Big Moves in the ‘Big Mac’ Index for 2015

Written by Nicholas Vardy, CFA.

SNAG Program-0800

George Soros, the world-famous currency speculator "who broke the Bank of England" in 1992, calls investing in currencies "an existential choice."

No wonder most folks have a hard time getting their heads around the $5-trillion-a-day world of currency trading. Nevertheless, the second half of 2014 was the most exciting time in major global currencies in recent memory.

Thanks to a stronger economy and falling oil prices, the U.S. dollar has soared 15% over the past six months. Meanwhile, the euro has tumbled by 17% in anticipation of the European Central Bank's recent entry into the quantitative-easing game. The relentless drop of 14% in the value of the Japanese yen over the past six months was almost as sharp.

Finally, there was the dramatic jump of 13% in a day in the Swiss franc last week, when the Swiss National Bank abandoned its currency's peg to the euro.

Not to be outdone by the less virile West, Vladimir Putin helped beat the Russian ruble down by roughly 50% over the past six months.

The last time I was in Moscow, it was more expensive than London or New York. Today, it's cheaper than global centers like Krakow, Poland, or Colombo, Sri Lanka.

Enter the Economist's Big Mac Index

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

Britain's Economist magazine has done so since 1986 with its now-famous Big Mac Index — a tongue-in-cheek but surprisingly useful way of measuring purchasing power parity (PPP) — that is, 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 voilà!... you see which currencies are under- or overvalued.

Global Currencies: The Current State of Play

I have been studying the Big Mac index closely for about a decade. And in the past year, I've seen the most dramatic movements yet.

Let's take the example of Europe. Seven years ago, the euro was overvalued by a massive 50% compared to the U.S. dollar. Last year, the European currency was 7.8% overvalued. Today, it is 11% undervalued. It is time to take that European vacation!

Back in 2007, the British pound hit 2.10 U.S. dollars to the Great Britain Pound (GBP) and the United Kingdom was one of the most expensive places on the planet. After the Great Recession, the GBP tumbled to about $1.35. Today, it's back down to $1.50. In the current survey, a Big Mac actually costs 8.8% less in the United Kingdom — $4.37 — than it does in the United States, where a Big Mac sells for $4.62 (By the way, the cost of a Big Mac in the United States rose 3.7% in 2014 on top of a 5.72% rise over the previous year — both substantially higher than the headline U.S. inflation numbers).

The Big Mac Index: Few Overvalued Currencies

Not surprisingly, the Swiss franc is the most overvalued currency in the world — though at 57.5% overvalued, it's just 3% higher than last year.

As a group, the Scandinavian currencies have always been at the top of the charts. A Big Mac in Norway today is 31.5% more expensive than in the United States. But that is down from 68.6% last year. Sweden and Denmark come in at a mere 2.7% and 12.2% undervalued, respectively. Once again, this is a far cry from the 36% and 12% overvalued levels, respectively, you saw last year at this time in the currencies for each of those countries.

Brazil's currency — the real — rounds out the ranks of overvalued currencies. Four years ago, the Brazilian real was 52% overvalued on the Big Mac Index. Today, the real is 8.7% overvalued compared to the U.S. dollar.


India’s Curious Conservative Consensus

Written by Nicholas Vardy, CFA.

SNAG Program-0799

The global market horses are off to the 2015 races, and leading the pack through the first two-plus weeks of the year is India.

Of the 46 global markets I track each day at my firm Global Guru Capital, India has shot out in front of the pack with a 6.7% year-to-date gain in the benchmark WisdomTree India Earnings ETF (EPI). By way of comparison, stocks in the U.S. benchmark S&P 500 Index are down about 2% so far this year.

Even as the stock markets of other leading BRIC emerging markets like Brazil, Russia and China struggle, India has broken away from its major rivals, both in terms of market performance and expectations for the prospects for its economy.

What Do Louisiana and India Have in Common?

Truth be told, I was prompted to write about India this week not only because of its stock market's great start to 2015, but also because on Monday, I met Louisiana Governor Bobby Jindal. Jindal was in London to meet with members of British Parliament at Westminster. That's where I had the opportunity to chat with him.

If you're familiar with Jindal, you'll know that he's a popular figure in both Louisiana and national politics. He is also a rising star and potential presidential candidate in the Republican Party.

Jindal also is of Indian descent.

Although Gov. Jindal was born in Louisiana, his parents were from Punjab, India, and they came to America about six months before his birth.

As an Indian reporter noted yesterday, Jindal is so popular in India that if the entire world could vote for the U.S. President, Jindal would be a shoe-in by successfully attracting all of India's close to one billion voters.

As his speech at Westminster confirmed, Gov. Jindal is a "Reagan" conservative, and he's an exponent of free markets and smaller government.

What I found more interesting was that his beliefs also happen to be consistent with India's current government, led by Prime Minister Narendra Modi.

The Modi Market Tailwind

As I wrote last May, Modi's "Reaganesque" brand of pro-economic policies has been the bullish catalyst for Indian stocks since he was elected.

Modi and his BJP party came to power in a landslide victory last May, sweeping the Indian National Congress from power. The election was a clear and decisive win for Modi and the BJP, hailed as the biggest change in Indian politics since the nation gained independence in 1947.

More importantly for its economy, Modi's win brought with it the promise of better days ahead for India.

Following the first few months after his May 2014 election win, Modi made slow progress on crucial structural reforms to kick-start India's economy.

However, by the end of the year, Modi and the BJP became "hyperactive," according to the Economist. New bills presented to parliament include reforms designed to make it easier for big industrial projects to acquire land; to increase the cap on foreign investment in the insurance sector; and the re-auctioning of coal-mining licenses.

Modi made other changes that have also impressed the financial markets. India now has streamlined the approvals process for investment projects. The number of days required to register a business has been reduced from 27 to now just one day. Also, the railway sector now will be completely opened up to foreign ownership.

The government has amended the Factories Act and the Apprentices Act to make hiring easier, which commentator R. Jagannathan deemed a "radical step." Modi also plans to introduce a law to establish a uniform rate of GST (the equivalent of the value-added tax, or VAT) across the country, thereby cutting bureaucracy and bolstering trade.

An Interest-Driven Bull Run

The promise of these types of reforms provided a Modi-led market tailwind to the Indian stock market entering 2015.

But the Indian stock market just got an even bigger boost — courtesy of its central bank.

Last week, the Reserve Bank of India (RBI) cut its benchmark interest rate by 25 basis points to 7.75%.

While the decision wasn't a total surprise, the cut came outside of the normal cycle of monetary-policy decisions and weeks before the bank's scheduled policy meeting.

So you can appreciate the significance of the RBI's move, it is as if Fed Chair Janet Yellen cut the Fed Funds Rate between Federal Open Market Committee (FOMC) meetings.

In fact, Yellen's Indian counterpart, RBI Governor Raghuram Rajan, a former chief economist at the World Bank and professor at the University of Chicago, had signaled back in December that he would cut interest rates before the RBI's next regularly scheduled policy meeting, provided inflation data remained tame.



Written by Nicholas Vardy, CFA.

Untitled Document


December 2014

The "Ivy Plus" Investment Program lost 1.17% for the month.
The "Global Gains" Investment Program fell 3.04% for the month.
The "Double Your Dividends" Investment Program lost 2.98% for the month.
The "American Alpha" Investment Program added 0.11% for the month.
The “Masters of the Universe” Investment Program dipped 1.02% for the month.


The "Ivy Plus" Investment Program lost 1.17% for the month. The program was up 4.15% in 2014.

Overall, it was weak December for the ultra-diversified “Ivy Plus” Investment Program. Timber was the month’s top performer, ending the month 2% higher. U.S. small caps closed the year with a solid 1.26% gain, after underperforming their large cap counterparts throughout 2014. U.S. mid-caps also eked out a slight gain of 0.31%.

Commodities continued to plummet, tracking the collapsing oil price, and dropping 9.65%. With close to 20% of High Yield Bonds’ invested in energy related issues, this position also crumbled 7.23%. Thanks to turmoil in commodities-linked economies, and falling currencies, emerging markets continued to lose ground, erasing all their YTD gains.

2014’s top performing asset class in the “Ivy Plus” Investment Program was U.S.  real estate,  chalking up a 30.36% gain. Next come U.S. stocks, with U.S. Mid caps, with the specialist equally weighted and dividend oriented large cap strategies outperforming the traditional market weighted U.S. indexes. Returns in any foreign currency denominated strategies – that is, anything not invested in the U.S.- were hit hard by the soaring dollar. With global stocks underperforming for several years in a row, they stand to become the most hated asset class on the planet.

The model “Ivy Plus” Investment portfolio will be adjusted somewhat for 2015, based on the publicly available “policy portfolio” of the Harvard endowment. Most notably, there will be no more weighting in commodities in the portfolio.

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


Monthly Gain

YTD Gain







US Large Cap



US Mid Cap



US Small Cap



Developed Large Cap



Developed Small Cap



Emerging Markets



Emerging Markets Small Cap



Emerging Markets – Low Volatility



Private Equity



Business Development Companies (BDCs)



S&P 500 Equal Weight



S&P 500 Dividend Payers



Initial Public Offerings (IPOs)



Corporate Spin-offs






Fixed Income






US Treasuries



Foreign Bonds



Inflation Protected



High Yield Bonds






Real Assets






US Real Estate



International Real Estate















Hedge Funds






Global Macro



Hedge Fund Long/Short



Managed Futures



Hedge Fund Managers




The "Global Gains" Investment Program fell 3.04% for the month. The program fell 4.22% overall in 2014.

With Q4 traditionally the strongest time of the year for global markets, this year proved to be the exception to the rule with the “Global Gains” Investment program suffering one of its worst months of of 2014 in December.

Only a single strategy- Frontier Markets- ended the year in the black. And it had boasted double-digit gains prior to the collapse in oil prices. With 9 out of 10 “Global Gains” strategies down in 2014, all global investment strategies were thumped across the board.

In addition to negative sentiment in global stock markets, U.S. dollar based investors faced the headwind of soaring U.S. currency. If it weren’t for the U.S. Dollar Index being up 13.56% since mid 2014, the “Global Gains” Program would have certainly ended the year in the plus column.

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


Monthly Gain

YTD Gain




Emerging Markets Low Volatility



Emerging Markets Small Cap



Frontier Markets



International Markets – High Quality



International Dividends



Non-US Developed Markets



Global Emerging Markets



Non-US Developed Small & Mid Caps



Non-US Developed Large Cap



Non-US Small Cap




How to Profit from the Income Investing Panic of 2015

Written by Nicholas Vardy, CFA.

SNAG Program-0798

It hasn't been easy being an income investor over the past few years.

The Fed's zero interest rate policy (ZIRP) has punished savers with its low interest rates since 2009.

Many retirees who depend on their accumulated savings have grown increasingly frustrated trying to eke out income from their hard-earned investments.

So it's no surprise that over the past few years, these same retirees have piled into income investments that promised regular high-single-digit, or even double-digit, percentage income.

The promise of steady income — hearing the metaphorical cash register of regular returns ring every month or quarter — offered at least some semblance of stability in the face of Mr. Market's relentless mood swings.

Alas, the slow and steady drumbeat of regular, steady returns from income investments of all stripes will face a huge challenge in 2015.

Recall that in May 2013, even the mere hint of "tapering" by the U.S. Federal Reserve caused the bottom to drop out from under virtually all previously "safe" income investments.

Within a matter of days, investors found that even if a diversified portfolio of, say, U.S. Real Estate Investment Trusts (REITs) boasted double-digit percentage yields, it could tumble by as much as 20%, cowed by the threat of rising interest rates.

And as Mark Twain observed, "History never repeats itself but it does rhyme."

With the U.S. economy expanding, and the Fed widely expected to raise interest rates some time this year, I expect investors will see another interest-rate-related sell-off in income investments, similar to the one they saw in 2013.

Double-Digit Percentage Yields in a Zero Interest Rate World

That all said, there is something compelling about investments that generate high income, month after month, year after year.

That's why I hold quite a few of these high-yielding investments personally, as well as on behalf of my clients at my investment advisory firm, Global Guru Capital.

With all the caveats of an impending sell-off, here are three of my favorite, top-performing, double-digit-percentage-yielding income investments

1. iShares Mortgage Real Estate Capped ETF (REM) — 14.52% Yield

iShares Mortgage Real Estate Capped ETF (REM) tracks the FTSE NAREIT All Mortgage Capped Index. The index is weighted by market cap and screens constituents for size and liquidity. Most of REM's holdings are in medium- and small-cap mortgage real estate investment trusts. REM has large allocations to two giant mortgage REITs, Annaly Capital Management (16.95%) and American Capital Agency (12.94%).

Unlike equity REITs, which generate income by managing properties and collecting rent, mortgage REITs are financial firms that engage in arbitrage on the spread between the short-term interest rate and income from mortgage-backed securities.

That's why mortgage REITs are very susceptible to rising interest rate risk. Even small upticks in the short-term rate can have a significant impact on these firms' profitability. Several mortgage REITs have cut their distributions and have performed poorly during past rising-rate environments.

REM yields an impressive 14.52%, pays dividends monthly and charges a fee of 0.48% annually.

REM generated a total return of 16.77% in 2014 and boasts an annualized return of 10.6% over the past three years.


The 2014 Global Market Merry-Go-Round

Written by Nicholas Vardy, CFA.

SNAG Program-0797

You know that old karmic saying, "What goes around comes around?"

Well, in the world of global stock investing in 2014, it was the U.S. stock market that attracted the attention of stock market bulls, alongside a handful of markets in Asia and the Middle East.

Meanwhile, once-robust global stock market performers such as Germany, the United Kingdom and Latin America all had a bearish go around in 2014 — proof once again that investors readily shift to the markets where the money is.

In 2014, the global capital merry-go-round was especially concentrated in the handful or so of the biggest winning countries.

Only nine markets out of the 46 (including the United States) that I monitor daily at my firm, Global Guru Capital, generated double-digit percentage gains this past year. That was by far the lowest number since 2011, when the United States was the only stock market in the world to eke out a gain.

Another result of this concentration of capital was that 28 of the 46 markets — over 60% — actually finished the year in the red.

Europe was particularly weak, with all but two markets — the iShares MSCI Denmark (EDEN), with a total return in 2014 of 7.85%, and the iShares MSCI Belgium (EWK), with a slight 0.63% total return for the year — ending in the minus column. Latin America fared even worse, with no market able to end 2014 in the black.

Meanwhile, the United States, as measured by the Vanguard Total Stock Market ETF (VTI), finished in the top 10 (eighth this year) for the third time in the past four years. This makes the U.S. stock market the most consistent performer on the planet over the recent past.

For all the handwringing about the U.S. economy in decline, this confirms that, as far as the rest of the world is concerned, the United States has remained a bullish beacon for global investment capital.

The Best of the Best

Topping the 2014 global market merry-go-round was the WisdomTree India Earnings ETF (EPI), which rose 27.84% for the year. Undoubtedly, one of the primary drivers of the Indian equity market was the election of pro-business reformist Prime Minister Narendra Modi. His promises of turning India's bullish demographics and tech-savvy workforce into an economic success story made this market the biggest star of 2014.

Other big winners for the year include the iShares MSCI Philippines (EPHE), +22.09%, iShares MSCI Turkey (TUR), +15.76%, iShares MSCI Thailand (THD), +15.50%, and Market Vectors Indonesia ETF (IDX), +14.50%.

SNAG Program-0795

In all, six of the top-10-performing global equity markets were in Asia, with the iShares China Large-Cap (FXI) weighing in with an 11.45% total return.

While the market's upward move in China was strong, and a very welcome shift from the underperformance there during the recent past, the irony is that this fund wasn't even the best China-based market in 2014.

Truth be told, the top-performing global market last year is one that I hadn't even tracked: the China A-shares market. The Deutsche X-trackers Harvest CSI 300 China A-Shares ETF (ASHR), a fund that tracks the performance of China's A-share stocks that trade on the Shenzhen and Shanghai Stock Exchanges, was up 51.31% in 2014.

And that's because at the start of 2014, these markets still literally were off investors' maps. New trading rules in the fall of 2014 opened up the China A-shares market to non-Chinese investors, and this caused the market to soar in the final two months of 2014. And while we're unlikely to see a repeat performance in the A-shares market in 2015, the money merry-go-round looks like it's not ready to jump off the China A-shares horse just yet.

The Bottom of the Barrel

Claiming the dubious distinction of markets dwelling at, or near, the bottom of the 2014 performance list were some familiar losers, as well as many countries suffering from the precipitous plunge in oil prices.

Stocks in the political and debt-ridden basket case that is Greece once again suffered a huge sell-off in 2014. The Global X FTSE Greece 20 ETF (GREK) was nearly the worst-performing fund I track, down 39.96% for the year.

While that decline was ghastly, the hideous sell-off was easily eclipsed by the biggest loser of all in 2014, the Market Vectors Russia ETF (RSX), which cratered some 47.22% for the year.

And while we'd like to think that this was all comeuppance for Russia's adventurism in Crimea and Ukraine, it was more 2014's second-half plunge in oil prices that pummeled the petrol-based Russian equity market. And if oil prices remain at 5-1/2-year lows, and particularly if crude prices continue their descent, Russian equities will likely pick up where they left off in 2014.

That said, while Russia is admittedly a mess, the global equity market merry-go-round has a tendency to turn wounded bears into bucking bulls.