Why the Nasdaq is Back

Written by Nicholas Vardy, CFA.

SNAG Program-0786

Back in the 1990s, the technology-dominated Nasdaq was best known for minting millionaires. Today, the Nasdaq is the red-headed stepchild of the U.S. stock market.

After all, the S&P has hit almost 40 new record highs in 2014. The venerable Dow Jones index has notched more than 20 new highs this year. Meanwhile, after almost 15 years, Nasdaq has yet to regain its highs.

Let's recall some history...

On March 10, 2000, the peak of the dotcom bubble, the Nasdaq hit an all-time high of 5,049.

Then the bubble burst, wiping 80% off the value of the index.

Fast forward 15 years, and the Nasdaq is now less than 10% off its previous highs. The Nasdaq closed yesterday at 4,671.

That means there's a good chance that by the time the Easter Bunny shows up at your doorstep in the spring of 2015, the Nasdaq will have reclaimed its prior highs. And with earnings for Nasdaq stocks forecast to grow 18% in 2015, it's more a question of "when" and not "if."

Today's Nasdaq: A Different Animal

Despite its mixed reputation, today's Nasdaq is a different animal from the days of the dotcom era.

Here's why...

First, Nasdaq itself is a lot smaller — certainly in terms of number of companies listed. Once listing as many as 4,715 companies, acquisitions and bankruptcies have reduced that number to 2,565. It's no longer home to every Tom, Dick and Harry tech stock with ".com" in its name. The numbers bear this out. Between 1999 and 2000, there were 630 technology initial public offerings (IPOs) on Nasdaq. The total for the next 13 years (!) combined dropped the number of technology IPOs to 462. That means it's a lot less risky compared to when it was partying like it was 1999.

Second, Nasdaq is no longer as tech-heavy as its reputation suggests. Sure, it still has a 48% weighting in information technology. But consumer discretionary and healthcare stocks now account for 17% and 16% of the Nasdaq. The remainder is made up of boring old consumer staples, industrials and financials.

Third, Nasdaq is no longer just about the "new, new thing." Yes, there are newish companies like Google (GOOGL) and Facebook (FB) that are changing the world. But there are also lots of well established tech-giant cash machines. At the height of the Internet boom in 2000, the median age for a newly public tech company was five. Today, it's double that. Like a reformed teenager who turned into a 30-something responsible adult, the Nasdaq has matured.

Finally, valuations are no longer off the charts. Back in 2000, the Nasdaq index reached a price-to-sales ratio of almost 6; now it's 2.2. Today, the Nasdaq's price-to-earnings (P/E) ratio is 23. That compares to 175 in the bad old days — for all 4,714 stocks. If you think Nasdaq is still home to highly speculative stocks, it's because of high-profile stocks like GoPro (GPRO), Netflix (NFLX) and LinkedIn (LNKD) whose P/E multiples range from 80 to 218. But these are the exception, not the rule.

The Unlikely Heroes of Nasdaq

There are a handful of familiar names in the Nasdaq "Top 10" from 2000. These include Cisco Systems (CSCO), Microsoft (MSFT), Intel (INTL) and Qualcomm (QCOM).

But these tech giants have not been the key to Nasdaq's rebound. It turns out that only about 727 of the Nasdaq stocks from the 1,233 still around from back then have hit new highs, according to USA TODAY.

The single biggest winner since March 2000? A beverage company, Monster Beverage (MNST). Back in 2000, Monster, then known as Hansen's Natural, traded for about 27 cents on a split-adjusted basis, according to S&P Capital IQ. Since then, shares have exploded 40,618% to $110.07.


Why the ‘Barbarous Relic’ Should NOT Be in Your Portfolio

Written by Nicholas Vardy, CFA.

SNAG Program-0785


The economist John Maynard Keynes once famously dismissed gold as a "barbarous relic."

Keynes was actually referring to the gold standard.

But his inflammatory description reflected his heartfelt sentiment about gold.

Nevertheless, gold has maintained its unique status as both a commodity and a store of monetary value.

Gold is the ultimate safe-haven investment when the stock and bond markets head south.

Everything that is bearish for stocks — political instability, inflationary fears, a falling dollar — tends to be very bullish for the yellow metal.

All three of these factors helped propel gold prices to one of its greatest runs ever.

Since 2001, gold rose from $250 per ounce to a high of $1,900 an ounce in 2011. That's a massive 660% increase.

Along the way, gold prices hit numerous all-time highs. That made "gold bugs" seem like the smartest guys in the room.

That's all changed in recent years.


In the past five years, the price of gold has been flat while the S&P 500 is up over 50%.

More recently, the price of gold has suffered one of its sharpest declines in years. Over the past three months alone, the price of the yellow metal has slid nearly 12%.

Gold dropped to $1,131.85 an ounce on Friday, Nov. 7, its lowest level since April 2010.

Jim Rogers once predicted that gold will never fall to $1,000. That level looks increasingly precarious.

I think gold will see $1,000 sooner than it will see $5,000.

All of this has put the gold bugs on the defensive.

A case in point is the University of Texas and local hedge fund guru Kyle Bass.

Back in April 2011, Bass advised UT to take delivery of nearly $1 billion worth of gold bars. That decision has cost the university $250 million in cash — so far. And that doesn't include another $500 million in foregone profits had the endowment just stuck to investing in the S&P 500 Index.

A Less Than Golden Future

Nor does the near future for gold look any better.

Gold faces the proverbial "perfect storm" of circumstances likely to keep prices in decline.

First, the U.S. economy has not imploded. Gross Domestic Product expanded by a stronger-than-expected 3.5% in the third quarter, and unemployment now is below the 6% level.

Second, hyperinflation never happened. Gold bugs are not yet replacing the collectible 100 trillion dollar Zimbabwe notes they carry around in their wallets with the U.S. dollar equivalent. Today, the specter of deflation is much more of a threat than inflation.

Third, interest rates are likely to rise. Last week, the Federal Reserve ended its quantitative-easing (QE) program. It also indicated that strong economic growth and the improving labor market could mean higher interest rates as soon as 2015. This also has fuelled the rally in the U.S. Dollar Index, which recently hit a four-year high.


The Japanese QE Surprise and the Juicing of the Markets

Written by Nicholas Vardy, CFA.

SNAG Program-0782

Just when you thought the financial world would take a much-needed break from quantitative easing (QE), the Land of the Rising Sun comes in and juices up the markets with more QE.

The irony here is telling.

In the same week that the U.S. Federal Reserve shut down what was effectively "QE4," with its announcement on Wednesday that its bond-buying program had ended, the Bank of Japan (BoJ) announced that it was turning up its printing presses.

The BoJ's move took most market watchers — including myself — by surprise.

Specifically, Japanese policymakers announced that the BoJ's annual target for expanding the monetary base would rise to 80 trillion yen ($724 billion), up from 60-70 trillion yen.

What does the BoJ's move mean in practice?

It means that Japan's central bank has committed to purchasing the equivalent of more than double the value of new bonds actually issued by the government. That's a far greater amount than for any of the other bond-buying programs that have become fashionable among the world's central banks, including the massive QE programs of the Federal Reserve.

Reaction to the BoJ's move pushed the yen to a six-year low and sparked a rally in the Japanese stock market. It also helped fuel the big gains we saw on Friday in both the U.S. and global stock markets.

While the BoJ's new monetary base expansion target dominated the headlines on Friday, we also learned that Japan's Government Pension Investment Fund, the world's largest pension fund, holding about $1.1 trillion in assets, also increased its allocation to stocks. Japanese and overseas stocks will now have a 25% weighting each, up from 12%.

This move, too, puts upward pressure on the Japanese stock market, especially over the long term.

A Furious Short-Covering Rally

The unexpected policy shift by the BoJ set off a furious short-covering rally in the Japanese stock market.

Prior to Friday, a whole lot of investors were betting against Japanese equities. In fact, as recently as Oct. 16, bearish bets made up 36.6% of all transactions on the Tokyo Stock Exchange. That was the highest level since the exchange started keeping records. Such a high degree of pessimism has been, without exception, bullish for the market. Historically, Japanese equities have rallied 9.7% on average over the following three months after a jump in bearish bets.

Sure enough, on Friday, the Nikkei 225 Average leapt 4.8% to a seven-year high, as the yen tumbled to its lowest level against the dollar since January 2008.

So, is this short-covering rally in the Nikkei a mere anomaly, or should the BoJ's move be read as a long-term bullish force to reckon with?

It is my view that the rally in the Japanese stock market, along with the concomitant decline in the yen, is a trend that has legs, and that will likely continue for some time.

Here's why...

Well, in addition to the basic economics of more yen (or dollars, or pounds or euro, etc.) chasing the same amount of securities, there is also the issue of politics.

For Japan, the BoJ's move to turbocharge QE in order to stimulate the economy is an all-in bet to validate the economic policies of Prime Minister Shinzo Abe's "Abenomics."

Honor, Validation and Abenomics

To understand the context of BoJ's move, we need to go back to December 2012, when Shinzo Abe assumed the duties of Prime Minister. Mr. Abe was swept into office by the Japanese electorate after promising to reinvigorate that country's ailing economy and extricate the country from the decade-long vice grip of deflation.

Mr. Abe's plan to stimulate Japan's economy was dubbed the "three arrows" policy.

The first arrow was the economic stimulus provided through QE by the BoJ. Under the direction of Mr. Abe's handpicked BoJ chief governor, Haruhiko Kuroda, the BoJ introduced its own version of money printing.

The second arrow was huge public-works infrastructure spending, a veritable panacea in the minds of politicians since the beginning of civilization. Recall that the Great Pyramids of Egypt, the Parthenon of Ancient Greece and the Coliseum of the Roman Empire were all infrastructure projects in their day.

The third arrow — and arguably the hardest to implement — was the introduction of structural financial reforms.

In the beginning, Abenomics worked. Japanese equity markets soared, and the yen fell sharply against both the U.S. dollar and the euro. That helped Japanese exports, caused a rise in inflation and resumed economic growth.

Unfortunately for Mr. Abe and his economic platform, the Japanese economy eventually ran out of steam.



Written by Nicholas Vardy, CFA.

Untitled Document


October  2014

The "Ivy Plus" Investment Program gained 2.11% for the month.
The "Global Gains" Investment Program fell 1.05% for the month.
The "Double Your Dividends" Investment Program rose 0.05% for the month.
The "American Alpha" Investment Program added 2.26% for the month.
The “Masters of the Universe” Investment Program gained 0.62% for the month.


The "Ivy Plus" Investment Program gained 2.11% for the month. The program is up 4.00% year-to-date, through October 31.

After two months negative months, the “Ivy Plus” Investment Program closed a solid month in October. U.S. large caps continue to be the engine of strong performance, with two specialist S&P 500 strategies - S&P 500 Equal Weight and S&P 500 Dividend Payers- now boasting both strong a strong October and double-digit year to date returns.

Two other asset classes in the "Ivy Plus" Investment Program stand out. U.S. real estate is having a terrific year, with that asset class soaring 25.45% year to date. On the downside, commodities continue to get hit hard, down 13.02% year to date, thanks to a combination of a fall in demand and a strengthening U.S. dollar. According to current indications, the “Ivy Plus” Investment Program will exiot this asset class altogether for 2015.

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 1.05% for the month. The program is up 0.42% year-to-date, through October 31.

Global stock markets continue to lag U.S. markets by a substantial margin in 2014. Emerging market small cap stocks had a lousy month, and were the program’s worst performer. Frontier markets- still the program’s top performer in 2014-  also suffered, tumbling 4.02%. 

Negative returns in the "Global Gains" Investment Program were exacerbated by the strong upwards move in the U.S. dollar over the past two months. The U.S. dollar’s strength has reduced foreign currency returns once translated back into U.S. dollars.


Warren Buffett Stumbles

Written by Nicholas Vardy, CFA.

SNAG Program-0780

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.