The Global Guru: What I’m Buying in the Current Market Pullback

As painful as the current market sell-off may seem, it’s actually been much worse for most investors than the headlines would lead you to believe.

After all, if you’re an investor focused on U.S. stocks, you’re probably feeling pretty good about yourself.

Indeed, the Dow Jones Industrial Average ended May 4.08% higher, rising for six straight months. Up 17 months out of the last 20, the Dow is on its longest winning streak since 1951.

Yet for most investors, Mr. Market’s Moodswings of late have been much more painful.

Cast a glance beyond the U.S. stock market, and the returns across many asset classes and global stock markets in May were positively grim. Real estate stocks lost all of 2013’s hard-fought gains in a single month. Income investors endured one of the worst months in the past two decades.

But it’s precisely after these kinds of sudden moves that “reality” diverges from Mr. Market’s panic-induced perception — and which give rise to the best long-term investment opportunities.

Here’s how I expect to play two prominent asset sell-offs in the coming days.

The Japanese Stock Market

Japan began May as the investment story of the year. But by the end of the month, the Japan Index MSCI iShares (EWJ) had tumbled 7.35%.

And that figure masks the pain that after soaring 83% in seven months, the Japanese market pulled back 15% in a mere eight trading days since May 23. Combine that with the Japanese currency briefly appreciating to below 100 yen to the U.S. dollar, and it’s no wonder investors who placed big bets on Japan are suffering from vertigo.

But signs are the Japanese market may be stabilizing. Overnight, the Nikkei 225 share index closed up 2.05% at 13,533.76 points and is now back to levels it last saw on April 23. The yen has also crept back to above 100 to the U.S. dollar.

My Verdict:

Sustained market pullbacks are usually caused by some kind of crisis. But this time, there was no apparent crisis in Japan or Asia.

There have been no fundamental changes to Japan’s economic outlook. In fact, prospects for economic recovery are improving. Brisk exports are leading to a rebound in industrial production. Exporters like Sony are seeing their profits soar on a weakening yen. Consumer spending is likely to pick up soon.

I expect the Japanese market to stabilize and resume its upward trend.

Bonds and Income Investments

Income investors have had the worst month in recent memory, as the Fed signaled it may curtail its asset purchases this year as the U.S. economic recovery strengthens.

Global government bonds saw the fourth-worst monthly performance in the past two decades. The bloodbath spread beyond sovereign debt.

Every one of the most popular class of U.S. mutual funds investing in fixed income lost money last month. PIMCO bond guru Bill Gross, who loaded up on U.S. Treasuries earlier this year, saw his Total Return fund tumble by 2.2% — one of its worst months ever.

My own firm Global Guru Capital’s “Double Your Dividends” Investment Program — which spreads its income investments across a wide range of asset classes — suffered the same fate. Not a single income-generating strategy produced positive returns during the month of May.

The question on investors’ minds: Is this just a short-term hiccup or the beginning of the end for a 30-year bond bull market?

My Verdict:

The Fed is damned if it does, and damned if it doesn’t.

If the Fed signals its eventual intention to curtail gradually its bond buying program, markets go into a tizzy, as they have over the past couple of weeks.

If the Fed fails to signal its intention, thereby preparing the market ahead of time, then it is pilloried for poor communication.

As this was the Fed’s initial shot across the bow, hinting at the inevitable wind down of its asset purchase program, I believe the market overreacted.

As the market becomes acclimated to the idea, each successive Fed signaling will have less of an impact.

I expect the income-generating investments to recover strongly over the coming months in a low interest rate environment.

Why I am Selling as a Trader, Buying as an Investor?

On the one hand, one of the many first rules of trading is not to catch a falling knife.

That’s why I’ve recommended to my trading service subscribers to take risk off the table.

On the other hand, the #1 rule for longer-term investors is to take advantage of Mr. Market’s Moodswings.

As Warren Buffett says, “Be greedy when others are fearful and fearful when others are greedy.”

So where does that leave us today?

First, I believe negative investor sentiment is overdone.

Second, basic technical analysis — indicators like stochastics, Bollinger bands and the like — tell me that both Japan and income investments are all severely oversold and due for a bounce.

Remember August of 2011? Over the course of 12 sessions through Aug. 8, the S&P 500 fell 16.8%.

In the Global Guru sent out on Aug. 9, I called that pullback the investment opportunity of the year.

Since the market bottomed on that day, the S&P 500 is up 46.6%.

At that time, I levered up my personal portfolio to buy into the hardest-hit asset classes — a very profitable decision.

In the coming days, I expect to do the same.

To read my e-letter from last week’s Eagle Daily Investor, please click here. I also invite you to comment about my column in the space provided below my Eagle Daily Investor commentary.


Nicholas Vardy, CFA
Editor, The Global Guru
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