Equal Weight

-2.27%

0.47%

S&P 500 Dividend Payers

-1.80%

-0.94%

Initial Public Offerings (IPOs)

-0.12%

8.73%

Corporate Spin-offs

-4.34%

2.41%

 

 

 

Fixed Income

 

 

 

 

 

US Treasuries

-1.11%

-0.34%

Foreign Bonds

-0.74%

-5.98%

Inflation Protected

-1.02%

0.04%

High Yield Bonds

-1.31%

2.58%

 

 

 

Real Assets

 

 

 

 

 

US Real Estate

-4.68%

-6.30%

International Real Estate

-3.30%

4.38%

Timber

-2.39%

0.23%

Agriculture

-2.16%

2.69%

 

 

 

Hedge Funds

 

 

 

 

 

Global Macro

-1.47%

-1.27%

Hedge Fund Long/Short

-2.62%

6.30%

Managed Futures

-2.89%

-2.02%

Hedge Fund Managers

-2.84%

0.73%

THE "GLOBAL GAINS" INVESTMENT PROGRAM
GLOBAL MARKETS PAUSE FOR BREATH


The "Global Gains" Investment Program declined 2.42% for the month. The program is up 4.27% year-to-date, through June 30. Nine out of 10 positions have posted gains for the year.

Global stocks were hit hard this past month, thanks to a combination of the Greek debt crisis, a collapsing stock market in China, and a tumbling oil price. Global Value suffered the most as it includes markets that remain out of favor with investors. Frontier markets remained surprisingly robust, closing the month essentially flat, if still down for the year.