Big Gains Come in All Sorts of Packages

Written by Nicholas Vardy, CFA.

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Investing is a harsh taskmaster. Each day, cold, hard numbers tell you what you got right and what you got wrong.

If you've been bullish on a country's stock market and that country lights up the scoreboard with big gains, you feel vindicated about your powers of prognostication.

Sometimes the country you tap for big gains is a turnaround story and one where the markets have been beaten down too far, too fast. That's what the original Global Guru, John Templeton, did, investing only in the countries where "the outlook was always the worst."

Other times, a country's stock market strength is based purely on momentum and the influx of "hot money" flowing into that market.

Finally, a country's strong stock market performance can just leave you scratching your head. It is hard to come up with a rational explanation even with the benefit of 20/20 hindsight.

On Monday, I saw examples of all three cases as I surveyed the 46 global stock markets I monitor daily at my firm, Global Guru Capital.

It turns out that the top three markets of 2015 so far have come from big gains in a once beaten-down market; a stock market bubble that will end in tears; and, most interestingly, in a country that is far off the radar screen of even the most sophisticated global investors.

NOTE: Global Guru Capital is a Securities and Exchange Commission-registered investment adviser, and is not affiliated with Eagle Financial Publications.

First Place: Russia — An 'I Told You So' Moment

So, what did my latest survey of top-performing global markets reveal?

First, it showed me that my bullish call in July 2014 on Russian stocks is paying off big time.

Year to date, the Market Vectors Russia ETF (RSX) is the best-performing global equity market with a total return of 31%.

Plunging oil prices, a ruptured ruble and Western economic sanctions prompted by the annexation of Crimea made the Russian equity market an investment pariah.

As sure as day follows night, an extremely bearish article on Russia and its wounded economy on the cover of The Economist magazine appeared in November of 2014.

That's also when I wrote about how this epic bad press could be the turning point investors needed to get back into Russian equities.

The pendulum had swung against Russian stocks way too far. It was time to grit your teeth and buy Russia.

Second Place: China — A Living, Breathing Bubble

The second-best-performing market in 2015 is the once-again-trendy China. The iShares China Large-Cap (FXI), the benchmark fund for China, has delivered a total return of 21.12% year to date (YTD).

I say once again trendy because a few years back no market was hotter than China, as the endless promises of the "China Miracle" once filling your email inbox could attest.

Of course, with the benefit of hindsight, everyone "knew" the Chinese stock bubble was destined to burst. Sadly, once the music in this game of musical chairs stopped, many investors couldn't find a seat and suffered tremendous losses.

Now it appears we've come full circle.

As economist John Kenneth Galbraith observed, "The financial memory is very short."

The Chinese stock market bubble is back. It recently has been reported that the Chinese have started taking second mortgages to funnel capital into the Chinese equity market boom. More and more Chinese are scrambling to get in on the action, as 1.68 million new brokerage accounts were opened in the week ended April 10.

A recent analysis in the Financial Times of Chinese valuations shows just how frothy this bubble has become. For example, consider the data here regarding the median company's valuation, based on forward price/earnings (P/E) ratios, in the following markets:


To Hedge, or Not to Hedge, That is the European Question

Written by Nicholas Vardy, CFA.

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By Jim Woods

When Nicholas Vardy asks you to do a guest column for The Global Guru, the first thing that goes through your mind is flattery. The second thing is abject fear that you'll be able to at least somewhat fill such large intellectual shoes. The third thing that comes to mind is Europe.

Why Europe?

Well, because firstly that's where Nicholas spends much of his time hobnobbing with London's financial elite. Second, from a money-flow standpoint, Europe is where the real action is taking place right now.

Proof of this point can be seen via the fund inflows in what has so far this year been one of the market's biggest winning exchange-traded funds (ETFs), the WisdomTree Europe Hedged Equity Fund (HEDJ).

According to data from, HEDJ has attracted some $10.6 billion in new fund inflows in 2015 through April 2. That metric led all ETFs in terms of fund flows through Q1. Meanwhile, second on the ETF fund inflows list with $5.9 billion was the Deutsche X-trackers MSCI EAFE Hedged Equity (DBEF), a fund that's also heavily allocated to European stocks.

As you might expect, with the capital gates wide open toward Europe generally and particularly the funds that hedge out any negative effects of the falling euro, HEDJ has seen very strong share price appreciation. Through April 13, HEDJ has seen a remarkable surge of 22.7% year to date.

So, what's fueling European stocks right now and why is so much investment capital migrating to the Old World, particularly to hedged-euro ETFs?

It's All about QE

The simplest answer to the question of "why Europe" can be summed up in five letters: ECB QE.

Since the European Central Bank (ECB) implemented its own version of "quantitative easing" (QE), nominal European stock values have soared.

This kind of spike in nominal stock values is similar to what we witnessed in the United States following every round of QE by the Federal Reserve.

This post-QE spike in equity values also has taken place in Japan. As the Bank of Japan (BoJ) has continued its own version of QE, equity values in the Japanese market also have soared.

The respective charts here of HEDJ and the WisdomTree Japan Hedged Equity ETF (DXJ) show the powerful bullish trends taking shape in two regions whose markets are currently fueled by ultra-accommodative central bank policies.


Optimism Fades for the U.S. Large-Cap Bull

Written by Nicholas Vardy, CFA.

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So far, 2015 has not been kind to U.S. large-cap stock bull market optimists.

During the first three months of the year, the S&P 500 Index has barely budged, providing zero upside for investors pegged to this leading benchmark measure of the U.S. domestic equity market.

Lofty valuations, a strengthening U.S. dollar, sharply lower oil prices and the continued uncertainty of when the Federal Reserve will finally begin to hike interest rates have weighed heavily on the most heavily traded U.S. stocks.

All of these factors combine to make for a challenging backdrop as we head into the next big catalyst for stocks — the beginning of Q1 earnings season, which kicks off in earnest during the next several weeks.

Gone are the days when companies could financially engineer a boost in their earnings and share prices via mere cost cutting or share buybacks.

For this bull market in large-cap equities to get a second wind, the market will need to see real growth reflected in higher revenues.

Get Ready for Lousy Earnings

Sadly, there's little to be excited about for the bulls as we head into reporting season.

According to FactSet, on a per share basis, aggregate earnings estimates for the first quarter already have fallen by 8.2% since the end of 2014.

That's the largest decline in quarterly earnings estimates since the aftermath of the financial crisis during the first quarter of 2009.

Moreover, rather than getting a much-needed boost from Q1 results, earnings are expected to fall nearly 5% year over year, while revenue is expected to decline by 2.7%.

The one caveat?

The dramatic plunge in the price of oil during Q1 certainly has had a disproportionately negative impact on the energy sector — itself a chunky portion of the S&P 500.

Exclude energy, and earnings are expected to rise 3.4% while revenue is projected to increase 3.1%.

But don't pop the champagne just quite yet.

Consider that these estimates have tumbled from just three months ago, when analysts were predicting earnings ex-energy to rise 8.9% and revenue to grow at a 4.7% rate.

Then there is the issue of valuation.

Heading into what will likely be a tough earnings season, this bull market also faces the headwind of a market that is by no means trading at bargain basement prices.

Stocks in the S&P 500 currently trade at a somewhat lofty 17 times forward earnings per share.

On a CAPE (cyclically adjusted price-to-earnings ratio) basis, the picture is much worse, with the large-cap U.S. equity market trading at around 28.

Only the pre-meltdown years of 1928 and 2007 saw stocks trade at higher CAPE valuations.

Money Getting Small and Traveling Abroad

As falling oil prices have slammed large-cap stocks in the energy sector, we've also seen the value of the U.S. dollar surge versus rival foreign currencies. In fact, the value of the U.S. Dollar Index ($USD) (a measure of the dollar versus six major overseas currencies, with the euro accounting for nearly 60% of the index) is up nearly 20% over the past 12 months.

My own recommendation to my Alpha Investor Letter subscribers of PowerShares DB US Dollar Bullish ETF (UUP) is up 12.63% since October.

The soaring U.S. dollar has lowered foreign-based revenue for many large-cap U.S. companies among firms that derive a substantial portion of their revenues from abroad.


To avoid the negative impact of a rising dollar and plunging energy prices on large-cap U.S. equities, investors have rotated away from the behemoths and opted to play "small ball."



Written by Nicholas Vardy, CFA.

Untitled Document


March 2015

The "Ivy Plus" Investment Program dipped 0.40% for the month.
The "Global Gains" Investment Program lost 1.66% for the month.
The "Double Your Dividends" Investment Program fell 0.72% for the month.
The "American Alpha" Investment Program dipped 0.01% for the month.
The “Masters of the Universe” Investment Program pulled back 1.07% for the month.


The "Ivy Plus" Investment Program dipped 0.40% for the month. The program is up 3.76% year-to-date, through March 31.

The broad diversification of the “Ivy Plus” Program is paying off, as “Ivy Plus” has gotten off to a solid start in 2015.  Twenty-one out of 24 positions are up so far this year.

Even as U.S. large cap stocks struggle, domestic oriented mid caps and small caps are faring well, up 3.39% and 1.52%, respectively in an otherwise negative month. The IPO Index- which includes both small and mid cap U.S. stocks- also rose 2.05% in March.  Long short hedge fund strategies and managed futures also managed to generate gains of 1.59% and 1.91%

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 lost 1.66% for the month. The program is up 3.74% year-to-date, through March 31. Nine out of 10 positions have posted gains for the year.

The “Global Gains” Program closed a negative month in March, largely due to the headwinds of a strong U.S. dollar. The U.S. dollar Index has risen 20% over the past 12 months- and about 6% in 2015 alone. In fact, if it weren’t for the U.S. dollars strength, it is likely that the “Global Gains” Investment Program would be looking at close to double-digit gains this year.

With the rise in the U.S. dollar abating, I expect the “Global Gains” Investment Program to resume its upward trajectory in coming months.

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


'Exponential’ Investing Explained

Written by Nicholas Vardy, CFA.

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Technology is back.

With the U.S. Nasdaq hitting the 5,000 level on March 10 for the first time since the bubble peaked just over 15 years ago, investors are slowly climbing back onto the technology investing bandwagon.

While the financial media is dominated by the doom-and-gloom crowd, obsessed with the dysfunctionality of politics in Washington, D.C., a whole new generation of (usually Silicon Valley-based) hyper-optimists are focused on developing the next generation of companies set to change the world.

"Disruptive" has become the new buzzword, in a world where asset-light companies like Airbnb and Uber are valued more highly than long-established brand names like Intercontinental Hotels Group plc (IHG) and Fiat Chrysler Automobiles N.V. (FCAU) within a few years of their founding.

Silicon Valley's super-optimists are tackling problems ranging from self-driving cars to abolishing human mortality. The mantra of Astro Teller — the director of the Google X laboratories responsible for Google Glass and the Google Driverless Car — is that if you aren't providing a solution to a problem that is at least 10X better than the current one, it's not worth his attention.

The Relentless Mathematics of Exponential Change

Of course, all of the "this time it's different" talk carries with it more than a whiff of financial mania.

That said, the intellectual justification behind Silicon Valley's super aspirations just may be more substantive than the sock puppet of the Internet boom.

The core idea of the hyper-optimists is that the technology — or, more broadly, solutions to all of humanity's natty problems — is driven by a universal but hard to get "law of exponential growth."

Futurist Ray Kurzweil, himself striving for immortality, has argued for decades that the pace of change in technology is not just linear. It is exponential — and accelerating.

The graph below illustrates the remarkable — and counterintuitive — implications of this difference.


Here are two oft-cited examples of exponential change.

If you could fold a piece of paper in half indefinitely (essentially doubling its height every fold), it would only take you 42 folds to reach the moon.

Or, if you started with one dollar and doubled your money every day, by the end of the first week you'd have $64. But by the end of the first month, you'd have $268,435,456!

As Kurzweil put it: