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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.

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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:

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Why You Should Invest Like Harvard

Written by Nicholas Vardy, CFA.

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The top university endowments have been announcing their annual investment returns over the past week.

Harvard University announced its endowment rose 15.4% in the fiscal year ending June 30th. That return trailed Yale University's 20.2% and Stanford University's 17% for the same period.

These are solid returns. But each endowment trailed the S&P 500's return of 24.6% over the same period by a substantial margin.

Once again, look for the "smartest guys in the room" to catch a lot of flack for being unable to match, let alone beat, a simple S&P 500 Index fund.

That said, it's not like Harvard hasn't been making money. In fact, the Harvard endowment generated an average of 11.4% over the past five years. Notwithstanding the challenges of the financial crisis, that's not far off its long-term track record of 12.3%.

The real issue is that Harvard and its academic rivals have not only trailed the S&P 500 over the past five years, but also have even struggled to match a conventional 60/40 mix of U.S. stocks and bonds.

The 'Yale Model' Since the Crisis

Like its top rivals, Harvard adopted the investment strategy pioneered by David Swensen of Yale in the 1980s. This strategy involved diversifying investments beyond mainstream U.S. stocks and bonds into investing in non-traditional asset classes like timber, private equity, real estate and global stocks and bonds.

Up until 2008, it was hard to argue with this approach. After all, Yale's endowment boasted 15.6% average annual returns through 2007 – and no down years – stretching back to 1987.

That changed when the value of Harvard's endowment tumbled 27.3% in 2008.

As a result, the Harvard endowment's current 10-year track record dropped to a less impressive average return of 8.9%. That compares with 8.38% for the S&P 500 over the same period. Yale's 10-year return figure stands at 11% and Stanford's at 9.9%.

Harvard officials would argue that comparing its recent performance to the S&P 500 misses the point. After all, the Harvard "policy portfolio's" allocation to U.S. equities is only 11%.

Furthermore, this U.S. stock allocation actually outperformed the S&P 500 in 2014 by 1.1%, thereby proving that Harvard's money managers can actually "beat the market" when investing in U.S. stocks.

So what accounts for Harvard's underperformance over the past five years?

Place the blame on asset allocation. Many of Harvard's "alternative investments" — commodities, hedge funds and global stock markets — have lagged U.S. stocks over the past five years. For example, an 11% allocation to emerging markets has massively underperformed the S&P 500.

Why You Should Invest Beyond the S&P 500

Modern portfolio theory holds that "asset allocation" explains over 90% of the variability of a portfolio's investment returns. Other studies that suggest that the percentage explaining the actual level of returns is even higher.

So the most important decision is whether to invest in emerging markets or hedge funds that matters more than which emerging market or hedge fund you invest in.

But what does all of this mean for you as a retail investor?

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The USA is Back on the Global Competitiveness Podium

Written by Nicholas Vardy, CFA.

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Of course, every top athlete strives to be #1 in the world. But at events like the Olympic Games, athletes still get recognized if they make it "on the podium."

Even if an athlete doesn't get the gold, a silver or bronze medal is an achievement worthy of his country's celebration.

The same applies to the world of global economic competition.

Each September, the Davos-based World Economic Forum holds the equivalent of the Olympic Games for global economies. Although the forum doesn't host an actual competition, it does calculate and present its annual ranking of countries via the Global Competitiveness Report.

The U.S. Economy: Back in the Top Three

This year's results were a watershed for the United States. Uncle Sam made it back on the podium when he grabbed the No. 3 spot on the listing of the most competitive economies.

That's two slots higher than its showing last year, and up four spots since 2012.

So, what does the Global Competitiveness Report measure, and what are the key takeaways from this year's report?

The economists at the World Economic Forum rank the world's 144 economies based on what it calls 12 pillars – institutions, infrastructure, macroeconomics, health and primary education, goods and market efficiency, higher education and training, labor market efficiency, technological readiness, financial market development, market size, business sophistication and innovation.

Before its rebound over the past two years, the recent showing for the United States has been more like that of an aging athlete than a nimble competitor for the title of the world's best.

The United States had owned the top spot on the podium in 2008. But just four years later it had tumbled to a lowly seventh place. The global financial crisis, the housing crash of 2008 and four consecutive years of $1 trillion-plus deficits reduced what was once the most competitive economy in the world into an also-ran.

Yet as I wrote last year in The Global Guru, the U.S. economy just may be cementing its place as the global economy's "comeback kid," a nickname confirmed yet again by this year's return to the podium. As for the two top spots, they stayed the same as last year. Singapore was in second place and Switzerland once again earned top honors for the sixth consecutive year.

@NickVardy