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Why This May Be the Best Week of the Year to Pile into Stocks

Written by Nicholas Vardy, CFA.

SNAG Program-0846

What a week it has been...

During the course of the past five sessions, the S&P 500 has corrected by 10%. Yesterday, it suffered its worst day of trading since 2011. And the Shanghai stock market tumbled 19% during the past week, erasing all of its 2015 gains.

As someone who manages money for private clients, it is a challenging time. Unlike when I was a mutual fund manager and my job was to be "fully invested" through thick and thin, I am forced to make decisions on whether to ride out these sharp corrections — or to put a big chunk of my clients' assets in cash.

On the one hand, my clients are understandably worried.

On the other, it is astonishing how little objective data there is to support the notion that we are on the verge of another 2008-style economic meltdown.

So, I am going to go out on a limb here:

I think the current sell-off is massively overdone.

And I think that when you look back in three months as we enter a traditional Q4 rally, this week will be the buying opportunity of the year.

The China Sell-off in Perspective

Yes, the Chinese stock market bubble has popped, wiping out trillions of dollars of paper wealth, mostly for the Chinese retail investor. And the knock-on effect of the change in sentiment on developed markets across the globe has been even greater.

But the Chinese stock market — let alone those in the United States, Europe and Japan — does not disappear because of a crash. Ironically, the Chinese blue chips are among the cheapest in the world with iShares China Large-Cap (FXI) trading with a price-to-earnings (P/E) ratio now in the single digits. It is now trading where it did in March of 2014 — before the big rally in Chinese stocks began.

The sell-off in China does, however, show the vulnerability of emerging markets in general, following years of talk of the BRICs (Brazil, Russia, India and China) taking over the world.

Back in 2011, Russia's Vladimir Putin commented that the United States "is living like a parasite off the global economy." That's ironic coming from a country whose fate is so strongly linked to the price of oil.

But parasite or not, your pension fund is unlikely to be moving your retirement assets to Moscow or Shanghai anytime soon.

The Bullish Case — The Fundamentals

You don't need me to tell you about the bearish case for global financial markets. You can find that anywhere.

But here are two reasons to be bullish, which you won't find in a media that reports 13 negative stories for every positive one.

First, U.S. stocks aren't cheap. But they aren't off the charts expensive either. That's hardly a euphoric level that signals the onset of a crash. Recall the words of Sir John Templeton, "Bull markets are born in pessimism, grow on skepticism, mature on optimism and die on euphoria."

If anything, we're at the "pessimism" phase of this cycle and not at "euphoria."

Second, falling oil prices are their own "stimulus package" to U.S. consumers. Deutsche Bank estimates that when gas falls to $3 a gallon, the reduced pricing frees up $100 billion in annualized consumer spending. With gas now at an average of $2.57 in the United States, all this adds up to more money in U.S. consumers' pockets. That should be bullish for U.S. stocks as well, except for the hard hit energy sector.

The Bullish Case — Investor Sentiment

I'm a big believer in the distortions caused by market psychology.

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Profit from the Cable-Cutting Mega Trend

Written by Nicholas Vardy, CFA.

SNAG Program-0845

The way in which Americans are consuming media is undergoing a revolution.

Early 2015 marked the first time in history that the number of pay-TV subscribers in the United States dropped. During Q2, 566,000 customers "cut the cord" to pay TV, making it the industry's worst quarter on record. With the exception of Verizon Communications Inc. (NYSE: VZ), all pay-TV companies lost subscribers during the quarter. And this follows a lousy 2014 when approximately 1.4 million households didn't sign up for any service or cancelled their existing pay-TV subscriptions.

The loss of half a million customers in a 100 million U.S. pay-TV market alone does not spell the end of an industry. Although this was the sharpest contraction on record, the collapse was nowhere near the declines seen in other media businesses such as newspapers and recorded music.

Still, the cable-cutting mega trend threatens the entire cable TV ecosystem. And nervous investors are taking notice. When Walt Disney Co. (NYSE: DIS) announced that growth projections at its flagship offering ESPN were revised downward, the stock fell over 13% in two days. Other media stocks were swept up in the Disney-induced sell-off as more than $50 billion was wiped from the market value of major media companies in a blink of an eye.

The iPhone Generation's Challenge

The pay-TV industry faces a single great challenge: the iPhone generation is tuning out of television in favor of advertising-free offerings by newfangled streaming services. Today's kids are not growing up to be tomorrow's pay-TV customers. A recent study from PwC found more than half of eight-to-18-year-­olds said streaming TV was their favorite way to access media. Streaming ranked ahead of cable and network TV shows, games and short videos.

That said, consumers of all ages have moved gradually away from watching the "boob tube" to consuming media on phones, tablets and computers. Thus, we have witnessed the rise of streaming services such as Netflix Inc. (NASDAQ: NFLX), Hulu and Amazon.com Inc.'s (NYSE: AMZN) Prime service and the nervousness of both traditional content providers and the pay-TV companies that deliver it.

The Pipe Providers

Traditionally, there have been two ways Americans have consumed media content: satellite and cable.

Between the two groups, satellite is faring worse. Dish Network Corp. (NASDAQ: DISH), one of the two big U.S. satellite-TV groups, lost 151,000 subscribers in the second quarter versus a loss of 44,000 for the same quarter a year ago. DirecTV, the largest satellite-TV service provider, which AT&T Inc. (NYSE: T) recently acquired, also had its worst quarter ever, posting net customer losses of 133,000 versus 34,000 in the same period last year. This has forced Dish executives to diversify by launching Sling TV — where customers get to pick and choose channels — and by buying spectrum for tens of billions of dollars to deliver broadband services. Unlike with cable operators, it is difficult for satellite companies to offer a high-speed broadband connection — which is essential for anyone wanting to watch streaming services such as Netflix or Hulu.

The prospects for cable operators are better. After all, even if customers ditch their pay TV and move to Netflix or HBO, they still need a high-speed Internet connection. And on this front, cable trounces broadband. Even if the pay-TV industry suffers from cord-cutting, cable still wins in the long term. Comcast Corp.'s (NASDAQ: CMCSA) cable subscription business has already steadied, as it lost 69,000 subscribers last quarter versus 144,000 during the same quarter a year ago. Time Warner Cable Inc. (NYSE: TWC) lost 43,000 in the just-ended quarter, compared with a loss of 147,000 in the second quarter of 2014. In fact, starting in Q2 Comcast boasted more broadband subscribers than video ones.

That's not to say that the move away from pay TV isn't painful. Comcast and Time Warner Cable still make a lot of money on providing content. Today, if a customer pays $100 a month for cable TV, half goes to the broadcasters for content, while the other $50 goes to the pay-TV provider. Broadband services are less lucrative. And if cable companies get too greedy and hike prices too much, the regulators just might step in, as they have for traditional utilities.

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GLOBAL GURU CAPITAL – MONTHLY UPDATE

Written by Nicholas Vardy, CFA.

Untitled Document

GLOBAL GURU CAPITAL – MONTHLY UPDATE

July 2015

The "Ivy Plus" Investment Program dipped 0.06% for the month.
The "Global Gains" Investment Program declined 1.37% for the month.
The "Double Your Dividends" Investment Program gained 0.36% for the month.
The "American Alpha" Investment Program added 0.59% for the month.
The “Masters of the Universe” Investment Program rose 0.63% for the month.

THE "IVY PLUS" INVESTMENT PROGRAM
FLAT MONTH FOR THE DIVERSIFIED STRATEGY


The "Ivy Plus" Investment Program dipped 0.06% for the month. The program is up 2.23% year-to-date, through July 31. Sixteen out of 26 positions have posted gains for the year.

U.S. real estate topped the performance tables this month, rising 5.77%. U.S. and global large caps followed suite with these risk averse holdings all scoring gains over the course of the month.

Most notable was the weakness in emerging market stocks, hit hard by the 30% collapse of the stock market in China. Note that the low volatility emerging markets bet did behave as advertised, and is now solidly outperforming its mainstream and small caps counterparts, down only 1.01% for the year.

Among the 26 positions, only three asset classes – private equity, initial public offerings, developed market small caps- have generated double-digit gains. Foreign binds have been hit the hardest, suffering from the effects of the strong U.S. dollar.

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

 

Monthly Gain

YTD Gain

Equities

 

 

 

 

 

US Large Cap

1.70%

3.61%

US Mid Cap

1.17%

4.36%

US Small Cap

-0.29%

3.87%

Developed Large Cap

1.46%

8.01%

Developed Small Cap

0.86%

11.44%

Emerging Markets

-6.26%

-3.18%

Emerging Markets Small Cap

-7.31%

-6.01%

Emerging Markets – Low Volatility

-3.80%

-1.01%

Private Equity

1.29%

12.58%

Business Development Companies (BDCs)

-2.46%

-0.98%

S&P 500 Equal Weight

0.96%

1.44%

S&P 500 Dividend Payers

2.46%

1.50%

Initial Public Offerings (IPOs)

2.75%

11.72%

Corporate Spin-offs

-0.74%

1.65%

 

 

 

Fixed Income

 

 

 

 

 

US Treasuries

0.88%

0.54%

Foreign Bonds

-0.21%

-6.18%

Inflation Protected

0.54%

0.57%

High Yield Bonds

-2.39%

0.13%

 

 

 

Real Assets

 

 

 

 

 

US Real Estate

5.77%

-0.89%

International Real Estate

-0.65%

3.71%

Timber

-2.87%

-2.65%

Agriculture

-4.62%

-2.05%

 

 

 

Hedge Funds

 

 

 

 

 

Global Macro

-0.96%

-2.22%

Hedge Fund Long/Short

2.49%

8.95%

Managed Futures

-3.58%

-5.53%

Hedge Fund Managers

1.18%

1.91%

THE "GLOBAL GAINS" INVESTMENT PROGRAM
SOLID MONTH IN THE FACE OF THE CHINA SELL OFF


The "Global Gains" Investment Program declined 1.37% for the month. The program is up 2.98% year-to-date, through July 31. Seven out of 10 positions have posted gains for the year.

With the Chinese stock market down 30% from its peak at one point, investors could have fared much worse than they actually did this past month.  The fact that five out of the 10 positions in the Program actually gained during a very difficult month is a testament to the robustness of the strategies. The low volatility exposure to emerging markets paid off, as it had a much lower weighting in China than market cap weighted indices.

Two position- International High Quality Stocks and Non-US Small caps still boast double digit gains for the year, up 11.44% and 10.70%, respectively. In contrast, bets farther out on the risk curve- frontier markets- have been hit hardest by the recent volatility.

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

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Is the Bull Run in Biotech over?

Written by Nicholas Vardy, CFA.

SNAG Program-0844

In a bull market that's six-plus years old, bull runs in hot sectors become increasingly scarce commodities.

One sector that's been the lead bull pulling this bull market cart forward is biotech.

But even this raging bull could be in need of a breather.

The biotech sector has been the top performer in the market over much of the past 12 months.

In fact, it has been the secret of many of the best hedge fund managers who have counted on the biotech boom to keep them delivering big gains.

In the interest of full disclosure, the Market Vectors Biotech ETF (BBH) is a current recommendation in my Alpha Investor Letter service.

I'm very happy to admit that.

After all, the biotech sector has enjoyed a stellar run over the past 52 weeks, surging nearly 40%.

Yet over the past month, this same exchange-traded fund (ETF) has actually tipped slightly into the red.

As the overall equity market begins to stall, could we begin to see the stocks leading the charge higher launch a substantial correction?

If so, does this mean that the bull run in biotech is over?

A Noisy Bubble Debate

A recent article in London's Financial Times described current conditions in the biotech sector.

It highlighted the "noisy debate" of whether biotech stocks are now in a bubble, or whether we are just seeing a much-overdue correction within a larger bull market.

BBH_081115

The Financial Times piece quoted advisors on both sides of the biotech bull run question.

Charles Heenan, investment director at Edinburgh-based Kennox Asset Management, argued that biotech is a bubble about to burst. As Heenan points out, "The sector can move quickly without much change to fundamentals. When it goes right, it goes very right. But when it goes wrong, investors could lose it all."

On the pro-biotech side is Neil Woodford, fund manager of the namesake Woodford Investment Management. Woodford, the best-known fund manager in the United Kingdom today, is famous both for finding small gems to invest in and for having the best long-term track record among his peers.

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What’s That Got to Do with the Price of a Big Mac in China?

Written by Nicholas Vardy, CFA.

SNAG Program-0843

I've written about The Economist magazine's "Big Mac Index" many times in The Global Guru.

But if you're new to this quick and dirty but useful method of measuring the relative values of global currencies, then here's the basic idea.

One of the best ways to get your head around relative currency valuations is to look at what the same goods cost in New York, London, Tokyo, Beijing and elsewhere.

Editors at the Economist magazine knew that as well, so in 1986 they created the now-famous "Big Mac Index," a tongue-in-cheek but surprisingly useful way of measuring purchasing power parity, or PPP.

By looking at the price of the same good — and made up of the same locally produced raw ingredients — the index gave an insight into the relative over- and undervaluation of the world's currencies compared to the U.S. dollar.

By comparing the cost of Big Macs — an identical item sold in about 120 countries — the Big Mac Index calculates the exchange rate (the Big Mac PPP) that would result in hamburgers costing the same in the United States as they do abroad.

Compare the Big Mac PPP to the market exchange rates and you have a handy way to quickly see which currencies are under- or overvalued.

Hot off the Griddle

According to the latest data released by The Economist, the average price of a Big Mac in the United States in July 2015 was $4.79. That seems high to me. But then again, I haven't been to a McDonald's in the United States since George Bush was President.

By way of comparison, in China the average cost of a Big Mac was only $2.74 at market exchange rates. That means the "raw" Big Mac Index says that the yuan was undervalued by 42.8%. That's pretty much in line with where it's been for the last 10 years or so.

Earlier this year, I noted that the strength in the U.S. dollar relative to so many rival foreign currencies was so pronounced that it was time to take that long-awaited European vacation.

The recent Big Mac Index confirms this advice. Today, a Big Mac in the European Union will cost you an average of $4.05, meaning that the euro is undervalued by 15.4%.

That's a far cry from just seven years ago when the euro was overvalued by some 50% compared to the U.S. dollar.

As Bob Dylan might say — the times they are a-changin'.