Tuesday, September 8, 2009

The Global Guru: Top Five Investment Themes for the Rest of 2009

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Nicholas Vardy's The Global Guru
September 8 , 2009
Vol. 4, No.32

Fellow Investor,

Top Five Investment Themes for the Rest of 2009

Making investment predictions is easy. But making money from them is hard. Recent track records can be particularly deceptive. When you look at last year's best-performing fund, you'll often see it at the bottom of the charts this year. So instead of piling blindly into last year's top-performing fund, the question you should be asking is: "Was the fund manager smart... or just lucky?"
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Investors in Bill Miller's Legg Mason Trust thought for sure that he was a genius. As the Chairman of the Board of Trustees of the brainy Santa Fe Institute, Miller had at one time pursued a Ph.D. in Philosophy from Johns Hopkins University. More importantly, Miller's Legg Mason Value Trust (LMVTX) outperformed the S&P 500 for 15 straight years from 1991 to 2005. But hampered by the complete lack of a risk management culture in the mutual find industry, Bill Miller went from "hero" to "zero" in the blink of a financial eye, with shares in his fund dropping from $66.06 in October 2007 to $19.30 over the span of 18 months. With the Legg Mason Value Trust up over 75% in the last six months, Miller must be feeling a bit better about himself. The bad news is that he's still down almost 20% compared to a year ago, and 50% down from his peak two years ago.

My skepticism notwithstanding, I believe that looking at what some of the world's top traders are buying today can help you to boost your own investment returns.

With that in mind, here are five investment themes that I've culled from publicly available sources about the ideas of the world's top investors. Full disclosure: I have taken some of these positions on behalf of my clients at my investment firm, Global Guru Capital, which is not associated with Eagle Publishing.

Top Five Investment Themes

1. Sell U.S. Treasuries

"Bond King" and PIMCO Chief Investment Officer Bill Gross, has called U.S. government Treasuries the "last, great financial bubble" and "the most overvalued asset in the world, bar none." Warren Buffett recently warned that the U.S. government's "greenback emissions" will feed potentially "banana-republic" style inflation. Thanks to the Obama administration's breathtaking profligacy, the federal budget deficit will widen to around a record $1.5 trillion this fiscal year, and expand by another $9 trillion over the next decade. And that's based on unrealistically rosy scenarios. Gird yourself and look at USDebtclock.org. It is one of the scariest sites on the Internet. Global economic recovery means interest rates and inflation are expected to rise sharply. There is no scenario where the current, historically low interest rates on U.S. Treasuries are sustainable. Yet, after getting off to a strong start this year, this trade has weakened in recent months.

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2. Buy Gold and Gold Miners

With gold nudging up against the $1,000 level this week, the yellow metal is back in the headlines. And gold is now playing a rather prominent role in the portfolios of some of the most successful and high-profile hedge funds around. John Paulson, who made billions of dollars betting against sub-prime loans, and David Einhorn of Greenlight Capital have made big bets on gold on this "reflation" trade. With the Federal Reserve printing money and with global economic recovery on the horizon, their view is that higher inflation is not a question of "if," but "when." And with one year's gold production only about $100 billion, once other hedge funds pile in, physical supplies of gold will be overwhelmed, sending prices soaring.

3. Sugar High

If there is a financial mania somewhere today, it is in sugar. Sugar prices have hit highs not seen since early 1981, as production in Brazil and India has collapsed thanks to El Niño. I pointed out in a recent Global Guru, that benchmark sugar prices hit a 28-year high of 23 cents per pound. Since then, sugar prices soared even more, hitting 25 cents per pound. Net long positions on sugar contracts are running at five times their normal levels. The number of call options to buy sugar at 40 cents a pound in the spring of 2010 jumped six-fold in less than five months. Smart hedge funds are making money in sugar on the way up. Even smarter ones will make money on the way down, as well.

4. Harvard's "Alternative Investments"

Last year's collapse of global financial markets was all about an unprecedented spike in risk aversion. Whether it was lumber or private equity or high-yield debt, the price of every asset plummeted as the benefits of diversification went out the window. That hit top university endowments hard. At my firm, I run an investment program that mimics the performance of the Harvard and similar endowments. Down 26% in early March, the program closed July with a 17.55% gain, comfortably outperforming the S&P 500. The top-performing asset classes have been emerging markets, timber and global real estate. With such strong bounces in the prices of alternative assets, Harvard and its rivals are in much better shape than they were just six months ago.

5.George Soros' Big Bets

Hedge fund manager George Soros is known for making big bets. After all, he is the one who doubled up his $1 billion bet against the British pound in 1992, saying "It takes courage, to be a pig!" His style hasn't changed much since. Just over 29% of his portfolio is in high-yielding notes and bonds. But he combines this with a few large concentrated bets on a recovery in emerging markets and commodities. His biggest single stock position is an eye-popping 21.2% stake in Brazilian oil giant Petrobras and a 10.2% stake in Canada's Potash.

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The conflicting views on the market make this a particularly challenging time for all investors, large and small. So far, bets against U.S. Treasuries and gold have been okay, but hardly spectacular. Momentum bets on emerging markets, sugar, and alternative assets have been the big winners. But knowing what some of the world's top managers are betting on today can give you a crucial edge. And thanks to the increasingly wide array of exchange-traded funds, you can replicate these bets in your own portfolio with the click of a mouse.


Nicholas A. Vardy
Editor, The Global Guru

P.S. If you want to take advantage of opportunities in financial markets, wherever they may be, look no further than my trading service Global Bull Market Alert. Having booked profits of 41%, 36.3%, 34.2%, and 21.9% over the past few weeks, I'm looking forward to a strong fourth quarter for Global Bull Market Alert subscribers. Join us by signing up for Global Bull Market Alert today.

P.P.S. If you want to keep up with my latest insights on developments in fast-paced global markets, you can now follow me on Twitter on @NickVardy.

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