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Are We on the Verge of a Market Crash?

Written by Nicholas Vardy, CFA.

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Much like the Great Depression did to the "Greatest Generation," the financial crisis of 2008 seared the souls of millions of investors. Almost six years after the collapse of Lehman Brothers, professional Cassandras never ceased predicting that the next economic meltdown and a stock market crash is just around the corner.

That's ironic...

After all, U.S. stock markets have been in a classic bull market for over five years now.

Instead of gold hitting $5,000 an ounce and the Dow Jones collapsing below 1,000, the S&P 500 has risen 189% from a low of 683 on March 2, 2009, to yesterday's close of 1,971. The Nasdaq closed yesterday at its highest level since early 2000.

And that's with the most anti-business U.S. administration since the days of Woodrow Wilson.

The Case Against a Coming Crash

First, let's review the factors that have supported this surprising bull market.

Most of the global economy has recovered from the very worst of the economic contraction between October 2008 and March 2009. Strong earnings growth, combined with record levels of share buybacks, has boosted companies' earnings per share. Finally, artificially low interest rates supplying liquidity to the banking sector have served as a tailwind to asset prices around the world.

There are still several contrarians willing to endure the public humiliation of being in the bull camp. The much-reviled Goldman Sachs reckons that another economic collapse is unlikely. Sure, Goldman concedes that the stock market could crash any day. But one of the key preconditions needed for an economic bust is high credit growth. Credit may be accelerating. But in the grand scheme of things, it's still at pretty low levels. The global economy is more macro-economically stable than headlines would suggest.

Steven Auth of Federated Investors is another brave bull who thinks the S&P 500 will hit 2,100 by the end of 2014. Auth also predicts the S&P 500 will reach 2,500 within the next 18 months to two years. The combination of growth, bond rates and perceptions of risk will continue to propel the U.S. stock market ahead. With the Fed paranoid about tightening rates too soon, as it did in 1937, a liquidity backdrop for stocks will remain favorable.

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Why You Should Invest in These Arab Economies

Written by Nicholas Vardy, CFA.

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Even in the best of times, the Arab World is not a place you'd normally think of as a red-hot investment opportunity.

Yet, I bet you'd be surprised to learn that the Market Vectors Egypt ETF (EGPT) is the single-best-performing stock market in 2014 among the 46 global markets I track on a daily basis.

Given the political chaos in that country, investing in Egypt is clearly a contrarian call, much like, say, investing in Russia.

Yet, there is a group of Arab countries — the Gulf States — that are attracting investors' attention because they are among the fastest growing and most successful economies in the world. In fact, the Gulf States collectively are the #4 ranked global markets in 2014 and are up 22.22% this year.

No wonder that investor interest in the Gulf States is growing steadily.

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What Market Sentiment Tells Me about Today’s Market

Written by Nicholas Vardy, CFA.

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With last week ranking as the worst for the S&P 500 since 2012, the bears are out in full force.

By some measures, market sentiment has not been this negative since August 2011.

Market sentiment occupies a curious position in investing.

In many ways, it is the red-headed stepchild of stock market investing.

In a world awash and bedazzled by complex financial models, gauging market sentiment doesn't seem as legitimate, as, say, fundamental or even technical analysis.

That's ironic.

After all, the best investors in the world know that the short-term price of financial assets is driven by little else.

Warren Buffett was a disciple of Ben Graham and a value investor. That places Buffett firmly in the fundamental analysis camp.

Yet, Buffett has said that the single-most-important thing he has ever read was Graham's chapter on Mr. Market's Moodswings in "The Intelligent Investor."

And "Mr. Market" is just another metaphor for market sentiment.

In his book, Graham compares the market to a manic-depressive.

Some days, Mr. Market is euphoric. On other days, he's very depressed. If you catch him on a euphoric day, he wants a very high price for his shares. If he's in one of his down moods, he's willing to sell you his shares for a pittance.

Mr. Market highlights the one thing you can predict with certainty about financial markets: investors will always overreact to events — whether positive or negative.

And it also highlights how savvy traders profit from just such overreactions.

Why Market Sentiment Matters

So why is an understanding of market sentiment so crucial?

It is because it gives you an edge.

Both mainstream fundamental and technical analysis are pretty much commonplace.

Every financial analyst in the world studies from the same textbooks.

With all financial analysts trained the same way, it's hard to generate the kind of novel perspective to distinguish yourself from the crowd.

You can say the same about technical analysts.

How To Make Money From Market Sentiment

One myth surrounding market sentiment is that it is not quantifiable.

Nothing could be further from the truth.

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GLOBAL GURU CAPITAL – MONTHLY UPDATE

Written by Nicholas Vardy, CFA.

Untitled Document

GLOBAL GURU CAPITAL – MONTHLY UPDATE
July  2014

The "Ivy Plus" Investment Program fell 2.26% for the month.
The "Global Gains" Investment Program dipped 0.51% for the month.
The "Double Your Dividends" Investment Program lost 1.99% for the month.
The "American Alpha" Investment Program fell 3.10% for the month.
The “Masters of the Universe” Investment Program lost 1.25% for the month.

THE "IVY PLUS" INVESTMENT PROGRAM
ALMOST ALL ASSET CLASSES PULL BACK


The "Ivy Plus" Investment Program lost 2.26% for the month. The program is up 3.14% year-to-date, through July 31.

The Ivy Plus investment program had a poor month, with most asset classes falling across the board.

The exception was your holdings in emerging markets- an asset class that seems to have found its footing after a long period of underperformance.

Managed futures also managed to eke out a gain. Real Estate and U.S-based holdings continue to be the strongest gainers year-to-date, although some emerging markets assets are catching up fast .

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

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Why You Should Give a Hoot About Global Currencies

Written by Nicholas Vardy, CFA.

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The relevance of global currency movements is tough for most American investors to get their heads around.

Looking to make the difficult and remote even more philosophically complex, currency speculator extraordinaire George Soros once opined that investing in currencies is an "existential choice."

Now before you reach your well-thumbed copy of existential philosopher Jean-Paul Sartre's "Being and Nothingness," understand that Soros's point has nothing to do with the thinking of this Gauloises cigarette-smoking, womanizing French rake.

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Jean-Paul Sartre: "Me, long the U.S. Dollar? Never!"

Soros' point is that no matter what you invest in, you are always also betting on a currency — whether you know it or not.

So when you buy a share of Facebook (FB), this U.S.-dollar denominated stock carries U.S. dollar risk with it. You just don't think about it because the U.S. government does not have a history of announcing an overnight currency devaluation — as governments elsewhere in the world have done in the past.

Throw in the fact that Facebook gets a growing percentage of its revenues from overseas in non-dollar denominated currencies, and you start to see why currencies matter. And that's even if you are comfortably ensconced far afield on the beach in Naples, Florida.

Enter The "Big Mac" Index

Britain's Economist magazine has just updated its measure of global currencies — the "Big Mac Index."

The "Big Mac Index" has provided a tongue-in-cheek but surprisingly useful way of measuring purchasing power parity (PPP) since 1986 — that is, the relative over- and undervaluation of the world's currencies compared to the U.S. dollar.

The Big Mac Index is useful tool for assessing the relative over- and undervaluation of the U.S. dollar — according to the textbook measures of "purchasing power parity."

According to the theory of purchasing power parity, a U.S. dollar should buy the same amount of the same good across all countries.

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

Once you compare the Big Mac PPP to the market exchange rates, you see which currencies are under- or overvalued.

I like to think of purchasing power parity as the "fundamentals" of a currency.

But as with stock prices, exchange rates can often diverge substantially from their fundamentals.

@NickVardy