Zulauf’s first pick is to short the Japanese yen due to the debt crisis that others like Kyle Bass have noted.
“The dollar/yen trade could have a mild correction, dropping back to the €86 area. I would buy on that correction. Professional investors could employ an options strategy, buying $1 million of yen futures with a strike price of ¥95 at the end of 2014, for $35,000. Break-even would be ¥98.30. At ¥120, you quintuple your money.”
For retail investors, simply shorting the FXY, Japanese yen currency ETF would be a similar stratey.
Zulauf believes that one of the prime beneficiaries of a weaker yen would be Japanese companies. For car or electronics exporters, a weaker yen could make these companies more competitive against Korean or German counterparts.
The Nikkei hit a low of 7,000 in 2009 and since then has traded in a range of 7,000 to 11,000. Japan has one of the cheapest equity markets in the world, as it has disappointed for years. The market trades for 20 times earnings, but the price/earnings multiple isn’t relevant because earnings are so depressed. Price-to-book is one. Seventy percent of all Japanese stocks trade below book. Price-to-sales is 0.5, compared to 1.5 times in the U.S. Fiscal and monetary stimulus are the keys to change.
Zulauf believe that the weaker yen will lead to higher stock prices.
A major reallocation from bonds to stocks is beginning. I would be surprised if the Japanese stock market didn’t rally 50% in the next two years. The best instrument to play this trend is a currency-hedged exchange-traded fund listed in the U.S. It is the WisdomTree Japan Hedged Equity fund, or DXJ. It trades for $38.53.
Zulauf’s other picks are mainly from the emerging markets. He believes that we are in the midst of a tradeable rally in China and Brazil.
Emerging-market equities will have the wind at their backs in the year’s first half. The U.S. dollar is weakening because of the Fed’s moves. But emerging markets don’t want their currencies to rise because they need more trade and growth. They will try to lean against the Fed with some monetary stimulation of their own. Whether this will help their economies is a question, but it will help their stock markets, which will do well in the first half of the year. I would buy Brazil because it is a commodity producer, and commodities traded in dollars will benefit. I would buy the EWZ, or iShares MSCI Brazil Index ETF, which is trading at $56. I would also buy the iShares FTSE China 25 Index, or FXI, which I recommended at the October conference. China’s market has been disappointing and could probably rally a little longer. The Chinese market is trading where it did in 2001. It is not a market for widows and orphans. The iShares MSCI Emerging Markets Index, or EEM, is another pick, as the whole emerging-markets complex will outperform the U.S. I reserve the right to take all these trading recommendations off the table at the midyear Roundtable in June.
However, it should be emphasized that Zulauf is most likely only interested in a short 3-6 month trade. Eventually he feels that the macro problems will resurface. Interestingly, in the last two years the market has sold off in April-May and this summer might be just as gloomy.
From a long term perspective, Zulauf is still bullish on gold as he has been for several years. In world where 40 countries have loose monetary policies, Zulauf wants currency protection.
That is why I have to recommend gold again. Gold’s fundamentals are strong; although some technical indicators of sentiment and momentum turned down in the summer of 2011, gold is at the very end of a cyclical correction and the gold price will be up and running again soon. Once gold surpasses $1,800 an ounce, it will run to the low- to mid-$2,000s.
Here is a video of Zulauf talking about hist stock picks for 2013.